Secrets of success in manufacturing agreements

‘Before any contract conversations even begin, you need to have a clear understanding of the various responsibilities, expectations and requirements that are critical to how your product will get manufactured in a safe, accurate and cost-effective way’, recommends Dr Saverio Salandra, Head of Corporate Law at Thackray Williams . ‘This initial pre-contract work will ensure the correct foundations for a solid and profitable arrangement.’

You will need to gauge how flexible the manufacturer is and what level of negotiation will be possible. If the manufacturer is well established, they may be resistant to negotiating certain terms. Preparing well will give you the best leverage to get key protections in place.

Pre-contract checks

It is a good idea to work through the logistics of the production process and unpick it to clarify your requirements before you seek to agree them with your manufacturer. Remember, the more information you can agree upfront, the more accurate the manufacturer’s pricing will be. This will mitigate the risk of unexpected costs or disputes in the future. Here are some key examples:

• Who is responsible for supplying what? – this sounds basic but knowing who will supply the ingredients, parts or packaging will dictate the pricing and responsibilities.

• Checks and certifications – depending on the nature of your business and your products, you may require the parts or ingredients to meet certain quality checks or certifications. If the manufacturer is going to be sourcing all the elements for production, then it is prudent to set out the expectations in terms of how they should verify that supplies meet the quality checks or certifications you require. Accountability measures are highly recommended.

• Product specifications – the production process needs to be set out meticulously and agreed with the manufacturer in advance. This will form the crux of your agreement and will help protect you and give appropriate recourse in the event of a breach, deviation, or mistake.

• Post production storage or distribution – if the manufacturer is going to be extending their services to storing your products and also helping with distribution to customers, you need to discuss and agree how products must be stored and how the distribution and order process ought to work. Will they be responsible for delivery charges? Will they need to pick the products by expiry date or production date order? What will happen if there is damage in transit? Who will be responsible for erroneous orders being sent to your customers?

• Insurance – ask to verify your manufacturer’s insurance coverage to ensure it covers all the risks pertinent to your production runs.

• Cost calculations, inclusions, and exclusions – it is imperative to have a clear understanding of what you are going to have to pay for, what could give rise to potential extra charges, and what you should not be liable for. If, for example, the manufacturer is responsible for importing components on your behalf, will they complete all the paperwork and pay the duties as part of their cost or will this need to be covered separately by you? You should not be liable for normal wear and tear of machinery or maintenance costs unless the machinery is exclusively used for your products.

Protecting your brand

There are a couple of key areas where your brand might be exposed to risk from a manufacturer. This can happen where intellectual property rights in your products are infringed, or if the manufacturer does not adhere to environmental and social governance.

It is not always possible to have your products or processes protected by trade marks, design registrations or patents. Also, manufacturers may not be willing to sign up to an exclusivity clause which prevents them from producing products for direct or indirect competitors. It is therefore important to get professional advice on other options that may be available to you to protect against the manufacturer acting in bad faith.

Legislation in the past decade, such as the Modern Slavery Act 2015 and the Bribery Act 2010, has sought to increase the onus on businesses to ensure they put in place and adhere to both strong ethical and sustainable business practices. If your brand positioning relies on sustainability or other ethical standards, aligning yourself with a manufacturer that can support that positioning and having some way to hold them accountable will strengthen your brand reputation. For example, if you produce chocolate and you wish to promote an ethical brand, you will need to ensure that your manufacturer does not source chocolate from a supplier that uses child labour or grows cocoa beans on land that has been farmed from deforestation.

Legal pitfalls

Once you have discussed and agreed commercial points with your chosen manufacturer, it is important to ensure they are accurately reflected in a legal contract.

There may be additional areas which your solicitor will highlight as a potential pitfall if not negotiated or considered appropriately.

Product liability is one such area. Dealing with issues relating to product defects, a product recall, overages and shortages, and wastage allowances could all prove costly for you if the contract is silent on this or is drafted in the manufacturer’s favour.

Effects of termination is another area to be wary of. If adequate notice periods are not built in, you could be left without a manufacturer or not enough time to transition over to a new manufacturer. If the contract is silent or ambiguous on deciding how supplies still in the manufacturer’s possession at the time of termination should be disposed of or transferred over, there is a risk your business could be left out of pocket.

How we can help

Ensuring your manufacturing agreement accurately reflects and brings together the commercial points and legal protections cohesively will be paramount to building a successful and long lasting relationship with your chosen manufacturer. Our commercial team can advise and guide you through this each step of the way.