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A manufacturing agreement sets out the terms on which the manufacturer will manufacture goods for a customer. It includes both parties’ obligations and the various details, specifications, and technical descriptions of the goods the manufacturer will make. It also covers the commercial terms, such as the length of the agreement, and the price and payment terms. This article will explain what is included in a manufacturing agreement. 

Framework Agreement

Generally, a manufacturing agreement will be drafted as a ‘framework agreement’. This means that it acts as a master agreement for its term, which is commonly a period of three or five years. Under that framework agreement, the customer can submit orders to the manufacturer for the goods they require them to make in accordance with the agreement. For those orders, the manufacturing agreement should outline the process for how a customer makes an order. For example, whether they make an order with an order form or through an online system.

Minimum Orders

If you are the manufacturer, you might want the agreement to specify the minimum number of orders that a customer must request over a month, a quarter or a year. It is always good to have a steady stream of revenue, and it allows you to resource and plan efficiently. A manufacturer may also want the manufacturing agreement to include a minimum purchase amount per order to avoid having to make extra small orders. If you are a customer, you may not want to make a certain number of orders per month, quarter or year or have a minimum purchase amount per order. You should negotiate these types of clauses so that both parties can reach a position that is commercially acceptable.

Another part of the agreement might be whether a manufacturer must accept every order the customer issues or whether order acceptance is at the manufacturer’s discretion.

Relationship Between the Parties

The manufacturing agreement will also indicate whether the relationship between the parties is exclusive. Manufacturers will most likely want a non-exclusive relationship so that they can also provide their services to other customers. As a customer, you may be comfortable with a non-exclusive relationship with the manufacturer. However, there may be instances where a customer will want an exclusive relationship. It will be prudent for both parties to negotiate this term to reach a mutual agreement in those situations.

Intellectual Property Protection

As a customer, it is important that you ensure you protect your intellectual property. A comprehensively drafted manufacturing agreement should include a clause that prevents the manufacturer from producing any of your products for other customers or similar products to yours or from using your intellectual property in any other way apart from manufacturing the goods. You may also consider specifying that the clause regarding intellectual property continues even after the expiry of the manufacturing agreement. This will ensure that you still have intellectual property protection after the agreement expires or terminates.

Furthermore, manufacturers in some industries might create intellectual property, for example, formulas or recipes. Therefore, the manufacturing agreement should determine if the manufacturer retains the intellectual property rights in the formula or recipe or whether the customer obtains an assignment of the rights.

Warranties

There are numerous warranties that the parties may want from one another in the manufacturing agreement. Importantly, as a customer, you may want your manufacturer to give warranties. These may include that the goods they produce for you will be:

  • prepared in accordance with the specifications you have provided and any applicable standards or laws; and
  • free from defects. 

Further, suppose a customer provides a manufacturer with the designs and specifications for the products they would like produced. In that case, the manufacturer may want a warranty that any intellectual property provided by the customer does not infringe any intellectual property rights of a third party. 

Australian Consumer Law and Defects

Manufacturers of goods must comply with the consumer guarantees under the Australian Consumer Law (ACL). A manufacturer’s customer is also required to comply with the consumer guarantees if they sell the goods to consumers. You cannot contract out of the consumer guarantees. Therefore, it is important to make sure that the manufacturing agreement clearly sets out: 

  • how the manufacturer must assist its customer in dealing with ACL claims; and
  • who will be responsible for the repair or replacement of goods or refund required under the ACL. 

There could also be credits to the customer for goods that are over a certain threshold of defective goods.

Additionally, it is important that the manufacturing agreement identifies whether the manufacturer provides any warranties beyond the consumer guarantees (i.e. a manufacturer’s warranty for five years).

Key Takeaways

If you are entering into a manufacturing relationship, it is important to make sure that you have a clear and well-drafted manufacturing agreement from the start. There are a lot of considerations to take into account when preparing a manufacturing agreement. For help making sure that your manufacturing agreement is comprehensive and well-considered, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What is a manufacturing agreement?

It is an agreement that sets out the terms on which the manufacturer will manufacture goods for a customer. It includes the parties’ obligations and the details of the goods to be manufactured.

Do I need to comply with the Australian Consumer Law?

Manufacturers of goods are required to comply with the consumer guarantees under the Australian Consumer Law (ACL). A manufacturer’s customer will also be required to comply with the consumer guarantees if they sell the goods to consumers. You cannot contract out of the ACL.

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