In Short
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Manufacturing agreements set clear expectations on specifications, quality, delivery, pricing and approvals, helping to avoid disputes.
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They allocate risk and responsibility, including for consumer law compliance, liability, IP ownership and confidentiality.
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Well-drafted agreements protect your business throughout the manufacturing relationship, including on termination.
Tips for Businesses
Before signing a manufacturing agreement, clearly document your product specifications, approval processes and pricing structure. Make sure ownership of designs and confidential information is explicit, especially if you plan to change manufacturers later. Remember you cannot contract out of consumer law obligations, so include practical processes for inspections, defect rectification and compliance to reduce risk.
If you sell or make goods, manufacturing agreements are an important foundation for your business. These agreements can establish clear expectations around specifications, quality, delivery timelines, and pricing to keep your supply chain operations smooth. They can also include important legal protections for your business. This article will explore the legal framework for manufacturing agreements.
Specifications and Approval Process
Clear product specifications can help ensure that each party is on the same page.
Your manufacturing agreement can specify the:
- dimensions;
- materials;
- performance characteristics;
- packaging requirements; and
- any relevant industry standards or certifications.
It can also define processes for:
- providing pre-production samples;
- in-process inspections and testing protocols at key stages;
- final inspection and acceptance procedures; and
- defect rectification.
These specifications and quality controls help prevent disputes about whether manufactured goods meet agreed standards and what happens if they don’t.
Consumer Guarantees and Safety Requirements
Under the Australian Consumer Law, consumer guarantees automatically apply to goods that you manufacture for, or supply to consumers. These include standards about:
- quality;
- safety; and
- fitness for purpose.
Depending on the type of goods being manufactured, you may also need to ensure they comply with industry-specific regulatory requirements. The manufacturing agreement can set out each party’s responsibilities for ensuring that the goods meet these compliance standards.
This is particularly important if you are supplying goods, as you will still be liable for breaches of consumer guarantees even where manufacturing defects caused the problem. You will also have further responsibilities as a supplier if your manufacturer is based overseas. While your manufacturing agreement cannot exclude these consumer guarantees, it can set out a process for the manufacturer to rectify defects. This will make it easier for you to remedy consumer guarantee breaches.
Continue reading this article below the formDelivery Timelines
As a supplier, you can set clear delivery timelines in your manufacturing agreement to coordinate the manufacturing process with other parts of your supply chain. If you are a manufacturer, the manufacturing agreement can include estimated lead times to ensure that the parties have reasonable expectations.
Pricing Structure and Payment Terms
Your manufacturing agreement should clearly outline pricing arrangements to avoid potential disputes.
There are various ways to structure pricing, including:
- structured per-unit costs;
- tiered pricing based on volume; or
- pricing on a time-and-materials basis.
Manufacturing agreements also typically accommodate changes in:
- raw material costs;
- currency exchange rates; or
- other variables.
You might also include mechanisms such as:
- price adjustment clauses with notice periods;
- caps on price increases; or
- regular pricing review schedules.
This can help keep the agreement fair and ensure that there are no surprise costs. Payment terms should specify what conditions must be met before payment is due and how long a party has to pay.
Intellectual Property and Confidential Information
One of the most important parts of a manufacturing agreement will be setting out who owns the goods and the related materials. It is important to set out when ownership of the goods will transfer from the manufacturer to the supplier to avoid potential disputes.
If you are engaging a manufacturer to make goods based on your own designs or formulas, the manufacturing agreement should clearly recognise that you own these original designs. The manufacturing agreement can set out restrictions to ensure the manufacturer uses your designs solely to manufacture goods for you.
In some cases, a manufacturing agreement might include design and development services, where the manufacturer creates product designs or formulas for you. In these cases, the designs will usually be owned by the manufacturer.
Without these points being stated clearly, you could find yourself locked into a single manufacturer because they own the designs needed to produce your goods.
As product designs and manufacturing processes will likely be commercially sensitive, the manufacturing agreement can also include confidentiality obligations. This will protect the information from disclosure to competitors or other third parties.
Liability
The manufacturing agreement can indicate who’s responsible for the goods at different stages of the manufacturing and delivery process, so you have more certainty about your liability exposure.
You can increase this certainty by including a liability cap, which sets a maximum amount that one party can be liable to pay the other. However, it is important to note that liability caps will only apply to your contractual relationship with the other party. Other types of liability, such as your liability under the Australian Consumer Law, will not be limited.
Termination
It is useful to clearly outline what happens when your manufacturing agreement comes to an end. There may be orders in progress, partially completed goods, and your confidential information or equipment may be in the other party’s possession.
Key Takeaways
Manufacturing agreements can include the commercial details of your manufacturing arrangements and appropriate legal protections. By addressing both of these aspects, you can:
- reduce the risk of disputes; and
- protect your business interests throughout the manufacturing relationship.
If you need assistance drafting or reviewing a manufacturing agreement, our experienced contract lawyers can help as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Starting or running a manufacturing and logistics business? Download this guide for essential legal insights on compliance, contracts, and risk management.
Frequently Asked Questions
What should I include in a manufacturing agreement to protect my product designs?
If you have created product designs, your manufacturing agreement should clearly recognise that you own the designs and set out limitations on the party’s right to use the designs. You should also include confidentiality obligations to ensure that the other party can’t share these designs with third parties unless they have your permission. Our experienced contract lawyers can assist you with drafting a manufacturing agreement that protects your ownership and rights to use the product designs.
How can a manufacturing agreement help me comply with the Australian Consumer Law?
While a manufacturing agreement cannot exclude consumer guarantees under Australian Consumer Law, it can clarify each party’s responsibilities. This can ensure that the goods are of an acceptable quality and are fit for purpose. A clear process for inspection, approval, and defect rectification will make it easier to ensure the goods comply with these requirements.
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