If you have designed a product, finding a manufacturer is necessary but also brings many risks. For example, they may not complete your work on time or may finish it to a poor quality. You may also want to engage them to perform distribution services. In this case, you also need to ensure that they make deliveries on time. A well-drafted manufacturing contract can reduce these risks by clearly defining each party’s obligations. This article explains some of the more important issues that your manufacturing contract should address.

Protecting Your Intellectual Property

The intellectual property of the product is a significant asset, so it is important that your contract deals with ownership of the intellectual property. A typical manufacturing contract will state that you retain all intellectual property rights in the product and that the manufacturer’s licence to use your intellectual property is strictly limited to the purpose of manufacturing.

There are various ways in which your contract can protect your intellectual property. For example, the contract can protect you from the manufacturer:

  • copying or reusing the intellectual property for its commercial benefit;
  • taking actions that reduce the value of the intellectual property; or
  • misusing the intellectual property.

You may also impose further obligations on the manufacturer. For example, your contract may include a confidentiality clause to prevent disclosure of your intellectual property.

The Contract Should Reflect the Scope of Engagement

You can hire a manufacturer to do more than make your product. For example, you might ask them to distribute it as well. You should tailor your manufacturing contract to the scope of the engagement.

 

Scope of Engagement Contractual Provisions
Manufacturing only If you are only engaging a manufacturer to manufacture the products, your contract will include clauses regarding the licensing of your intellectual property, quality assurance, delivery, rectification of defective goods, payment, and insurance.
Manufacturing and distribution If a manufacturer will also be engaged in distributing the products, your contract should cover the area where the products will be distributed, whether the manufacturer is an exclusive distributor, sales targets, commissions, and the use of marketing materials.
Sales and marketing If the manufacturer will be actively representing your brand, your contract will need to address training, referrals for potential customers and the area in which they will be marketing.

 

Consider the Length of the Engagement

You may engage your manufacturer for a one-off project or you may need them for an ongoing period. The length of the engagement will influence the obligations you include in your contract.

For example, consider long-term engagements where you hire the manufacturer to perform sales and marketing. In this case, you will usually require a restraint of trade clause. This clause will prevent the manufacturer from competing with you in the future or poaching your employees, suppliers or customers.

Furthermore, your agreement may also need to specify the ordering process, how the contract will be renewed and forecasting requirements. Forecasting requirements are where you provide the manufacturer with a regular forecast on the number of products that you may need to be manufactured for a particular period.

Key Takeaways

A well-drafted manufacturing contract will reduce the risks of hiring a manufacturer to make your product. At a minimum, it should include clauses that:

  • protect your intellectual property;
  • reflect the scope of the engagement; and
  • are appropriate for the length of the contract.

If you need assistance in drafting or reviewing your manufacturing contract, call LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

Kristine Biason
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