1. What is a Manufacturing and Supply Agreement?
A Manufacturing and Supply Agreement outlines the parameters of a business relationship between a distributor and their manufacturer or the supplier of their products. For example, your company designed their own product. In order to sell the product, you might partner with a manufacturer who could produce that product and supply it to your business so that you could distribute the items for sale. This agreement outlines all of the terms of this business partnership.
When determining the terms of the contract, any current or future distribution contracts should be considered. For instance, if your company already has distribution agreements in place that stipulate orders will be filled in a set amount of time, the agreement needs to allow for this provision. These stipulations will also need to be considered when negotiating future distribution contracts.
This agreement will not only have clauses to ensure the timeline on delivery. The cost of manufacturing will also be itemized, as well as any savings for ordering in larger quantities. For a company producing a product, this agreement provides the structure to determine pricing and profits. In essence, the provisions for this contract are essential to the success of an endeavor that hinges on the distribution of a product.
Your business is unique, so the terms and clauses for your agreement should directly reflect your business model and the constraints of your manufacturer and supplier.
2. When Do I Need a Manufacturing and Supply Agreement?
A Manufacturing and Supply Agreement should be used in any business partnership between a manufacturer/supplier and the distributor. If, for example, your company devises a new design or completely new product for the marketplace. Finding the right manufacturer and supplier is only part of the process. You’ll also need to discuss the terms of this business agreement and create a legal contract stipulating each party’s responsibility. Different industries will need various clauses.
In some cases, proprietary information is an integral portion of the contract. If, for example, the product is a new invention that no other business manufactures, it’s important that there’s a clause in the contract ensuring confidentiality between the companies.
It’s also important that there’s a clause indicating where this product can be sold. If you invented a machine to show the future and no other company had anything similar, you would want a clause so that the company putting together the machine couldn’t then sell the machine to a competitor.
Your business model might not need confidentiality or discuss proprietary products. For instance, a Pharmaceutical distributor might have contracts with numerous manufacturers. In this case, the Manufacturing and Supply Agreement might not stipulate that the product can only be sold to your business. But it would likely include information on liability and clauses to meet the many regulatory requirements in that industry.
In short, if your business sells products that you do not manufacture in house, it’s likely that you need an agreement to make sure that your legal needs are covered.
3. Why You Need a Manufacturing and Supply Agreement
The honest truth of the matter is that many companies, even large corporations with impressive legal departments, have contracts that they don’t pay enough attention to. It’s routine for contracts such as manufacturing and supply to be drawn up, signed, and then filed away. That being said, there are a number of consequence of not having an agreement in place:
Your business won’t have a concrete manufacturing and distribution timeline
Perhaps the biggest component of the agreement is the timeline. If the manufacturer doesn’t meet the agreed-upon schedule, the distributor will not be able to deliver promised products to their customers.
Vital information about packaging and logistics will be unclear
There are, of course, other important aspects to this agreement. Information such as packaging and logistics are often discussed in these agreements. When you consider the cost of shipping one package to a relative, you’ll recognize that these “small” considerations can amount to a great expenditure.
Your business won’t be properly protected
Often companies look closely at these terms when the contract is drafted and signed. Then the contract is filed. Until there’s a problem.
The problem – business entities not meeting their contractual obligations, insolvency of one company in the agreement, or legal liability issues from consumers. All of these issues can pose a serious risk to your business. And all of these issues can be discussed within the agreement. If you’ve created a well thought out contract, there should be provisions for the worst case scenario to protect your company and investments.
Without an agreement in place, there are virtually not protections from any of these scenarios. Your company may in fact be liable for manufacturer errors and your partner company’s difficulties can possibly domino to impact your own.
Having an agreement is not enough. It’s important that your agreement is tailored for your own business model and dealings. A good practice is to review your contracts on a regular basis in order to determine whether the clauses and stipulations best meet your current needs.
4. Most Common Uses
As covered previously, this type of agreement outlines the responsibilities of each business in dealings between a manufacturer and a distributor. Different types of companies will need these contracts. A startup will need a Manufacturing and Supply Agreements if they contract another company to produce their product. These agreements span different industries but the common theme is that there is the construction of a product that one party creates and the other sells. Essentially, the manufacturer is only charged with creating a set amount of product for a set price and within a set timeline.
These contracts become essential when there is a dispute. Often the contracts might stipulate a way that disputes should be settled and they will always include termination clauses to protect both parties in the event the partnership should need to dissolve.
In most cases, disputes can be solved through a process. Initially, officers of both companies might discuss the business situation to attempt to reach an agreement. If the companies cannot reach an agreement amicably, it might be stipulated that the matter goes to arbitration or it may be a matter for litigation.
5. What Should be Included in a Manufacturing and Supply Agreement?
Manufacturing and Supply Agreements include clauses that are specific to the business they’re created to serve. However, there are some common uses for these contracts that are routinely included to protect businesses in the event of possible issues. Here are a few of the considerations when drafting your agreement:
- Terms of the Agreement. The term is the length of time the agreement is in place. You might create an agreement that’s good for one year or five years. You might set the terms so that the agreement automatically renews. The contract might also stipulate that a new contract will need to be signed each year.
- Confidentiality and Proprietary Information. In some cases, confidentiality between business entities might be integral. This should be directly addressed within the contract to protect proprietary information from competitors.
- Product Specifications. There are often specifications that need to be met for the product to pass safety protocols and other considerations before being sold to the public. This area of the contract would take into consideration any federal requirements in the particular industry. The product should also discuss the protocol for a situation where the products do not meet standards – ie. what’s the process for returning faulty products to the manufacturer and timeline for replacement?
- Pricing. The contract should stipulate the pricing per item and also account for any savings for larger orders. For a long term contract, this clause might offer some insight as to how to handle price increases over the term of the contract. There should be a protocol in place for increasing prices as the costs of material and overhead fluctuates.
- Logistics. The contract should discuss the cost of logistics. Which entity will pay for logistics and which entity will be responsible for the shipping/packaging of products. Other considerations in shipping include the time frame of delivery and any guarantees on the timeline of receiving products.
- Clauses for Acts of God. While hopefully rare, there are cases where whole inventories have been lost due to natural disasters. This should be a consideration in the contract so that the responsible party can adequately cover products with insurance at the point that the product becomes their possession.
- Clauses for Damage During Shipping. In some cases, products can be damaged during transit due to no fault of the manufacturer or distributor. There should be a provision in the agreement to account for this aspect of the process.
- Termination Clauses. There should be a clause in the contract discussing the termination of the agreement. There might be a number of reasons that termination becomes necessary. One company might wind up insolvent or unable to meet the agreed-upon contract. In this case, it’s important for the remaining company to be able to sever the agreement in order to continue their own venture with a different manufacturer or distributor.
- Liability. When products will eventually be sold to the public, it’s important that liability is discussed in the agreement. There might be clauses containing warranty information from the manufacturer and the agreement can stipulate which entity is responsible for liability to the public.
A manufacturing and supply agreement is essential for any company distributing products that were manufactured by a different entity. There are many possible stipulations your agreement can include to better protect your assets and aid you in addressing possible disputes in the future.
6. Manufacturing and Supply Agreement Sample
Here’s what a typical manufacturing and supply agreement looks like:
Manufacturing and Supply Agreement
|State of ______________|
|MANUFACTURING AND SUPPLY AGREEMENT|
This Manufacturing and Supply Agreement (this “Agreement”) is made as of the ______ day of _______________, 20______ (the “Effective Date”) by and between:
Supplier: ________________________ (“Supplier”), located at ________________________________
________________________________________________________________________ [Address] and
Buyer: ________________________ (“Buyer”), located at ____________________________________
Manufacturing under this Agreement will take place at ________________________________________
______________________ [Address] (the “Manufacturing Plant”).
- Supply of Products. Supplier shall manufacture and supply to Buyer __________________________ _______________________________________________________________________ (the “Products”) in accordance with the following specifications (the “SOW”): ____________________________________
Buyer will make all reasonable efforts to provide clear instructions, documentation, and product specifications to Supplier.
Additional Orders (Check one)
☐ Buyer may submit additional orders under this Agreement. Buyer shall submit orders for the Products by submitting a purchase order to Supplier (the “Purchase Order”) detailing the number of units of the Products to be manufactured and supplied.
☐ Buyer may NOT submit additional orders under this Agreement.
Subcontracting (Check one)
☐ Supplier may subcontract the manufacture of the Products without the prior written consent of Buyer.
☐ Supplier will NOT subcontract the manufacture of the Products without the prior written consent of Buyer.
Supplier must manufacture and supply the Products in accordance with this Agreement, in compliance with applicable laws and regulation, and using generally accepted industry practice.
- Grant of License. Buyer represents and warrants to Supplier that all trademarks, trade names, trade labels, trade dress, packaging and other intellectual property (the “Intellectual Property”) supplied by Buyer to Supplier for the Products do not infringe upon or otherwise violate the intellectual property rights of any third party. Buyer grants to Supplier a limited, non-transferrable and non-exclusive license to use the Intellectual Property and manufacture the Products during the term of this Agreement. Nothing in this Agreement shall give Supplier any right, title or interest in the Intellectual Property. In addition, Supplier shall not adopt any trademark, trade name, trade dress, labeling or packaging which is deceptively similar to or likely to cause confusion with respect to the Intellectual Property and/or the Products. The license granted by Buyer in this Agreement is non-exclusive, and Buyer will not be limited in any manner to engage in other manufacturing or distribution activities or to appointment of other manufacturers, dealers, distributors, value-added resellers, original equipment manufacturers, licensees or agents.
- Ownership of Products. Buyer owns all rights to the Products produced by Supplier.Supplier’s sale, re-sale or distribution to any entity other than Buyer, including without limitation distribution to retailers or other distributors or sub-distributors, will be prohibited unless made pursuant to a specific written agreement between Buyer and Supplier.
(Fill out if Additional Orders are accepted)
Supplier will be paid $_____________ per unit for the number of units specified in each Purchase Order. Payment shall be made: (Check one)
☐ After submitting a Purchase Order. Payments shall be made within __________ days from the date of each Purchase Order.
☐ After delivery of the Products. Payments shall be made within __________ days from the date the Products are delivered.
☐ According to the SOW. Supplier will be paid accordance to the agreed upon fee schedule included in the SOW.
(Fill out if Additional Orders are NOT accepted)
Supplier will be paid $_____________ under this Agreement. Payment will be made: (Check one)
☐ After executing the Agreement. Payment will be made within __________ days from the date of this Agreement.
☐ After delivery of the Products. Payment will be made within __________ days from the date the Products are delivered.
☐ After receiving an invoice. Payment will be made within __________ days from receiving an invoice from Supplier.
☐ According to the SOW. Supplier and Buyer will agree to a fee schedule included in the SOW.
Additional Payment Terms: _____________________________________________________________
- Late Payments. Supplier will be entitled to charge interest of __________% on any unpaid balance more than __________ days past due.
- Discount. (Check one)
☐ If payment is made at least __________ days before the due date, Buyer will be entitled to a discount of __________% off the total amount due.
☐ Not applicable.
- Shipments. The Products will be delivered by Supplier to Buyer: (Check one)
☐ On or before ____________________, 20______ at the following address: ________________________________________
☐ In accordance with the terms of each Purchase Order
☐ In accordance with the agreed upon terms and delivery schedule in the SOW
The Products will be suitably packaged in accordance with the SOW. ☐ Supplier ☐ Buyer will pay for all freight, insurance and other shipping expenses. Supplier will use commercially reasonable efforts to deliver the Products on the agreed-upon delivery dates and notify Buyer of any anticipated delays.
Risk of Loss (Check one)
☐ Title and risk of loss will pass to Buyer upon delivery of the Products.
☐ Title and risk of loss will pass to Buyer upon shipment of the Products.
- Product Acceptance. The Products delivered by Supplier will be inspected and tested by Buyer within __________ days of delivery. If the Products delivered do not comply with the specifications in the SOW
( ☐ and Purchase Order), Buyer has the right to reject the non-conforming Products. Products not rejected within __________ days of delivery will be deemed to be accepted by Buyer. In the event any Products do not comply with the specifications in the SOW and are rejected by Buyer, Buyer may, at its option: (Check all that apply)
☐ Return for a replacement
☐ Return for a credit
☐ Return for a refund
☐ Other: _________________________________________
- Warranties. Supplier warrants that it will perform the SOW in a good, professional and workmanlike manner, and Supplier will promptly notify Buyer of any delay or defect in the manufacture and supply of the Products. Supplier warrants that the Products will be manufacture and supplied in compliance with the specifications in the SOW and in compliance with all governmental and environmental regulations.
Substantive Defects (Check one)
☐ Supplier warrants that the Products will be free from substantive defects in workmanship for a period of __________ (Check one) ☐ days ☐ months ☐ years from the date of shipment. The warranty does not apply to any Products that are damaged due to the misuse, abuse, alteration or negligence of any party other than Supplier. SUPPLIER MAKES NO OTHER REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
☐ There is NO warranty for substantive defects. SUPPLIER MAKES NO REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
- Term. This Agreement commences on the Effective Date and will remain in effect for __________ years. This Agreement will: (Check one)
☐ Terminate, unless the parties have mutually agreed in writing to renew it for an additional term.
☐ Renew automatically for a term of __________ year(s), unless either party has given at least __________ days written notice not to renew to the other party.
- Termination. Buyer and Supplier may at any time by mutual consent decide to terminate this Agreement pursuant to written and delivered notice to the other party.Buyer may terminate Supplier’s rights to manufacture and supply the Products for any reason on __________ days’ written notice of termination. Supplier retains the right at any time to terminate its obligations to manufacture and supply the Products on __________ days’ written notice of termination. This Agreement also may be terminated automatically, without notice, (i) upon the institution by or against Buyer or Supplier of any insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of debts, (ii) upon Buyer or Supplier’s making an assignment for the benefit of creditors, or (iii) upon Buyer or Supplier’s dissolution.
- Default. If either party should fail to perform its respective obligations under the terms of this Agreement, the other party will notify of the party that it is presumed to be in default and give reasonable recourse to cure the stated issue. The defaulting party will have the opportunity to cure the default within __________ days of notice by the other party. In the event of a failure to cure a breach or default within the stipulated time, the other parties will have the right to terminate this Agreement immediately.
- Effect of Termination. Upon the termination of this Agreement, the rights and licenses granted to Supplier pursuant to this Agreement, including without limitation the right to use the Intellectual Property and manufacture the Products, will automatically terminate. All payments owing from Buyer to Supplier, or refunds due from Supplier, will become immediately due and payable, and legally enforceable, upon termination. Supplier will not make or retain any copies or samples of any confidential items or information which may have been entrusted to it.
- Confidentiality. In the course of manufacturing and supplying the Products, each party may be exposed to confidential and proprietary information of the other party, including designs, drawings, materials, manufacturing specifications, trade secrets, business and financial information and other confidential information (the “Confidential Information). Supplier will keep confidential all Confidential Information of Buyer, including details of the manufacturing the Products, and will manufacture the Products in accordance with strict security procedures. During the term of this Agreement, each party will refrain from disclosing any Confidential Information of the other party, except for the strict purposes or activities specifically authorized in this Agreement or if required by law. Each party will use all reasonable efforts to maintain the privacy of the Confidential Information in its possession or control.
- Prohibited Acts. Neither Supplier, nor any agent, representative, affiliate, or subcontractor of Supplier, will have the right to copy, manufacture or distribute the Products without the express prior written approval of Buyer. Anyone who copies, manufactures or distributes the Products without a license and prior written approval of Buyer will be liable for any cost or loss in sales, revenue or profits by Buyer, plus all applicable attorneys’ fees and costs incurred in investigating and prosecuting an action against the offending party. Supplier will notify those to whom it entrusts knowledge of, or access to, the Products that Supplier and the offending party will be liable for losses.
- Inspection of Books. Buyer will have the right, upon reasonable request, to audit and review the books and records of Supplier sufficient to verify the number and quality of the Products being manufactured. Any such audit will be conducted at Buyer’s expense and at such times and in such a manner as to not unreasonably interfere with Supplier’s normal operations. Supplier shall maintain all such books and records for a period of __________ years after shipment of the Products.
- Insurance. Buyer and Supplier agree to maintain appropriate insurance to adequately cover their respective risks under this Agreement, with coverage amounts commensurate with levels in their respective markets.
- Limitation of Liability. In no event will either party be liable for costs, expenses, or damages in connection with this Agreement in excess of actual costs, expenses, damages, or provable and actual lost revenue.
- Force Majeure. Neither party will be liable for the costs or expenses arising from any failure or delay in the performance of this Agreement that is due and attributable to causes beyond the control of either party, including but not limited to acts of God, weather, war, civil unrest, strikes, lockouts, destruction of production facilities, riots, insurrection, terrorist attacks, government regulatory actions, acts or decrees of governmental or military bodies, fire, casualty, flood, earthquake, or any other force majeure event, provided that the party has used commercially reasonable efforts to mitigate the effects of the cause. Supplier will not be liable for any delays in the normal production or interruption in the workflow process caused by changes to the specifications by.
- Amendments. This Agreement may not be modified or amended except by a written agreement signed by all of the parties.
- Notices. Any notice or communication under this Agreement must be in writing and sent via personal delivery, overnight courier service, or certified or registered mail, postage prepaid, return receipt requested and addressed to the to the address stated above or to another address as that party may subsequently designate by notice and shall be deemed given on the date of delivery.
- No Waiver. No party shall be deemed to have waived any provision of this Agreement or the exercise of any rights held under this Agreement unless such waiver is made expressly and in writing. Waiver by any party of a breach or violation of any provision of this Agreement shall not constitute a waiver of any other subsequent breach or violation.
- Assignment. The parties agree that their rights and obligations under this Agreement may not be transferred or assigned without the prior written consent of Buyer. Buyer may assign its rights and obligations under this Agreement without Supplier’s consent.
- Successors and Assigns. This Agreement shall be binding and inure to the benefit of the parties and their respective legal representatives, heirs, administrators, executors, successors and permitted assigns.
- Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of _________________, without regard to its conflicts of laws provisions.
- Disputes. Any dispute arising from this Agreement shall be resolved through: (Check one)
☐ Court litigation. Disputes shall be resolved in the courts of the State of ______________.
(Check if applicable)
☐ If either party brings legal action to enforce its rights under this Agreement, the prevailing party will be entitled to recover from the other party its expenses (including reasonable attorneys’ fees and costs) incurred in connection with the action and any appeal.
☐ Binding arbitration. Binding arbitration shall be conducted in accordance with the rules of the American Arbitration Association.
☐ Mediation, then binding arbitration. If the dispute cannot be resolved through mediation, then the dispute will be resolved through binding arbitration conducted in accordance with the rules of the American Arbitration Association.
- 29. If any provision of this Agreement is held to be invalid, illegal or unenforceable in whole or in part, the remaining provisions shall not be affected and shall continue to be valid, legal and enforceable as though the invalid, illegal or unenforceable part had not been included in this Agreement.
- 30. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together, shall constitute one and the same document.
- 31. The section headings herein are for reference purposes only and shall not otherwise affect the meaning, construction or interpretation of any provision of this Agreement.
- 32. Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior negotiations, understandings and agreements.
- 33. ___________________________________________________________________
IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.
|Buyer Signature||Buyer Full Name|
|Supplier Signature||Supplier Full Name|