An International Manufacturing Term Sheet Checklist

The Power of Term Sheets

Our international manufacturing lawyers are frequently asked what companies should agree on before we draft their International Manufacturing Agreement. The checklist below highlights key points you may want to discuss with your potential manufacturer before moving forward with the crafting of your manufacturing Agreement.

Please note that this list is not exhaustive, and some items may not be relevant to your specific needs. Likewise, the examples of contract provisions are simplified summaries and may not perfectly suit your particular product or situation—some may apply well, while others may not be at all suitable.

In many cases, all you need to proceed with drafting your international manufacturing agreement is clarity on pricing, quantities, and specifications. With these three elements (or sometimes even just two of the three), our international manufacturing lawyers usually can draft an agreement tailored to our client’s needs, incorporating terms that work best for our client.

1. Term of Agreement

Duration: Define the initial term and any automatic renewal terms.
Notice for Termination: Specify the required notice period for terminating the agreement.
Example: “2-year initial term, automatically renews for 1-year terms, unless either party provides 90 days’ written notice.”

2. Exclusivity

Buyer or Manufacturer Exclusivity: Determine if exclusivity applies to the buyer (as the sole purchaser) or manufacturer (as the only producer).
Benefits and Drawbacks: Assess the advantages and potential limitations of exclusivity for both parties.
Example: “Buyer will have exclusive purchasing rights for specified products during the agreement term.”

3. Quantities

Volume Commitments: Define estimated product volumes and minimum order quantities.
Rolling Forecasts: Specify forecast requirements (e.g., 12-month non-binding, 6-month semi-binding).
Example: “Buyer provides a 12-month rolling forecast, updated monthly, with the first 3 months as a firm order.”

4. Orders

Purchase Order Process: Outline the process and lead times for submitting purchase orders.
Order Acceptance or Rejection: Specify circumstances under which the manufacturer may reject orders.
Example: “Buyer issues monthly POs at least 60 days before delivery. Manufacturer may reject orders exceeding 125% of forecast.”

5. Delivery Terms

Shipping Terms: Clearly define terms like EXW, FOB, etc.
Chain of Custody and Penalties: Establish chain of custody, title transfer points, and penalties for late delivery.
Example: “FOB Manufacturer Facility. Title and risk transfer upon shipment. Manufacturer to deliver within 2 days of schedule.”

6. Customs and Import/Export

Classification and Documentation: Clarify which party manages import/export documentation.
Duties and Compliance: Specify responsibilities for duties, taxes, and regulatory compliance.
Example: “Manufacturer classifies goods with HTS codes provided by Buyer and retains documentation for 5 years.”

7. Pricing

Pricing Structure: Define base prices, volume discounts, and notice periods for price changes.
Example: “Pricing remains firm for the first 6 months. Any changes require 90 days’ written notice.”

8. Payment Terms

Milestones and Payment Schedules: Specify amounts, payment milestones, and timelines.
Example: “30% deposit upon PO, 30% prior to shipment, remainder due net 45 days after delivery.”

9. Product Quality

Quality Standards: Establish product standards and acceptable defect rates.
Testing Procedures: Define quality control procedures, testing, and remedies for non-conformance.
Example: “ISO 9001 certification required. Defect rate not to exceed 2% per shipment.”

10. Inspections

Inspection Rights: Give the buyer rights to inspect facilities and finished products.
Frequency and Issue Resolution: Outline inspection frequency and resolution process for identified issues.
Example: “Buyer may conduct unannounced quarterly inspections. Manufacturer must remedy deficiencies within 30 days.”

11. Warranties

Warranty Period and Coverage: Specify warranty details for product defects and claim processes.
Example: “1-year warranty covering materials and workmanship. Buyer may return defective products for repair, replacement, or credit.”

12. Molds and Tooling

Ownership and Cost: Clarify tooling ownership and cost allocation, often favoring buyer ownership.
Maintenance: Specify maintenance, amortization, and replacement terms for limited-lifespan tooling.
Example: “Buyer retains ownership. Manufacturer amortizes costs over five years, with routine maintenance at its own expense.”

13. Intellectual Property

IP Ownership and Use: Define ownership of product designs and production processes.
IP Usage Restrictions: Restrict manufacturer’s use of IP to fulfilling buyer orders.
Example: “Buyer retains all IP rights. Manufacturer may not share or use IP except for buyer’s production. New IP jointly owned.”

14. Insurance

Required Coverage: Specify insurance types and minimum coverage, such as general liability and product liability.
Example: “Manufacturer must maintain $5M general liability and $10M product liability coverage.”

15. Limitations of Liability

Exclusions and Liability Caps: Exclude certain damages (e.g., consequential damages) and set liability caps.
Example: “Liability capped at $500,000 per party, excluding damages from willful misconduct or gross negligence.”

16. Indemnification

Responsibilities for Legal Claims: Outline indemnification responsibilities for IP infringement and other claims.
Example: “Manufacturer indemnifies buyer against IP infringement claims related to manufacturer’s processes.”

17. Confidentiality

Confidentiality and NNN Provisions: Include Non-Disclosure, Non-Use, and Non-Circumvention (NNN) provisions.
Example: “Manufacturer agrees to keep buyer’s information confidential and secure under NNN Agreement.”

18. Assignment

Assignment Conditions: Define requirements for assigning rights or obligations under the agreement.
Example: “Neither party may assign without 30 days’ notice and consent. Assignments are binding on successors.”

19. Termination Rights

Termination Conditions: Specify conditions for voluntary termination and termination notice periods.
Example: “Either party may terminate with 180 days’ notice or immediately for uncured material breach.”

20. Dispute Resolution

Resolution Process: Define process for resolving disputes, e.g., negotiation, arbitration, or litigation.
Jurisdiction and Governing Law: Specify jurisdiction and choice of law.
Example: “Disputes to be resolved by arbitration under SIAC rules, in English, governed by Singapore law.”

21. Non-Performance (Force Majeure)

- Qualifying Events and Remedies: Define events qualifying as Force Majeure and related remedies.
- Example: “Non-performance due to events such as natural disasters or government actions will not be considered a breach.”

Successful Manufacturing Term Sheets

The practical application of a term sheet generally involves two steps:

Negotiation of Key Terms: Before drafting a comprehensive Manufacturing Agreement, both parties negotiate and reach consensus on the fundamental terms outlined in the term sheet. This process ensures alignment and helps prevent disputes during formal contract drafting.
Formalizing the Agreement: Once consensus is reached, the term sheet serves as the foundation for the Manufacturing Agreement, minimizing discrepancies and misunderstandings.

An International Manufacturing Term Sheet can be invaluable for building strong buyer-manufacturer relationships. By setting clear priorities and boundaries from the outset, your term sheet can reduce conflicts, control costs, manage risks, and lay the groundwork for a well-structured and collaborative International Manufacturing Agreement.