The Key Components of International Manufacturing Contracts

International Manufacturing Contracts

Strong country-specific contracts are essential for international manufacturing success. But poorly drafted agreements lead to millions lost annually in production delays, quality issues and intellectual property theft. Our international manufacturing lawyers field these frustrating calls daily.

Nearly every day, our firm’s international manufacturing lawyers are approached by companies from the Americas, Europe, and Australasia regarding production issues with their offshore manufacturers. Don’t become the next victim. Read this post to get the right provisions in place before issues arise.

International Manufacturing Means International Manufacturing Problems

The companies seeking our assistance typically fall into one of three categories:

  1. Dispute-Driven Companies: These companies want our law firm to take immediate legal action against their manufacturer because something went wrong, and they have no confidence in their manufacturer. They may or may not have good grounds for a lawsuit.
  2. Contract Compliance Seekers: These companies want our lawyers to make their manufacturers adhere strictly to their existing manufacturing contract.
  3. Purchase Order Adherence Advocates: These companies want our lawyers to get their manufacturers to adhere strictly to the terms specified in their purchase orders or emails, but they have no formal manufacturing contract.

We then usually initiate our consultation by posing the following diagnostic questions to the potential client, tailored to the jurisdiction in question:

  • Do you have a written contract with your manufacturer?
  • Is your contract in the language of the country in which the manufacturer is based?
  • Has the manufacturer appropriately signed (and chopped) your contract?
  • What does your contract say about how disputes are to be resolved?
  • What specific provisions do you believe your manufacturer breached?

If there is a signed written contract, one of my law firm’s international litigators will review it. We often decline to proceed with a lawsuit because the contract between the parties is simply insufficient to protect the potential client company from its foreign manufacturer.

Key Components of an International Manufacturing Contract

A well-crafted manufacturing contract with your foreign manufacturer should usually contain some or all of the following:

1. Inspection Rights

Ensure that you, or your designated representatives, have the right to inspect your goods before they are shipped and prior to making the final payment. If your manufacturer possesses any of your molds or tooling, you should also have the right to inspect the entire factory where your molds and tooling are being used.

2. Ownership of Molds and Tooling

Establish clear ownership of all tooling, jigs, and molds, and specify a penalty for any delays in returning them to you when asked to do so. It’s alarming how often our lawyers see production delays caused by manufacturers withholding essential production tools.

3. Resale Restrictions

Your manufacturer cannot market or sell your product (or any close variation thereof) to anyone but you. We often see well-written but completely inapplicable non-disclosure provisions (NDA). If you have a marketable product, your manufacturer usually has no interest in disclosing your IP to the public, but it has a very strong interest in stealing your IP so it can make money from it, and most NDAs do not prevent this.

4. Non-Circumvention and Non-Competition Clauses

Include non-compete and non-circumvention clauses to stop your manufacturer from stealing your customers or copying your product. Provisions tailored to your country are key to prevent your own manufacturer from becoming your competitor. NNN provisions are invaluable in deterring your manufacturer from morphing into your competitor.

5. Defined Contract Damages

In many of the leading manufacturing countries, contract damages provisions provide more effective remedies for intellectual property infringements than injunctive relief. Avoid relying solely on injunctive relief and ensure that your contract specifies tangible, measurable damages. For more on this, see China NNN Agreements and How To Give Them Real Teeth.

6. Supply Chain Transparency

Your manufacturer should be required to secure your permission before using a new part or component supplier. You will have to make your own determination as to how far down the supply chain you need (or want) to go. Forced labor reporting requirements may impact your decisions on this, and China is not the only country in the crosshairs (see here).

7. Subcontractor Accountability

Require your manufacturer to disclose all subcontractors involved in producing your goods and be liable for the actions of its chosen subcontractors. We have seen numerous instances where the supposed manufacturer is no longer doing any manufacturing and has subcontracted all of it to another factory. Unauthorized subcontracting is a leading cause of both defective products and counterfeit and gray market goods.

8. A Well-Chosen Dispute Resolution Clause

Typically, your manufacturing contract should provide for local laws, for enforcement in local courts, and be in the local language. This allows better enforceability. Our lawyers typically select the law, courts, and language of where the manufacturer is located. See The Power of Well-Crafted China Contracts. But these choices do vary, as they depend on a wide range of situation-specific factors, such as the country of manufacture, the nature and size of the manufacturer, and the location of its (manufacturing and non-manufacturing) assets. See e.g., Arbitration in Your International Contracts: Adult Supervision Required and How to Write a Bad International Arbitration Clause and International Dispute Resolution Clauses: Context is Everything.

9. Balanced Realism

Your manufacturing contract should be written both to protect you so that your manufacturer actually signs it. See International Manufacturing Contracts: The Basics. Beware low-cost template contracts that are heavily biased in favor of your manufacturer. The drafter of these contracts may be receiving a kickback from your manufacturer. These contract template companies (they are rarely law firms) often strive just to get a signed contract, no matter how bad it is for you, figuring that by the time problems are discovered, they’ll be long gone — and they virtually always are. See China Contract Drafting Scams: From Bad to Much Worse.

Strengthening Your International Manufacturing Relationships

The issues encountered by companies in international manufacturing highlight the importance of having well-structured manufacturing contracts. A good international manufacturing contract should delineate the rights, obligations, and recourse mechanisms for both parties. The above list of essential contract components gives you a foundational framework for international manufacturing contracts that can both reduce and mitigate your risks of problems and disputes.