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Everything About Manufacturing Agreement and Major Reasons for Dispute in it

Narendra Kumar

| Updated: Mar 26, 2019 | Category: Legal Agreements

Manufacturing Agreement

These days many overseas business owners are interested in spending in the Indian market. They also plan to establish several commercial activities in this country. It is because of the quickly growing Indian economy, certain businesses deal with the process of manufacturing various products such as drugs, clothes, machinery, devices and much more. Hence, the requirement of Manufacturing arises. Let’s go ahead and discuss this agreement in detail.

What is the meaning of Manufacturing Agreement?

This is a legal document which is actually executed by two different parties i.e. owner and manufacturer. While executing a Manufacturing Agreement:

  • Manufacturers can ensure that they manufacture the desired number of products for either buyers or owners for the considerations.
  • During the process of agreement drafting, the draftsman includes the overall process, quality stands, design, payment, delivery, cost, used materials and much more.
  • It contains the execution date, production timelines, quality standard, suppliers, delivery date, number of team members and their individual qualifications, norms, and notices.
  • They are created with governance and standard regulatory conditions and terms.

Why opt for Manufacturing Agreement?

Though the manufacturing companies have their own designs and ideas, they face some challenges while manufacturing certain parts of their products including tires, motor, and engines.  It is the main reasons why manufacturing companies opt for external services from OEMs (Original Equipment Manufacturers). To make the process successful, both of them can opt for supply agreement. Manufacturing Agreement is also known as the Supply Agreement.

What to consider in a Manufacturing Agreement?

The modern manufacturing industry is the need for getting punctual delivery of products. To acquire the desired results, it uses this kind of agreement. Manufacturing Agreement will bring a proper idea about how to cooperate and perform efficiently.  The agreement terms may differ at the consent and discretion of every party.  If you want to reduce or avoid the dispute, it is important to answer certain questions which are given below:

  • Who are accountable for broken products?
  • What are the major responsibilities of the manufacturer for you?
  • What takes place if manufacturers have sent you products with damages?
  • Will the product manufacturer be capable of using your intellectual property and design for any other purposes?

They are the important points that may differ based on the nature of the contract. Though, this kind of dispute may happen between two different parties under the above-mentioned agreement if they fail to consider these points.

What are the major reasons for any dispute in the agreement?

There are lots of reasons available for dispute in Manufacturing Agreement and five of them are given below:

  • Warranty Obligations

The agreement can be considered good when it precisely explain both the obligations and guarantees of both parties to a contract.

What are the guarantees towards the buyers with respect to function, life, manufacture, and design of the goods? Is there some lacking in a contract with the answers to previous queries? If the answer to these questions is yes, then both the parties need to take immediate actions for the alignment of contract with these above-said promises and requirement.

It ensures that it avoids the miscommunication between both the parties that may lead to an upcoming dispute.

The buyers will file a complaint against the business that may put parties into several years of both dispute and costly arbitration proceedings. The main aim of choosing this agreement is to avoid getting into any dispute in the upcoming days.

  • High-risk points of business

Whether it may be fashion, heavy machinery manufacturing or pharmaceuticals companies, every business is different because they have various types of risks. Some of the business consider the tools used in product creation and their prices as their increased risk. These kinds of hassles are required to be addressed properly in this agreement during the drafting process. 

If the companies produce more products, they must satisfy the fundamental needs of their customers that includes social care, user-friendly gadgets, health care, pricing, and security.

It is a well-known fact that the risk of tough competition is increasing more and more in this manufacturing industry. There are roughly about ninety-eight percentages of the manufacturers are discovered to be fully incompetent for managing, integrating and completing joint venture and M & A.

When it comes to pricing, cybersecurity, technology, and regulatory and competitive risks, they can be considered as the other growing and emerging risks.

  • Confidentiality

When it comes to the contract, it is the right destination for both parties when the sensitive information is shared from one party to another party for achieving a successful contract.   The main function of a contract is to spell out certain details that are both important and confidential to the company.

It is significant to know that both the parties are limited for sharing sensitive information with others who are not the member of a particular contract. The specialized technique will increase the protection of both parties against dispute or potential competition.

If you want to increase the protection of your confidential business details, you need to add the non-disclosure clause. The major function of this clause is to answer lots of questions while avoiding the upcoming disputes. With the best clause, you can easily know everything about confidential information.  

  • IPR Ownership

When it comes to IPR (Intellectual Property Right), it is a well-known type of property right.  This property category consists of intangible creations of major human rights. There are a lot of major intellectual property rights available that includes designs, patent, and passing-off type, and trademarks rights as well as copyright rights.

  • These rights are included precisely in a reliable agreement.
  • It is helpful for individuals who own IP rights which are associated with the product.
  • The contract should contain the details regarding who owns the Intellectual Properties and who gets for exploiting it.

If you trust that Intellectual property is essential for your business, you must ensure that the contract brings you the required level of protection and rights.

  • Deficiency in your product design

It is important to know that each industry has specific quality standards or requirement of compliance which regulate your manufacturing process.  When it comes to quality standards, they set out some priority regions for overall quality enhancement in social and health care.   If you provide the quality standards in the Manufacturing Agreement clearly, you are able to reduce the danger of an upcoming dispute. 

Hence, it is important for manufacturers to comply with all instructed standards of an agreement while entering into this agreement.

  • If the agreement fails to have useful details, it will lead to certain mishaps. 
  • It will increase the possibilities of dispute.
  • Also, the manufactured products never satisfy the mentioned quality standards of a company.

During this situation, the company asks for compensation or modification or cancellation of an entire order based on this agreement.

Conclusion:

Creating a legal relation in the Manufacturing Agreement is important while entering into any contract. The presence of the party’s intentions will be based on the form and nature of contracting parties and contract. The Court will focus on the intentions of both parties when the dispute happens.

If you want to avoid the dispute, you must ensure that you intend for creating a legal relationship with other parties before concluding the contract.  For more information related to the Manufacturing Agreement, you can contact Enterslice.

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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