A contract manufacturing agreement is a legal document that defines the commercial relationship between a client (an individual or a business) and a manufacturing company. Just like other contracts, it stipulates the obligations of both parties and the terms of the agreement.
A contract manufacturing agreement also contains important information on warranties, insurance, equipment and materials, confidentiality, delivery and the limitation of liability.
Continue reading to learn more about the key terms you’ll find in a manufacturing agreement and why they’re so important.
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What is contract manufacturing?
Contract manufacturing is a type of outsourcing service offered by manufacturers to other companies or individuals. The item being manufactured can either be a component part or a finished product that typically features the client’s branding. At ReAgent, for example, we provide bespoke chemical contract manufacturing services to businesses from a range of different industries. 
The terms and conditions of a contract manufacturing agreement define the extent of the services the manufacturer is providing. These services typically only involve mass producing a particular component, set of components, or a finished product – other tasks like research and design are generally left to the client.
As branded products are usually patented and exclusively owned by a company, the manufacturer can’t use the design or special ingredients for their other clients. To protect the client’s intellectual property, many agreements therefore include a non-disclosure clause.
You can learn more about how contract manufacturing works by reading our comprehensive guide.
What is a contract manufacturing agreement?
Businesses that hire other companies to manufacture products on their behalf must enter into a contract manufacturing agreement. The two parties are considered to be on equal footing and are free to negotiate the terms of the contract to suit their requirements.
As a contract manufacturing agreement is legally binding, it can be used as the basis for judicial decisions if conflicts arise between the client and the manufacturer.
To ensure both parties fulfil their obligations, a contract manufacturing agreement clearly outlines the terms and conditions that have been agreed upon. It stipulates the specific services that will be provided and contains details on manufacturing fees, turnaround times, order quantities, liability and intellectual property rights. A typical contract may also include terms relating to insurance and penalties, as well as an indemnification clause.
As we explain below, the precise nature of the agreement depends on the parties involved and the products that are being manufactured. However, some general terms are included in most contracts.
Contract manufacturing agreement format
The exact format of a contract manufacturing agreement depends on several factors. For example, it may vary due to the jurisdiction (different countries have specific legal formats), the industry sector, and the particular parties involved. And of course, the specific provisions in any contract will largely depend on the products that are being manufactured.
Although the precise format may vary, most legally-binding contract manufacturing agreements contain the following sections:
- Terms of agreement – found in virtually all business contracts, this is the most important and generic part of the agreement. It defines the legal conditions and ensures the parties involved understand their obligations and responsibilities to each other. The contract start and end dates may also be stated here.
- Warranties – this section of the agreement stipulates that the product will be delivered on time and in good condition. It may also explain how any mistakes will be corrected (usually at no additional cost to the customer). Products that do not meet the agreed quality standards may be rejected by the customer and replaced with those that do.
- Insurance – the insurance section in a contract typically relates to a third-party service that both the client and the contract manufacturer agree to hire. The contractor may include the insurance premiums in their fees. Insurance is necessary to financially indemnify both the manufacturer and the client in case of irreversible damage to the products.
- Required equipment & materials – in this section, the client specifies the raw materials, machinery and facilities that are necessary to manufacture the products. It may also specify the dimensions, bulk capacity, and other technical details of the equipment required.
- Confidentiality – this part of the contract is where the manufacturer agrees not to divulge any trade secrets such as ingredients and methods used by the client. This is especially true for proprietary products with patents that are exclusive to the client.
- Purchase & delivery of goods – most contract manufacturing agreements include a section that specifies the turnaround time, quantity, and delivery schedule for the manufactured goods. The manufacturer may only be paid in bulk once the goods are manufactured and delivered as per the terms of the agreement.
- Limitation of liability – although insurance may cover financial losses and certain acts of negligence, there are limitations to the liability of both the manufacturer and the client. These may include natural disasters and man-made calamities, as well as market factors such as a drop in end-user demand.
Why is it important to have a contract manufacturing agreement?
It’s crucial to have a contract manufacturing agreement between a client and the manufacturer because it clearly defines the expectations and obligations of both parties. From the expected quality and quantity of the goods to timely delivery, a contract manufacturing agreement stipulates a variety of key business terms. It also ensures that either party will be indemnified in certain circumstances.
A written contract agreement serves as a legally-binding document that can be used as evidence in court, should the need arise. It plays an important role in judicial decisions, enabling experts to determine if a business agreement has been violated and which party is at fault.
Who is responsible for the manufacturing contract?
The client and the contract manufacturer are jointly responsible for a contract manufacturing agreement. They both have duties and obligations they need to fulfil based on the provisions in the agreed contract.
All of the stipulations in the contract can be negotiated and must be clearly understood by all parties – there should be no ambiguity. Both the client and the manufacturer must also hire a lawyer to ensure the contract is fair and legal.
Summary
A contract manufacturing agreement is an important legal document that binds the client and the manufacturer to certain duties and obligations. It serves as the basis for all the expectations and deliverables. Although specific provisions may vary, most manufacturing contracts contain terms relating to warranties, insurance, equipment and materials, confidentiality, delivery and the limitation of liability.
ReAgent provides high-quality contract chemical manufacturing services to clients from a range of industries. Get in touch today to find out more.
