AI Review for Manufacturing and Supply Agreements

Learn how integrating AI contract review into your Manufacturing and Supply Agreements can improve your contract negotiation, ensuring clarity, precision, and mutual understanding.

What is a Manufacturing and Supply Agreement?

A Manufacturing and Supply Agreement (MAS) is a type of commercial contract that sets out the terms and conditions under which one party, the manufacturer, will manufacture and supply certain goods to the other party, the purchaser. The MAS typically includes terms relating to the quantity, quality, and price of the goods, the timeline for delivery, payment terms, intellectual property rights (if applicable), and provisions dealing with issues such as warranties, liability, dispute resolution, and termination of the agreement.

The MAS is similar in many respects to the Master Purchase Agreement (PSA). Both agreements involve a purchaser agreeing to buy certain goods from a supplier (or manufacturer) and outline the terms and conditions for the purchase of the goods, including the price, delivery, and payment terms, and other conditions.

The primary difference between the two is that the MAS is specifically geared towards situations where the supplier is also the manufacturer of the goods. This can bring additional complexities such as specifications for the manufacturing process, quality control measures, and intellectual property rights, which might not be present in a standard PSA.

Industry Applications of Manufacturing and Supply Agreements

Manufacturing and Supply Agreements are used in various industries where companies require a steady supply of manufactured goods. Some common industry applications include:

  1. Manufacturing: In industries like automotive, electronics, or aerospace, an MAS might be used to establish terms for the regular purchase of component parts from a supplier.
  2. Oil and Gas: Companies often enter into an MAS with suppliers of equipment, materials, and other goods necessary for exploration and production activities.
  3. Pharmaceuticals and Healthcare: Companies might use an MAS for the supply of raw materials, specialized equipment, or other goods necessary for the production of pharmaceuticals or delivery of healthcare services.
  4. Construction: Construction companies often have an MAS with suppliers of building materials for various construction projects over a certain period.
  5. Retail: Large retail chains might have an MAS with suppliers of the products they sell, particularly for private label products.
  6. Food and Beverage: Companies in this industry often have an MAS with suppliers of ingredients or other raw materials.

Top Provisions to Consider in a Manufacturing and Supply Agreement

The top provisions to consider in a Manufacturing and Supply Agreement are:

  1. Scope of Work and Specifications: This section clearly defines the products to be manufactured, including detailed specifications, quality standards, and compliance requirements. It is necessary because it sets the expectations and standards for the product, ensuring both parties agree on what is being manufactured.
  2. Pricing and Payment Terms: This provision outlines the pricing structure, payment schedules, and terms. It is important to prevent disputes over financial matters and ensure the supplier is compensated while the buyer manages cash flow effectively.
  3. Delivery Terms and Scheduling: This includes agreed-upon delivery dates, shipping methods, and handling of delays. It is crucial for planning and inventory management, and helps avoid misunderstandings about when and how products will be delivered.
  4. Quality Control and Testing: Details on quality assurance processes, testing procedures, and who is responsible for these tasks. It ensures the products meet agreed-upon standards, reducing the risk of defective or substandard goods.
  5. Intellectual Property Rights: Clarifies the ownership and use rights of any intellectual property involved in the manufacturing process. This is essential to protect proprietary designs, patents, and trademarks.
  6. Confidentiality and Non-Disclosure: This provision protects any sensitive information shared between parties during the agreement. It's important for maintaining trade secrets and competitive advantages.
  7. Liability and Indemnification: Outlines each party's liability in case of damages or legal issues and may include indemnification clauses. It's crucial for risk management and clarifies responsibilities in case of problems.
  8. Term and Termination: Specifies the duration of the agreement and conditions under which it can be terminated. This is important for planning and provides a clear exit strategy for both parties.
  9. Compliance with Laws and Regulations: Ensures that both parties adhere to relevant local, national, and international laws and regulations. This is vital for legal compliance and avoiding penalties.
  10. Dispute Resolution: Establishes the process for resolving disagreements, potentially including arbitration or mediation clauses. This helps manage conflicts effectively and avoid costly legal battles.

In addition to these top provisions, a comprehensive Manufacturing and Supply Agreement should also include:

  1. Forecasting and Ordering: Procedures for the purchaser to provide regular forecasts of their requirements and place orders, including lead times and minimum order quantities.
  2. Inventory Management: Responsibilities for maintaining appropriate inventory levels, including safety stock, and handling of excess or obsolete inventory.
  3. Packaging and Labeling: Specifications for how the products should be packaged and labeled, including any branding or regulatory requirements.
  4. Warranties: The manufacturer's warranties regarding the quality and performance of the products, and the procedures for handling defective or non-conforming products.
  5. Insurance: Requirements for each party to maintain appropriate insurance coverage, such as product liability insurance for the manufacturer and business interruption insurance for the purchaser.

Checklist for a Good Manufacturing and Supply Agreement

To ensure that your Manufacturing and Supply Agreement is effective, comprehensive, and legally sound, use this checklist:

  •  Clearly define the scope of work and product specifications
  •  Include detailed pricing and payment terms
  •  Specify delivery terms and schedules
  •  Outline quality control and testing procedures
  •  Clarify intellectual property rights and ownership
  •  Include confidentiality and non-disclosure provisions
  •  Define liability and indemnification terms
  •  Specify the term of the agreement and termination conditions
  •  Ensure compliance with relevant laws and regulations
  •  Include a dispute resolution mechanism
  •  Outline forecasting and ordering procedures
  •  Define responsibilities for inventory management
  •  Specify packaging and labeling requirements
  •  Include warranty provisions
  •  Require appropriate insurance coverage
  •  Have the agreement reviewed by legal counsel
  •  Ensure the agreement is signed by authorized representatives of both parties

AI Contract Review for Manufacturing and Supply Agreements

To give you a sense for the benefits of leveraging legal ai software trained by lawyers, we’ve selected some sample language our software presents to customers during a review. Keep in mind that these are static in this overview, but dynamic in our software - meaning our AI identifies the key issues and proactively surfaces alerts based on importance level and position (company, 3rd party, or neutral) and provides suggested revisions that mimic the style of the contract and align with party names and defined terms.

These samples represent less than 5% of the pre-built, pre-trained Legal AI Contract Review solution for Manufacturing and Supply Agreements. If you’d like to see more, we invite you to book a demo.

MANUFACTURER AND SUPPLY OF PRODUCT

For: Manufacturer

Alert: May be missing a clause allowing changes to product specifications only upon prior written consent of the other party.

Guidance: In an MAS Agreement, it is essential to create a transparent mechanism for negotiating and agreeing upon changes to product specifications. This can be accomplished by mandating mutual written consent from both parties before implementing any modifications. This method not only safeguards the Manufacturer's interests but also minimizes the risk of disputes and misunderstandings.

For example, if the other party desires to alter a widget's design, the Manufacturer can assess the proposed changes and negotiate suitable adjustments to the agreement before committing to the new specifications. This ensures that both parties have a clear understanding of the changes and their potential impact on production costs and timelines.

General contract law principles, such as mutual assent and the enforceability of written agreements, support the Manufacturer's interest in having a clear and enforceable mechanism for negotiating and agreeing upon changes to product specifications.

It is crucial to consider the ""pre-existing duty rule"" and the UCC in the context of contract modifications. The pre-existing duty rule stipulates that a party cannot use their pre-existing contractual obligations as leverage to negotiate for additional benefits in a contract modification. However, under UCC § 2-209, contract modifications can be made without additional consideration, as long as the parties agree to the modification in good faith. This means that, in the context of an MAS Agreement involving the sale of goods, the parties can modify the contract terms, such as product specifications, without needing to provide additional consideration, as long as they obtain the prior written consent of the other party as suggested.

Sample Language:

MANUFACTURER AND SUPPLY OF PRODUCT

1. MANUFACTURER shall manufacture products listed in Exhibit A (the “Products”) in accordance with specifications stated in Exhibit B (the “Product Specifications”) and shall supply Products to CUSTOMER in accordance with the Accepted Purchase Orders as defined in Article 7.  

2. CUSTOMER or MANUFACTURER may not change the Product Specifications without prior written consent from the other Party. If CUSTOMER requests to modify the Product Specifications, MANUFACTURER shall (a) notify whether the requested change is feasible, along with an estimate of costs to implement change and adjustment to the Product pricing, (b) negotiate in good faith with CUSTOMER the revised Product Specifications and the cost and schedule for implementation. MANUFACTURER will be entitled to full reimbursement by CUSTOMER for any reasonable costs incurred by implementing changes.

3. CUSTOMER will make all reasonable efforts to provide clear instructions, documentation, and Product Specifications to MANUFACTURER.

RECALL

For: Customer

Alert: May be missing an article regarding product recalls.

Guidance: In an MAS Agreement, addressing the allocation of responsibilities and liabilities related to product recalls is of utmost importance. A well-defined provision that outlines the roles, procedures, and liabilities of both parties in the event of a recall is essential to protect their interests and minimize potential legal and financial risks.

A clear framework for handling product recalls benefits both parties by ensuring they understand their respective responsibilities and reducing the likelihood of disputes or misunderstandings. For instance, if a product is found to be defective or unsafe, leading to a mandatory recall by a regulatory authority, a well-defined product recall provision would help both parties efficiently coordinate their efforts, share relevant information, and allocate costs and responsibilities associated with the recall.

Relevant statutes or laws to consider include the Consumer Product Safety Act (CPSA), and any other applicable federal, state, or local regulations related to product safety and recalls. Incorporating these legal requirements into the proposed product recall provision will help ensure compliance with all relevant laws and regulations, further protecting the interests of both parties.

One significant exception or doctrine that applies to product liability is the doctrine of federal preemption. This occurs when a federal law or regulation takes precedence over a conflicting state law or regulation. In the context of product recalls, federal preemption may arise when a federal agency, such as the Consumer Product Safety Commission (CPSC), issues a mandatory recall or establishes safety standards for a particular product. In such cases, the federal regulations may preempt state product liability laws, limiting or altering the manufacturer's or seller's liability under state law. However, the extent of preemption may vary depending on the specific facts and circumstances of each case.

Sample Language:

RECALL

1. Each Party shall notify the other Party as soon as possible when it receives information, whether received directly or indirectly, which may affect the marketability, quality, safety, or effectiveness of the Product or which may result in a recall of the Product.

2. If it is required by any regulatory authority to recall any Product, MANUFACTURER shall be responsible for conducting the recall of any Product. 

3. MANUFACTURER shall reimburse {%pa1%} for (a) the purchase price paid by {%pa1%} to MANUFACTURER for the recalled Product, and (b) all of {%pa1%}’s costs actually incurred by {%pa1%} in connection with the recall.

REMEDY FOR NON-CONFORMING PRODUCTS

For: Customer

Alert: May be missing an article covering remedies regarding non-conforming products.

Guidance: In an MAS Agreement, addressing remedies for non-conforming products is essential to ensure both parties have a clear understanding of the process to follow if the supplied products fail to meet the agreed-upon specifications, quality, or other requirements.

For example, if a company contracts a supplier to produce custom-made widgets and the delivered widgets do not meet the agreed-upon specifications, having a provision in the agreement that outlines remedies for non-conforming products would provide a clear process for addressing the issue. This could include requiring the supplier to replace the non-conforming widgets or providing a refund for the affected products.

To ensure that the remedies provided are consistent with applicable law, it is important to consider relevant statutes, such as the UCC, specifically Article 2, which governs the sale of goods and provides remedies for non-conforming goods. One significant doctrine within the UCC is the ""perfect tender rule,"" which allows the buyer to demand perfect performance from the seller and provides the buyer with several remedies in case of non-conforming goods. However, this rule is subject to certain exceptions and limitations, such as the parties' agreement to modify the rule, the buyer's waiver of the right to reject non-conforming goods, or the application of the ""cure"" provision under UCC § 2-508.

Sample Language: 

REMEDY FOR NON-CONFORMING PRODUCTS

In the event that CUSTOMER has found the Non-Conforming Products, {%pa1%} may seek one of the following remedies at MANUFACTURER’s sole risk and expense:

(a) to receive a full refund for all the Non-Conforming Products and reject or withhold payments for such Non-Conforming Products if such payments have not been paid; 

(b) to require MANUFACTURER to repair or replace the Non-Conforming Products; or

(c) to repair or replace the Non-Conforming Products by itself and recover from MANUFACTURER all expenses reasonably incurred by {%pa1%} for such repair or replacement.

Best Practices for Using Manufacturing and Supply Agreements

To make the most of your Manufacturing and Supply Agreements and ensure their effectiveness, follow these best practices:

  1. Conduct Due Diligence: Before entering into an MAS, thoroughly research the other party. For purchasers, this means evaluating the manufacturer's capabilities, quality control processes, financial stability, and reputation. For manufacturers, this means assessing the purchaser's financial health, projected volumes, and market position.
  2. Negotiate Terms: While a template can provide a good starting point, it's important to negotiate the specific terms of your agreement to ensure that they align with your business goals and needs. Be prepared to discuss and negotiate key provisions such as pricing, quality standards, delivery schedules, and liability terms.
  3. Be Clear and Specific: Clarity is essential in an MAS. Make sure that all terms and conditions are clearly defined and that both parties have the same understanding of their rights and obligations. Use specific language and avoid ambiguities that could lead to disputes down the road.
  4. Plan for Contingencies: Consider potential issues that could arise during the course of the agreement, such as supply chain disruptions, quality issues, or changes in market conditions. Include provisions in your MAS to address these contingencies, such as alternative supply sources, corrective action procedures, or price adjustment mechanisms.
  5. Communicate Regularly: An MAS is not a one-time transaction but an ongoing relationship. Maintain regular communication with your manufacturing or supply partner to ensure that the agreement is being followed and that both parties are meeting their obligations. Regular check-ins can help identify and address any issues before they become major problems.
  6. Monitor Performance: Regularly monitor the performance of your manufacturing or supply partner against the metrics and standards set forth in the agreement. This may include quality audits, on-time delivery rates, and responsiveness to issues or complaints.
  7. Be Prepared to Enforce: While no one enters into an MAS expecting it to fail, it's important to be prepared to enforce the terms of the agreement if necessary. This means being willing to utilize the dispute resolution provisions, terminate the agreement for material breach, or pursue legal remedies if warranted.

Conclusion

Manufacturing and Supply Agreements are essential tools for companies that rely on third-party manufacturers for a steady supply of goods. By clearly defining the terms and conditions of the manufacturing and supply relationship, including specifications, pricing, delivery, quality control, intellectual property rights, liability, and termination, these agreements provide a framework for a successful and mutually beneficial business relationship.

To ensure the effectiveness of your Manufacturing and Supply Agreements, it's important to include comprehensive provisions that address the unique needs and risks of your specific industry and business. The agreement should be tailored to your particular circumstances, thoroughly reviewed by legal counsel, and regularly monitored for compliance and performance.

By following best practices for negotiating, drafting, and managing your Manufacturing and Supply Agreements, you can build strong, reliable, and long-term manufacturing and supply partnerships that support the growth and success of your business.

Our guides are for informational purposes only. Such information is not legal advice and is not guaranteed to be correct, complete, or an up-to-date representation of LegalOn's legal content. Nor is the information tailored to the unique needs or objectives that accompany each transaction. For legal advice for a specific problem, you should consult an attorney licensed to practice law in the appropriate jurisdiction for each transaction.

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