International Manufacturing Contracts: Perfection Should Cost Less

1. The Perfect International Manufacturing Contract

My law firm generally uses flat fee billing for international manufacturing agreements. We have done so many of these that we pretty much know the range of time one of these will take, even allowing for the required customization and the normal back and forth negotiating that will go on between our client and their supplier. Our time estimates are nearly always dead on, except for those clients who want the “perfect” OEM agreement.

Those take us less time.

Let me explain.

I am always saying it is easy to write the “perfect” contract and it is. The perfect contract does everything possible to protect your client. At least in theory.

By way of example, the “perfect” manufacturing agreement would contain something like the following:

1. The product supplier cannot raise its prices during the three year term, but the product buyer has no minimum purchase requirement.

2. Product deliveries more than 10 days late, for any reason, result in a $100,000 cost reduction penalty.

3. Product buyer does not pay until 30 days after the product has arrived at the product buyer’s facility, been inspected, and been approved. No time limits imposed on buyer to do the inspection. Buyer pays nothing for non-conforming goods and need not return them to supplier.

4. Product supplier is penalized for a defect rate of more than 1%.

5. Arbitration shall occur in Topeka, Kansas (buyer’s hometown).

6. Product supplier cannot sell similar product to anyone else. Buyer is free to buy from anyone else.

Okay, you get the picture. This is obviously a great/perfect contact for the product buyer.

2. The Better Than Perfect International Manufacturing Contract

Except there is only one problem. No serious product manufacturer will ever agree to a contract like this, unless you are Walmart or Apple. In fact contracts like this are automatic deal killers and that is why we should charge less for them.

Over the years, our international manufacturing lawyers have been asked maybe half a dozen times to write manufacturing agreements not all that dissimilar from that set forth above. Each time, we have counseled our clients against this sort of agreement, but a few times we have been instructed to go ahead. Once (or maybe even twice), the client remarked on how they bet Wal-Mart has this sort of contract. Our response was that we had seen a number of Walmart’s contracts and though they do tend to be pretty favorable for Walmart, they also typically contain massive minimum purchase guarantees that make the contracts worthwhile for the foreign product supplier.

Now usually when we write a normal (as opposed to a “perfect”) manufacturing contract, we hear back from our client within a couple of days, discussing potential changes to the contract suggested by the foreign product supplier. We then work for another few days to a week on modifying the agreement to suit both sides and then we are done.

With the perfect contract, we get silence and then we eventually contact the client. Each time, the client has told us that they have been unable to find a product supplier willing to do business “our way” and so they will be looking elsewhere for their supplies. We suggest they allow us to modify the manufacturing agreement before they go back out there looking for new potential product suppliers. About half the time, they say “no, we do not want to do business under terms that will put us at any risk.” Those companies typically end up buying from nobody.

The funny thing about the companies seeking the perfect contract is that they almost always are of a particular type: old line, mid-sized (not small) businesses that have been in business for a very long time and have carved out a pretty good niche and strong brand name in their market. They are looking at overseas manufacturing not so much because they have to, but because they believe it will allow them to cut costs and thereby increase their margins.

In any event, the lack of subtlety in the initial manufacturing contract and the subsequent lack of negotiations and back and forth between the Western buyer and their overseas product supplier means these are the agreements that fall short of our estimated time range. So I guess the next time someone persists on insisting that they want us to draft them the “perfect” manufacturing agreement from us, we will have to charge less for that than for one that will actually allow the deal to get done.

3. Additional Reading on International Manufacturing Agreements

For more on international manufacturing contracts check out the following:

• The 101 on International Product Sourcing
• International Manufacturing Contracts: The Basics
• International Manufacturing Contracts: Why Templates are a No-Go
• Manufacturing Contracts When Manufacturing in Multiple Countries

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