This article is written by Jyoti Choudhary, student of diploma in Contract drafting from Lawsikho, here she discusses the major reasons of dispute in a Manufacturing Agreement.
Introduction
The Indian economy has grown fastest in the past few years itself. Many foreign businesses have started taking interest in investing in the Indian market and establishing their commercial activities in India. Some of the companies deal in manufacturing products like clothes, devices, machineries, drugs etc. When manufacturing companies come up with their own idea and designs, they may take external services from Original Equipment Manufacturers (‘OEMs’) for manufacturing some parts of the product like motor, engine, and tyres. For this purpose, the parties can enter into manufacturing or/and supply agreement.
What is Manufacturing Agreement?
A Manufacturing agreement is a legal document which is executed by two parties i.e., Manufacturer and Owner. The Manufacturer promises to manufacture products for the Owner/buyer for consideration. Whilst drafting an agreement, the draftsman should include the entire process, design, quality standards, materials to be used, costs, payment, and delivery. This should also include the date of execution, date of delivery, timelines for production, supplies, quality standard, number of experts and their qualifications, notices, norms and with standard regulatory and governance terms and conditions.
What are the vital points for Consideration in the Agreement?
It’s critical in the manufacturing industry to get on-time delivery of the products. This is one of the reasons why manufacturing agreement comes in handy. A manufacturing agreement will give the parties a clearer idea as to how to perform and cooperate efficiently. The terms of the agreement may change at the discretion and consent of each party. To avoid or minimize the dispute, the Manufacturing Agreement should answer the following questions:
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- What happens if the manufacturer has sent me goods with defects?
- Who is responsible for damaged goods?
- Will the manufacturer be able to use my design and intellectual property for other purposes?
- What are the manufacturer’s responsibilities for me?
These points may vary depending on the nature of the contract. However, the dispute may arise between the parties under this agreement if the points are not taken into consideration.
Top 5 reasons for dispute in the Manufacturing Agreement
Company’s high-risk points
Every company is different, be it fashion, pharmaceuticals or heavy machinery manufacturing companies that comes with a different kind of risk. For some company, the equipment used in the creation of the final product and their costs are considered as their high risk and same must be addressed in the agreement while drafting.
For companies having heavy productions every year, it is vital to meet the basic requirements of the customers, which involve pricing, user-friendly gadgets, security, health, and social care.
There is a constant risk of competition in this industry. In the year of 2015, 98% of manufacturers were found to be incompetent to manage, complete, and integrate M&A and joint venture.
Other emerging and growing risks are cybersecurity, labor, pricing, technology, and competitive and regulatory risks.
Deficiency in the design of the products/Quality standard of the products manufactured by the Manufacturer
Every industry has unique quality requirement or standards of compliance that regulate manufacturing. Quality standards set out the priority areas for quality improvement in health and social care. Quality standards if provided clearly by the Owner in the manufacturing agreement with all the requirements can eliminate the risk of future dispute. So, when the parties entered into an agreement, the Manufacturer shall comply with the instructed standards of the agreement. However, when specified information has not been mentioned clearly in the agreement, there’s bound to have some mishaps.
Further, the dispute may also arise when the company enters into a contract with the Original equipment manufacturers but the product manufactured doesn’t meet the quality standards of the company. The company may ask for modification or compensation or cancellation of the order under the agreement.
In M/S Michigan Rubber(I) Ltd vs State of Karnataka & Ors, the Appellant/Company challenged the order passed by the High Court of Karnataka wherein it was held that the Appellant was asked to supply the products as per the said pre-qualification criteria. The Appellant contended that they have successfully made the supply of products in previous three contracts. There was no complaint pertaining to short supply and quality. Hence, the impugned pre-qualification criteria shall be excluded from the tender bidding process. However, in instant case, the SC affirmed the pre-qualification criteria imposed by the HC and stated that contentions of the Appellant are baseless and unreasonable.
Warranty Obligations
A good agreement will clearly explain the promises and obligations of the parties to the contract. That means focusing on what promises should suppliers make as to the performance of the product?
What are your promises towards the customers in relation to the design, manufacture, function or life of your product? Is there any lacking in the contract with your answers to the previous questions? If yes, the parties shall require taking actions for alignment of the contract with the said requirement and promises. There should not be any miscommunication between the parties which may end up into a future dispute.
Often than not, parties do land up in disputes before the court, where parties do not give specifications as to who will be held responsible when executing the agreement. Here, the consumer will file the complaint against the company which might put both the parties into years and years of dispute and expensive arbitration proceedings. Most of the parties enter into a binding agreement for the sole purpose of not getting into the dispute in the future.
For example: ‘A’ purchased a motor vehicle of XYZ Ltd., a well-reputed company in the industry. The motor vehicle has a warranty of 2 years but after usage of 8 months, the vehicle caught on fire, which results in severe injuries to the consumer. ‘A’ filed a consumer complaint against XYZ Ltd. for having manufacturing defects and can ask for compensation. Now, in the Court, XYZ Ltd. may be held responsible or waive their liability to pay compensation by stating that the manufacturer warranty was given by the Original Equipment Manufacturers. Is consumer entitled for the compensation? Who will be held responsible for such events? How much compensation is to be paid by the responsible party. If the agreement, more specifically, a warranty clause answers all these questions, there will be less chances of disputes between the parties. Here, when the products do not meet any or more of Consumer Guarantees, the consumer will be entitled to some remedies against the suppliers and/or manufacturer as per the agreement.
IPR Ownership
The intellectual Property right is any other property right. It is a category of property that includes intangible creations of human rights. The main intellectual property rights are patent, designs (registered or unregistered), trademarks and passing-off type rights and copyright and related rights.
In a good manufacturing agreement, intellectual property rights will be spelt out clearly as to who owns the intellectual property (IP) rights that are incorporated into the product or that are used to manufacture the product. Let’s say, you’re designing a specific device for a customer’s manufacturing process. Your engineers are creating IP with respect to that design. Who owns that IP? Who gets to exploit it? These questions should be clearly defined within your contract, so it’s aligned with each party’s expectations. The bottom line is that if IP is important to you, make sure your contract gives you the rights and protections you need.
In case of Bridgestone v. Bridestone, Delhi HC took serious action against Tolin Tyres for denying to export the tyres under trademark “BRIDGESTONE” in spite of constant requests. The Defendants herein held liable for an infringement of trademark and order of permanent injunction was passed against Defendant. The Defendant was also held liable to compensate the Plaintiff towards damages faced due to export of tyres under trademark ‘BRIDESTONE’.
Confidentiality
When a party enters into a contract, where sensitive information is to be shared with the other party to achieve the purpose of the contract. The contract will spell out the set of information which is confidential and very important to the business. The parties agree to maintain the information secretive in pursuant to the agreement. So, the parties are restricted to share that information with anyone who is not the party to the contract. This will ensure the protection of the party from a potential competitor or dispute.
To avoid leaking the confidential information, the parties shall require adding a non-disclosure clause. What is confidential? What information is confidential? When and where the information can be used? Who can use the information? What happens when either of the party shares this information outside? This clause should explain these questions in order to avoid future disputes and to have a smooth transaction. In the event of a breach, the party which infringes the contract must compensate the other party in a way which has been agreed by the parties in the contract.
For example, B Ltd is a truck manufacturing company, whereby tires to be used in the finished products are to be supplied by the Original Equipment Manufacturer. In order to do so, B Ltd. entered into an agreement with OEM for manufacturing of tires. In the agreement, parties shall agree not to disclose any confidential information, which has been defined under the agreement and the consequences in the event of a breach.
Resolution of dispute in Manufacturing Agreement In India
When entering into a contract, parties’ intention to create legal relation is an essential feature under the Indian Contract Act, 1872. The existence of the intention of the party will depend on the nature and form of the contract and the contracting parties. In commercial agreements, there is a rebuttable presumption that parties intend to create legal relations and conclude a contract. In case of dispute, the Court will look at the intentions of the parties.
In a landmark case of Balfour v Balfour, the Court gave attention to the importance of intention of the parties. In instant case, it was determined to be a social activity between the spouses. There was no intention to create a legal relation. Hence, the Court passed the judgment in favor of Mr. Balfour.
So, this can be applicable to cases where the agreement is not binding and not enforceable in the eye of law. But what happens when parties entered into an agreement which has legal enforceability? In such cases, parties may settle the matter among themselves or may appoint an arbitrator for amicable settlement under the agreement. In India, arbitration proceedings are regulated under the Arbitration and Conciliation Act, 1996 and are the alternative of litigation for resolving the sophisticated and modern engineering-based dispute. In arbitration proceedings, the appointment of the arbitrator will be done with the consent of both the parties. Most of the arbitrators are either laymen or retired judge or lawyers, whoever being agreed by the parties of the agreement.
In Satyendra Kumar v. Hind Construction Ltd., AIR 1852 Bom. 227, it was held that ‘where the parties to a dispute refer the matter to a person and such person holds a judicial inquiry in deciding that dispute and comes to a judicial decision, such a person is called an ‘Arbitrator’.
Information requisition form for a Manufacturing Agreement
The information which will be required to perform a legally binding manufacturing agreement:
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The manufacturing agreement is entered between
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| 2.Product | The Owner has given an order for manufacturing 100 tyres for multi utility vehicles.
Product Specifications: Size: 175 R14 C 96/94Q (6P) Tyres Type: Tube Type Design: Flat Contact Patch (FCP) design Features: LIGHTNING GROOVE pattern to drain water away from the tyre and to increase traction. Design by: Bridgeside Tyres |
| 3.Prototyping | Date of production of Prototype: 16th September 2019
Testing by: Senior Engineer of the Owner Protype Cost shall pay by the Owner |
| 4.Intellectual Property |
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| 5.Manufacturer’s warranties/Quality Control | The Manufacturer should make quality control check before delivering the finished product, which are:
As per BIS Quality Control Order w.e.f. 13/5/2011, all tyres must have ISI mark engraved on the tyres sidewall. Tyres should be manufactured under Central Motor Vehicle Rules and BIS Standards. Warranty: 5 years from the date of manufacture or till the tyre tread is worn up to “TWI” (i.e. tread wear indicators), whichever is earlier. |
| 6.Confidentiality | The parties to the agreement are restrained from disclosing any confidential information in pursuant to the agreement.
For this purpose, the parties shall be entering into Non-Disclosure Agreement for protection against infringement. The parties have agreed to oblige a ‘Return of Confidential Information’ in case of termination of non-disclosure clause in the agreement. |
| 7.Indemnity | No indemnity shall be provided for the wire and tire of tyres only. However, if harm, loss or damage caused to the entire truck or product, the insurance company may compensate the consumer under the agreement. |
| 8.Payment Terms | The Manufacturer shall deliver the products on the date of delivery agreed by the Parties. In return, the Owner may make payment in advance, or cash on delivery, or a deferred payment period of 30 days from the date of delivery of the products. |
| 9.Termination | The agreement shall stand terminated in the following events:
Notices: Any notice given to a party for the purpose of this agreement shall be in writing and shall deemed to served properly by courier, sent in person, by fax, by e-mail, by prepaid recorded delivery or registered post at the address of such person. |
| 10.Ownership/title and risk | Ownership of products shall products shall transfer to the Buyer on clearing of all due amount regarding the products. By that time, the Buyer shall be considered as bailee for the Seller. |
| 11.Disputes | In the event of Dispute in this agreement:
The aggrieved party may appoint an Arbitrator as per the agreement. The arbitrator can be appointed by either of the parties or both the parties. Place of Jurisdiction: Pune, Maharashtra. |
Conclusion
Since the process of creation, execution, formation and performance of the contract is time consuming and a long-term transaction, the aim of the parties must be to create a legally binding agreement that aligned with the parties’ expectations and accurately sets out the parties’ business relationship. While reviewing the contract parties are require to carefully go through each and every clause stated therein and also keep in mind the company’s high risk points. A legally binding and carefully drafted contract shall provide protection and shield to the parties from every possible risk and can help in maximizing the benefits from it.
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