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This article is written by Suhasani Kamble, pursuing a Certificate Course in Advanced Commercial Contract Drafting, Negotiation & Dispute Resolution from LawSikho.com.

Introduction

International manufacturing contracts are made when a company arranges to start another company in a different country to manufacture its products means an international subcontracting. The company provides all the required specifications and probably also the materials necessary for the manufacturing process. The contract starts with all the necessary supplies which the manufacturer will get satisfied concerning the quality of the products, certification, quantities, conditions and dates of delivery, etc. The related clauses are to be mentioned in such contracts. Like the clauses regarding the inspection and testing of the products, modifications to orders as well as guarantees and compensations in case of breach of the contract also be mentioned in such contracts. 

This type of model of contracts may be used for the subcontracting of products such as food, textiles and clothing, furniture, toys, electronics, components, machinery, etc. Language being an important part, as it is an international contract the language may differ from country to country. If the manufacturing is carried out in foreign country like the USA, China, Spain or any other country it is advisable to use the language of that country like (English – Spanish) or any other.

Before entering into any such contracts one or both of the parties may need to comply with Foreign exchange control regulations and be updated with applicable & suitable rules and & regulations. In such contracts there are some specific points to be described in the contracts which are mentioned as below in this article:

Obligations of the manufacturer

It is a very important part of the contracts as the obligations compel/require to undertake a legal/moral duty to the process of the work to be done smoothly by the manufacturer. They put their trust in companies and in manufacturers to ensure purity and safety and thus, the manufacturer bears the consequences of poor or shoddy goods and services. So, let’s see what are the obligations of the manufacturer.

  • The manufacturer shall have the full knowledge of the rules and regulation to be followed by him/her to carry out the manufacturing in respective country.
  • Ensure with the security of the materials provided for the business.
  • Perform safety assessment to identify hazardous that can emit through the production, if it’s necessity of the material.
  • Draw up technical documentation as per requirement and check on the retain- ability of the product in the market.
  • Keep up the trust maintained on which the company and the manufacturer had promised to deliver and should meet the timelines as per agreed milestones. 
  • Ensure production control, create a product without any defect in it, provide safety devices to the workers, check out the quality of the product etc.
  • As it is an international contract, the manufacturer should provide reports via email, messages, calls, or any other way time to time as per the contract.
  •  Give detailed information about the use of the product and put warning stickers on the products, advising consumers about potential dangers etc.

Inspection & testing

These measures are important for the determination of the quality level of the products. Before bringing the product into the market for distribution, the manufacturer has to check the product by inspecting and testing the same by a professional and well qualified expert. 

They are measures aimed at checking, testing of one or more product characteristics and to reach the required quality and comply. This tool helps to control quality, reduce manufacturing costs, reduce rejection loss and assign causes for the production of defective products. There are bodies like National Accreditation Board for Certification Bodies and International Accreditation Forum in India for looking into such inspection and testing.

Delivery terms

The term describes mainly the tasks, costs and risks involved in the delivery of the product. In international business, an agreement is made between the seller and buyer as to who is responsible for the cost and risk of delivering the goods. The Incoterms rule is suited to the type of goods sold, the means of transport used, and other obligations of the seller and the buyer which could include insurance or customs clearance. In this the either parties may be responsible for the cost and risk. The delivery terms have to be mentioned clearly in the contract, like the place of the delivery and specified time and the quantity of the products to be delivered. 

The international chamber of commerce has set up approximately different types of delivery terms for international movement of products. Common examples of this delivery type includes EXW (Ex Works) and FOB (Free on Board). 

In EXW it means that the seller has fulfilled his/her obligation to deliver the good when he/she has made it available at his/her premises for the buyer to pick up. Therefore he/she is not responsible for the transporting as it reaches the buyer. 

The FOB implies the delivery facilities like conveyance and management performed on goods up to the customs frontier. In such types of delivery the seller has fulfilled the obligation to deliver a good when he/she has transferred it to the ship on which it will be transported. Here the buyer designates the ship onto which the seller must deliver the goods and all the cost and risk ends over here. 

The delivery period mentioned in the contract shall be binding to the parties. the party has to inform the company about the delivery. If there is any delay for any issues both shall have the responsibility to look into the matter and solve the same as to be mentioned in the contract. 

Rejection of products

Rejection of the product means it is rejected/returned because of the defect in it. The contract should have a proper clause which clarifies the rejection related issues that occur during the production, transportation or delivery of the product. There should be a remedy mentioned in the contract as this right is lost after the acceptance of the product. 

The contract should clarify that the product should not be faulty or damaged or at least be of satisfactory quality. A quality finalizing clause shall be mentioned in the contract to be binding to both the parties getting into the contract in which the billing should be proper and delivery details should be properly mentioned and if there is any defect then the receiver has the right that he/she shall on the given time period return the product.

The defect exists in both the document as well as the product. The documents sent with the product shall have the proper details in it. It should have no hidden facts or fake documents related to the product. The receiver has the right to reject the product in such instances. 

Case law

Haldiram Manufacturing Co.Ltd v/s Srf International on 20 march, 2007, Delhi High Court.

In this case the ingredient named “khas khas” was mentioned in the package so it was returned by the buyer as it was mentioned that it should not be included in the product and the seller had to face many issues as the buyer directly filed a case in the court rather than going through the procedure of Arbitration and Conciliation Act, 1996, even it was mentioned in the agreement made by the parties. The case then referred to the arbitration process with the said report of this case. 

Intellectual property rights (IPR)

The IPR law is a patchwork area of crossing multidimensional and bilateral contracts resulting in harmonization of national laws. It has become an increasingly important and frequently litigated area, particularly in the patent, copyright, and trademark arenas. 

There are international treaties which provide protection for all creative works in a standard form. Like the Buenos Aires Convention and the Berne Convention, WIPO copyright treaty etc. The legal rights that provide the creators protection for the original work, inventions, or the appearance of products, artistic works etc. and are usually an exclusive right over the use of his/her creation for a certain period of time. 

A proper clause shall have to be mentioned in the contract. It should give a clear idea related to the ownership of the product and for this there is a need to keep it under scrutiny, be aware of the IP rights, consult an expert regarding the same, double check if your idea is unique etc.

Case law

M/s. Superflo Pvt Ltd v/s M/s SandhyamaniAssociates (P) on 17th dec 2015, Delhi High Court.

In this case the trademark used by the defendant was identical so it was held that till final disposal of the suit the defendant is restrained to use the plaintiff’s mark SUPERFLO or any other mark similar to it.

Conclusion

Many important points are to be mentioned in an international manufacturing contract as per the law of both the countries who are getting into such contracts. Till today there is no proper law related to international manufacturing in India. Specific law should be brought before for the smooth and safe international manufacturing laws in India. 

References

  • internationalcontracts.net
  • freedictionary.com
  • lbfpartners.com
  • rightsdirect.com
  • ciindia.in

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