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This article is written by Namita N Wagh, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

What are International Manufacturing Contracts

International Manufacturing Contract is used in situations when one Company arranges for another company in a different country to manufacture its product in other words, international subcontracting. The Company which subcontracts the manufacturing is generally based in developed countries and the manufacturer in the developing country.  The Company provides the manufacturer with all the specifications, and applicable, also the materials required for the production process.

Foreign Exchange Regulations

Prior to entering into a contract, one or both of the parties may need to comply with exchange control regulations. Appropriate checks should be made of such regulations. 

Made in India- Outsourced Contract Manufacturing

Within the biotechnology industry, the number of US India collaboration is on rise. However, there are some problems many US firms identify in their collaborations including but not limited to smaller than expected cost savings, excessive time spent on managing relationships, and production delays. According to the joint study by Ernst and Young and the organization of Pharmaceuticals of producers of India, India grew at 43% of global rate as manufacturing outsourcing destination for Pharmaceuticals.

100% FDI in Manufacturing Contracts

According to the reports of “The Economic Times’’ (mentioned in reference) India is considering allowing 100% FDI in contract manufacturing to give a boost to manufacturing in the country along with foreign inflows. Although the existing norms allow 100% FDI in the manufacturing sector under automatic route, there is no clarity on contract manufacturing. The rules say that “a manufacturer is permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce, without government approval”.

Some important clauses in International Manufacturing Contract

  • Obligations of the parties

Obligations of manufacturer

The Manufacturer hereby agrees and undertakes to the following terms listed below:

  1. Manufacturers should meet the timelines as per agreed milestones.
  2. Manufacturer should develop the product as per project plan.
  3. The product must be ready for delivery within specified months or weeks from the date of order.
  4. As it is an international contract, the manufacturer should provide timely reports via email, messages, calls, or any other way.
  5. The manufacturer should be available for timely discussions with the Company, and also update new improvements to the Company.
  6. The manufacturer should agree to incorporate necessary changes suggested by the Company.

Obligations of Company

The Company hereby agrees and undertakes to the following terms listed below:

  1. The Company undertakes to make timely payments for every milestone/tranche.
  2. Provide all necessary information for manufacturing of goods to the manufacturer in a simple and comprehensive manner.
  3. Undertakes to provide all necessary materials, or goods or resources to the manufacturer for manufacturing the products.
  • Inspection and testing

  • Material and equipment shall be tested properly to ensure that it is as per the project plan before it is released for use.
  • Inspection of material which are traded to foreign land or which are exported shall be done with due and reasonable care.
  • Inspection of Quality, specifications, quantity, volume, packaging, label, hygiene safety.
  • Pre shipment Inspection. (M/S. Shree Ganesh Stell Rolling vs. M/S Anjaney
    International Co… 28th August 2009)
  • Pre delivery Inspection
  • If the standard quality prescribed is not met, the product can be rejected by the owner through a notice within specified time period.
  • One the inspection is completed the manufacturer will ask the Company to provide required documents relating to export shipment so that, to send Certificate of export inspection.

Testing

  • All the work will be subject to testing at any reasonable time or times by the Company
  • Any inspection or testing shall not relieve the contractor of the responsibility of providing quality control measures that work strictly complies with contract requirements.
  • During the manufacturing process the work will be tested and observed by the Manager or his representative, it shall be tested within a reasonable time.
  • All the work that is deficient or does not meet the specification shall be removed and replaced with proper material at Company’s expense.
  • In case law M/S. Oblum Electrical industries vs. collector of custom Bombay 1992, it happened that the beams were susceptible to breakage and damage have to be continuously replaced in course of manufacture. 
  • Delivery terms

  • All the products to be delivered by manufacturer under this Contract shall be delivered to the place decided by the Owner/Company.
  • It should be delivered as per the details specified by the Owner.
  • In case the delivery address is not known to the Company or changed then relevant details shall be given to the manufacturer as soon as possible.

Delivery period

  • The delivery period begins as soon as the contract is concluded and all official formalities are done, the payments arising from the order are done and any collateral are paid.
  • The delivery period is deemed to meet if readiness of dispatch has been communicated to the Company before it expires.

Delivery transport

  • The products are packed appropriately by the manufacturer. The packaging will be charged to the company at cost.
  • Special requests regarding shipping and insurance are to be announced to the manufacturer at good time. Transport takes place at the expense and risk of the Company.
  • Benefit and risk are transferred to the Owner at the latest of dispatch of deliveries of products.
  • The shipping is delayed at the request of the Owner or for other reasons, for which the supplier is not responsible, the risk is transferred to the Owner at the time originally intended for the dispatch products. From this point on, the work is stored and insured at the expense and risk of the Owner.
  • Rejection of products

  • Rejection occurs when one party decides not to accept the offer which was made. Rejection also means that one party refused goods offered to them as a part of contractual performance. If the goods offered in a contract do not conform to their contractual description, the buyer has the right to reject goods. 
  • If the buyer wants to reject the goods/products, they should make their rejection within a reasonable amount of time after delivery. The buyer must also Alert the seller that they are rejecting the goods.
  • Rejection can mean different things depending upon the law. First is parliamentary law means rejection indicates a failure to ratify or adopt. In patent law, rejection means that the patent examiner decided that the invention cannot be patented. A rejection does not take effect until the supplier/Manufacturer receives notice of rejection.
  • In many cases, documents are conformity with contracts on Surface, while goods are not conforming with defects. The buyer cannot reject the documents but may reject the goods. Because buyer’s right to reject nonconforming goods and nonconforming documents are different.

Defects exist both in documents and goods

  • The documents are faked, hiding the good’s defect. In this case the seller does not provide the real documents or deliver conforming goods.
  • Secondly, the documents reveal the defects of the goods. The seller delivered the nonconforming documents and nonconforming goods, it is different from the first institution. In the first case, the buyer cannot find the documents fake, so he can exercise the right to reject the goods. On the other hand, in the second case the buyer accepts the wrong documents, meanwhile he has lost the rights to reject nonconforming goods.

Relationship between Rejection of Goods and Documents

  • Buyers rejection of documents is separate from rejection of goods. Beside the buyer’s rejection of documents relates to rejection of goods. For one thing, disposing of the buyers to the goods have no influence on rejection of documents. For another, after acceptance of nonconforming documents means loss of rejection of goods. Therefore, at some extent the two rejections of the buyer are not separate from each other. 
  • Intellectual property

  • As the term Intellectual property relates to the creation of human mind and human intellect, this property is called Intellectual property. 

International Copyrights: Copyright will give you complete protection if your work includes original work of authorship such as art, advertising copy, books, music, etc. The Central Government can extend provisions of the Act to work published out of India or to unpublished work made out of India work of a foreign author who has died. The Central Government can declare some international organizations as eligible to hold copyrights. Government or sovereign powers should be members of such an organization.

Berne Convention for protection for literary, artistic works and universal copyright convention are the two important international treaties to provide copyright protection. India has adopted these treaties and if any copyright exists in India, it enjoys protection in all convention countries.

Patents: If you are developing a new product the patent gives you best protection. It will secure the right to prevent others from making, using or selling the patented product described in words in the patent’s claims. Patent Cooperation treaty (PCT) provides for international cooperation. Patent act allows grant of patent to persons out of India, on the basis of international arrangements.

Trademarks: Trademark rights will protect the symbolic value of word, name, symbol or device that the trademark owner will be using to distinguish its product/Company from those of others.

In Exphar Sa & Ors. vs. Eupharma Laboratories Ltd. 18th April 2012, the plaintiff is the proprietor of trademark MALOXINE as also copyright in MELOXINE packaging and MALOXINE tablets were sold by the defendant in cartoons clearly attributing the ownership of trademark MALOXINE to the plaintiff.

Conclusion

  • Indian Government is working on multiple fronts to make India a manufacturing hub with a strong focus on export. Nitti Aayog CEO ‘Amitabh Kant’ said that the Government is finalising its plan to expand its Production link-incentive (PLI) to more sectors for boosting domestic manufacturing. 
  • He also noted that Atma Nirbhar Bharat does not mean self-isolation but a very deep integration into the global value chains and using the manufacturing strength of India to become a leading exporter globally
  • We are living in the golden era of IP were billions of Patents being filed every year, these patent would require suitable and adequate legal documentation in order to successfully commercialize and give any benefits to their owner because any innovation without adequate safeguards is a treasure trove for infringers which disrupts the genuine claims of the rightful owner of the IP and causes loss of value to the economy.
  • In this contract, I am of the opinion that the Obligations of both the parties must be fulfilled and if the product is not as per the subject requirement or if it is defective it can be rejected. It shall be rejected within a reasonable time after giving notice to the manufacturer. Inspection of all materials as mentioned in clause 2 shall be done.

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