Manufacturing agreements and what to check before you sign

Your manufacturer emails their standard form agreement with a note that production cannot start until it is signed. You designed the product, you are paying for the tooling, but the contract on screen was drafted by the manufacturer, in their interests. What the agreement says about intellectual property, pricing, liability and termination will matter far more than the quality of the samples if the relationship ever sours.

A manufacturing agreement, sometimes called a contract manufacturing or manufacturing and supply agreement, binds a manufacturer to produce goods to your specification on an ongoing basis, usually against purchase orders, rather than as a one-off sale. It replaces the informal quotes, emails and purchase orders you may have been working on, and it governs everything from the unit price to who owns the moulds that shape your product, who carries the stock, and who pays if the goods injure someone.

The clauses that do the work

Who owns the IP in your product, and the tooling that makes it

This clause assigns or licences ownership of your designs, drawings, trade marks and any intellectual property the manufacturer creates while producing your goods. It is the first clause to check, because Australian copyright law does not follow the money.

Copyright in material the manufacturer creates, such as adapted drawings, packaging designs or improvements made during production, belongs to the manufacturer unless the agreement assigns it to you. Under s 196(3) of the Copyright Act 1968 (Cth), an assignment of copyright has no effect unless it is in writing signed by or on behalf of the assignor. A handshake, an email, or a purchase order that says "all IP to buyer" is not enough. The drafting choices below are the ones that matter:

The variant they push for: ownership of all IP developed during the term, or a broad licence allowing the manufacturer to use your designs for other customers once your order is finished.
The trap: ownership of tooling, moulds, dies and jigs left unstated. If the manufacturer paid for the tooling and the agreement is silent, the tooling is their asset. If they go into liquidation, your moulds are sold to pay their creditors, and there is no clause to get them back.
The drafting minimum: a written assignment of existing and future IP, plus express terms on who pays for tooling, who owns it, and what happens to it on termination, including a transfer or buy-back price.

How the price is calculated

The pricing clause fixes the unit price, what it includes (materials, labour, packaging, freight), the currency, and whether the price can change over the term. The drafting choice that matters most is how price increases are handled, because a manufacturing agreement often runs for years while input costs move. The points to check are:

Fixed price or indexed: whether the price is locked, or adjusts against an agreed formula or published raw material index.
Currency risk: if you manufacture offshore, who wears exchange rate movements between order and invoice.
The trap: a unilateral price variation clause. A term allowing one party to vary the upfront price without giving the other the right to terminate is listed in s 25 of the Australian Consumer Law, Schedule 2 to the Competition and Consumer Act 2010 (Cth), as an example of a term that may be unfair, and if it sits in a standard form contract with a small business it can be void.

Minimum order quantities and forecasts

Minimum order quantities (MOQs) and forecasting clauses set how much you must order, how far ahead you must forecast, and what happens if your orders fall short. The drafting choice that decides who carries the commercial risk is what a forecast actually means. The questions to resolve are:

Take-or-pay: if you forecast 10,000 units and order 4,000, do you pay for the difference, or is the forecast only an estimate?
The variant they push for: forecasts that bind you in one direction only. You must take the quantities you forecast, but the manufacturer is not obliged to supply more than your last confirmed order.
Inventory risk: where the manufacturer produces to forecast and holds finished stock, who pays for warehousing, insurance and obsolescence if sales do not eventuate?

Delivery dates and what happens when they slip

This clause sets the delivery schedule, what counts as a delay, and what you can recover when a run is late. A late delivery fee is only enforceable if it is a genuine pre-estimate of your loss, not a punishment.

Under the penalty doctrine, restated by the High Court in Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, a sum payable on breach is unenforceable as a penalty if it is out of all proportion to the legitimate interest of the party seeking to enforce it in performance of the contract. A flat $50,000 late fee plucked from the air will likely be struck down, while a fee calculated against your real costs, such as lost sales, expedited freight or customer penalties, is far more likely to hold. Two further drafting points matter:

Force majeure: whether events outside either party's control, such as port closures, raw material shortages or another pandemic, suspend delivery obligations or end the agreement, and which party carries the loss in the meantime.
The trap: a force majeure clause that excuses the manufacturer's obligations but does not let you source from elsewhere or terminate if the disruption runs on.

Quality, specifications and compliance with Australian law

The quality clause attaches the product specification, requires approval of samples and first articles, and obliges the manufacturer to comply with Australian laws and mandatory product safety standards. Two parts of the Australian Consumer Law (the ACL) make this clause matter even though your agreement is between businesses.

First, consumer guarantees apply to goods supplied to consumers down the chain, and consumers can sue the manufacturer directly. Under s 271 of the ACL, an affected person can recover damages from the manufacturer for failures of guarantees such as acceptable quality, and under s 274 the manufacturer must indemnify the retailer for the same failures.

Second, the ACL defines who the manufacturer is for these purposes. Section 7 of the ACL includes a person whose brand or mark is applied to the goods, and an importer where the actual manufacturer has no place of business in Australia. If your brand goes on goods made overseas, you are the manufacturer for ACL purposes, whatever the factory's contract says. The agreement should require the actual manufacturer to comply with the guarantees and to indemnify you for any claims that flow to you through your brand.

Who is liable if the product injures someone

Part 3-5 of the ACL creates defective goods actions against manufacturers for goods with safety defects that cause injury, death or other loss. The manufacturer's defences are limited: for example, that the defect did not exist when the goods were supplied by the actual manufacturer, that the goods complied with a mandatory standard, or that the state of scientific knowledge at the time made the defect undiscoverable (s 142 of the ACL).

The liability clause allocates that exposure between you and the manufacturer through indemnities and insurance. The key points to check are:

Your indemnity in: the manufacturer indemnifies you for claims caused by their manufacturing defects, non-compliance with your specification, or breach of Australian laws.
Their indemnity back: you indemnify the manufacturer for claims caused by your design, instructions or branding. A one-sided indemnity is a red flag.
Caps and exclusions: check that limits on liability and exclusions of consequential loss run in both directions, and that the caps match the product liability insurance each party carries.
The statutory floor: for goods of a kind ordinarily acquired for personal, domestic or household use, the consumer guarantees generally cannot be excluded. For other goods, s 64A of the ACL lets the parties cap guarantee liability to repair, replacement or the cost of either, which is a useful limit in a business-to-business supply chain.

How the deal ends

Termination clauses set the notice periods, the grounds for ending the agreement, and what happens to your tooling, work in progress and forecasts when it ends. The drafting choices here decide how much of your business you can walk away with. The points that matter most are:

Notice periods: how long after notice the agreement ends, and whether either party can terminate for convenience or only for breach.
Wind-down: the manufacturer's obligation to finish work in progress, transfer or sell back tooling at an agreed price, and deliver up designs and data.
Survival: which clauses, typically IP, confidentiality, indemnities and dispute resolution, keep operating after termination.
Termination fees: subject to the same penalty doctrine as late delivery fees, so they should reflect the manufacturer's real costs of winding down, not a round number designed to lock you in.

There is also a statutory constraint. Under s 23 of the ACL, a term of a standard form small business contract is void if it is unfair, and proposing or relying on an unfair term can attract a pecuniary penalty under s 224. A small business contract is one where a party employs fewer than 100 people or has turnover under $10 million (s 23(4)). A term is unfair if it causes a significant imbalance in the parties' rights and obligations, is not reasonably necessary to protect the legitimate interests of the party advantaged, and would cause detriment if relied on (s 24 of the ACL). Terms that let one party, but not the other, terminate or vary the contract are listed as examples in s 25. A clause that lets the manufacturer walk away on 7 days notice while locking you in for 12 months is exactly the imbalance the regime targets.

How disputes get resolved

A dispute resolution clause sets the path when things go wrong: negotiation between the parties, then mediation, then arbitration or litigation. Without it, a disagreement over a rejected batch escalates straight to lawyers and the courts, and production stops while it resolves. The drafting choices to check are:

The ladder: usually a short negotiation window, then mediation with an agreed timeframe, then a binding process. A mediation precondition that has no time limit can be used to stall.
Arbitration: worth considering when your manufacturer is offshore, because an arbitral award under an international convention is easier to enforce overseas than an Australian court judgment.
Governing law: the agreement should state Australian law and a specific Australian state, and say which courts hear disputes. If the manufacturer is offshore, this clause decides whether you can enforce anything at all.
The trap: clauses that require supply to continue during a dispute, which can leave you paying for goods you cannot sell while the disagreement runs.

Clauses worth adding when they fit

Beyond the core clauses, a few additions are worth asking for when they fit your deal:

Exclusivity: if you are committing a product line to one manufacturer, protect your position if they start producing for a competitor.
Retention of title: whether the manufacturer keeps title to goods and raw materials until payment, and what that means for your stock if they fail.
Confidentiality: covers your designs, pricing, forecasts and customer lists during and after the term.
Insurance: minimum product liability and property insurance limits, with you named as an additional insured.
Assignment and change of control: stops the manufacturer selling the business mid-term and leaving you with an unknown counterparty.
Survival: states which obligations keep operating after the agreement ends, so the end of the deal does not end your protections.

How an Artificer Legal practitioner would review this agreement

Whether you are the business commissioning the goods or the manufacturer supplying them, a review starts with the clauses that are hardest to fix later. An Artificer Legal practitioner would push back on unilateral price variation and termination rights, IP and tooling clauses that do not vest ownership where it should sit, one-sided indemnities and liability caps, and fees structured as penalties.

The order of negotiation matters. Intellectual property and tooling come first, because they cannot be retrieved once the manufacturer has used them or gone under. Liability allocation and insurance follow, then price mechanics and MOQs, then termination and dispute resolution. On the IP front we would insist on a written assignment of existing and future IP under s 196 of the Copyright Act 1968 (Cth), and on the liability front we would make sure the indemnities, caps and insurance match the ACL exposure that flows from putting your brand on the goods.

The IP and tooling clause

The clause that most often decides who wins is the one covering intellectual property and tooling. Everything else, price, volumes, delivery, can be negotiated or litigated. But if the agreement ends and the moulds belong to the manufacturer, or your IP was never assigned in writing, you no longer have a product to sell. It is the most skipped clause in short-form agreements and the most expensive to discover is missing after the relationship has broken down, so it deserves attention before you sign, not after.

A well-drafted manufacturing agreement assigns IP in writing, settles who owns and pays for tooling, fixes how price changes are calculated, allocates forecast and inventory risk, ties delivery remedies to real loss, requires compliance with Australian law, matches indemnities and insurance to ACL exposure, and sets a clear exit path with fair notice and survival of the clauses you rely on. Checking each of those before signing is how you protect the business you are building on the manufacturer's production line.