Summary
- A manufacturing agreement protects your business by clearly setting out each party’s responsibilities, ownership of intellectual property (IP), and how disputes are handled.
- Without clear IP provisions, manufacturers may reuse your designs, claim rights to improvements, or use your confidential know-how for other projects.
- Confidentiality obligations, limited IP licences, and indemnities are key tools for managing IP risk in manufacturing relationships.
- This article is a plain-English guide to manufacturing agreements and IP protection for Australian business owners operating in Australia.
- It has been prepared by LegalVision, a commercial law firm that specialises in advising clients on manufacturing contracts and intellectual property.
Tips for Businesses
Define IP ownership clearly in your manufacturing agreement before production begins. Grant only a limited, non-exclusive licence tied to your specific products. Require subcontractors to follow the same confidentiality obligations as the manufacturer. Address ownership of any improvements upfront to avoid disputes later.
On this page
- The Role and Importance of a Manufacturing Agreement
- What a Manufacturing Agreement Covers
- Protecting Your IP
- Defining IP Ownership
- Rules on Customer IP Use for Manufacturing
- Use of Trade Marks
- Subcontracting and IP Risk
- Improvements and Changes
- IP Infringement Risk
- Confidentiality and IP Protection
- Taking Legal Advice on Manufacturing Agreements
- Key Takeaways
- Frequently Asked Questions
Manufacturing projects can often give rise to high costs, expectations and risks. When you outsource production to an external manufacturer, you will often have to share:
- valuable designs;
- technical details; and
- business knowledge
This is why it is highly important to make sure that your intellectual property (IP) is protected from any potential misuse or harm in manufacturing relationships.
This article explores how a robust manufacturing agreement helps protect your business and your IP when you are working with a third-party manufacturer.
The Role and Importance of a Manufacturing Agreement
Manufacturing often means:
- high costs;
- specific requirements; and
- tight delivery deadlines.
Many businesses depend on their manufactured products for their business income and operations. Problems such as poor quality, late deliveries, or misuse of IP can seriously damage your business and pose various risks.
A manufacturing agreement sets out each party’s responsibilities and helps manage common risks. It sets:
- clear expectations;
- protects your rights; and
- can help serve as evidence in the event of a dispute.
What a Manufacturing Agreement Covers
A manufacturing agreement explains how the manufacturer will make and deliver products to you. The agreement should correspond with how you will actually work together in practice and cover:
- how orders are placed;
- how production is planned;
- any product quality issues are handled;
- agreed delivery requirements;
- inspection rights;
- how products are accepted; and
- commercial terms.
A thorough agreement will also often include provisions, such as:
- warranties;
- limits on liability;
- indemnities;
- insurance;
- how the contract can end;
- following rules regulations;
- how disputes are handled; and
- which laws apply.
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Protecting Your IP
IP often gives a product significant value. When you share this property with a manufacturer, if the agreement does not clearly define IP rights, problems and disputes may arise.
For example, manufacturers could:
- reuse designs;
- claim rights to improvements; or
- use your own know-how in other projects.
Addressing IP protection in the agreement can give you greater certainty and avoid costly disputes.
Defining IP Ownership
A manufacturing agreement should make it clear who owns the IP. If you give the manufacturer access to your IP, the contract should state that all your IP remains yours.
The agreement should also acknowledge any pre-existing IP owned by the manufacturer, such as:
- production methods;
- manufacturing processes; or
- independently developed tooling.
Rules on Customer IP Use for Manufacturing
If you own the IP, the manufacturer must obtain permission to use it. The agreement should grant a limited licence that allows the manufacturer to fulfil its services and obligations. This licence is typically non-exclusive and royalty-free. It should permit the use of the IP only to manufacture products under the agreement and solely for you as the customer.
The licence should not allow use for:
- other customers;
- competing products; or
- internal development.
The license should also end when the agreement terminates, which prevents continued use of the IP after the contract ends.
Use of Trade Marks
Trade marks require specific attention, and the manufacturing agreement should outline rules for how and when the manufacturer may use your trade mark on products and packaging.
Subcontracting and IP Risk
Manufacturers may use subcontractors, which can make your IP more vulnerable to misuse or harm. The agreement should disclose if the manufacturer is allowed to use subcontractors. If they are, only approved subcontractors should get access to your IP, and they must follow the same confidentiality rules. The manufacturer should be held strictly responsible for what the subcontractor does and any omissions.
Improvements and Changes
Working with a manufacturer can lead to changes or improvements in your products or processes.
The agreement should clearly define what constitutes an improvement and require both parties to disclose any new developments. It should also set out who owns those improvements and whether any licences are required to continue performing the agreement.
Clear rules on ownership and licensing help prevent IP-related disputes and allow the relationship to continue smoothly.
IP Infringement Risk
Manufacturing agreements often address third-party IP risks through indemnities. If the manufacturer provides its own technology or processes under the agreement, you may seek a specific IP indemnity from the manufacturer to protect your business from risk. This may require some negotiation with the manufacturer.
Confidentiality and IP Protection
Confidentiality rules can help to protect your IP. Manufacturing agreements usually require both sides to keep each other’s confidential information safe during the contract and for a set time after it ends.
These obligations can be used to restrict both the disclosure and use of confidential information, including any IP.
These are simplified and high-level examples of common provisions, but legal advice can help you determine the correct clauses to include to protect your business IP from risk.
Taking Legal Advice on Manufacturing Agreements
The examples outlined in this article are high-level and simplified; legal advice can help you determine the correct clauses to protect your business IP from risk.
Manufacturing agreements can be complex and high-risk, and manufacturers often propose standard terms that may not align with your legal and commercial priorities as a customer.
Legal advice from a commercial solicitor can help your business:
- identify risks,
- clarify IP ownership; and
- negotiate appropriate protections.
If no agreement is put forward, then a commercial lawyer can draft one tailored to your needs. Addressing these matters in a robust agreement can help prevent costly and worrying disputes and protect your IP and brand.
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Key Takeaways
Manufacturing agreements are key to your protection when you outsource product production. A clear manufacturing agreement can help manage risk and, in particular, protect your IP through robust contractual rules. Taking time to put in place protective legal terms can support a smooth manufacturing relationship and reduce the likelihood of disputes, especially around the use of your valuable IP.
LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced contract lawyers help businesses across industries manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A manufacturing agreement sets clear rules for working with a manufacturer. For instance, it can help ensure products meet specifications, are delivered on time, that you have remedies if needed and that your IP is protected.
A commercial lawyer can review or draft the agreement, identify legal and commercial risks, and negotiate terms to protect your interests in the commercial relationship.
A licence grants the manufacturer limited permission to use your IP solely to fulfil its obligations under the agreement.
Only if your agreement permits it. You should restrict access to approved subcontractors who follow the same confidentiality obligations.
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