There are many sources of potential confusion between a Buyer and a Manufacturer, from language difficulties to differences in business practices.
Drawing up a clear written contract is the best way to avoid problems. If disagreements do arise, they will be easier to resolve if you have a written contract rather than a verbal agreement.
Your contract should make all aspects of the trading process as clear as possible – what will happen, when it will happen, and exactly what each party is responsible for at each stage.
There are standard trading practices and systems to help you agree on key issues. Incoterms are an internationally recognized set of trading terms used in contracts of delivery. Special trade-related payment methods reduce the risks and uncertainties of international trade.
Key things to cover in a contract with a manufacturer include:
- Goods. Specify what goods are being bought, noting any legal or technical rules with which they must comply, like FDA certification, a specific level of protection for gowns, NIOSH for masks, Nitrile or Latex for gloves.
- Price. How much will you pay? In which currency? At which exchange rate?
- Payment method. When and how will payment be made? Escrow? Line of Credit? Full Prepayment? Deposit with Balance Due FOB prior to shipment? There are many options and balancing risk vs expense is a key consideration.
- Delivery. How will the goods be transported to you? Air? Sea? If by sea, Fast Boat? Slow Boat? To the port? Through customs duties paid? To the Buyer’s door?
- Trading terms. Use Incoterms to specify exactly who is responsible for shipping costs, duties, and customs-related formalities.
- Insurance. Be clear about who bears what risks – e.g. loss or damage – at each stage of the process.
- Potential problems. Include procedures that would be implemented if a dispute arises, e.g. if one party’s error causes delays or losses for the other. Most of the contracts we have reviewed include Arbitration only clauses. There are also Performance Bonds that can be utilized to provide cost recovery in case of non-performance on either side.
- Service level agreement. Define the level of service your supplier must provide.
- Legal jurisdiction of the contract. If there is a dispute, where would legal proceedings be heard? Most manufacturing contracts will usually specify the country of manufacture. We have never seen a manufacturer agree to a USA or other foreign jurisdiction.
Bear in mind that the contracts you enter into with a manufacturer will evolve with your trading relationship. While early contracts might be on a shipment-by-shipment basis, longer-term production contracts might follow as familiarity and trust develop.