- Specifications, materials and tooling
- Price, payment and delivery
- Intellectual property and confidentiality
- Quality, defects and the Australian Consumer Law
- Liability, termination and governing law
- A manufacturing agreement in practice
- Common misconceptions about manufacturing agreements
- How a commercial lawyer can help
- Before your first production run
Many Australian businesses sell goods they do not make. A clothing label designs its range but has no factory, a hardware start-up holds a patent but no production line, and a food business has a recipe but no facility. In each case the goods are produced by someone else under a contract, and that contract is called a manufacturing agreement. In plain terms, a manufacturing agreement is the agreement between your business and the manufacturer that produces your goods. It sets out what will be made, to what standard, for what price, and who owns what when the process is finished.
A well-drafted manufacturing agreement does more than record a price and a delivery date. It decides questions that only become urgent when something goes wrong: who owns the drawings and tooling, who pays when a batch is defective, and whether the manufacturer can sell your design to a competitor. This article explains what a manufacturing agreement covers, why each part matters, and where relying on an informal arrangement can leave your business exposed.
Specifications, materials and tooling
At its core, the agreement must pin down exactly what the manufacturer is obliged to produce. That means a precise description of the goods, the approved specifications and drawings, the materials to be used, and the tolerances and finish the finished product must meet. Where a prototype or sample has been approved, the agreement should say that all production runs must match it.
The agreement should also deal with moulds, dies and tooling. In industries such as plastics and metal fabrication, the manufacturer creates tooling to produce your goods, and that tooling can be expensive. The agreement should state who pays for it, who owns it while it is in the manufacturer's hands, and what happens to it when the arrangement ends. The same applies to changes: a clause requiring variations to specifications, materials or price to be confirmed in writing prevents a dispute about whether a change was ever agreed.
Price, payment and delivery
A manufacturing agreement should set out the price, the currency, the payment schedule and the delivery terms. Payment milestones are common, with a deposit before production starts, progress payments tied to stages of work, and the balance due on delivery or after inspection. The schedule matters because it controls how much of your money is exposed before you have seen the goods.
Delivery terms should cover lead times, minimum and maximum order quantities, packaging, freight and who bears the risk of goods being lost or damaged in transit. Standard trade terms such as Incoterms are often used to allocate that risk, and the agreement should say which version applies. Where delivery dates are critical, the agreement can provide for what happens if the manufacturer is late, although a carefully drafted right to recover costs for delay is more useful than an unrealistic penalty.
Intellectual property and confidentiality
The most valuable thing a manufacturing agreement protects is often not the goods themselves but the intellectual property behind them. Under Australian law, ownership does not automatically follow payment, and the default position favours the creator. Under s 35 of the Copyright Act 1968 (Cth), the author of an artistic work such as a technical drawing owns the copyright in it. There is no general rule that a business which commissions a drawing owns it: the private-purpose commissioning exception only covers photographs, portraits and engravings. So if the manufacturer's engineers produce the production drawings, the manufacturer owns the copyright in those drawings unless the agreement assigns it to you. An assignment of copyright only has effect if it is in writing and signed, as required by s 196 of the Copyright Act 1968 (Cth).
Registered designs work on a similar logic. Under s 13 of the Designs Act 2003 (Cth), the person who creates a design is entitled to be registered as its owner, unless the design was created in the course of employment or under a contract with someone else. If your manufacturer's designers create the product design, the agreement is the place to decide and record who owns it and who may register it.
A manufacturing agreement should therefore address intellectual property expressly. Typically it assigns to your business any designs, drawings and improvements created during the engagement, and grants the manufacturer only a licence to use them for the purpose of making your goods. It should also include confidentiality obligations so the manufacturer cannot share your specifications with competitors, and an obligation to return or destroy drawings and tooling when the arrangement ends.
Quality, defects and the Australian Consumer Law
Specifications only matter if the goods actually meet them. The agreement should set out how quality is checked, whether by inspection of samples, testing or certification, and what happens when goods are rejected. It should give your business a right to reject defective goods, to require rework or replacement, and to claim the costs of dealing with a failed batch. A time limit for raising defects, and a warranty that the goods meet the specifications, should be included.
These clauses matter more in Australia than in many other jurisdictions because of the Australian Consumer Law (the ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth). Under s 54 of the ACL, goods supplied to consumers carry a guarantee of acceptable quality. If a consumer buys a defective product, the business that sold it is the party the consumer comes back to, and a consumer can also recover damages directly from the manufacturer under s 271 of the ACL. The ACL gives suppliers a statutory right to be indemnified by the manufacturer under s 274, but that right is limited for goods not ordinarily bought for personal or household use. Your manufacturing agreement should give you direct contractual rights against the manufacturer, including warranties and an indemnity for consumer claims, rather than leaving you to rely on the statute.
Liability, termination and governing law
The agreement should also allocate risk if things go wrong. Who is responsible if goods are damaged in transit, and who bears the cost if the manufacturer's goods cause harm to a third party? A liability clause usually caps the manufacturer's exposure and excludes certain types of loss, and your business should understand what that means before agreeing to it. Termination rights are equally important: the agreement should say when either party can end the arrangement, what happens to outstanding orders, and what the manufacturer must return on termination, including tooling and confidential information.
Because many manufacturers are based overseas, the agreement should state which law governs it and where disputes will be heard. A clause saying the agreement is governed by Australian law and that disputes go to Australian courts is worth having, but its practical value depends on where the manufacturer's assets are located. Enforcing an Australian judgment against an overseas manufacturer can be difficult, so it is common to add practical protections such as limits on upfront deposits, quality inspections before shipment, and ownership of tooling as a lever if the relationship breaks down.
A manufacturing agreement in practice
Consider a Sydney-based business that designs a line of insulated drink bottles and engages a manufacturer to produce its first commercial run. The business provides its concept drawings, the manufacturer refines them into production drawings and builds the moulds, and production begins. Everything works smoothly until the first shipment arrives with a visible defect in a quarter of the bottles, and a competitor then launches a near-identical product.
Without a manufacturing agreement, the business faces three problems at once. The production drawings were made by the manufacturer's engineers, so under the Copyright Act 1968 (Cth) the manufacturer owns the copyright in them unless there is a written assignment. The moulds were paid for by the business, but nothing states who owns them. And while consumers who bought defective bottles have rights against the business under the ACL, the business has no clear contractual route to recover its costs from the manufacturer. Each of those problems is answered by a clause in a properly drafted agreement: an assignment of intellectual property, ownership of tooling, and a warranty and indemnity giving the business a direct right to recover the cost of defective goods.
Common misconceptions about manufacturing agreements
Several misunderstandings cause businesses to skip the agreement or accept whatever the manufacturer offers.
- A purchase order or email chain is enough: A purchase order records the price and quantity of an order, but it does not deal with ownership of drawings and tooling, quality standards, liability, or confidentiality. Those issues are exactly where disputes arise.
- If I paid for the tooling, I own it: Ownership follows the contract, not the payment. Without a clause saying the tooling belongs to your business, the manufacturer can keep it when the arrangement ends.
- Because I supplied the design, I own everything the manufacturer creates: Copyright in new drawings and improvements belongs to whoever created them unless the agreement assigns those rights, and an assignment must be in writing.
- The manufacturer is responsible for defects, so my business is safe: Your business is the party the consumer bought from, and the ACL guarantee of acceptable quality applies to your supply of the goods. The statutory indemnity from the manufacturer does exist, but it is limited in some cases, and a contract should back it up.
How a commercial lawyer can help
A lawyer's role in a manufacturing arrangement is not to hand over a template, because the agreement needs to reflect your industry, your product and your manufacturer. A commercial lawyer can review the manufacturer's standard terms, which are usually drafted to protect the manufacturer, and negotiate the clauses that matter most to your business: assignment of intellectual property, ownership of tooling, quality and rejection rights, and warranties and indemnities that work with the ACL. Where your product is new, a lawyer can also advise on whether to register a design or trade mark before production begins, and on how to structure the agreement when the manufacturer is overseas.
Before your first production run
Before you commit to a manufacturer, you should be able to answer three questions from your agreement: who owns the production drawings and the tooling, who pays when a batch is defective, and what happens if the manufacturer sells your design to someone else. If the answer to any of them is unclear, that is the risk your business is carrying, and it is far cheaper to resolve it in writing before production starts than in a dispute after it. A manufacturing agreement is the document that turns those answers from assumptions into obligations.