Outsourcing manufacturing can offer considerable savings and production efficiencies, but only if you have a robust, bespoke manufacturing agreement. Without one, your business risks costly disputes, reputational harm and operational disruption.
Getting the legal framework right from the start helps you retain control over pricing, specifications, quality, production timelines, IP ownership, supply chain risks, warranties, and indemnities.
Our experienced commercial law solicitors work closely with businesses across the manufacturing sector to draft, negotiate and enforce clear, commercially focused agreements that protect your interests at every production stage. Whether you're outsourcing a component or a complete product range, we’ll ensure your contract supports your objectives while minimising risk.
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Considerations before outsourcing production
You have decided that outsourcing production is your preferred business model and have chosen the manufacturer you want to work with. Robust and thorough due diligence at the outset of your outsourcing project is essential to avoid consumer claims, reputational damage or a commercial contract dispute. Here are some key considerations for moving forward:
1. Scope of work
What are you outsourcing – the whole manufacturing process, or a component part? Are the specifications clearly defined? If the manufacturer produces a component part, are the turnaround times specified so your production process isn’t delayed? What tooling, technology and equipment are being provided? Can the scope of the work be adapted if any industry-specific regulations change?
When negotiating your agreement, it is vital to:
- Get the scope of the work and the specifications clear at the outset, and
- Retain the flexibility to adapt the product or process during the contract, whether to keep pace with changes in your commercial environment, to meet consumer demand, or to comply with an evolving legal and regulatory landscape.
2. Testing and quality
Your agreement should cover the testing and quality of the manufactured product. Ask for product samples as a pre-condition of the contract, and ensure that factory inspections are allowed during the contract term.
If product quality is unacceptable, your brand and reputation will suffer, so your agreement must include robust rights and remedies if the manufacturer delivers defective products. Additionally, it’s crucial to outline how to handle a product liability claim, clearly defining responsibilities, legal recourse, and insurance requirements if a defective product causes harm.
3. Supply chain risks
Your agreement should include obligations on the manufacturer to ensure the ethical manufacture of the products. Whether the product is an IT product or an item of retail clothing, your brand can be damaged if your manufacturer does not follow ethical practices. Factors like the choice and sourcing of raw materials, the employment of workers without the right to work in the UK, or workers paid less than the minimum wage, could tarnish your business reputation, especially if you market your business as an ethical and sustainable brand.
Whilst you cannot eliminate these risks, before entering into a manufacturing agreement, you should conduct due diligence, examine your manufacturer’s supply chain contracts, and include appropriate warranty, indemnity, and termination clauses. These are critical steps in effectively managing supply chain risk.
4. IP
Before outsourcing manufacturing, protect your IP rights in the product or parts if you are the IP owner. If you aren’t, ensure you have valid IP licences to enable the manufacturer to make the product.
The manufacturing agreement must clearly state that your business exclusively owns the IP or, where applicable, that a third party has licensed the IP to you. Check your licence terms, as the IP owner may require additional safeguards, which must be reflected in your manufacturing agreement.
Factors to consider include:
- Whether the manufacturer will have exclusive or non-exclusive use of the IP
- Whether you will indemnify the manufacturer if they are accused of IP infringement or passing off because of their manufacture of your product
- The manufacturer’s obligations to you if they are notified of an IP claim
- Whether the manufacturer has the right to use sub-contractors, and how the grant of sub-licences will be dealt with
- Who owns the IP rights if changes are made to the product during the agreement
- What happens to the IP on termination?
5. Third-party suppliers
Your manufacturer is likely to use third-party suppliers (depending on your bargaining position and the potential damage to your brand), so you may want to include the following in your contract:
- A requirement that the manufacturer must notify you if they change the supplier
- A warranty from the manufacturer that any supplier will be a member of an industry-specific regulatory body or association
- A right to veto certain suppliers
- If ethical sourcing is essential to your brand, you can refuse materials from suppliers in specified countries.
6. Manufacturer's location
Where your manufacturer is located can create difficulties with language barriers, choice of law, or practical issues around delivery timescales. These must be balanced against the cost of UK or EU manufacturing. In some cases, the cost differential may outweigh the location risks. Your business may be confident that the risk level is acceptable because of your due diligence process and robust manufacturing agreement, which includes the appropriate warranties, insurances and termination provisions.
Timing will be key to your manufacturing requirements. Consider what delivery timeframes you require (considering what is realistic if your manufacturer is overseas), and what penalties you will apply if deadlines are not met.
Make sure the contract states which country’s law is to apply. Otherwise, you could find yourself subject to the laws of a foreign country and forced to litigate through their courts if things go wrong.
What could affect your day-to-day business operations?
Give careful thought to the daily operation of your manufacturing arrangement, so that both parties understand what is required and meet expectations. This will reduce the risk of commercial contract disputes.
1. Order process
Some manufacturing agreements are straightforward. For example, you may know that you need to order 5,000 component parts each month. Alternatively, consumer demand may be unpredictable and subject to weather or other variables. To cater for this, many manufacturing agreements include detailed provisions for placing orders periodically, with flexibility for amendments or cancellations.
Consider the bigger picture, such as IT or high street trends and the manufacturer’s capacity for flexibility. This broader view is integral to effective contract management, helping ensure your supply arrangements remain commercially viable and responsive to change.
2. Payment terms
Payment terms vary greatly, depending on the product and sector. For example:
- The product price may be set together with a minimum monthly order, with the product price dependent on the number of orders, allowing parties to benefit from economies of scale or volume order discounts
- Payment terms and price may be fixed for the duration of the contract, or
- They may be variable by a price increase notice or a price escalation clause.
Payment terms must be bespoke and be considered in line with your termination clause. For example, if the manufacturer gives notice of a price increase, can you terminate the contract early? If you give notice to terminate, is the notice period sufficient to find another manufacturer and agree to terms?
3. Insurance
The manufacturer must maintain public liability and product liability insurance cover, and ideally, your agreement should:
- Specify the minimum level of insurance cover required
- Ensure that your interest is noted on the policy, and
- You can see the insurance renewal certificate and confirmation that the premium has been paid.
If the manufacturer subcontracts any element of the manufacturing process, it should also require its subcontractors to maintain a minimum insurance coverage.
4. Dealing with defects
You will need a contractual process to deal with defective products. This should include:
- a timescale for you to notify the manufacturer about obvious visual defects,
- a notice of rejection procedure, and
- a requirement for replacement or reimbursement.
If notice of rejection for obvious defects is not given within the agreed time frame, the product will be deemed accepted, so you need effective and timely quality control procedures. You must also notify the manufacturer about latent defects within a reasonable time frame.
5. Product flexibility
Your products may need to be tweaked or evolve periodically. Your manufacturing agreement should accommodate this, either by allowing you to vary the specification provisions or terminate the agreement.
You should also monitor product evolution as part of your contract lifecycle management process so that your business continues to get the most out of its manufacturing agreement.
6. Termination
Consider why you may want to end your arrangements with the manufacturer and ensure these are covered in the termination clause. Consider the key factors that would justify terminating the contract, such as ongoing quality issues, failure to meet deadlines, or breaches of key obligations, and build in terms that allow for a fair and practical exit.
What your manufacturing agreement should include
A strong manufacturing agreement does more than set out production terms—it becomes a core part of how your business controls quality, manages risk, and protects its IP and reputation. At a minimum, your contract should address four key areas:
- Product manufacture: Covering specifications, tooling, technology, and any IP licensing required for production.
- Product supply: This includes quality control measures, delivery obligations, title transfer, risk allocation, and payment terms.
- Risk management: With clearly defined limits of liability, warranties, indemnities, insurance requirements, termination triggers and confidentiality provisions.
- General provisions: From legal and regulatory compliance to dispute resolution and jurisdiction clauses – especially critical when working with overseas manufacturers.
This framework is essential, but not exhaustive. Every manufacturing agreement must be tailored to reflect the unique demands of your product, sector, and supply chain. Our experienced commercial law solicitors will help you create a bespoke agreement that meets legal requirements and supports your business strategy, ensuring your outsourcing arrangements deliver maximum value and minimal risk.
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