Before You Sign a Third Party Manufacturing Agreement: 12 Checks
Most third party manufacturing disputes trace back to a term nobody read closely. The agreement decides who carries liability, who owns the formulation, what happens to a rejected batch and how you leave. Here are the twelve clauses that matter most.
Why This Document Matters More Than the Price
This guide is for brand owners and direct selling companies entering third party or contract manufacturing arrangements in India.
Buyers negotiate hard on per-unit price and then sign a two-page agreement that does not address liability, formulation ownership, batch rejection or exit. When something goes wrong, those silences decide the outcome, and they usually decide it against the brand owner.
This is not a substitute for legal review. It is a list of the places where review is most worth paying for.
The Twelve Checks
Work through each one against the draft in front of you.
- Licence scope: that the manufacturer’s licence actually covers your dosage form and category, verified against the licence document rather than an assurance.
- Formulation ownership: who owns a formulation developed for you, and whether the manufacturer may supply it to others.
- Exclusivity: whether any exclusivity exists, for what, and for how long.
- Specification and change control: the agreed specification, and that the manufacturer cannot change ingredients or sources without written approval.
- Testing obligations: which tests run per batch, to which limits, and who holds retention samples.
- Batch rejection: what happens to a batch failing specification, who bears the cost, and the timeline for resolution.
- Liability allocation: who carries liability for a defect, a mislabel, a contamination event or a regulatory action, and whether insurance backs it.
- Artwork and label approval: who approves artwork, and who is responsible if a label is non-compliant.
- Lead times and shortfall: committed lead times, and the remedy if the manufacturer cannot supply.
- Pricing and revision: how price changes are triggered, notified and capped.
- Confidentiality: covering your formulation, volumes and customer information, in both directions.
- Exit: notice period, what happens to in-progress stock, packaging material and your formulation, and whether you may move production.
Where Agreements Most Often Fail
Three clauses account for most real disputes.
| Clause | Common Gap | Consequence |
|---|---|---|
| Liability | Silent or vague | Brand owner carries everything by default |
| Formulation ownership | Not addressed | Your formulation may be supplied to competitors |
| Exit | Notice only, no asset terms | Stock, packaging and formulation stranded |
| Batch rejection | No defined process | Prolonged dispute over a single batch |
| Change control | Not required in writing | Ingredient or source changes you never approved |
| Label responsibility | Assumed, not stated | Dispute after a compliance issue |
Exit terms are the most consistently neglected, and the most expensive when neglected. Negotiate them while the relationship is good.
Practical Negotiation Notes
A few things worth knowing before you ask.
Liability Is Negotiable
Manufacturers often accept liability for manufacturing defects and specification failures. They will resist liability for your claims and marketing, reasonably.
Formulation Ownership Is Often Available
If you funded development, ask for ownership or at least a supply restriction. Many manufacturers will agree if asked at the outset.
Change Control Costs Nothing
A written requirement that ingredients and sources cannot change without approval is rarely refused and prevents a common surprise.
Small Volumes Limit Leverage
At low volumes you will not win every term. Prioritise liability, change control and exit over exclusivity.
Before Signing
Final sequence.
- Verify the licence document covers your form and category.
- Confirm the agreed specification is attached, not merely referenced.
- Settle formulation ownership in writing.
- Require written change control.
- Define batch rejection process and cost allocation.
- Allocate liability explicitly, with insurance where available.
- State who approves artwork and who is responsible for label compliance.
- Negotiate exit terms covering stock, packaging and formulation.
- Have a qualified lawyer review the final draft.
- Keep the signed agreement, licence copies and specification together in one file.
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Frequently Asked Questions
What is the most neglected clause in these agreements?
Exit terms. Most agreements state a notice period but say nothing about in-progress stock, packaging material, or whether you may move your formulation elsewhere. Negotiate exit while the relationship is good, because it cannot be negotiated once it is not.
Who owns a formulation developed for my brand?
Whatever the agreement says, and many agreements say nothing. If you funded development, ask for ownership or at least a restriction preventing supply of the same formulation to others. Raised at the outset, this is often agreed.
Who is liable if a product has a defect?
It depends entirely on the agreement. Manufacturers will often accept liability for manufacturing defects and specification failures, while reasonably resisting liability for your marketing claims. If the clause is silent, the brand owner typically carries the exposure.
Should I require written change control?
Yes. A clause stating that ingredients and sources cannot change without your written approval is rarely refused and prevents one of the most common surprises in contract manufacturing. It costs nothing to ask for.
Do I need a lawyer to review this?
Yes. This checklist helps you brief a review usefully by pointing to the clauses that generate most disputes, but it does not replace legal advice on the actual document you are being asked to sign.