Negotiating a cross-border manufacturing and supply agreement presents unique challenges to both the seller and the buyer.
Should You Use a Single Agreement or a Master Agreement?
An initial consideration is whether to use a single agreement or a master agreement. A single agreement is generally appropriate for a limited, well-defined transaction. A master agreement is more appropriate (in conjunction with periodic purchase orders) for relationships that may span longer periods of time, where the quantity, price, delivery, and even types of goods may vary.
Description of Goods
A critical element of the agreement is the description of the goods. The parties must clearly describe the range and specifications of goods that the seller is manufacturing and selling to the buyer. Additionally, and especially if the goods are custom-made, the parties should address any special rights and obligations (such as those relating to tooling), minimum purchase commitments and exclusivity provisions, and intellectual property rights. The parties should also determine whether the seller or buyer has the right to change materials, designs, or specifications and the effect of such changes on pricing and delivery. In all cases, the parties should pay close attention to their representations, warranties, and indemnification obligations; applicable quality standards; and compliance with export-import laws; and customs requirements and allocation of payment responsibility.
Shipment of Goods
In connection with shipment of goods, the parties should specify who selects the carrier; the commercial terms governing carriage, insurance, shipping, and transfer of risks (for example, under Incoterms 2020); and turn-around time. The parties should also negotiate their rights and obligations if goods are delivered late, as well as inspection and rejection rights (and related notification and return costs).
Negotiating Payment Terms
The seller must carefully negotiate payment terms (including method and currency for payment). From the seller’s perspective, prepayment for goods is the ideal (but often unavailable) option. If the seller grants credit to the buyer, the seller should consider whether it requires a letter of credit or another form of payment guarantee.
The parties should decide appropriate product warranties (and limitations thereon, such as those arising from misuse and neglect). Except as provided for under the agreement, the seller should disclaim all warranties (including implied warranties) to the fullest extent permissible under applicable laws. Except in narrow circumstances, warranties should be limited to the buyer and not extend to any third-party, such as the buyer’s customers and end users.
The parties should state insurance obligations both during the term of the agreement and for an appropriate period thereafter. The parties should specify the types and minimum limits of insurance, and consider whether one party should add the other as an additional insured.
Cross-border manufacturing and supply agreements should include other general provisions such as those relating to remedies, limitation of liability, indemnification, confidentiality, force majeure, dispute resolution, choice of law, and choice of forum.
The movement of goods, including software, machinery, and biotechnological products, across borders presents additional risk with respect to protection of, and the infringement of, intellectual property rights. Intellectual property rights are largely jurisdiction specific, and protected at a national level. Some are protected via formal registration (i.e. patent), while others arise automatically upon creation (i.e. copyright). Although the nature of certain intellectual property rights is consistent across jurisdictions, for others, there are notable differences in scope or enforcement ability.
As a result, consideration of the intellectual property regime in both the originating jurisdiction and receiving jurisdiction is of prime importance. Assessing rights that may exist in each jurisdiction is key to understanding if the goods being sold are adequately protected not just in the jurisdiction in which they are produced, but also in the jurisdiction into which they are being sold. It is the presence (or absence) of this protection that impacts the ability of the seller to enforce its rights in the goods, and to ensure that the goods are used for permitted purposes.
For example, when considering software goods, a seller must consider both the various jurisdictions in which it may offer the goods for sale, and the various forms of intellectual property rights that may exist in that software. Depending upon the nature of the software, protection of trade secret, copyright, and/or patent rights may be relevant, and the nature or scope of those rights may not be consistent between the originating jurisdiction and the receiving jurisdiction.
The seller should consider whether or not it holds or has established appropriate protection of its intellectual property rights in the software prior to selling it into the U.S. As patent protection is jurisdiction specific, the seller will want to ensure that it has applied for patent protection of any component of the software that is properly eligible for such protection in the U.S., either through filing an application for patent with the U.S. Patent and Trademark Office (USPTO), or via filing through the Patent Cooperation Treaty process. It will also want to consider if the claims in a granted US patent are the same or similar to the claims in a granted Canadian patent, in order to ensure the scope of protection is the same in both countries.
The seller will also want to consider if the code that comprises the software is properly protected by copyright. Copyright is similarly national in scope, and therefore the copyright protection applicable to the code depends upon the laws of the country in which the author of that code (if the seller) is selling the software. If the seller wishes to sell the software into the U.S., for example, it should consider if the software code will be protected in the U.S. similarly to how it is protected in Canada. The seller is not required to seek registration of its copyright in the U.S. Rather, the seller must consider if the U.S. is a member of relevant international treaties and conventions that provide protection for creative works, such as code, that are subject to copyright (such as the Berne Convention). If it is, then the author of the code will automatically be entitled to protection against the infringement of its copyright in that code in the U.S. in much the same way that it is entitled to that protection in Canada. However, addressing the existence of such rights, and any limitations on the buyer’s permitted exercise of same, is important to aid in enforcement.
Be Aware of Different Intellectual Property Regimes
As differences exist in the intellectual property regimes of Canada and other countries, awareness of what those differences are can help frame the contract of purchase or sale that applies to goods sold from Canada for use in other countries. Understanding what rights a seller holds in goods, and how it may wish to permit others to use or exercise any portion of those rights upon the sale of goods, impacts provisions of the contract that may deal with such as issues as:
- authorized use and permitted users,
- modification or customization,
- maintenance, service, support and repair,
- fees payable for use or purchase, and
- termination or expiration of use.
These provisions can be tailored to ensure that the buyer uses the goods for the purposes the seller intends, pays the seller fees that appropriately account for that use, and provides the seller recourse in the event that use and payment are not made as permitted or required. Doing this provides the ability for the seller to control how its goods are made available and used in the jurisdiction in which they are sold, thus providing a strong basis for enforcement and maintenance of the seller’s intellectual property rights in such goods.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.