A contract manufacturer (also known as a “co-man” or “co-packer” and for brevity, we’ll use “co-man” from here on out) is a critical partner for most emerging companies in the healthy food and beverage (F&B) space. The co-man has the facilities and equipment necessary to produce and package your products at scale, which means you don’t need to spend millions of dollars to have your own factory and packing capabilities. Negotiating an agreement for these production services with a co-man (not surprisingly called a “co-man agreement”) is a complex process, as it involves product development, regulatory compliance, fees, financial forecasts, your proprietary recipes, and the logistics of processing, labeling, and delivery. While not exhaustive, the discussion below highlights some of the most critical aspects of a co-man agreement. Good counsel can help you negotiate the best agreement for your unique products under the circumstances.
- Product Specifications: A co-man agreement needs to include the necessary details (usually called “specifications”) about your product(s) so that the co-man can make and pack them to your (and your customers’) satisfaction. These specifications should include ingredients, recipe(s), packaging, and labeling requirements. Make sure your co-man understands all the specifications and agrees that it can meet them all before finalizing the co-man agreement. You will also want to make sure you have the ability over time to modify your specifications as needed and understand any pricing changes that may come because of those changes.
- Sourcing Ingredients: Who sources the ingredients for your products is a big decision. You may choose to have the co-man source all ingredients using its pre-established network of vendors. Alternatively, you may want to direct the co-man to purchase some or all ingredients from parties you have already identified (a “directed buy”). Having the co-man do all the sourcing saves you time and energy and makes the co-man solely responsible for those ingredients and any issues related to using them, including quality, pricing changes, shortages, and the like. A directed buy gives you more control over your product but also means the co-man may look to you to be responsible for all or some of those issues.
- Quality Assurance and Control: A co-man agreement also needs to establish clear standards for quality control and assurance, including inspection rights and procedures for dealing with non-conformities. The agreement usually clarifies who is responsible for product quality at each stage of the manufacturing process. The co-man should also provide a warranty for its services with remedies to address defects. Other topics that may be addressed include records auditing, testing, and sample processes.
- Volume Commitments and Forecasts: A co-man agreement should specify a minimum volume of products to be produced. Without a specified quantity, the agreement for the sale of goods will not be enforceable! The co-man may also require you to provide forecasts, but unless you can determine your requirements for products with certainty at the time of forecasting, you should make sure the forecasts are just that – predictions – and are not binding.
- Intellectual Property (IP) Rights: You need to protect your intellectual property (IP) rights, particularly if your products involve proprietary information or unique recipes. The co-man agreement should clearly define who owns what and set out protections for all IP that is being used or incorporated into the product. Be very careful if the co-man tries to claim proprietary rights in any of its manufacturing processes, as that may create issues for you when you try to have another co-man produce your products.
- Regulatory Compliance: As a food and beverage company, your products are subject to a variety of food safety regulations. You will need to ensure that the co-man understands and complies with these regulations, and the co-man agreement should spell out responsibilities for regulatory compliance.
- Pricing and Payment Terms: The co-man agreement should clearly define the pricing structure, whether it is per unit, batch, or hour. It should also specify the terms of payment, including timing and conditions for any changes in pricing. Recently, it has become common to see terms permitting the co-man to unilaterally adjust price. Ideally, any price changes should be mutually agreed upon or at a minimum should be based on pre-determined factors, such as circumstances where prices are scaled to an agreed-to index.
- Exclusivity: You should never agree to give a co-man exclusive rights to manufacture your products, as this prevents you from using other co-mans while the agreement is in place and makes your business especially vulnerable to production disruptions. The only exceptions to this rule are if the co-man agreement is for a short term (a year or less) or the co-man has agreed to minimum performance and quantity requirements and if it fails to achieve them, the exclusivity terminates.
- Term and Termination: The co-man agreement should state a term, with start and end dates, renewal terms (if any), and conditions under which the contract can be terminated, including notice periods. You should avoid agreeing to unduly long initial terms (e.g., more than 2 years), particularly if you have not dealt with the co-man before.
- Liability and Indemnification: The co-man agreement should address potential liabilities, including product liability, recall responsibilities, and damages. Some of the most important terms of the agreement are the liability and indemnification provisions because these set forth how the parties allocate risks.
Emerging companies in the healthy F&B space would do well to make sure they have a well-drafted, comprehensive co-man agreement in place to help ensure it is getting its customers high-quality products and providing adequate remedies for any issues that may arise. If you need assistance, please reach out to the authors or your Foley relationship partner with any questions.
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