One of the most common contracts in production and trade is the Manufacturing Agreement. This legal agreement allows an employer to entrust the manufacturing and production of a specific good or product to another party, often referred to as the contractor or manufacturer. The contractor is responsible for producing and delivering the product in accordance with the technical specifications, quality standards, and timelines outlined in the contract. It is important to note that the contractor is merely the executor of the production process; the ultimate ownership of the product and brand rests with the employer. Additionally, it is crucial to understand that this type of contract differs from agreements related to participation in the production or sale of goods.
The preparation and drafting of contracts, like other agreements, are extremely important. It requires a strong understanding of the law, practical experience, and the ability to foresee potential legal challenges. Karimi & Associates Law Firm is here to assist you with a team of legal experts specializing in contract drafting. Contact us for advice.
The Manufacturing Agreement is one of the most common contracts used across various industries, including clothing, food, industrial parts, packaging, and even cultural products. Despite its wide applicability, the “Manufacturing Agreement” lacks a distinct title in Iranian law. However, it is recognized as a valid, enforceable, and referable contract based on general contract principles. This article explores the concept, legal nature, and legal foundations of the production order contract under Iranian law.
The Main Elements of a Manufacturing Agreement
The key elements of a Manufacturing Agreement are as follows:
- Orderer (Employer): This is the individual or entity that places the order for the product and defines its specifications.
- Manufacturer (Contractor/Producer): This refers to the individual or entity responsible for producing the product in accordance with the terms of the agreement.
- Subject of the Contract: This section should clearly outline the exact specifications of the goods, including raw materials, standards, and quality requirements for the product in question.
- Obligations: This part specifies the responsibilities of each party, including delivery timelines, pricing, manufacturing methods, and quality assurance measures.
- Ownership: Typically, in this type of contract, ownership of the final product and its intellectual property rights remains with the employer.
In the remainder of this article, we will explore some of these elements in more detail.
Legal Basis and Nature of the Manufacturing Agreement
The primary legal basis for a Manufacturing Agreement in Iranian law is Article 10 of the Civil Code. This article states that “private contracts are enforceable against those who have entered into them unless they are explicitly contrary to the law.” Since a Manufacturing Agreement does not conflict with mandatory laws, nor is it contrary to public order or good morals, it is recognized as valid under this article. Therefore, the lack of a specific legal title does not render this contract void or invalid.
Parties’ Obligations
Each party in this contract has specific rights and obligations. Carefully attending to all relevant details can help prevent future issues and challenges.
In a production order contract, the manufacturer agrees to produce and deliver the product in accordance with the agreed technical specifications, quality standards, and delivery timelines. The manufacturer must also comply with legal regulations, industry standards, and safety or health regulations related to the product.
In return, the customer is obligated to pay the agreed-upon fee on time and, if necessary, provide essential cooperation. This may include supplying information, drawings, samples, or raw materials. If either party fails to fulfill their obligations, they may incur contractual liability.
Liability arising from product defects or non-conformity
One of the most important articles in these contracts addresses the liability for defects or non-conformities in the product. While the parties may adjust their responsibilities, the general principle is that if the manufactured product is defective or fails to meet the agreed-upon specifications, the rules of contractual liability apply. In the case of a breach of obligation, the party at fault is responsible for compensating any damages incurred, unless they can prove that the failure to fulfill the obligation was due to an external factor beyond their control. In such cases, the customer may request the repair or replacement of the product, claim damages, or, in more serious instances, terminate the contract.
Other Important Clauses in the Manufacturing Agreement
To minimize the likelihood of disputes, it is advisable for the contract to also encompass the following elements:
In addition to the main elements mentioned in the previous paragraphs, to reduce the risk of disputes, it is recommended that the contract also include the following:
- Precise product specifications and quantity
- Quality standard and reference sample
- Price and payment method
- Production and delivery schedule
- Performance guarantee and deposit
- Liability for defects
- Termination conditions
- Force majeure
- Dispute resolution authority (court or arbitration)
Similar Contracts
In business transactions and collaborations, various types of contracts are used that resemble production order contracts in their structure and function. However, there are fundamental differences between these contracts in terms of their legal nature, the extent of the parties’ obligations, and the consequences of fulfilling or breaching the contract. Accurately recognizing these differences helps businesses select the appropriate contract format based on the type of cooperation they intend to pursue, which can prevent potential legal disputes and risks. Additionally, these distinctions have significant implications for the transfer of ownership, the disposal of sold goods, and the responsibilities of the parties involved. Similar contracts include production participation contracts and sales contracts.
The Manufacturing Agreement is one of the most commonly used commercial contracts in Iranian law. Although it lacks an independent legal title, it is fully valid under the principle of freedom of contract and the general rules of civil law. Additionally, production costs in Iran are lower than those in neighboring countries, which means the costs associated with this contract in Iran are likely to be more economical on average.
However, accurately and professionally regulating this contract—taking into account the nature of the production, the parties’ obligations, and commercial customs—plays a crucial role in preventing disputes and safeguarding the economic interests of all parties.
Karimi & Associates Law Firm has a team of lawyers specializing in contract drafting. We are committed to minimizing legal risks by offering specialized advice and drafting precise contracts tailored to your business needs.