Author's Note
The Toll Manufacturing Agreement is a Swiss-law governed standard toll manufacturing agreement for use on an intra-group basis. In a toll manufacturing arrangement, the principal is usually responsible for procuring and providing to the manufacturer all materials necessary for manufacture of the products. Conversely, in a contract manufacturing arrangement, the manufacturer is responsible for procuring the required materials. Under the Toll Manufacturing Agreement, the manufacturer is compensated on the basis of recovery of the fully-loaded costs of manufacture, plus a margin (user defined). The agreement assumes that as between the parties, the principal owns all intellectual property rights relating to the products and the manufacturing process. The template includes, as standard, an allocation of risks between the parties that is consistent with that found in a typical toll manufacturing relationship, as well as an obligation on the principal to indemnify...
Read moreThe Toll Manufacturing Agreement is a Swiss-law governed standard toll manufacturing agreement for use on an intra-group basis.
In a toll manufacturing arrangement, the principal is usually responsible for procuring and providing to the manufacturer all materials necessary for manufacture of the products. Conversely, in a contract manufacturing arrangement, the manufacturer is responsible for procuring the required materials.
Under the Toll Manufacturing Agreement, the manufacturer is compensated on the basis of recovery of the fully-loaded costs of manufacture, plus a margin (user defined). The agreement assumes that as between the parties, the principal owns all intellectual property rights relating to the products and the manufacturing process.
The template includes, as standard, an allocation of risks between the parties that is consistent with that found in a typical toll manufacturing relationship, as well as an obligation on the principal to indemnify the manufacturer for any loss or damage arising out of the performance of the manufacturing activities.
Terms which are configurable to the user’s needs include:
- Purpose and background;
- Term and termination;
- The products to be manufactured and any specific requirements applicable to the manufacturing process;
- Budgeting, payment and reconciliation mechanisms;
- Territory;
- Terms relating to delivery of products;
- Termination assistance;
- Sub-contracting and assignment rights;
- Provisions relating to notices;
- Dispute resolution, jurisdiction and arbitration; and
- Other boiler-plate provisions (e.g. confidentiality, force majeure).
Circumstances of Use
This document is intended to be used to document the provision of toll manufacturing services between group companies, for transfer pricing purposes.
The Toll Manufacturing Agreement may be used for cross-border transactions where the parties have agreed to use Swiss law.
Terms of Use
The purchase of this Product is subject to PartnerVine Terms.
You (the registered user through whose account the purchase is made) may:
- Access the document-generation interview for 90 days from date of purchase;
- Export and download an unlimited number of copies of the document(s) in Word or pdf format;
- Share and use the document copies in connection with the circumstances described in this Author’s Note and only for the ordinary business purposes of the group of companies to which you belong.
Exclusions and Limitations
The Toll Manufacturing Agreement assumes that the allocation of risk between the parties is aligned with that in a typical toll manufacturing relationship, and that the manufacturer is compensated accordingly.
The key differences between a toll manufacturing relationship and a contract manufacturing relationship lie in the assumption of risks and responsibility for procuring raw materials. A Contract Manufacturing Agreement template is also available.
Other Comments
No warranty or representation is given or made that the allocation of functions and risk and the related transfer pricing arrangements provided for in this document are appropriate in the specific circumstances of any given group of companies. No legal or tax advice is provided and nothing in this template or the related user interview shall be deemed to constitute the provision of legal or tax advice in relation to any fact or matter. Where necessary, specialist legal and tax advice should be sought together with input from group accounting functions prior to executing this agreement.
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Frequently asked questions
One party that is known as the Principal and the other party which is referred to as being the Manufacturer.
Yes, if the manufacturing has already commenced, the agreement will have retrospective effect.
The agreement can be of fixed term or indefinite term. Additionally, it is possible to sign an initial term with extension. The extension can be of indefinite nature or consist of successive additional terms.
No. Manufacturing must not be limited to take place at a specified place. However, the manufacturing agreement can be limited to a specific territory (or territories) or to a specific country (or countries).
Yes, it is possible to include reporting obligations for several events. Example are: (1) current status of the manufacturing process and product inventory, (2) the cost of manufacturing the products, (3) manufacturing delays, cost deviations and problems, (4) completed products and (5) others.
Yes, but only if specified in the manufacturing agreement.
Yes, but we should consider the following: It is important to take into consideration whether the principal or the manufacturer has responsibility for selecting suppliers as this may have a bearing on risk allocation and pricing. Buying production material form third parties may be (1) selected by Principal in its sole discretion, (2) selected by Principal in its discretion but subject to Manufacturer’s recommendations, (3) selected by Manufacturer but with Principal’s explicit approval.
Yes, but only if specified in the manufacturing agreement. This does not affect ownership.
The principal has to pay the transport costs while the manufacturer needs to provide the shipping documentation.
Whether it is appropriate for the principal to accept the risk of the manufacturer’s breach or gross negligence will depend on the level of compensation payable to the manufacturer. The principal may include costs attributable to Manufacturer's inefficiency, breach or gross negligence. This may impact the transfer pricing approach
The following options are possible: (1) annual budget for total costs, on-account invoicing and true-up: Costs plus mark-up will be invoiced based on an agreed budget, and then adjusted to reflect actual costs; (2) annual budget, price list invoicing and true-up: Invoicing will be based on a per-product “price list” created using the agreed budget, and then adjusted to reflect actual costs; (3) flexible invoicing of actual fees: group has maximum flexibility as to how fees are calculated and invoiced; (4) case by case invoicing, agreed costs: This option provides for invoicing on the basis of an agreed budget, but without any reconciliation process. It may be appropriate where costs are relatively stable/predictable.
Sub-contracting can be: (1) not permitted, (2) permitted only with principal's prior consent, (3) permitted only within group
Yes. A right to require continued provision of the services after termination is common for agreements where the manufacturing activities are complex and/or require transition to a third party. The principal may be obliged to reimburse the manufacturer for non-avoidable third party costs after termination if it is desirable to reduce the risk assumed by the manufacturer.
We can have possibilities: (1) standard warranty that each party has power to enter into and perform agreement (standard arm's length) and (2) explicit disclaimer of any warranties which creates greater risk for the other party. It is a standard warranty that the principal owns or has right to use all relevant intellectual property rights necessary for the manufacture of the products.
Typically in a toll manufacturing agreement, the principal will indemnify the manufacturer against any losses arising from the manufacture of the products. It is optional to carve out losses arising from the manufacturer's wilful default or gross negligence.
The confidentiality clause can be short or long depending on whether the agreement contains complex processes or highly sensitive or confidential information. With the latter, a long clause is recommended. The contents as well as its existence can be assigned to be confidential.
Yes. It may be appropriate to prohibit copies of confidential information being made if confidential information is being supplied in hard-copy format. If information is provided electronically, consider whether such a restriction is practical.
Yes, in an intra-group agreement, the parties may have more flexibility if email qualifies as writing (e.g. for the purposes of “written notice”). This must be specified in the agreement and may even allow termination. It is good practice to specify who is able to receive or send notices. Moreover, inserting a title is recommended, rather than an individual's name (e.g. "the Finance Director"), as roles and responsibilities change over time.
You may specify whether each party should bear their own costs arising from the negotiation, preparation, amendment, preservation and enforcement of the agreement, or whether one party should bear all the costs.