A manufacturing agreement is a commercial contract that establishes the legal framework for production relationships between brand owners and manufacturers. In Nepal, manufacturing agreements are governed by the Contract Act 2056 (2000) and sector-specific regulations, requiring precise drafting to allocate risks, protect intellectual property, and ensure regulatory compliance.
Manufacturing agreements in Nepal serve critical commercial purposes across diverse sectors including garments, pharmaceuticals, food processing, cosmetics, electronics, and FMCG. These contracts define production specifications, quality standards, pricing mechanisms, and liability allocation between parties. Without comprehensive documentation, manufacturing relationships frequently encounter disputes involving quality failures, production delays, intellectual property leakage, and regulatory non-compliance leading to product recalls.
Common disputes in Nepalese manufacturing arrangements include:
The complexity of manufacturing agreements in Nepal requires careful attention to contract law principles, sector-specific regulations, and international commercial practices where export production is involved.
The information provided herein is for general informational purposes only and does not constitute legal advice. Manufacturing agreement requirements vary significantly by product type, with additional regulatory approvals required for pharmaceuticals, food products, cosmetics, medical devices, and hazardous materials. Parties should obtain professional legal review before executing binding manufacturing arrangements.
Manufacturing agreements are enforceable contracts under the Contract Act 2056 (2000) when they satisfy the statutory requirements for valid contract formation.
Valid manufacturing agreements require: (1) lawful offer and acceptance between competent parties, (2) lawful consideration, (3) lawful object, and (4) free consent without coercion, undue influence, fraud, or misrepresentation. Written documentation is mandatory for manufacturing agreements exceeding NPR 5,000 in value under Section 3 of the Contract Act.
Key enforceability factors include:
Governing law provisions typically specify Nepalese law as the controlling legal framework, with jurisdiction clauses designating courts in Kathmandu or alternative dispute resolution mechanisms. Cross-border manufacturing agreements may incorporate international commercial law principles and Incoterms where foreign parties are involved.
Manufacturing arrangements in Nepal fall into three primary categories: contract manufacturing, toll manufacturing, and private label manufacturing, each with distinct ownership structures and risk allocations.
Contract Manufacturing: The brand owner provides product specifications, formulations, and intellectual property while the manufacturer provides production facilities, labor, and procurement of raw materials. The manufacturer delivers finished goods to the brand owner. Risk allocation: Manufacturer bears procurement risk; brand owner bears IP and market risk.
Toll Manufacturing: The brand owner or third party supplies raw materials to the manufacturer, who provides processing services for a conversion fee. The brand owner retains ownership of raw materials, work-in-progress, and finished goods throughout production. Risk allocation: Brand owner bears material cost and inventory risk; manufacturer bears processing quality risk.
Private Label Manufacturing: The manufacturer produces goods according to buyer specifications for sale under the buyer's brand name. The manufacturer typically owns formulations unless expressly transferred. Risk allocation varies by agreement but generally follows contract manufacturing principles.
| Element | Contract Manufacturing | Toll Manufacturing | Private Label |
|---|---|---|---|
| Raw material ownership | Manufacturer | Brand owner | Manufacturer |
| WIP ownership | Manufacturer | Brand owner | Manufacturer |
| Finished goods ownership | Brand owner (upon delivery) | Brand owner | Brand owner |
| Waste/scrap ownership | Typically manufacturer | Typically brand owner | Typically manufacturer |
| Pricing basis | Unit price or cost-plus | Conversion/processing fee | Unit price |
| IP ownership | Brand owner | Brand owner | Negotiable |
Risk differences include regulatory liability (typically borne by brand owner for market-facing products), recall costs (allocated by fault or contractually), IP infringement exposure (manufacturer warranty and indemnity), and pricing volatility (raw material index adjustments in long-term agreements).
Manufacturing agreements involve multiple stakeholders with defined roles: the brand owner/buyer who owns product IP and market rights, the primary manufacturer responsible for production, and any approved subcontractors for specialized processes.
The brand owner provides product specifications, quality standards, and intellectual property licenses. The manufacturer provides production capacity, quality control systems, and regulatory compliance. Subcontracting requires express written approval with flow-down of contractual obligations.
Effective manufacturing agreements utilize comprehensive annexures:
Subcontracting controls require manufacturer notification and brand owner approval for any production delegation, with subcontractors bound by equivalent confidentiality and quality obligations.
Technical specifications form the operational core of manufacturing agreements, defining exactly what the manufacturer must produce and the standards that govern production.
Product specifications must include: detailed product descriptions with diagrams or prototypes, dimensional tolerances and acceptable variation ranges, material composition and grade requirements, performance specifications and testing protocols, and shelf life or durability requirements.
Bill of Materials management requires: approved supplier lists for critical components, alternative supplier approval procedures, material certification requirements (COA/COC), and inventory management responsibilities.
Packaging and labeling specifications must address: primary packaging materials and construction, secondary packaging and palletization, labeling content including regulatory warnings and instructions, batch coding and traceability requirements, and multi-language labeling for export products.
Engineering change control procedures require: formal change request submission processes, technical review and approval timelines, cost impact assessment protocols, implementation schedules, and version control documentation.
Quality control provisions establish the inspection protocols, testing standards, and regulatory compliance requirements that govern production acceptance.
QC checkpoints must cover: incoming material inspection for component quality, in-process monitoring at critical production stages, final product inspection against specifications, and pre-shipment inspection where required. Inspection protocols specify sampling plans (AQL levels), testing equipment calibration, and inspector qualifications.
Testing standards include: laboratory accreditation requirements, testing methodology references (ISO, ASTM, or sector-specific), Certificate of Analysis (COA) and Certificate of Conformance (COC) documentation, and third-party testing for critical specifications.
Sector-specific compliance requirements include:
Recall management procedures require: incident reporting timelines (typically 24-48 hours), root cause investigation protocols, corrective action implementation, regulatory notification procedures, and recall execution workflows including customer notification and product retrieval.
Tooling and mold provisions address the ownership, maintenance, and return of specialized production equipment that may represent significant capital investment.
Ownership allocation must specify: molds, dies, jigs, and fixtures provided by or paid for by the brand owner remain brand owner property; tooling developed at manufacturer's expense but for exclusive brand owner products; and artwork, printing plates, and packaging designs.
Maintenance and storage obligations include: proper storage conditions to prevent deterioration, regular maintenance schedules, insurance requirements for high-value tooling, and restriction on use for any customer other than the brand owner.
Termination procedures require: prompt return of all tooling and molds upon contract termination, condition assessment and repair obligations, transfer assistance for tooling to replacement manufacturers, and destruction of obsolete tooling where required.
Depreciation and replacement provisions address: normal wear and tear versus damage allocation, replacement cost responsibility, and end-of-life tooling disposition.
Production planning provisions balance the manufacturer's capacity planning needs against the brand owner's inventory flexibility requirements.
Forecast mechanisms include: rolling 12-month forecasts updated quarterly, binding versus non-binding forecast portions (typically first 3 months binding), forecast variance tolerances, and capacity planning coordination meetings.
Minimum Order Quantity (MOQ) provisions specify: per-order minimum quantities, annual volume commitments, lead time requirements from order placement to production start, and order cancellation windows with associated penalties.
Capacity reservation arrangements may include: dedicated production line commitments, capacity reservation fees, exclusivity arrangements, and penalties for failure to reserve agreed capacity.
Inventory management addresses: safety stock maintenance responsibilities, obsolete inventory allocation when forecasts change, work-in-progress ownership, and finished goods storage limitations.
Pricing mechanisms in manufacturing agreements must accommodate raw material volatility, currency fluctuations, and regulatory changes while providing cost predictability.
Pricing models include:
Tax and invoicing requirements specify: VAT obligations under Nepal's Value Added Tax Act 2052, withholding tax requirements for cross-border payments, invoice documentation requirements, and payment terms (typically 30-60 days from delivery or invoice).
Currency and foreign exchange provisions address: pricing currency (NPR or USD/EUR for exports), exchange rate fluctuation allocation, and hedging responsibilities for long-term agreements.
Price revision triggers include: raw material index movements exceeding agreed thresholds (typically 5-10%), utility cost changes, minimum wage adjustments, and regulatory cost increases. Revision procedures require advance notice (typically 60-90 days) and negotiation protocols.
Delivery and acceptance provisions define when manufactured goods become the brand owner's property and when risk transfers from manufacturer to buyer.
Delivery terms specify: delivery locations (manufacturer facility, brand owner warehouse, or third-party logistics), delivery documentation requirements (packing lists, certificates of conformance), and shipping arrangements. Incoterms (FOB, CIF, DDP) may be incorporated for international shipments.
Title and risk transfer timing varies by manufacturing model:
Acceptance procedures require: inspection periods (typically 7-30 days post-delivery), rejection criteria and notification requirements, rework or replacement obligations for non-conforming goods, and scrap allocation for rejected products.
Storage and warehousing responsibilities address: post-manufacturing storage obligations, insurance requirements during storage, and demurrage charges for delayed pickup.
Intellectual property protection is critical in manufacturing agreements where proprietary designs, formulations, and know-how are disclosed to manufacturers.
IP ownership provisions must clarify: brand owner retains all rights to trademarks, designs, formulations, and technical data provided to manufacturer; improvements or modifications to brand owner IP remain brand owner property; and manufacturer background IP used in production remains manufacturer property.
Licensing scope limits manufacturer use of brand owner IP strictly to production under the agreement, with no rights to use for other customers, marketing, or independent development.
Confidentiality obligations require: comprehensive non-disclosure agreements for all proprietary information, employee and subcontractor confidentiality obligations, information security measures, and post-termination confidentiality survival (typically 3-5 years).
Non-compete and non-use restrictions may include: prohibition on producing competing products using brand owner designs or formulations, non-solicitation of brand owner customers, and restrictions on hiring brand owner personnel. Such provisions must be reasonable in scope, duration, and geographic coverage to be enforceable under Nepalese contract law.
Risk allocation provisions distribute liability for product defects, regulatory violations, and third-party claims between manufacturer and brand owner.
Product liability allocation typically assigns: manufacturer liability for defects caused by manufacturing errors, material substitutions, or quality control failures; brand owner liability for design defects, improper specifications, or marketing claims; and joint liability where both parties contribute to defects.
Indemnity structures require manufacturers to indemnify brand owners for: third-party claims arising from manufacturing defects, intellectual property infringement claims related to manufacturing processes, and regulatory violations caused by manufacturing non-compliance.
Liability caps and exclusions may limit: consequential damages (lost profits, reputation harm), indirect damages, and aggregate liability caps (typically 12-24 months of fees or specific monetary limits). Liability for gross negligence, willful misconduct, and confidentiality breaches typically remains uncapped.
Insurance requirements include: product liability insurance, public liability insurance, and recall insurance where available. Insurance certificates and renewal documentation must be provided to brand owner.
Recall cost allocation specifies: responsibility for recall costs based on fault determination, crisis management plan requirements, and cost-sharing where fault is disputed or joint.
Termination provisions provide orderly exit mechanisms while protecting both parties' interests in ongoing production, tooling, and intellectual property.
Initial terms typically range from 1-3 years with automatic renewal or negotiation requirements. Renewal procedures require advance notice (typically 60-90 days) and renegotiation of pricing and terms.
Termination grounds include: convenience termination with advance notice (typically 6-12 months), quality failures or persistent non-conformance, material breach of contract terms, insolvency or bankruptcy, and regulatory violations making continued production unlawful.
Exit management procedures require: immediate cessation of production using brand owner IP, return of all tooling, molds, and equipment, disposition of work-in-progress and raw materials (typically return or purchase by brand owner), return or destruction of confidential materials, and final settlement of accounts.
Transition support obligations may include: production support for replacement manufacturers, knowledge transfer assistance, and continued supply during transition periods.
Legal professionals provide specialized support in manufacturing agreement structuring, risk assessment, and compliance alignment.
Contract structuring services include: manufacturing model selection and optimization, clause drafting for complex technical specifications, risk allocation analysis, and negotiation support for critical terms.
Compliance framework alignment involves: sector-specific regulatory mapping, quality control protocol review, import/export documentation requirements, and permit and licensing verification.
Intellectual property protection services encompass: IP ownership structure design, licensing scope definition, confidentiality framework development, and non-compete provision drafting.
Dispute prevention and resolution support includes: escalation procedure design, arbitration clause optimization, and representation in manufacturing disputes.
What is a contract manufacturing agreement in Nepal?
A contract manufacturing agreement is a legally binding contract under Nepal's Contract Act 2056 where a manufacturer produces goods according to specifications provided by a brand owner, with the manufacturer procuring raw materials and delivering finished goods.
Who owns molds and tooling in a manufacturing agreement?
Molds and tooling ownership depends on payment source: tooling paid for by the brand owner remains brand owner property; tooling developed by manufacturer for exclusive use may transfer upon full payment or remain with restrictions on use for other customers.
How should QC and acceptance be drafted?
Quality control provisions should specify inspection checkpoints (incoming, in-process, final), sampling plans with AQL levels, testing protocols, rejection procedures with rework/replacement obligations, and documentation requirements including COA/COC.
Who pays for recalls caused by defects?
Recall costs are typically allocated based on fault: manufacturer bears costs for manufacturing defects, material substitutions, or quality failures; brand owner bears costs for design defects or specification errors; joint contribution requires negotiated cost-sharing.
Can a manufacturer subcontract production in Nepal?
Subcontracting requires express written approval from the brand owner, with subcontractors bound by equivalent quality, confidentiality, and IP obligations. Unauthorized subcontracting constitutes material breach.
How to protect formulas and designs in a manufacturing contract?
Protection requires: clear IP ownership clauses, strict confidentiality obligations with survival periods, limited licensing scope for production only, employee/subcontractor NDAs, and non-reverse engineering prohibitions.
What is the difference between contract and toll manufacturing?
In contract manufacturing, the manufacturer procures raw materials and owns them until delivery. In toll manufacturing, the brand owner supplies raw materials and pays a conversion fee, retaining ownership throughout production.
Are manufacturing agreements required to be in writing?
Under Section 3 of Nepal's Contract Act 2056, contracts exceeding NPR 5,000 must be in writing. Manufacturing agreements should always be written to ensure enforceability of complex technical and IP provisions.
What delivery terms should be specified?
Delivery terms should specify delivery location, Incoterms for international shipments, documentation requirements, title and risk transfer timing, and acceptance inspection periods with rejection procedures.
How are price adjustments handled in long-term agreements?
Price adjustments typically trigger on raw material index movements exceeding agreed thresholds (5-10%), utility cost changes, or regulatory cost increases, with 60-90 day advance notice and negotiation requirements.
What insurance should manufacturers maintain?
Manufacturers should maintain product liability insurance, public liability insurance, and property insurance covering tooling and equipment. Recall insurance should be considered for high-risk product categories.
How long do confidentiality obligations survive termination?
Confidentiality obligations typically survive contract termination for 3-5 years, with perpetual survival for trade secrets and proprietary formulations that qualify as true trade secrets under Nepalese law.
Can a brand owner terminate for convenience?
Termination for convenience is permitted if expressly provided in the agreement, typically requiring 6-12 months advance notice and payment for work-in-progress and committed inventory.
What happens to inventory upon termination?
Upon termination, brand owner typically must purchase finished goods produced to order, work-in-progress, and raw materials procured to specification. Obsolete inventory allocation depends on forecast accuracy and change control compliance.
Are non-compete clauses enforceable in Nepal?
Non-compete clauses are enforceable if reasonable in scope, duration, and geographic coverage. Excessive restrictions may be deemed unenforceable as restraints on trade under general contract law principles.
February 26, 2026 - BY Admin