How to Review a Manufacturing / Supply Agreement in India

A manufacturing or supply agreement governs an ongoing production relationship: a buyer places recurring orders for goods a seller makes to spec, often against tooling or drawings the buyer funded. It looks like a vendor agreement but carries extra risk a one-off purchase order never faces: a forecast that reads like a promise but is not one, a mould paid for but not owned, and a force majeure clause that sounds broad but excuses almost nothing in practice. Adira, which publishes this guide, sells contract review and CLM software, so it benefits when businesses run supply agreements through a proper system rather than a shared drive. Nothing below depends on that; you can mark up a supply agreement clause by clause, free, in Weave, our browser tool, without creating an account.

This guide is written from the buyer's side, since the buyer usually drafts the template, but every red flag works in reverse for a manufacturer reading a buyer's paper.

Clause by clause: what to check, and where to go deeper

• Volume forecast and commitment, binding or just planning. Covered below.
• Pricing and escalation, fixed or tied to a named index. See our price escalation guide on why Section 29 voids a formula too vague to compute.
• Quality specification and acceptance. See our acceptance clause guide on Sections 41 to 43 of the Sale of Goods Act.
• Lead times, delivery, and Incoterms. A named Incoterm (FOB, CIF, DAP) fixes when risk passes in one word; silence does not.
• Warranties and recall, who pays if the goods hurt someone. Covered below.
• IP in tooling and designs, who owns the mould versus the drawing. Covered below.
• Exclusivity and minimum purchase. See our exclusivity clause guide on the Competition Act's rule-of-reason test.
• Retention of title. See our retention of title guide on Sections 19 and 25 of the Sale of Goods Act.
• Force majeure and supply continuity. Covered below.
• Term and termination, notice plus the transition: tooling handback and spares. See our termination clause guide.

Forecasts versus firm commitments: the distinction most templates blur on purpose

Manufacturing runs on forecasts. A buyer shares a rolling 3, 6, or 12-month volume estimate so the seller can plan capacity and raw material buys. The dispute that follows almost every rough patch is simple: does the forecast bind the buyer to actually place those orders, or was it only ever a planning number?

Indian law does not resolve this by default; it turns on the words used, and on whether the number is determinable at all. Section 29 of the Indian Contract Act, 1872 states: "Agreements, the meaning of which is not certain, or capable of being made certain, are void." A forecast phrased as "Buyer anticipates ordering approximately 10,000 units per quarter, subject to demand" cannot be enforced as a purchase obligation, since there is no fixed number and no mechanism to fix one. Source: Section 29, Indian Contract Act, 1872 (Indian Kanoon).

That cuts both ways. If the agreement is silent, a seller who built capacity against the forecast may later argue the buyer's conduct created an implied commitment. The clean fix is to say so directly: forecasts are non-binding estimates, and only a signed purchase order or a stated minimum purchase quantity creates a payment obligation. Any floor should be a real number per period, not "reasonable efforts to meet the forecast."

A test you can run: search the forecast clause for a number next to a word like "shall" or "commits." If the only verb near the number is "anticipates" or "plans," it is not a binding order, whatever capacity the seller built against it.

Force majeure and supply continuity: what a "broad" clause actually excuses

Most supply agreements carry a force majeure clause listing floods, fires, war, pandemics, and "acts of God." Almost none say what buyers actually want covered: a raw material price spike, a key sub-supplier failing, or an export restriction abroad. Indian law is stricter here than most drafters expect.

Where a contract has no force majeure clause, Section 56 of the Indian Contract Act, 1872 supplies the default, the doctrine of frustration: "A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful." Source: Section 56, Indian Contract Act, 1872 (Indian Kanoon). Where a clause does exist, courts apply it first and fall back to Section 56 only for gaps it leaves.

The Supreme Court drew the line on commercial hardship in Energy Watchdog v Central Electricity Regulatory Commission, (2017) 14 SCC 80. Power generators argued that a sharp, unforeseen rise in imported coal prices, caused by a change in Indonesian export law, was force majeure excusing them from supplying at the contracted tariff. The Court disagreed: a rise in the cost of performance, however severe, does not make performance "impossible" under Section 56; it only makes the contract less profitable, which the law does not excuse. See the judgment on Indian Kanoon. The case arose from power purchase agreements, not a manufacturing contract, so treat it as confirming the general principle, not a ruling on your facts.

For a buyer, this cuts against the seller's usual excuse: "raw material costs went up" is commercial hardship, not force majeure, unless the clause names a price threshold as a trigger, negotiated in explicitly since the law will not imply it. A force majeure clause should also state notice timelines and what happens to the volume commitment once the event ends, made up later, or simply lost.

Recall and product liability: who pays when the goods are the problem

A supply agreement's indemnity usually names IP infringement. Fewer name the risk that actually shows up: a manufacturing defect reaching a consumer. Chapter VI of the Consumer Protection Act, 2019 makes this a specific, no-fault exposure. Section 84(2) states: "A product manufacturer shall be liable in a product liability action even if he proves that he was not negligent or fraudulent in making the express warranty of a product." Source: Section 84, Consumer Protection Act, 2019 (Indian Kanoon).

The buyer's exposure sits one section later. Section 86(d) makes a "product seller who is not a product manufacturer," exactly what a buyer becomes on rebranding or reselling a manufacturer's output, liable where "the identity of product manufacturer of such product is not known, or if known, the service of notice or process or warrant cannot be effected on him." Source: Section 86, Consumer Protection Act, 2019 (Indian Kanoon). If the manufacturer is a small workshop or a supplier abroad with no assets in India, an injured consumer's claim can land squarely on the buyer's desk.

A regulatory layer sits on top of that private liability. Section 20 lets the Central Consumer Protection Authority act on its own where it finds unsafe goods, including "recalling of goods... which are dangerous, hazardous or unsafe" and "reimbursement of the prices of goods... so recalled to purchasers." Source: Section 20, Consumer Protection Act, 2019 (Indian Kanoon). A defect can trigger a recall independent of any contract clause, so the agreement should state in advance who bears the cost and who controls the process, before a regulator forces the pace.

IP in tooling and designs: paying for the mould does not mean you own the drawing

Buyers routinely fund the moulds, jigs, and technical drawings a manufacturer needs to produce to spec, and assume that paying for something means owning it. Indian copyright law does not work that way by default. Section 17 of the Copyright Act, 1957 makes the author the first owner as a general rule, with a narrow commissioning exception. Clause (b) provides that "in the case of a photograph taken, or a painting or portrait drawn, or an engraving or a cinematograph film made, for valuable consideration at the instance of any person, such person shall, in the absence of any agreement to the contrary, be the first owner of the copyright therein." Source: Section 17(b), Copyright Act, 1957 (Indian Kanoon). Notice what is missing: a technical drawing or CAD file is none of a photograph, painting, portrait, engraving, or film. Paying a manufacturer's design team to produce a mould drawing does not, by itself, transfer copyright in it to you.

Unless the agreement has an explicit assignment clause covering drawings and CAD files, the manufacturer retains copyright even though the buyer funded the work and owns the physical mould. Draft an IP clause that assigns copyright in tooling drawings to the buyer on payment, and separately state who owns the physical tooling and who bears its maintenance and scrapping cost. These are two different questions; a clause covering only one leaves the other unresolved.

India notes: three things a generic supply template gets wrong

MSME payment terms apply even under a long-term supply contract. If the manufacturer is a registered micro or small enterprise under Udyam, Section 15 of the MSMED Act, 2006 caps payment at 45 days from acceptance regardless of the master agreement, and Section 16 adds compound interest at three times the RBI-notified bank rate on late payment. In M/S Silpi Industries v Kerala State Road Transport Corporation (2021), the Supreme Court held the registration must exist on the signing date for the cap to apply. Verify at udyamregistration.gov.in before agreeing net-60 or net-90 across a multi-year schedule.

GST e-invoicing affects input credit on every shipment, not just the first. Section 16 of the CGST Act, 2017 conditions the buyer's input tax credit on holding a valid tax invoice from a supplier who has filed and paid GST. One supplier lapse can strand credit across hundreds of invoices, so the agreement should obligate timely, compliant e-invoices with a short cure period for errors. Source: Section 16, CGST Act, 2017 (Indian Kanoon).

Retention of title protects less than a template implies once goods are processed. Raw materials sitting in a buyer's plant awaiting assembly are the classic scenario, but protection weakens sharply once materials are welded, moulded, or blended in, since Sections 19 and 25 of the Sale of Goods Act need goods that remain identifiable. Our retention of title guide covers where that protection runs out.

Red flags

Normal	Red flag	Why it matters
Forecast is plainly non-binding, with a defined minimum quantity if one exists	Real number but vague verbs like "anticipates"	Conduct built on the forecast can still support an implied-commitment claim
Force majeure names specific triggers and a cost threshold	Generic list of floods, wars, and "acts of God"	Energy Watchdog confirms a cost rise alone is not force majeure
Indemnity names product liability and recall as distinct triggers	Covers only "third-party IP claims"	Section 86 exposure falls on the buyer when the manufacturer cannot be reached
Recall cost and process control stated in advance	Silent on who pays or leads a recall	Section 20 lets the regulator order a recall regardless of contract terms
IP clause assigns copyright in drawings and CAD files	Only says tooling is "buyer's property"	Section 17(b) does not cover drawings
Incoterm named, or terms state risk pass points	"Delivered" or "ex-works" used loosely	Ambiguity becomes an argument once goods are damaged in transit
Minimum purchase tied to exclusivity is a real number	Minimum described as "reasonable"	An unenforceable minimum leaves the seller locked in with no floor
Payment terms checked against Udyam status	Blanket net-60 or net-90, no MSME check	Unenforceable against a registered manufacturer under Section 15
Retention of title scoped to unpaid, unprocessed goods	"All monies" claimed over goods already moulded in	Sections 19 and 25 give little protection once identity is lost

Bad clause versus better clause: force majeure

Bad: "Neither party shall be liable for failure to perform its obligations under this Agreement due to causes beyond its reasonable control, including acts of God, fire, flood, war, and government action."

What is wrong: it says nothing about raw material cost increases or sub-supplier failure, the two events that disrupt supply chains most. Under Energy Watchdog, a cost rise is not covered by this wording, so the seller has no real relief, and volume commitments during the event are left unresolved.

Better: "Neither party shall be liable for delay or failure to perform caused by an event beyond its reasonable control, including acts of God, fire, flood, war, epidemic, government action, or failure of a named critical sub-supplier in Schedule [X], provided that a rise in raw material cost shall constitute force majeure only where it exceeds [percentage]% of the price in effect on the date of this Agreement, verified by [reference index]. The affected party shall give written notice within [number] business days and use reasonable efforts to mitigate, and any minimum purchase quantity suspended during the event shall be made up within [period] after it ends, failing which it lapses without penalty."

What changed: it names sub-supplier failure and a cost threshold explicitly, since Energy Watchdog confirms general wording will not cover cost shocks on its own, and resolves what happens to the volume commitment once the event ends.

The supply agreement checklist

1. Does the forecast clause state plainly whether it binds the buyer, or is it a planning estimate only?
2. Is pricing fixed, or does escalation name a calculable index under Section 29?
3. Is the quality spec a signed, dated schedule, with a realistic acceptance window?
4. Does the agreement name an Incoterm, or otherwise state when risk and title pass?
5. Does indemnity name product liability and recall separately from IP infringement?
6. Does the IP clause assign copyright in tooling drawings, not just the physical mould?
7. If exclusivity is granted, is the minimum purchase volume a real, calculable number?
8. Is retention of title scoped to unpaid, unprocessed, identifiable goods?
9. Does force majeure name specific triggers, including a cost threshold?
10. Does termination include a defined transition: tooling handback and spares?
11. Does payment respect the manufacturer's Udyam status and the Section 15 cap?
12. Is the agreement stamped for the state of execution?

How this differs from a vendor agreement

A vendor agreement, our guide to reviewing a vendor or supplier agreement, is the general procurement contract for standard goods, without a volume commitment. A supply agreement adds the terms that matter once production is made-to-order: a forecast that may or may not bind, tooling IP the buyer funds but does not automatically own, and a minimum purchase tied to exclusivity. Acceptance, warranty, and retention of title apply to both alike.

US and global contrast

US supply contracts run mainly on Article 2 of the Uniform Commercial Code, excusing non-performance under Section 2-615's "commercial impracticability" standard, somewhat more forgiving of cost shocks than India's strict "impossibility" reading of Section 56 under Energy Watchdog. Work-for-hire is broader under US copyright law too, letting a commissioned work shift ownership to the buyer more readily than India's narrow Section 17(b) proviso does. There is no US equivalent to the 45-day MSMED payment cap, and stamp duty on a commercial contract is not a US concept at all.

FAQ

Is a rolling volume forecast legally binding on the buyer? Only if the clause creates a fixed, calculable obligation. An estimate or plan is not binding under Section 29, though conduct against the forecast can still support an implied-commitment argument.

Can a manufacturer refuse to supply because raw material costs rose sharply? Not on force majeure grounds alone. Energy Watchdog held that a rise in cost, however steep, does not make performance impossible under Section 56. The manufacturer needs a specific cost-threshold clause.

If I pay a manufacturer to develop a mould, do I own the drawing too? Not automatically. Section 17(b) covers commissioned photographs, paintings, portraits, engravings, and films, not technical drawings. You need an explicit assignment clause to own the drawing's copyright, separate from the physical mould.

Who is liable if a product I resell under my own brand turns out to be defective? The Consumer Protection Act, 2019 can reach you as a "product seller" under Section 86 if the manufacturer cannot be identified or served, regardless of your supply contract. The contract only determines whether you can recover that cost through indemnity.

Does a product recall order override my supply agreement? Yes, in that Section 20 gives the Central Consumer Protection Authority power to order a recall independent of contract terms. State who bears the cost and controls the process in advance, since the statute does not allocate it. See our order form guide for which document controls if a purchase order later conflicts with the master agreement.

This guide covers the forecast-versus-commitment distinction, force majeure after Energy Watchdog, product liability and recall, and IP ownership in tooling, points a generic vendor template usually misses. It is not legal advice, and it does not tell you whether your specific agreement is enforceable or safe to sign on your facts. For that, especially before a multi-year production commitment, have a lawyer review the actual document.