Relying on One Factory or Supplier: A Backup Plan and Protective Contract Terms Before Trouble Starts

The core answer

Many businesses depend on a single factory or supplier without realising it, because they started with the one that had a good price and responded quickly. One day the factory burns down, raises its prices, declines orders because a bigger customer has taken its capacity, or closes. The brand owner then finds that the moulds, formulas, box files and licences are all in the factory's hands. The problem can be solved, but it has to be solved before the event, not after.

The rule (Thai law). Thai law has no provision that forces a supplier to keep supplying indefinitely or to return moulds when a contract ends. The buyer's rights depend mainly on the contract, and liability for failing to deliver depends on whether the cause is force majeure. Section 8 of the Civil and Commercial Code defines force majeure, and section 219 releases a debtor from performance that has become impossible because of circumstances for which it is not responsible. For assets that end up in the factory's hands, such as moulds, formulas and licences, you must look at the facts and documents item by item to see who owns each one and who is the holder.

Our practical view. Work in four layers. First, make the assets at the heart of the business (formulas, designs, moulds, artwork, licences) belong to you and be accessible to you. Second, have at least one tested backup source. Third, hold enough stock to get through the switch. Fourth, have a contract that gives notice time, gives you priority when capacity runs short, and gives a clear way out when the relationship ends.

This guide is about prevention before trouble starts. For the steps when you actually have to change factories, see switching OEM factories: who owns the formula, moulds, boxes and stock.

1. Assess how dependent you are

Before writing any contract, answer these questions product by product, not for the company as a whole.

• How many products, or SKUs, are made at only one factory, and do they generate most of the company's revenue?
• Are key raw materials or components bought through a single supplier, and are there alternatives on the market?
• If the supplier stopped shipping today, how many weeks could the current stock keep you selling?
• How long would it take to find a new factory, make samples, test and start real production? (Think back to any earlier switch you have made.)
• Does the supplier produce for other customers bigger than you? If capacity is tight, who will be pushed back first?
• Does the supplier know the formula or the details that make your product different from competitors, and does the contract protect them?
• In whose name are the product's documents (notification, licence, test results) issued?

If you can rank products by revenue and by how hard it is to change the source, you will see which items to tackle first. Do not try to fix everything at once.

2. Assets that must be yours and accessible

A common problem when one factory is the only producer is that the brand owner does not hold what it needs to produce elsewhere. Make an asset list and check it item by item.

The danger is writing "belongs to the client" without saying what, and with no record of what is where. In a dispute, an owner with no list and no photographs will find it hard to prove its case. Make the asset list an annex to the contract, update it whenever a new mould is made, and have both sides sign it.

Sample clause (an example only; adapt it to the business):

The moulds, dedicated tooling, designs, formulas, specifications and artwork files
listed in Annex A are the property of the Client. The Contractor holds them as
custodian and will use them only to produce goods for the Client. The Contractor
shall not use them to produce or sell goods for any other person. Upon the Client's
written notice, the Contractor will deliver the said assets within the stated period
and may not withhold them to claim a disputed amount.

The last point (no withholding) is one the factory may negotiate, because it also wants security for payment. A middle path is to require delivery once the undisputed amount has been paid, or to place the disputed portion in an escrow account.

3. Notifications, licences and FDA documents issued in the factory's name

For products that must be notified or registered with the FDA, such as cosmetics, food, supplements or medical devices, who holds the document directly affects whether you can change factories.

• The holder may be the brand owner, the importer or the manufacturer, depending on the product type and the agency's conditions. For some types, the place of production or import is tied to the document.
• If the factory is the holder, the brand owner depends on the factory's cooperation to change the production site, cancel or transfer. If the factory closes or ends the contract, the product may be unsellable while a new document is obtained.
• Check, product by product, who the correct holder is, and agree in writing with the factory that it will cooperate in transferring, amending or cancelling when the contract ends.
• Supporting documents such as test results, product information files and quality-system documents may be at the factory. Ask for copies.

This is complex and differs by product type. Read more in cosmetic notifications: who should be the holder and FDA approval for food, supplements and medical devices, or use our FDA registration service. Always check the latest announcements and procedures before deciding.

4. A backup supplier: how to prepare without damaging the existing relationship

A backup supplier does not mean dropping the current one. It means building a proven alternative.

1. Make a master spec that belongs to you. If the spec exists only in one factory's head, a new supplier cannot start.
2. Choose a pilot item. You do not need to move everything. Pick products that are easy to move or low risk, and run a small batch at the new supplier to prove quality, licensing and delivery time.
3. Sign a confidentiality agreement with the new supplier before sending the spec. Ban any other use of the information, and state who owns any improvements.
4. Check whether the existing contract prohibits it. An exclusivity clause, a ban on having others produce, or a tied minimum quantity may make ordering from a new supplier a breach. Check before you order.
5. Tell the existing supplier appropriately. You do not have to tell everything, but do not give false information, and do not pass the existing supplier's confidential information to the new one, which could breach the contract or trade secrets.
6. Set an order split. The backup should receive enough continuing work to keep its capacity and readiness. Otherwise, when the time comes, the backup may not have room.

For products tied to a licence, assessing a backup supplier must include whether the new production site can be added to the documents and how long that takes, so starting early matters a great deal.

For businesses choosing between contract manufacturing and building their own brand, see contract manufacturing (OEM) or building your own brand, which explains the risk from the other side.

5. The supply contract: terms to have before trouble starts

A long-term sale or contract-manufacturing agreement should include at least the following.

• Term and renewal. Too short is unstable; too long is binding. Include a way out if the supplier fails the standards or deadlines.
• Discontinuation notice. The supplier must give advance notice, for an agreed period, when it will stop making a product or stop dealing with you, so you have time to find a new source, and give you a chance to place a final order of an agreed quantity (last-time buy).
• Allocation when capacity is short. If the supplier produces for several customers, state how goods are allocated when there is a shortage, at least so that you are not pushed back ahead of other customers on equivalent terms.
• Forecasts and orders. Who is bound by forecasts, the minimum quantities you must take, and the delivery times the supplier must meet.
• Ownership of assets and formulas. As in section 2.
• Safety stock or consignment stock held by the supplier. If the supplier agrees to hold backup stock for you, state who bears the risk of damage, who pays for storage and when it can be called off.
• Audit rights. The right to inspect the factory or request quality documents on a schedule.
• Restrictions and confidentiality. No using your spec or products to produce for others.
• Changes in the supplier's own sub-suppliers. The supplier must give notice before changing materials or the actual production site, because that can affect licences and quality.
• Exit and handover. Delivery of assets, specs and documents within a set period, and help to train or temporarily keep producing during the transition.

The terms on termination, penalties, liability and acceptance follow the same principles as in contracts with large customers. See a big customer sent us its contract, which explains the principles on penalties and set-off that work in both directions, and MSA and SLA for monthly service contracts for setting service levels.

6. Force majeure and failure to deliver

Suppliers often claim force majeure when they cannot deliver, and buyers should understand both the legal framework and the contract terms to write.

The rule (Thai law). Section 8 of the Civil and Commercial Code defines force majeure as any event, whether it occurs or has damaging effect, that a person cannot prevent even by exercising reasonable care that could be expected from a person in that status and situation. Section 219 releases a debtor from performance when performance becomes impossible because of circumstances arising after the obligation was incurred for which the debtor is not responsible. If the debtor is responsible for those circumstances, the debtor must compensate the creditor. According to case law, section 219 applies when performance is truly impossible, not merely harder or more expensive. So higher raw material prices, or a factory having more work from other customers, are usually not force majeure in themselves.

The contract should therefore be explicit.

1. Definition of force majeure. List examples that count (for example natural disasters, fire, government orders) and those that do not (for example general raw-material shortages, labour shortages, or a failure by the supplier's own supplier, unless that event itself meets the definition).
2. Duty to notify. Written notice within an agreed time, with evidence and a mitigation plan.
3. Duty to mitigate. The supplier must try to fix the problem and resume production quickly.
4. Buyer's rights if the event drags on. For example, the buyer may temporarily order from another source without breaching exclusivity, reduce minimum quantities, withdraw the moulds to produce elsewhere, or terminate once a set period is exceeded.
5. Priority. During force majeure, the buyer has priority over, or at least equal treatment with, other customers.

Buyers should take care if they themselves must deliver to a large customer on stricter terms. If your customer does not accept a force majeure event that your supplier is allowed to rely on, you bear the difference in loss yourself, so make the terms you sign with the supplier and with the customer consistent (back-to-back) as far as you can.

7. Backup stock and cash

Backup stock reduces risk, but it ties up money and has storage costs, so decide on principle.

• Start with the best-selling products that are hardest to re-source.
• Work out the time needed to change source (see section 1) and hold stock to cover that time. This is an estimate, not a fixed figure.
• Consider shelf life, expiry dates and storage conditions, especially for food, cosmetics and medical devices.
• Check the cash-flow and tax effects with your accountant. See profitable but short of cash.
• Keep the backup stock in a location separate from the factory, otherwise the stock may be stuck in the same event that stops the factory.
• Record who owns the stock held at the factory (finished goods, raw materials, packaging), keep documents showing it, and count it periodically.

8. The relationship in practice

Law and contracts help only as far as the relationship allows. A supplier that feels pressured may not cooperate when you need it most, so you should:

• Share plans and forecasts in advance.
• Pay on time if there is no dispute.
• Write terms that are fair to both sides; the supplier also wants security for orders and payment.
• Hold periodic performance reviews and keep records of quality, late deliveries and fixes, for use if the contract has to be ended.

9. After the event

If the factory has actually stopped shipping, proceed in this order.

1. Gather the contract, purchase orders, the asset-list annex and past documents.
2. Check all stock, including what is inside the factory.
3. Read the force majeure, termination and handover terms before sending any letter to the factory.
4. Send clear written notice. Do not rely on phone calls alone.
5. If the factory is withholding moulds or formulas, consult a lawyer before acting. See switching OEM factories and demand letters.
6. Tell key customers early, truthfully, and check your customer contracts for penalties or a duty to notify when delivery is late.

10. Checklist

• Products with a single production source are identified and ranked by revenue and difficulty of switching
• There is an asset list (moulds, formulas, artwork) with photos, signed by both sides
• The contract names the owner, the right to get the assets back, and a ban on producing for others
• You have checked who holds each product's notification or licence and agreed on transfer
• The trademark is registered in the brand owner's name
• There is at least one backup supplier that has completed a trial batch
• You have checked that the existing contract does not bar buying from others
• The contract has a discontinuation notice, a last-time buy and allocation when capacity is short
• The force majeure clause sets a definition, a duty to notify and the buyer's rights if the event drags on
• Backup stock covers the time needed to switch, and cash flow has been discussed with your accountant
• The supplier contract and the customer contract are consistent on late delivery

Further reading

• Switching OEM factories: who owns the formula, moulds, boxes and stock — the steps when you actually have to switch
• Contract manufacturing (OEM) or building your own brand — the risk of relying on a manufacturer and brand ownership
• Cosmetic notifications: who should be the holder — the cosmetics case
• FDA approval for food, supplements and medical devices — the applicant and where brands go wrong
• Who owns the brand — structuring trademark ownership
• Profitable but short of cash — the effect of backup stock on cash

Do not wait for the factory to stop before asking who owns the moulds, formulas and licences. Make the key assets yours, have a tested backup source, and have a contract that gives you time and a way out when the relationship ends.

We draft and review supply and contract-manufacturing agreements, check ownership of assets and trademarks, and help coordinate FDA registration. For an initial consultation, call +66 92 254 2045 or send us the details. See also contracts and documents and FDA registration.

This guide is published by Suwanvara Law Firm — a Khon Kaen law firm established in 1986. General information only, not legal advice on a specific matter.