Manufacturing: How to enter into a collaboration with another firm

If the UK manufacturing industry is to seize the potential for growth, businesses will have to do more than cut costs and try to access the limited funding that is out there.

Engaging in effective partnering and embracing a more collaborative approach will be vital to accelerate and facilitate innovation, which can reduce costs, secure development of new products and open up new markets.

There are various possibilities for collaboration and bespoke partnering arrangements can be put in place, but there are three common structures or vehicles used where profit generation is the key objective.

1) Joint venture

This involves the creation of a separate joint venture vehicle, usually a limited company, to develop and commercialise a product or carry out a new business activity. 

Key considerations when setting up a vehicle of this type include: what each party will contribute to the company; what stake each party will receive; how the company will be funded; how the joint venture company will be managed and whether it company will give provided the desired tax result for partners.

2) Partnership

This has the advantage of a separate legal personality in Scotland (though not in England), which means that it can acquire rights or incur obligations in the firm name. However, tax on any profits is paid by the relevant partners rather than the partnership itself. 

The same issues arise for a partnership as for a joint venture company but, in addition, the partnership agreement will need to cover what share of the profits and losses each partner will bear and when the profits are distributed.

3) Contractual collaboration

It is possible to collaborate without forming a partnership or setting up a new company by working with another party (or more) through a contractual framework. The contract will need to be as thorough as possible. 

The failure of one party to perform is a key issue that needs to be addressed early as there is no jointly owned vehicle here. If the project requires grant or bank funding, a formal collaboration agreement is likely to be required to access capital.

Those businesses wishing to collaborate must consider as early as possible how they will approach and resolve significant issues such as the precise role of each in the collaboration; who manages the project; how they communicate with each other and third parties and how decisions are taken.

An additional issue to be aware of for each vehicle is intellectual property rights (IPR). It will be important in any collaboration agreement to identify clearly who will own any IPR created as a result of the collaboration and the manner in which it should be commercialised. 

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The collaboration agreement should also set out what happens to the jointly created IPR once the collaboration has ended and, where appropriate, state that each party retains its own pre-existing IPR so that none of the other partners can use it for competing products.

There are also risks involved when entering into overseas collaborations, for example with an offshore manufacturer. 

You will lose a degree of control over the manufacture of your products and acts or omissions by the manufacturer could affect the reputation of your business, so the agreement should provide protection in relation to this. You should also consider how to protect your business from fluctuations in foreign currency rates.

While the collaboration should be viewed in the most positive light, it is also crucial that you address early the consequences of termination of the collaboration or a default, and consider what dispute resolution mechanisms you might use. 

It is important to take legal advice as early as possible to identify the most appropriate route and ensure that the commercial interests of all parties are properly protected.

Paul Breen is a senior solicitor at Brodies LLP.

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