Example Agreements: Spirits Manufacturing Agreement (Licensing) – Contract Distilling With Enhanced “Flash” Aging
This recent dispute between a distiller and a company looking to contract manufacture a whiskey called Rattleback Rye has resulted in an opinion from a federal district court in South Carolina denying a motion to dismiss based on breach of contract grounds against both the company and its principals, but granting dismissal of claims for negligent misrepresentation and civil conspiracy. You can find the complaint and exhibits here. You can read the court’s opinion here.
The tale of woe is one of best intentions gone awry and of a contract that required minimum purchase/output levels of a party that found itself in a position to no longer pay for those required minimums. The branding company looking to make the spirits had apparently ordered some bulk spirits for aging at the distillery from a third-party distiller, and those bulk spirits allegedly contained trichloroanisole (cork taint) in amounts sufficient to force a recall of the products that were produced and ultimately shipped by the distillery for the branding company. That was apparently the straw that broke the camel’s back and the branding company couldn’t meet the obligations to pay for the contractual minimums.
While guaranteed minimums are a good way for a purchaser to ensure they will have a supply-line and for a distiller to ensure they will have income and orders, parties should also include a fair break-up provision (perhaps for a modest fee). This is doubly true where one of them is a start-up or new to the business of manufacturing and may be either undercapitalized or planning on funding future required orders with future anticipated profits. The contract arrangement here was a standard licensing for production of regulated product model. You can see a copy of the agreement which is attached as Exhibit 1 to the complaint filed by the distillery.
One other item of interest in the attached contract distilling agreement is the inclusion of provisions surrounding the installation and implementation of one of Lost Spirits “reactors” – those devices that are meant to provide twenty years of aging in a week. Sometimes called “flash aging” the process uses light to break down wood polymers to help the formation of the esters that mark maturation in a faster fashion that traditional barrel aging.
These provisions amount to a simple third-party acknowledgement and payment (the distillery paying Lost Spirits for the branding company’s license from Lost Spirits (not to exceed $1.00 per bottle)) but are interesting in that they deal with a subject matter that the industry may soon be dealing with as new methods for producing aged characteristics obtain acceptance. Licensing a “hack” to aging at a cost of both a per-bottle fee, that also includes the proprietary machine as well as ingredients such as wood staves (presumably oak?).
The complaint and the opinion are certainly worth a read for anyone interested in contract manufacturing and planning for eventualities that could have been addressed up-front in a contract.
