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Legal spotlight - Toll manufacturers under REACH

CW Briefing, September 2008

As corporations ready themselves for the end of the pre-registration period and finalise their REACH compliance strategies, they often face an unexpected hurdle: How should they deal with REACH registration of substances that are made by toll manufacturers? Jean-Philippe Montfort discusses.

Often, the customer owns the technology, the raw materials, the data and sometimes much more. Yet, in most cases it is the toller, if based in the EU, who is the "manufacturer" under REACH and who is required to register to continue manufacturing the substance lawfully. Often, the toller makes the substance only for a given customer and is not ready or capable to take on the costs of the registration. It is then for the customer to support him. But how can it do so in a way that safeguards its legitimate interest, particularly if it pays for the registration but the toller then ends up as its lawful registrant?

A "toll manufacturing" agreement is an agreement whereby the "toller" agrees to provide a "customer" with an end product or substance that it will manufacture. This is different to a normal supply contract because the customer owns part or all of the technology, and sometimes the incoming raw materials and/or the end products, and only subcontracts the "manufacturing" of the substance.

Inter-group contracts

Often, the deal is exclusive so that the toller only makes that substance for one customer (but may be tolling many different substances for many different customers). Other features of toll manufacturing agreements vary from one agreement to the other, with, in most cases, the customer taking on many tasks and responsibilities, except for the manufacturing operation itself. Inter-group company agreements may also include tolling agreements or raise similar issues, in particular when several legal entities of the same group share a given production site, with each entity being in charge of the different functions of a fully independent manufacturer.

REACH makes no mention of toll manufacturing nor toll manufacturers and offers no special treatment for these actors in the supply chain. This means that to the extent they qualify as "manufacturers" or "importers" of chemical substances above one tonne per year, they are subject to registration.

Of course, if the toller is located outside the EU and the customer is importing the substance manufactured, then it is the customer who is subject to the registration obligations.

By contrast, the toller will be considered to be an EU "manufacturer" under REACH if it meets three conditions:

  • it is a legal person;
  • it is established within the EU,
  • it manufactures a substance or extracts substances in their natural state within the EU.

Given the lack of specific guidance in the relevant REACH technical guidance documents and the number of elements that the customer deals with in relation to the substance manufactured, including all the intellectual property involved, companies are often hesitant to designate the EU toller as the REACH manufacturer. This is often unavoidable, however, even if a case-by-case review of the fundamental elements of what constitutes "manufacturing" is required to do so, including a review of who is in "control of the manufacturing process", as discussed in the ‘manual of decisions’ adopted in the framework of the EU dangerous substances Directive.

Vested interests

However, merely concluding that the toll manufacturer is indeed the EU manufacturer of the substances, and that it therefore must register the substances it manufactures above one tonne per year, is however not sufficient. The toller may not be aware and/or willing to take on this responsibility and the associated costs. Or, the customer may have other vested interests in controlling the registration of the substance for which it often will hold data and other intellectual property.

Below is a non-exhaustive list of issues that must be considered on a case-by-case basis when reviewing and adapting toll manufacturing agreements to ensure compliance with REACH:

Location/general approach towards REACH registration: If the toll manufacturer is established outside the EU and the customer within it, the customer can register as an importer, in which case it will control and own the registration dossier. It could also act as the ‘only representative’ (OR) of the toller to cover several importing legal entities but then the OR agreement must carefully consider a series of issues to ensure the customer remains in control. If both the toller and customer are established outside the EU, only the toller can appoint an OR to cover importers and this may be delicate for the customer, in relation to its own EU customers, in particular if the toller arrangement is confidential. Where both entities are established inside the EU and the toller is the REACH manufacturer, customers often seek to act as third party representatives ("TPR") for the toller to control the registration, but this also gives rise to confidentiality and other issues, such as data rights. Confidentiality: Toll manufacturing arrangements are often confidential, in that the customer does not want his own end-customers to know who is the actual manufacturer of the substance it is selling. If confidentiality is key, then appointment of an OR by the foreign toller is not easy as REACH requires foreign manufacturers to inform EU importers of the OR arrangement. Within the EU, a TPR arrangement may be tempting because in that case the TPR (the customer) would be the visible party in discussions in Substance Information Exchange Fora (SIEFs). There are, however, inherent problems with the use of the TPR concept for tollers. In many consortia agreements, TPRs are not accepted or must reveal the identity of the company they represent. The customer/TPR may therefore be tempted to simply act in the consortium as a regular member (actual or potential manufacturer or importer), but the non-disclosure obligations and right of access provisions in the consortium agreement may preclude the toller from registering the substance using the information/data obtained by the customer/TPR in the consortium. Resolving these issues requires careful handling of the consortia agreement provisions on membership, affiliates, disclosure, right of access and others. Registration dossier rights: If the customer is obliged or otherwise decides to compile the registration dossier, it will often have to pay for the registration costs. However, the registration itself will belong to the toller as the manufacturer. Therefore, the customer will want to ensure that it did not invest for the sole benefit of the toller. When the toller only produces for a single customer under an exclusive contract, the customer will only compile a registration dossier relating to the specific quantity being produced for him. It will also seek to include in the contract provisions to limit for the duration of the exclusive tolling arrangement, the right of access to the registration data granted to the toller.

However, if the toller manufactures the same substance for several customers, it becomes quite difficult to organise the registration in a way that allows the toller to continue manufacture for all customers, while protecting the vested interest of those that contribute data to the registration dossier of the toller and pay the registration costs. This requires careful consideration and drafting of contractual provisions related to e.g. data ownership, termination, liability and indemnity between the parties.

All these issues must be considered urgently by toll manufacturers and customers alike before the sun sets on pre-registration; otherwise these often intimate and delicate relationships may be compromised or REACH compliance jeopardised. Sometimes, companies are often acting as customer and toller, respectively, for different substances, and they will need to consider both sides of these deals. In turn, this should help to ensure that these deals are fair to both sides.
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