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AMERICAN-BLEND CIGARETTE MANUFACTURING AGREEMENT

Manufacturing Agreement

AMERICAN-BLEND CIGARETTE MANUFACTURING AGREEMENT | Document Parties: REYNOLDS AMERICAN INC | BATUS JAPAN, INC You are currently viewing:
This Manufacturing Agreement involves

REYNOLDS AMERICAN INC | BATUS JAPAN, INC

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Title: AMERICAN-BLEND CIGARETTE MANUFACTURING AGREEMENT
Governing Law: New York     Date: 6/2/2010
Industry: Tobacco     Sector: Consumer/Non-Cyclical

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Exhibit 10.1

AMERICAN-BLEND CIGARETTE MANUFACTURING AGREEMENT

EXECUTION COPY

     This American-blend Cigarette Manufacturing Agreement (the “Agreement”) is made and entered into as of this 26 th day of May, 2010 (the “Execution Date”), by and between R. J. REYNOLDS TOBACCO COMPANY , a North Carolina corporation (hereinafter, “RJRTC”), and BATUS JAPAN, INC. , a Delaware corporation (hereinafter, “BATUS Japan”). RJRTC and BATUS Japan shall be referred to herein individually as a “Party” and collectively as the “Parties.”

RECITALS

      WHEREAS, RJRTC and BATUS Japan entered into the Original Agreement (as defined below) on July 30, 2004. The Original Agreement (together with all protocols, guidelines and understandings entered into in connection with the Original Agreement) has now been terminated in its entirety with effect from midnight on December 31, 2009 (save where any such protocols, guidelines and understandings are expressly stated in this Agreement to survive termination of the Original Agreement).

      WHEREAS, BATUS Japan or its Affiliates (as defined below) have the right to distribute, market and sell certain Cigarettes (as defined below) and other tobacco products in the Territory (as defined below);

      WHEREAS, BATUS Japan wishes to engage RJRTC to manufacture American-blend Cigarettes which will be sold in Japan;

      WHEREAS, RJRTC has facilities for, and expertise relating to, the manufacture of American-blend Cigarettes and other tobacco products; and,

      WHEREAS, RJRTC is willing to manufacture American-blend Cigarettes for BATUS Japan in the United States pursuant to the terms and conditions set forth in this Agreement.

      NOW, THEREFORE , in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the mutuality, receipt and sufficiency of which are hereby acknowledged, RJRTC and BATUS Japan agree as follows:

SECTION 1
DEFINITIONS

     For purposes of this Agreement, the following terms shall mean:

1.1 “AAA” has the meaning set forth in Sub-Section 7.6(b) .

 


 

1.2 “Affiliate” of any Person means another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person.

1.3 “Agreement” has the meaning set forth in the Preamble above and shall also include any and all Schedules attached hereto, as may be amended from time to time by mutual written agreement of the Parties.

1.4 “Antiboycott Laws” means laws and regulations of the U.S.A. that prohibit participation or cooperation with, agreements to cooperate with and, in some cases, the provision of information in support of, any international boycott not sanctioned by the U.S.A., such as the Arab League boycott of Israel, and including but not limited to Section 999 of the U.S.A. Internal Revenue Code of 1986, and guidelines issued thereunder, and the U.S.A. Export Administration Regulations, 15 C.F.R. Part 760.

1.5 “B.A.T.” means British American Tobacco p.l.c., BATUS Japan’s indirect parent corporation.

1.6 “B.A.T. Group” means B.A.T. and its Affiliates.

1.7 “B.A.T. Group’s Five Largest Countries” means the five (5) countries in which the B.A.T. Group has the highest Cigarette production volume for the twelve (12) month period ending on May 31, 2013 and, for the purposes of this definition, for any country with multiple factories, the Cigarette production volumes of those factories shall be aggregated so as to provide a single country total.

1.8 “BATUS Japan Indemnified Party” has the meaning set forth in Sub-Section 6.9(a) .

1.9 “BCA” means the Business Combination Agreement, dated as of October 27, 2003, between R.J. Reynolds Tobacco Holdings, Inc and Brown & Williamson Tobacco Corporation.

1.10 “Bill of Materials” means, for any SKU, a price list of Tobacco Materials and Non-Tobacco Components in detail sufficient to allow BATUS Japan to exercise its rights under this Agreement.

1.11 “Capsule Cigarette” means a Cigarette possessing filter elements that incorporate capsules individually positioned at pre-determined locations within the filter element. As an example, a Capsule Cigarette is a Cigarette possessing a filter element that can have one or more segments, and at least one of those segments possesses one or more crushable capsules capable of releasing encapsulated flavoring agents.

1.12 “Carton” means a container that contains Cigarette Packages and associated materials including, but not limited to, inserts and onserts ( e.g. , ten (10) packages of twenty (20) Cigarettes each).

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1.13 “Case” means a shipping container that contains Cartons ( e.g. , a container which contains fifty (50) cartons).

1.14 “Cigarette” means: (a) any roll of tobacco wrapped in paper or in any substance not containing tobacco or (b) any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging or labeling, is likely to be offered to, or purchased by consumers, as a cigarette described in the foregoing clause (a).

1.15 “Cigarette Package” means the smallest container for Cigarettes that, when filled with Cigarettes and sealed, is intended for distribution and sale ( e.g. , packs of twenty (20) Cigarettes).

1.16 “Confidential Information” means: (a) information or data (whether of a technical or business nature), including, but not limited to, that relating to research, development, know-how, inventions, Trade Secrets, engineering, manufacturing, proposals and business plans, marketing plans and matters, financial matters and arrangements, personnel matters, sales, suppliers or customers; or (b) proprietary information or data of either Party hereto or of a third Person with whom such Party has an obligation of confidence (including all such information owned by any Affiliate of either Party), whether created by a Party individually or through the efforts contemplated by this Agreement; or (c) any other information or data, not publicly known, of either Party hereto or of a third Person with whom such Party has an obligation of confidence (including all such information owned by any Affiliate of either Party); whether any of the foregoing set forth in clauses (a)-(c) above is observed or in oral, written, graphic or electronic form, and whether or not marked or otherwise identified as “confidential.”

1.17 “Contract Year” means each successive period during the Term of this Agreement running from January 1 st through December 31 st.

1.18 “Damages” has the meaning set forth in Sub-Section 6.8(a) .

1.19 “ Delivery Grace Period has the meaning set forth in Sub-Section 2.17(c) .

1.20 “Dispute” has the meaning set forth in Sub-Section 7.6 .

1.21 “Effective Date” means January 1, 2010.

1.22 “Execution Date” is the date set forth in the Preamble above.

1.23 “Export License” means any license, permit, or other authorization issued by a Governmental Authority, including but not limited to OFAC (as defined below), permitting the manufacture, export and/or sale of the Products hereunder.

1.24 “Extension Criteria” has the meaning set forth in Sub-Section 4.4(b).

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1.25 “Extension Period” has the meaning set forth in Sub-Section 4.4(c).

1.26 “Extension Response Notice” has the meaning set forth in Sub-Section 4.4(b).

1.27 “Foreign Corrupt Practices Act” means 15 U.S.C. §§ 78dd-1, et seq. and any and all amendments thereto.

1.28 “Governance Agreement” means the Governance Agreement, dated as of July 30, 2004, among B.A.T., Brown & Williamson Tobacco Corporation and RAI.

1.29 “Governmental Authority” means any of the following: (a) the government of the U.S.A. or any other foreign country; (b) the government of any state, province, county, municipality, city, town, or district of the U.S.A. or any foreign country, or any multi-country district; and (c) any ministry, agency, department, authority, commission, administration, court, magistrate, tribunal, arbitrator, instrumentality, or political subdivision of, or within the geographical jurisdiction of, any government described in the foregoing clauses (a) and (b).

1.30 “Guidelines on Capital Expenditure” means the guidelines set out in Appendix 1 to Schedule “E”.

1.31 “Guidelines on Inventory” means the guidelines set out in Appendix 9 to Schedule “E” .

1.32 “INCOTERMS” means the terms for the international transportation of goods published by the International Chamber of Commerce, as in effect from time to time during the Term of this Agreement.

1.33 “Incumbent Board” has the meaning set forth in Sub-Section 4.2(d)(iii) .

1.34 “Intellectual Property” means information, concepts, ideas, discoveries, inventions (whether conceived or reduced to practice, and whether or not patentable), Specifications, requirements, samples of prototypical Cigarettes and Cigarette components, data, codes and programs, graphics, designs, prints, sketches, drawings and photographs, developments, processes and methods, know-how, Trade Secrets, patent applications, patents, other intellectual property of any type (including copyrights, trademarks, and service marks), and enhancements, derivatives, and improvements thereof.

1.35 “Manufacturing Costs” means the weighted (by production volume) average manufacturing cost of Cigarettes of factories in the B.A.T. Group’s Five Largest Countries (which, for the avoidance of doubt: (a) excludes the cost of raw materials; (b) includes labor costs; and (c) relates to all Cigarettes manufactured in factories in B.A.T. Group’s Five Largest Countries, not just the Cigarettes manufactured pursuant to this Agreement), as reported in the books and records of the B.A.T. Group, and using the B.A.T. Group’s standards, for the twelve (12) month period ending on May, 31 2013.

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1.36 “Manufacturing Costs Notice” has the meaning set forth in Sub-Section 4.4(b).

1.37 “Migration Period for Non-Key Brands” has the meaning set forth in Sub-Section 2.2(A)(b)(i).

1.38 “Nanotek Cigarette” means a king size, superslim Cigarette identified as a Nano style.

1.39 “Non-Key Brands” means the following Cigarette brand families: CAPRI, CARLTON, LUCKY STRIKE, PALL MALL, DUNHILL and JOHN PLAYER SPECIAL.

1.40 “Non-Tobacco Component” means a material that is used in combination with any Tobacco Material for the manufacture of Cigarettes, including tobacco rod wrapping materials, filter materials and components, plug wrapping materials, tipping materials, inks, flavor and casing components, and Packaging.

1.41 “OFAC” means the United States Department of the Treasury, Office of Foreign Assets Control, or any successor agency, department or unit of the federal government of the U.S.A. with regulatory authority over export/re-export transactions subject to U.S.A. jurisdiction.

1.42 “On Time/In Full” is the performance metric used in certain circumstances to measure RJRTC’s performance under this Agreement. On Time/In Full delivery performance is measured at the Purchase Order SKU order line level by week. To be credited for On Time/In Full delivery of a specific Purchase Order SKU order line level by week, RJRTC must: (a) deliver one hundred percent (100%) of the SKU volume ordered; (b) on the firm delivery date established pursuant to the mechanisms provided in Sub-Section 2.16 of this Agreement for the particular Purchase Order SKU order line; (c) at the railroad railhead or, if delivery by ship is required by BATUS Japan in the applicable Purchase Order, at the ship’s rail at the U.S.A. port of exit or, if air freight delivery is required by BATUS Japan in the applicable Purchase Order, at the fuselage of the aircraft; and (d) with all export and shipping documentation fully and properly completed. For purposes of Sub-Sections 1.42(b) and (c) above, should RJRTC cause a specific Purchase Order SKU order line volume level by week to arrive in the Territory not later than the date on which such SKU volume would have arrived in the Territory if delivered to the railroad railhead or, if shipment was required by BATUS Japan in the applicable Purchase Order, at the ship’s rail at the U.S.A. port of exit by RJRTC on the firm delivery date established pursuant to the mechanisms provided in Sub-Section 2.16, then such Purchase Order SKU order line volume by week shall be deemed delivered on time.

1.43 “On Time/In Full Delivery Percentage” means the percentage of RJRTC’s On Time/In Full deliveries over the time period stated in Sub-Section 2.17(d)(iv) measured as follows: [(total number of Purchase Order SKU order lines issued by week during the measurement period by BATUS Japan and accepted by RJRTC) minus (number of total

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Purchase Order SKU order lines not delivered by RJRTC On Time/In Full)] divided by (total number of Purchase Order SKU order lines issued by week during the measurement period by BATUS Japan and accepted by RJRTC) times one hundred (100). Stated formulaically:

 

 

 

Total number of Purchase Order SKU order lines issued by week during the measurement period by BATUS Japan and accepted by RJRTC (-) Number of total Purchase Order SKU order lines not delivered On Time/In Full

 

x 100 = On Time/In Full Delivery Percentage

 

 

Total number of Purchase Order SKU order lines issued by week during the measurement period by BATUS Japan and accepted by RJRTC

 

 

By way of illustration, if over the applicable measurement period orders for 1,500 total Purchase Order SKU order lines were issued by BATUS Japan and accepted by RJRTC, and RJRTC has On Time/In Full delivery of 1,450 of such total Purchase Order SKU order lines, RJRTC’s On Time/In Full Delivery Percentage for the measurement period would be as follows:

 

 

 

 

 

 

 

1,500 (-) 50

 

x 100 = 96.6%

 

 

 

1,500

 

1.44 “Original Agreement” has the meaning set forth in Sub-Section 2.2(b) .

1.45 “Outside the Jurisdiction of the U.S.A.” means all places other than the U.S.A.

1.46 “Packaging” means materials that are used to contain Cigarettes (or containers enclosing Cigarettes) for the purpose of distribution and sale to customers, including component materials referred to as foil, innerframes, closures, Cigarette boxes, labels, films, tear tapes, optional pack inserts and onserts, cartons and cases, including all graphics, holographics and printed matter on such materials.

1.47 “Person” means any firm, corporation, partnership, limited liability company, joint venture, trust, unincorporated association or organization, business, enterprise or other entity, any individual and any Governmental Authority. For purposes of Sub-Section 4.2(d) , any formal or informal group of the foregoing shall constitute a Person.

1.48 “PPI” means the Producer Price Index for Stage of Processing – Finished Goods, as compiled by the United States Bureau of Labor Statistics (1982 = 100). If the Bureau of Labor Statistics substantially revises the manner in which the PPI is determined, an adjustment shall be made in the revised index that will produce results equivalent, as

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nearly as possible, to those that would be obtained if the PPI had not been so revised. If the 1982 average is no longer used as an index of one hundred (100), or if the PPI is no longer available, then the Parties shall substitute a mutually acceptable comparable index, based on changes in the cost of production measured at the finished goods level published by an agency of the federal government of the U.S.A.

1.49 “Principal Party in Interest” means the Person in the U.S.A. listed as such on Shipper’s Export Declarations or Automated Export System records (and as defined in the U.S.A. Export Administration Regulations (15 C.F.R. Part 730 et seq. ) and the U.S.A. Foreign Trade Statistics Regulations (15 C.F.R. Part 30)) as the Person that receives the primary benefit, monetary or otherwise, of the transaction associated with such export shipment.

1.50 “Product” or “Products” means American-blend Cigarettes manufactured for BATUS Japan (or its Affiliates) pursuant to this Agreement which are intended to be distributed or sold in the Territory.

1.51 “Product Base Prices” means the price for each SKU (per one thousand (1,000) Cigarettes) chargeable by RJRTC for Products subject to Purchase Orders issued by BATUS Japan between the Effective Date and the end of Contract Year 2010. The Product Base Prices (per one thousand (1,000) Cigarettes) are listed on the attached Schedule “F” . The Product Base Prices are calculated by adding (or subtracting) all of the costing elements identified on Schedule “F” .

1.52 “Prohibited Countries” means countries subject to Trade Restrictions (as defined below) and for which no Governmental Authority licenses or authorizations permitting manufacture or export of Products are obtained. For the purposes of this Agreement, Prohibited Countries shall not include Restricted Countries.

1.53 “Purchase Order” means a purchase order issued by BATUS Japan on its behalf (or on behalf of its Affiliate, RFEBV) to RJRTC containing the following information about an order for Products pursuant to this Agreement: (a) identity of Products by SKU, with each SKU ordered entered on a separate order line; (b) quantity of Products by SKU; (c) delivery instructions and required delivery date(s) for the Products at the railroad railhead or, if delivery by ship is required by BATUS Japan in the applicable Purchase Order, at the ship’s rail at the U.S.A. port of exit or, if air freight delivery is required by BATUS Japan in the applicable Purchase Order, at the fuselage of the aircraft (with each Purchase Order typically providing for multiple deliveries of Product by SKU at scheduled intervals); (d) shipping instructions to the Territory; (e) consignee identification; (f) contact personnel; (g) Case mark requirements; (h) matters including “bill to” and “sold to” (which may be BATUS Japan or RFEBV); and (i) such other requirements as BATUS Japan may specify or RJRTC may reasonably require.

1.54 “RAI” means Reynolds American Inc., RJRTC’s indirect parent corporation.

1.55 “RAI Voting Power” has the meaning set forth in Sub-Section 4.2(d)(ii) .

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1.56 “Receiving Party” has the meaning set forth in Sub-Section 5.1.

1.57 “Restricted Countries” means those countries in the Territory that from time to time are subject to Trade Restrictions and for which Products are manufactured for export under this Agreement by RJRTC pursuant to licenses or other authorizations duly issued and in effect by the applicable Governmental Authority whether within or outside the U.S.A, including but not limited to OFAC, and to which the additional provisions of Schedule “B” shall apply. These additional provisions shall prevail only to the extent that they are inconsistent with the other provisions of this Agreement.

1.58 “Restricted Parties” means Persons who have been denied export privileges or who are otherwise restricted under the U.S.A. Export Administration Regulations or with respect to whom transactions, including but not limited to export and financial transactions, are restricted, pursuant to applicable Trade Restrictions (as defined below) in force from time to time.

1.59 “ RFEBV means BATUS Japan’s Affiliate, Rothmans Far East, B.V.

1.60 “RJRTC Indemnified Party” has the meaning set forth in Sub-Section 6.8(a) .

1.61 “SKU” means a stock keeping unit designation referring to a particular Cigarette brand style.

1.62 “Specifications” means specifications and standards set by BATUS Japan and pursuant to which RJRTC is manufacturing and packaging Products for BATUS Japan as of the Execution Date, as contained in whichever medium such specifications and standards may be held for each SKU, and as they may be amended from time to time in accordance with this Agreement.

1.63 “Surplus Equipment” means such surplus equipment owned by RJRTC which is used by RJRTC in relation to the manufacture and/or packaging of Products.

1.64 “Term” means the period in which this Agreement is in effect, in accordance with Section 4 .

1.65 “Termination Migration Period” has the meaning set forth in Sub-Section 4.2A(a).

1.66 “Territory” means Japan, the political jurisdiction outside the U.S.A. where BATUS Japan and RFEBV distribute and sell the Products and any other jurisdictions that the Parties may mutually agree upon in writing from time to time. The Territory subject to this Agreement is listed on the attached Schedule “A” , as may be amended from time to time by mutual written agreement of the Parties.

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1.67 “Tobacco Material” means any type or form of tobacco, including tobacco in whole leaf, strip, stem or blended cut filler form, reconstituted tobacco, and including tobacco by-products, and tobacco in any type of processed form, whether or not in blended form.

1.68 “Trademark” means any trademark: (a) that at any time is used on or in connection with a Product and (b) that is owned, licensed or controlled by BATUS Japan or an Affiliate of BATUS Japan.

1.69 “Trade Restrictions” mean restrictions on trade and dealings with certain countries, Persons or entities, including but not limited to restrictions on exports, imports, sales, and supplies of products, transshipments, and financial transactions imposed pursuant to export controls, trade sanctions and other trade and investment regulations of the U.S.A. and/or any other Governmental Authority outside the U.S.A. in force from time to time.

1.70 “Trade Secret” means information and data, including, without limitation, Specifications, that: (a) derive independent economic value, actual or potential, from not being generally known to the public or other Persons who can obtain economic value from their disclosure and use and (b) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy.

1.71 “TSRA” means the U.S.A. Trade Sanctions Reform and Export Enhancement Act of 2000 (Title IX of Pub. L. 106-387).

1.72 “TTB” means The Alcohol & Tobacco Tax and Trade Bureau, an agency of the U.S.A. Department of the Treasury.

1.73 “U.S.A.” means the fifty (50) States of the U.S.A., including offshore areas within their jurisdiction pursuant to Section 3 of the Submerged Lands Act (43 U.S.C. § 1311), the District of Columbia, Puerto Rico, and all territories, dependencies, and possessions of the U.S.A., including foreign trade zones established pursuant to 19 U.S.C. §§ 81A-81U, and also including the outer continental shelf, as defined in Section 2(a) of the Outer Continental Shelf Lands Act (43 U.S.C. § 1331(a)).

1.74 “Workout Period” has the meanings set forth in Sub-Sections 2.17(d)(i), (ii) and (iii) .

1.75 Other Terms shall have the defined meanings stated elsewhere in this Agreement.

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SECTION 2
RESPONSIBILITIES OF THE PARTIES

2.1 Appointment of RJRTC for Manufacture . Commencing on the Effective Date and until such time that this Agreement is terminated or expires pursuant to its terms and provisions, BATUS Japan hereby appoints RJRTC to be BATUS Japan’s exclusive manufacturer of all of BATUS Japan’s requirements for American-blend Cigarettes intended to be distributed and sold in the Territory, except: (a) any Cigarettes bearing the brand names CARTIER, VOGUE, DUNHILL or STATE EXPRESS 555, regardless of blend (except, in relation to DUNHILL only, for any SKU which bears the DUNHILL name and which was manufactured by RJRTC for BATUS Japan immediately prior to the Execution Date); (b) any Nanotek Cigarettes bearing the brand name KENT, regardless of blend and (c) from such time as RJRTC ceases to be the manufacturer of Cigarettes bearing each particular Non-Key Brand name in accordance with Sub-Section 2.2A , any Cigarettes bearing such Non-Key Brand names. All waivers previously granted by RJRTC to BATUS Japan providing for the manufacture of Nanotek Cigarettes bearing the brand name KENT in other than RJRTC facilities and remaining in force as of the Execution Date shall become permanent, as of the Execution Date. All waivers previously granted by RJRTC to BATUS Japan providing for the manufacture of Nanotek Cigarettes bearing the brand name KOOL in other than RJRTC facilities and remaining in force as of the Execution Date shall remain in force on their existing terms and conditions.

2.2 RJRTC’s Manufacture of Product .

      (a)  Provision of Products and place of manufacture .

          RJRTC shall provide the Products to BATUS Japan, subject to and in accordance with the terms and conditions of this Agreement. RJRTC shall manufacture Products in the U.S.A. at its facilities in North Carolina and shall not transfer production of Products subject to this Agreement to any other facility without BATUS Japan’s prior written consent.

      (b)  Products manufactured between Effective Date and Execution Date .

          The Parties acknowledge and agree that American-blend Cigarettes manufactured by RJRTC for BATUS Japan (or its Affiliates) between the Effective Date and the Execution Date pursuant to the Contract Manufacturing Agreement, dated as of July 30, 2004, by and between RJRTC and BATUS Japan (the “Original Agreement”), shall be deemed to be “Products” manufactured pursuant to this Agreement, as such term is defined in Sub-Section 1.50 . For the avoidance of doubt, a purchase order issued by BATUS Japan (or its Affiliates) to RJRTC pursuant to the Original Agreement relating to American-blend Cigarettes manufactured between the Effective Date and the Execution Date shall be deemed to be a “Purchase Order” issued pursuant to this Agreement as such term is defined in Sub-Section 1.53 . The price reconciliation referred to in Sub-Section

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3.1(a) shall apply to Products manufactured pursuant to Purchase Orders issued by BATUS Japan between the Effective Date and the Execution Date.

2.2A Transfer of manufacturing arrangements for Non-Key Brands .

      (a)  Transfer of manufacturing arrangements by May 31, 2011 .

           (i) All waivers previously granted by RJRTC to BATUS Japan providing for the manufacture of Cigarettes bearing the Non-Key Brand names in other than RJRTC facilities and remaining in force as of the Execution Date shall become permanent, as of the Execution Date.

           (ii) No later than May 31, 2011 the manufacturing of Cigarettes bearing the Non-Key Brand names shall be transferred from RJRTC to such facilities and such Persons as BATUS Japan may specify in accordance with this Sub-Section 2.2A .

      (b)  Migration period .

           (i) Commencing on the Execution Date the Parties shall work together in good faith to transfer the manufacturing arrangements in accordance with Sub-Section 2.2A(a)(ii) (the period commencing on the Execution Date and ending on the date on which RJRTC ceases to be the manufacturer of Cigarettes bearing the Non-Key Brand names being the “Migration Period for Non-Key Brands”). During the Migration Period for Non-Key Brands: (a) as soon as reasonably practicable, BATUS Japan shall submit to RJRTC a draft migration plan to assist in the orderly transfer of the relevant manufacturing arrangements, which the Parties shall discuss and seek to agree as soon as reasonably practicable thereafter; (b) RJRTC shall provide to BATUS Japan all reasonable assistance and co-operation to transfer production including enabling BATUS Japan to carry out consumer product and other relevant tests; and (c) by no later than July 31, 2010, RJRTC shall provide to BATUS Japan all blend recipes, Bills of Materials and Specifications and will identify other Intellectual Property relating to the Non-Key Brand families. Until RJRTC ceases to be the manufacturer of Cigarettes bearing a particular Non-Key Brand name (it being understood that RJRTC may cease to be the manufacturer of Cigarettes bearing the different Non-Key Brand names at different times) BATUS Japan shall continue to order Products in the relevant Non-Key Brand family exclusively from RJRTC, but shall be allowed to have test Products in that Non-Key Brand family manufactured by alternative sources for purposes of qualifying such alternative manufacturers.

           (ii) Once RJRTC ceases to be the manufacturer of Cigarettes bearing a particular Non-Key Brand name BATUS Japan may have any and all Product SKUs in the relevant Non-Key Brand family manufactured by any other Person, and RJRTC’s exclusive manufacturing rights stated in Sub-Section 2.1 with respect to any Cigarettes bearing such Non-Key Brand name will terminate. Except to the extent terminated earlier under the prior sentence, RJRTC’s exclusive manufacturing rights stated in Sub-

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Section 2.1 will terminate with respect to all Cigarettes bearing Non-Key Brand names on May 31, 2011.

      (c)  Application of Section 4.3 .

          Upon RJRTC ceasing to be the manufacturer of Cigarettes bearing each Non-Key Brand name in accordance with Sub-Section 2.2A the provisions of Sub-Section 4.3 shall apply to that Non-Key Brand.

      (d)  Surplus Equipment .

          Upon RJRTC ceasing to be the manufacturer of Cigarettes bearing a Non-Key Brand name in accordance with Sub-Section 2.2A , the Parties shall discuss in good faith the possible acquisition by BATUS Japan, on such terms as the Parties may agree, of any Surplus Equipment used in relation to the manufacturing and/or packaging of Cigarettes bearing such Non-Key Brand name. Prior to RJRTC ceasing to be the manufacturer of Cigarettes bearing each Non-Key Brand name, RJRTC shall provide BATUS Japan with details of all Surplus Equipment used in relation to the manufacturing and/or packaging of Cigarettes bearing the relevant Non-Key Brand name.

      (e)  Costs .

          For the avoidance of doubt, except as provided in Sub-Sections 2.2A(d) and 4.3(b) and except for unavoidable costs incurred by RJRTC in relation to writing off inventory of raw materials used exclusively in the manufacture and/or packaging of Cigarettes bearing the Non-Key Brand names, RJRTC shall not be entitled to charge BATUS Japan any fees or seek any costs from BATUS Japan in relation to the transfer of manufacturing arrangements contemplated by this Section 2.2A , as long as the manufacturing of Cigarettes bearing the Non-Key Brand names has been transferred from RJRTC by May 31, 2011 (as contemplated by Sub-Section 2.2A ) If such manufacturing arrangements have not been transferred by May 31, 2011 and RJRTC has fulfilled its transition obligations (as contained in this Sub-Section 2.2A), BATUS Japan shall be responsible for any additional costs incurred by RJRTC which result from the failure to transfer such manufacturing arrangements by May 31, 2011 (subject to RJRTC taking all commercially reasonable steps to mitigate any such additional costs).

2.3 Specifications .

      (a)  Original .

          RJRTC is in possession of the Specifications for all Products to be produced by RJRTC for BATUS Japan pursuant to this Agreement as of the Execution Date.

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      (b)  Specification Changes Proposed by BATUS Japan .

           (i) In accordance with the procedures stated below in clauses (ii) through (iv), RJRTC shall comply with BATUS Japan’s reasonable instructions in meeting any new Specifications (RJRTC’s costs of evaluating and implementing any such changes shall be borne by BATUS Japan, subject to BATUS Japan’s prior written approval of the budget for expenditure of such costs, which approval shall not be unreasonably withheld). If such budgets include required capital expenditures which RJRTC requests BATUS Japan to fund, a separate mutually acceptable agreement, to be in accordance with the Guidelines on Capital Expenditure, will be negotiated between the Parties.

           (ii) The Parties shall conduct trials, as appropriate, in order to evaluate the effect of changes in Specifications upon Products, Product pricing and RJRTC’s manufacturing environments (the costs associated with such trials shall be borne by BATUS Japan, subject to BATUS Japan’s prior written approval of the budget for expenditure of such costs, which approval shall not be unreasonably withheld).

           (iii) BATUS Japan shall provide written approval for changed Specifications of all Products upon completion of activities, including those set forth in the foregoing clauses (i) and (ii). BATUS Japan shall not be responsible for accepting any quantity of Products for which BATUS Japan has not provided such final approval, unless BATUS Japan has otherwise agreed in writing.

           (iv) RJRTC shall accept and acknowledge all changed Specifications for which BATUS Japan has provided final approval and provided to RJRTC, provided that RJRTC has determined that it can meet those Specifications.

      (c)  Specification Changes Proposed by RJRTC .

           (i) RJRTC shall inform BATUS Japan of changes in RJRTC’s manufacturing operations proposed at any time during the Term which are anticipated to have an effect upon or require modifications to Specifications or an effect upon RJRTC’s ability to produce the projected volumes of Products anticipated to be ordered by BATUS Japan (RJRTC’s costs of evaluating and implementing any such changes shall be borne by RJRTC, subject to RJRTC’s prior written approval of the budget for expenditure of such costs, which approval shall not be unreasonably withheld). RJRTC shall provide sufficient advance notice of such proposed changes in manufacturing operations so as to allow BATUS Japan commercially reasonable time to evaluate and test the effects of the associated Specification changes on the Products and the Products’ consumer acceptability in the Territory.

           (ii) The Parties shall conduct trials, as appropriate, in order to evaluate the effect of the foregoing changes in Specifications upon Products, Product pricing and RJRTC’s manufacturing environments and the Products’ consumer acceptability in the Territory (the costs associated with such trials shall be borne by RJRTC, including the

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costs of sampling and consumer testing as determined necessary by BATUS Japan in the Territory, subject to RJRTC’s prior written approval of the budget for expenditure of such costs, which approval shall not be unreasonably withheld). The trial, sampling and consumer testing methodology will be determined by mutual agreement of the Parties in accordance with BATUS Japan’s standard Consumer Product Testing Protocols attached hereto as Schedule “C.

           (iii) BATUS Japan shall provide written approval for changed Specifications of all Products upon completion of activities, including those set forth in the foregoing clauses (i) and (ii). BATUS Japan shall not be responsible for accepting any quantity of Products for which BATUS Japan has not provided such final approval, unless BATUS Japan has otherwise agreed in writing.

           (iv) RJRTC shall accept and acknowledge all changed Specifications for which BATUS Japan has provided final approval and provided to RJRTC.

           (v) The Parties acknowledge that, in order to meet its obligations under this Agreement, RJRTC will, from time to time, carry out Specification maintenance activities to ensure that actual Product data remains in conformity with Specifications. RJRTC shall notify BATUS Japan in advance of any such maintenance activities; however , the foregoing clauses (i) to (iv) and Sub-Section 2.3(d) shall not apply to any such maintenance activities.

      (d)  Changes to Product pricing following agreed Specification changes .

           (i) The following provisions of this Sub-Section 2.3(d) shall apply irrespective of whether a Specification change is proposed by BATUS Japan (in accordance with Sub-Section 2.3(b) ) or RJRTC (in accordance with Sub-Section 2.3(c) ).

           (ii) Any mutually agreed Specification changes shall result in an increase or decrease, as the case may be, to the then applicable Product Base Price (as determined in accordance with Sub-Sections 3.1(a) and 3.1(b) ) for the relevant SKU(s) in accordance with the following: (a) in relation to the relevant SKU(s), for each changing Non-Tobacco Component or change in respect of Tobacco Materials, RJRTC shall provide to BATUS Japan details of its incremental cost or benefit per one thousand (1,000) Cigarettes based on the most recent Bill of Materials applying pre-Specification change and a pro-forma Bill of Materials incorporating the Specification change(s); (b) RJRTC shall also provide to BATUS Japan details of any incremental labor cost or benefit per one thousand (1,000) Cigarettes; (c) to enable BATUS Japan to validate the incremental cost or benefit per one thousand (1,000) Cigarettes of the relevant SKU(s), on request by BATUS Japan, RJRTC shall promptly provide BATUS Japan with a then current priced Bill of Materials together with other information that BATUS Japan may reasonably request for the relevant SKU(s); (d) validated and agreed incremental costs or benefits shall increase or decrease, as the case may be, the then applicable Product Base Price (as determined in accordance with Sub-Sections 3.1(a) and 3.1(b) ) for the relevant SKU(s); and (e) subsequent changes to Specifications of a SKU which has already been

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the subject of a Specification change under this Sub-Section 2.3 will be treated as a new and separate Specification change.

           (iii) The Parties acknowledge that the Product Base Prices established in Schedule “F” do not reflect or incorporate any pricing changes resulting from Specification changes proposed, agreed or implemented since the Effective Date and any such proposed, agreed or implemented Specification changes are subject to the provisions of this Sub-Section 2.3 (to the extent that the matters within such provisions have not already been complied with).

2.4 Contact Personnel . Promptly after the Execution Date, each Party shall designate primary contact individuals for purposes of this Agreement. Those individuals shall have responsibility for communicating and receiving information regarding all matters that are relevant pursuant to the Parties’ relationship with one another in accordance with this Agreement. Each Party shall promptly notify the other upon the occurrence of a change in the identity of any contact individual of that Party.

2.5 Monthly Video Conferences; Periodic Meetings . Representatives of RJRTC and BATUS Japan shall conduct monthly video conferences to discuss with one another the Products, quality control procedures, and any other matters relating to the Parties’ activities involving the supply of Products to BATUS Japan by RJRTC. All issues identified by either Party during such conferences shall be immediately evaluated, addressed and remedied as soon as commercially reasonable. Further, BATUS Japan and RJRTC shall arrange for other periodic meetings at mutually agreeable times as needed to facilitate each Party’s continued performance under the Agreement.

2.6 Visits at Facilities and Inspection . Representatives of BATUS Japan may, upon reasonable notice and at times reasonably acceptable to RJRTC, visit RJRTC’s facilities at which the Products are manufactured. BATUS Japan shall bear its own expenses with regard to any such visits, unless otherwise agreed upon in writing by the Parties. If requested by BATUS Japan, RJRTC shall cause appropriate individuals working on the activities relating to this Agreement to be available for meetings at the location of the facilities where such individuals are employed at times reasonably convenient to each Party. BATUS Japan’s inspection rights shall include the inspection of the inventory of Products maintained by RJRTC, RJRTC’s manufacturing facilities and processes relating to the Products, RJRTC’s quality control procedures relating to the Products, and all materials used in the manufacturing and packaging of the Products.

Further, if requested by BATUS Japan at any time during the Term, BATUS Japan shall have the right to station not more than four (4) employees of BATUS Japan or any of its Affiliates on site at the facilities at which RJRTC manufactures the Products subject to this Agreement. These employees, when escorted by RJRTC personnel, shall be allowed to observe the production of Products and shall function as intermediaries between BATUS Japan and RJRTC to facilitate the timely production, inventory management, quality and shipment of Products subject to Purchase Orders issued by BATUS Japan under this Agreement. RJRTC shall provide these employees offices from which to

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operate, telephone, computer, fax and copier services, and shall provide access to all facility common areas including parking spaces, restroom facilities, meeting rooms and cafeteria facilities . BATUS Japan shall reimburse RJRTC for the costs of telephone, computer, fax and copier services actually used by BATUS Japan’s personnel.

BATUS Japan shall be responsible for ensuring that its representatives abide by all of RJRTC’s rules and regulations with regard to safety, security, personnel matters, computer use and computer network use while at RJRTC’s facilities. BATUS Japan shall inform its representatives that have access to RJRTC’s premises of their obligations under this Agreement and shall require its representatives to enter into a confidentiality agreement with RJRTC in a form to be mutually agreed by the Parties. BATUS Japan shall be responsible for ensuring that all of its visitors to RJRTC’s facilities are received and logged through RJRTC’s reception area, in accordance with RJRTC’s usual practice. BATUS Japan shall also be responsible for ensuring that its representatives and visitors refrain from actions and conduct that materially interfere with RJRTC’s business and operations and shall instruct its representatives and visitors not to conduct unauthorized activities on RJRTC’s facilities.

2.7 Revised Forecast . Promptly after the Execution Date, BATUS Japan shall provide RJRTC with a revised forecast (by SKU) that provides a projection for volumes for the various Products that BATUS Japan may require RJRTC to manufacture and supply during the period immediately following the Execution Date through the end of Contract Year 2011.

2.8 Subsequent Annual Forecasts . Beginning with Contract Year 2012, and for each successive Contract Year, BATUS Japan shall provide RJRTC with a forecast (by SKU) that provides a projection for volumes for the various Products that BATUS Japan may require RJRTC to provide during each successive Contract Year. A preliminary forecast for each successive Contract Year shall be provided to RJRTC at least by July 1 st and a confirmed forecast shall be provided by October 1 st of each preceding Contract Year. Any and all forecasts supplied are non-binding and will be supplied for purposes including general planning of capacities and inventories .

2.9 Periodic Forecasts . Promptly after providing its revised forecast in accordance with Sub-Section 2.7 , BATUS Japan shall begin providing RJRTC on a monthly basis rolling eighteen (18) month forecasts (by SKU) that provide projections for volumes of the various Products for which BATUS Japan expects to place Purchase Orders during the period covered by such periodic forecasts. Any and all forecasts supplied are non-binding and will be supplied for purposes including general planning of capacities and inventories.

2.10 Purchase/Supply of Materials .

      (a)  Subject to Sub-Sections 2.10(b) and 4.4(e) , RJRTC shall use raw materials (including, but not limited to, Tobacco Materials, Non-Tobacco Components, and Packaging materials) that are obtained from sources and suppliers selected by RJRTC,

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which sources and suppliers must be approved by BATUS Japan, such approval not to be withheld, conditioned or delayed unless BATUS Japan can reasonably demonstrate that RJRTC’s selected source(s) or supplier(s) do not at the time of selection meet the applicable Specifications. Unless otherwise agreed upon in writing, RJRTC shall be solely responsible for ordering, receiving, storing, maintaining, using, paying for (including the payment of all import duties, fees and internal revenue taxes, if applicable) and disposing of all raw materials.

      (b)  BATUS Japan may from time to time (a) direct RJRTC to purchase particular raw materials (including but not limited to, Tobacco Materials, Non-Tobacco Components, and Packaging materials) from specific sources and/or suppliers, including BATUS Japan or any of its Affiliates (in which case, for the avoidance of doubt, RJRTC shall remain solely responsible for ordering, receiving, storing, maintaining, using, paying for (including the payment of all import duties, fees and internal revenue taxes, if applicable) and disposing of any such raw materials) or (b) supply particular raw materials to RJRTC, and, save where RJRTC can demonstrate that purchasing the relevant raw materials from the specified source and/or supplier or receiving them from BATUS Japan would be contrary to any relevant law or regulation or would adversely affect it as a result of any contractual arrangement RJRTC may already have in place with other suppliers, RJRTC shall purchase the relevant raw materials from the source and/or supplier specified by BATUS Japan or receive them from BATUS Japan (as the case may be). A change of source or supplier in accordance with the above shall be treated as a Specification change proposed by BATUS Japan and the provisions of Sub-Sections 2.3(b) and (d) shall apply (including in relation to resultant pricing changes to reflect any lower raw material costs and/or any change in labor costs due to machinability of the raw materials). To assist BATUS Japan source raw materials on more advantageous trade terms, on request by BATUS Japan, RJRTC shall promptly provide BATUS Japan a then current priced Bill of Materials for the particular Product(s) in question.

2.11 Inventory . The Parties shall communicate in order to ensure that RJRTC possesses an inventory of raw materials sufficient to promptly fill Purchase Orders that BATUS Japan may place. The Parties shall communicate such that each Party possesses knowledge regarding the level of inventory of Products that RJRTC possesses. The Parties shall follow the Guidelines on Inventory in relation to the levels of inventory for all required raw materials that RJRTC will be responsible for having on hand to fulfill BATUS Japan’s forecasted Purchase Orders.

2.12 Sharing of Information . The Parties shall cooperate with one another (and relevant third Persons) in order to ensure that each Party is provided with relevant information regarding the physical and chemical properties (including toxicological information) of raw materials, equipment, process conditions, processes or treatment conditions that RJRTC may employ when producing Products for BATUS Japan. If requested by BATUS Japan, RJRTC shall provide samples of raw materials, at the times and in the amounts requested, to BATUS Japan or an Affiliate designee for testing and evaluation. Any change to raw material, type of equipment (routine/preventive maintenance and ordinary wear and tear excepted), processes, process conditions, or

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treatment conditions that RJRTC may employ when producing Products for BATUS Japan must be approved by BATUS Japan prior to implementation of the change by RJRTC.

2.13 Cigarette Packaging, Carton and Case Markings .

      (a)  Markings . Every Cigarette Package, Carton and Case produced by RJRTC for BATUS Japan shall bear such markings as required by: (i) the applicable laws and regulations of the U.S.A. for exported Products; (ii) the applicable laws and regulations of the relevant Territory; and (iii) the Specifications.

      (b)  Limitations . Except as set forth in Sub-Section 2.13(a) or otherwise agreed between the Parties in writing, RJRTC shall not be obligated to produce (and BATUS Japan shall not be obligated to accept as conforming) Products with markings on the Packaging, Carton or Case identifying RJRTC or an Affiliate of RJRTC as the manufacturing source of the Products.

2.14 Revenue Stamps . [Intentionally Left Blank].

2.15 Purchase Orders and Production Schedules . BATUS Japan shall place with RJRTC from time to time such Purchase Orders for Products that BATUS Japan (or RFEBV) desires to order. Unless an alternative schedule is determined necessary by BATUS Japan, BATUS Japan will place one (1) Purchase Order per week which will contain a binding order (by SKU) for a future one (1) week period, and non-binding forecasted orders for the succeeding eight (8) week period. Each Purchase Order will designate delivery dates for Products ordered by SKU. BATUS Japan shall provide (or reference) to RJRTC the Specifications for each of the Products ordered pursuant to a Purchase Order. RJRTC shall schedule production of Products based on forecasts provided by BATUS Japan and Purchase Orders placed by BATUS Japan. Each Purchase Order which requires normal ocean freight shipment shall contain instructions for each delivery that specify mode of transport to the Territory and a requested delivery date of the Products at the railroad railhead or, if delivery by ship is required by BATUS Japan in the applicable Purchase Order, at the ship’s rail at the U.S.A. port of exit that shall not typically be less than fourteen (14) calendar days from RJRTC’s receipt of the Purchase Order.

Purchase Orders which require delivery by air freight shipment may contain requested delivery dates at the fuselage of the aircraft that are typically not less than fourteen (14) calendar days from RJRTC’s receipt of the applicable Purchase Order.

The Parties acknowledge that there may be occasions when a weekly Purchase Order materially deviates from forecasted orders and, as a result, RJRTC is required to make adjustments to its production schedule in order to meet the requested delivery date. In such circumstances RJRTC shall be entitled to quantify the cost impact on it production schedule and RJRTC and BATUS Japan will work together in good faith to mitigate any

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such impact. Subject to the foregoing obligation to mitigate, RJRTC shall be entitled to reimbursement for any incremental cost impact.

2.16 Production Activities . RJRTC shall acknowledge receipt of each Purchase Order within three (3) business days of RJRTC’s receipt of such Purchase Order. RJRTC shall promptly inform BATUS Japan of RJRTC’s schedule for production and delivery of ordered Products at the railroad railhead or, if delivery by ship is required by BATUS Japan in the applicable Purchase Order, at the ship’s rail at the U.S.A. port of exit or, if air freight delivery is required by BATUS Japan in the applicable P


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