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A tolling agreement is a contract between one company that owns raw materials and another that is engaged to process those materials, according to the specifications of the owner. In some cases, the owner may retain control of the products that are created as a result of the processing, but in other instances, the owner sells the materials to the processor, also known as a toller, using pricing that is defined in the terms and conditions of the agreement. With both situations, the working relationship is usually designed to enhance the financial position of everyone concerned.
The concept of the tolling agreement is often used in situations where companies choose to outsource some aspect of the manufacturing process to a partner. For example, a company that produces carpeting and upholstery may choose to establish an agreement with another company that owns machinery and plant facilities where the raw stock can be refined and woven. The owner of the raw stock pays the partner for processing the stock, retains control of the goods produced with the stock, and ultimately sells the finished products to customers. This arrangement allows the business to produce quality goods while incurring less overhead expenses, making it possible to compete with larger manufacturers in the marketplace and increase profit margins.
Another example has to do with situations in which a company agrees to supply a partner with raw material on an ongoing basis. The partner receives the raw material and pays the original owner for all goods received. The new owner is then free to process the raw stock as he or she sees fit, producing goods that can be sold on the open market. This model is often employed in the oil industry, where a drilling company agrees to sell crude oil to a refinery on an ongoing basis. The drilling company benefits from having a steady customer for the crude oil it drills, while the refinery is ensured a steady supply of materials to make into different types of petroleum products.
In order for a tolling agreement to provide maximum benefits for both parties, the terms and conditions within it must address several important aspects of the business relationship. These include such important matters as the price for the goods or services rendered, how shipping costs will be handled, the duration of the agreement, and clauses that allow either party to terminate the agreement early under a limited scope of circumstances. As is true with many types of contracts, this agreement is likely to include provisions for automatically rolling the contract over into another duration, if one or both parties do not notify the other of their intention to not renew the agreement within a specified period of time before the contract is set to expire.
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