China Manufacturing Agreements: Know These Nine Things

By Dan Harris

Our China lawyers get a steady stream of emails from (mostly American and European) companies wanting to sue their China manufacturers. We respond by asking the potential client whether it has a written OEM Agreement with the Chinese manufacturer, whether that agreement is in Chinese, and whether the Chinese manufacturer signed and chopped that agreement.

What you need to know about China Manufacturing Agreements

 

If there is no written agreement (purchase orders and invoices do not count) at least signed by the Chinese manufacturer, we tell the foreign company it needs to find another law firm because we are just not interested. If there is a signed written agreement (preferably in Chinese – see China OEM Agreements. Why Ours Are In Chinese. Flat Out), we will review it, but even then we almost never take the case because the agreement is invariably written in a common-law style that lacks the provisions crucial for dealing with Chinese manufacturers. A sampling of these crucial provisions follows:

1. You (or anyone you designate) should be free to inspect your goods at any time before the goods are shipped and before you make your final payment.
2. All tooling, jigs and molds belongs to you, and if the Chinese manufacturer delays in returning them to you, it should be required to pay a sum certain in contract damages. You cannot believe how often we get called by U.S. companies that have informed their Chinese manufacturer that they will be ceasing production with that manufacturer and switching to another, only to have the Chinese manufacturer keep the tools and molds and thus delay new production by months.
3. Your Chinese manufacturer should not market or sell your product (or any close variation thereof) to anyone but you. What we often see instead of this is a completely inapplicable non-disclosure provision (NDA). If you have a marketable product, the Chinese side has zero interest in disclosing your IP to the public. But it has a very strong interest in stealing your IP so it can make money from it.
4. Your Chinese manufacturer should not circumvent you by selling directly to your customers. Same rationale as the previous point. Appropriately drafted and China-focused NNN provisions provide for this.
5. Contract damages should be available and highly preferred as a remedy for IP infringement. Far too often we see agreements that rely inappropriately on injunctive relief. For more on this, see China NNN Agreements and How To Give Them Real Teeth.
6. If your Chinese manufacturer changes suppliers, it should inform you and get permission before using a new supplier. You’ll have to make your own determination as to how far down the supply chain you need (or want) to go. Do you really need to know from where your Chinese manufacturer gets its diodes?
7. Your Chinese manufacturer should identify all subcontractors working on your product, and remain liable for any of their actions as if they had taken them themselves. We’ve seen numerous instances where the supposed manufacturer is no longer doing ANY manufacturing and has subcontracted all of it to another factory. Subcontractors are also a major source of counterfeit and gray market goods.
8. The agreement should be governed by Chinese law and enforceable in Chinese courts. See China Contracts: Make Them Enforceable or Don’t Bother. This also means it should be in Chinese.
9. Most importantly, your China OEM Agreement should be written so as to protect you and yet not protect you so “perfectly” that no Chinese manufacturer would ever sign it.

Any questions?