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That’s Hot: China Distribution Contracts

Posted in Legal News

We recently did a post, entitled, “That’s Hot: Made In China For China. By Foreigners” in which we talked about seeing a massive increase in licensing agreements for foreign companies licensing products to Chinese manufacturers. We have also been seeing a correspondingly massive increase in work for foreign companies entering into distribution contracts with Chinese distributors. Both of these increases are no doubt due to China’s rising status as a consumer/buyer nation.

Many of the companies that come to us to draft their distribution contracts with Chinese distributors are already experienced with distributor relationships and already have a “standard” distribution contract. Though China distribution agreements can have much in common with US and European distribution agreements, they also have stark and interesting differences.

Our clients’ standard distribution agreements (usually with a United States or a European company) typically make for an excellent starting point in our drafting of the Chinese distribution agreement. These standard distribution contracts have usually been honed and customized over the years to match what our client wants and needs from its relationships with its distributors.

But we always need to modify them to make them work for China. 

One reason for this is that the United States/Europe generally provide distributors with all sorts of legal protections. These countries often make it difficult or expensive to terminate a distributor and it is not at all unusual for distributors in these countries to sue or threaten to sue when a distribution relationship sours.  

Chinese law has no special protections for distributors. In particular, there is no legal requirement in China for payment of any special compensation to a distributor upon termination of the distribution agreement. For these reasons our China distribution agreements call for applying Chinese law.  For these same reasons, we usually also delete those provisions in US or European standard distribution contracts devoted to trying to work around distributor protections. 

We add in what we call a ”no registration” provision to further protect our clients’ China trademarks. In this provision, the distributor agrees our client has exclusive ownership of all trademarks, that the distributor gains no rights to those trademarks, and that the distributor will not register any trademarks in any way related to our client’s trademarks. I use the words “further protect” because the first line of protection for your trademarks in China is to register them properly in China. 

One other difference between a Chinese distribution agreement and that for the United States or Europe is that the signature line in a Chinese distribution contract should provide a place for the distributor to affix its company seal; unsealed distribution contracts are arguably not valid under Chinese law. 

  • Haley W.

    Great post. It never ceases to amaze me how so many companies still think their U.S. contracts are just fine for China. I know that is not what happened here, but that does happen all the time even now.

  • frankpinto

    What about if you are an American company about to sign an agreement to distribute a Chinese product in the United States?

  • Rosanacal

    My distributor wants to register my trademark as he says its the only way to legally protect himself from someone using illegally my trademark. I don’t agree and so he wants to know if I will be able to legally sue anyone there who infringes on it, if I register it. If he has the exclusive distributor agreement, is he not responsible to protect himself in his own country? Or do I have to pay the legal action in every country that I have a distributor if this occurs?

    • http://www.chinalawblog.com/ Dan Harris

      You need serious legal help as you have all sorts of legal options here and there is no way I or anyone else is going to set them out here as we do not have all of the necessary facts nor do we know what your goals/end game for China really is. But if I were you, I would run, not walk, to a good China lawyer as the longer you wait the greater the chance you will lose all rights to your trademark in China and then maybe lose all incentive for anyone to have a distributorship agreement with you.