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.