A good portion of my law firm’s work comes from China outsourcing consultants. The smart ones are sure to tell their clients they need to register their trade names in China and have a China lawyer draft their OEM agreements with their China suppliers.  I say the smart ones do this because those who don’t run the very real risk of later being sued for not having made these suggestions.

Once the consultant makes this recommendation though, he or she has to a large extent freed themselves of future legal liability and need not worry all that much about whether their client goes forward with registering their trademark in China or using an OEM agreement or not.  

A consultant from an emerging market country wrote me the other day saying he thought it would be good if his clients were to have well-crafted OEM agreements with their Chinese suppliers, but when I told him what we typically charge to do these agreements in Chinese and in English, he said he questioned the value of such an agreement since most of his clients would not have enough money to sue anyway.  

I then told him that a good OEM agreement is particularly valuable for those sorts of clients:

Ninety percent of the value of a good OEM contract is that it prevents the need to sue. Having one of these in place means the Chinese company KNOWS not to mess around because it will get sued and lose, so it chooses to follow the contract. Not only that, but lawsuits on a strong OEM Agreement don’t really cost all that much in China and if you have properly written into the agreement that the prevailing party gets its attorneys’ fees, such a lawsuit can end up costing next to nothing. If anything, such an agreement is more important for the small company than for the large one because it acts so well to prevent the one bad shipment that puts the small company under.

We have probably written at least 100 of these and I am not aware of a single time where the client has had to come back to us wanting to sue its Chinese supplier. And if it did, I can tell you that having a really good contract in place (in Chinese) would make going after the Chinese supplier a whole lot easier and cheaper than not having an OEM contract at all.

What do you think?  

  • G

    My challenge is having the Chinese company sign the contract. Once they see a contract in Chinese that shows they will get in trouble if they don’t fulfill the contract obligations the Chinese company wants to back out of the deal. They don’t want accountability and many come up with the usual mischief about how contracts are not necessary in China, which is a sob story I no longer have any tears left for. This reluctance to sign a Chinese language contract is increasing search costs enormously as there are so many Chinese companies out there which seem to be comfortable to have a Chinese language with their Chinese partners, but don’t want one with their foreign partners.

  • RW

    I wish I had read this six months ago. My company bought product from a Chinese manufacturer and the product was bad. When it came time for us to sue, we went to two Chinese lawyers and they both told us the same thing: our failure to have a good agreement that set out what was expected of the manufacturer was going to make our case only that much tougher and not worth even filing.

  • Joe M.

    Yeah, it’s always better to cover your bases and make sure you have that extra bit of legal protection.

  • Roland W.

    I totally hear you. I learned my lesson on this on my first China deal, which went much like the one you describe. Now, I don’t buy from anyone without a really good Chinese langauge OEM in place to protect me. I just view that as the cost of doing business with China and its like an insurance policy to me.

  • ted

    Who in the world would work without a valid contract?

  • Yes. The usual mischief about how contracts are not necessary in China, which is a sob story I no longer have any tears left for. This reluctance to sign a Chinese language contract is increasing search costs enormously as there are so many Chinese companies out there which seem to be comfortable to have a Chinese language with their Chinese partners, but don’t want one with their foreign partners.

  • Kathy K.

    Is there ever a situation where it does not make sense to have an OEM agreement? What if you are not paying anything until all of the goods have been thoroughly examined?

  • Manufacturing Guy

    Thanks for this lesson. Unfortunately, I was already taught it when our Chinese supplier gave us poor quality goods and our Chinese lawyer suggested we not bother suing about it because we did not have an agreement that clearly set out exactly what was expected from the Chinese supplier in terms of quality.

  • Sourcing Guy

    Further to Kathy K’s comment, what about on small level for clothing importers from China? You get the shipment inspected for quality in China, then if it’s OK, the shipment goes off, if not you don’t take the shipment and don’t open the L/C, tell them to remake 1/3 of shipment etc. Is it necessary to have Chinese OEM contract when you are importing 1,000 sets of clothes? We’re talking a total order value of few thousand US$ here.

  • What should be the title of the contract, in my case its “Business Contract” or should it clearly be titled as “OEM Agreement”.
    I am buying a product which is designed by chinese but I have improvised it with the help of a european consultant, so is it a OEM product ??
    Thanks in advance
    JK

  • Amanda Vines

    I would like to know what rights a chinese company has against a major high street retailer in this case:
    We have a UK office and Shenzhen office, we accepted 64 contracts of canvas frames from a major retailer in June 2010, we paid deposits on the goods, designed the whole range for them of over 100 designs which we bought from a photographic bureau paying license for the images to be used on this product, which we then manipulated in our design room for the final images.
    We shipped some product but then the customer started to push back the orders by months, then eventually cancelling all leaving us with paid deposits of over $300K and stock in the factory.
    Unknown to us the client had actively sourced our factory, took our ready made stock and then took all our designs and manufcatured them all without our consent.
    What rights do we have?
    Any suggestions?