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China Supplier Agreements. With Apologies To Kansas.

Posted in Legal News

When foreign companies call to have us draft their Chinese supplier agreements (a/k/a OEM Agreements), we explain their basic points, usually consisting of the following:

1. We usually like the official version to be in Chinese. If something goes wrong, they usually will need to be enforced in a Chinese court and putting them in Chinese will make things go faster and easier there. Putting them in Chinese has the added benefit of preventing the Chinese supplier from claiming not to have understood. For more on this, check out “China OEM Agreements. Why Ours Are In Chinese. Flat Out.

2. We usually put in trade secret/non compete/non circumvent provisions. For more on what is required of these provisions/agreements, check out “Why Non Disclosures (NDAs) Alone Are Not Enough For China.

3. We usually put in a set penalty (liquidated damages) for violations of the agreement. For more on the benefits of liquidated damages provisions in your Chinese contract, check out “China Manufacturing Agreements. Make Liquidated Damages Your Friend.

4. We usually put in a no sub-contracting provision. For more on this, check out “The Six (Not Five) Keys To China Quality.

I then quote a flat fee for our doing this company’s China supplier agreement, figuring that by this point the potential client now realizes that China OEM Agreements are nothing like the supplier agreements he or she uses for Kansas

I have a lot more trouble when dealing with American lawyers.

The problem is that lawyers typically send us an already completed OEM Agreement and ask us to “review it to make sure everything is okay for China.” 

Well, guess what, it isn’t. And I mean it really isn’t. And this is true not just sometimes, but always.

The problem is telling the lawyer in a nice way. I mean, it has to be something other than the following:

Thank you for sending this to us. It is of no value to us other than to the extent it sets forth some of the deal points. I really hope you did not charge your client for this because we are going to have to start over completely. We are going to charge you our regular flat fee for this, though if you even mention how you want us to at least “try to track what has already been done” we will charge you a 100% premium because trying to write a good China OEM Agreement while trying to track what has already been done is just going to double the time we will need to spend on this. 

But hey, even I recognize that is probably not the best approach. So what i usually do is something like the following:

This agreement does not work for China at all.  Just by way of some examples:

1.  This agreement calls for jurisdiction in Topeka.  If Kansas Company has problems and has to sue, it will need to sue in Topeka. Kansas Company will no doubt winin Topeka and then it will want to take the judgment to China where it will not be enforced. If Kansas Company tries to sue anew in China the Chinese courts will no doubt block it because Kansas Company already agreed to sue in Topeka and, in fact it already did sue in Topeka and it won. So suing in China would be res judicata.  If you want to read more about this, please check out “Suing Chinese Companies In US Courts. The Pros And The Cons.” You also may want to look at some of the links in that post. 

2.  It’s in English, not Chinese.

3.  It has all sorts of unnecessary provisions. It should set forth liquidated damages for breaches.  

4.  it needs a provision making clear to whom the molds and/or tooling belong. For more on this, check out “How To Protect Your Molds And Tooling In China.

5.  It uses words like “good quality,” which just will not work.  What the Chinese consider “good quality” has absolutely nothing in common with what we consider good quality and you must specify everything. For more on this, check out “China Contracts. Email Not Usually Included.

I came up with the above with a two minute review and I am sure there are all sorts of other issues with it as well.  I hate to say this, but there is nothing we can do with this document short of starting all over.  We do 3-4 of these OEM Agreements a month and that is what your client needs.

I would be happy to discuss this further, at which time we should also discuss what your client has done and needs to do to protect its intellectual property in China through trademark, copyright and/or patent registrations. 

This usually works.