Companies usually call my law firm at the inception of their China product outsourcing plans. We tell them that unless and until they have at least some concept of what their contract is going to be with their Chinese manufacturer, it is too early to hire us to draft their manufacturing contract. There is just no point in paying an attorney to draft a manufacturing contract if key terms such as price and quality have yet to be agreed upon between the Chinese manufacturer and the foreign buyer. It is the job of those two parties, not the lawyers, to fill in such terms. If the Chinese manufacturer and the foreign buyer cannot reach agreement on the key terms, there is no need for a contract at all.
But when we tell these companies that it is too early for us to help them much, they oftentimes ask us what terms they should be trying to reach agreement on with their potential Chinese manufacturers. We were asked this the other day and we responded with the following e-mail:
Here are the basics in terms of what you should be discussing with your potential Chinese product supplier:
- Products (list of products; whether products will be off-the-shelf, custom-designed, or a combination; exclusivity of products)
- Pricing (per unit; volume discounts; whether prices are guaranteed for a certain period of time)
- Payment Terms (amount due; date(s) due; method of payment)
- Shipment Terms
- Subcontractors (prohibited, allowed if approved in advance, etc.)
- Quality Control Procedures (including disposition of defective products)
- Warranty Terms (length, extent of coverage)
We do not expect our client to reach agreement on all of the above before we start drafting their contract. But if a company is going to pay us for drafting a product supply agreement for them, we do at least want them to have advanced far enough with their potential Chinese product supplier so that there is almost no chance of our drafting their contract for naught.
Many terms of a product manufacturing agreement are best left to the lawyers. For example, we typically like to discuss various penalty provisions with our clients (only) and then just put them in the draft agreement. Our argument is that if the Chinese company has, for instance, agreed to deliver product in 30 days, there is no reason why it should not also accept some sort of penalty for failing to meet such a term. Penalty provisions can be technical and unpleasant and thus best blamed on the lawyers. The same holds true for the dispute resolution provision.
In our experience, if the product buyer and the product seller can agree on price and quality, everything else usually follows and the deal gets done. Conversely, without agreement on those two things, there is no point in drafting a thing.
For more on China OEM Agreements, check out the following:
- China OEM Agreements. Ten Things To Consider.
- China OEM Agreements. Why Ours Are In Chinese. Flat Out.
- China Supplier Agreements. With Apologies To Kansas.
- Drafting A China Manufacturing Agreement. Watching The Sausage Get Made.
What have you seen out there?