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The New Era In China Product Supplier Relationships Requires New Contracts

Posted in Legal News

One of the themes we have been addressing for the last year or so is how the relationship between foreign companies and their Chinese product suppliers is maturing. A few months ago, in The New Role Of Written Contracts For Product Purchases In China we wrote of how rising product prices have increased the need for good contracts between foreign companies and their China product supplier and of how such contracts are becoming far more common.

There is an old saying that “good contracts make good partners” and that is even more true in a cross-cultural context, as we noted in China Contracts Make Sense:

A contract is the best way to make sure that you and the Chinese company with which you are contracting are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 30 days, it will say “yes” almost every time. But if you then put in your contract that the Chinese company must pay you a penalty if it fails to ship your product within 30 days, there is a very good chance the Chinese company will tell you that 30 days is impossible. At that point, you and the Chinese company should figure out realistic shipment dates and put that in the contract. You then know what is actually realistic to expect by way of shipment dates and you can act accordingly with your own customers. Spending the time to negotiate a contract with your Chinese counter-party, especially if that contract is in Chinese is the best way I know to achieve clarity before you lock yourself into a relationship.

With this increase in contracts between foreign companies and their Chinese product suppliers has come an increase in what I would describe as good relations between these two sides. Though I do not ascribe the increased use of contracts as the sole factor in the rising level of the supplier-purchaser relationship, I do see that as a factor.  But whatever is causing it, I am convinced it is happening because I am more and more hearing from foreign companies that rightly describe their relationship with their Chinese manufacturer as a partnership.  Foreign companies are becoming more experienced at dealing with Chinese factories and Chinese factories are becoming more experienced at dealing with foreign companies.

And with these real partnerships comes a desire from both the Chinese manufacturer and the foreign product buyer to “take the business to a higher level.”  This desire typically manifests itself with the two companies wanting to sell their “mutual” product in China (and sometimes elsewhere in Asia) together or to develop new and better products together. Neither of these things are particularly legally complicated but both of these things call for new contracts.

If you are going to have your Chinese manufacturer selling your product in China, you should, at minimum, enter into a distribution and/or licensing contract with your Chinese manufacturer. Your manufacturing agreement is not going to cover even close to the various important matters that are involved with using another party to market and sell your product.

For what is involved in a distribution contract with a Chinese company, check out the following:

If someone else is going to be using your trade name or logo in China or elsewhere, either through a distribution or a licensing arrangement, you are almost certainly going to want to register that trade name/logo as a trademark to make sure you and nobody else have ownership of those trademark rights. Here’s some information on that: China: Do Just One Thing. Trademarks.

If you are going to work extensively with a Chinese manufacturer to develop a new product, you need a specific product development agreement. These agreements cover the cost and procedure for development and ownership of the developed product. Many companies fail to enter into this kind of agreement and then discover that the Chinese side owns “their” product and/or molds at the end of the process.

What are you seeing out there?

  • http://www.qualityinspection.org/ Renaud Anjoran

    I have also seen cases where the importer wants one of its good suppliers to sell its products in China. Usually I advise them to go for this option after they have searched hard for, and failed to find, another way to distribute into China.
    The reason is this. If a conflict arises somewhere in the relationship, the contagion will immediately affect the whole relationship.
    I see why a contract would help prevent this. But it’d better be a really good contract that forecasts most possible problems.