A couple days ago, we did a post, entitled, Your Mold Done Gone To China And It Ain’t Never Coming Back, stressing how those doing China OEM Agreements need good contracts to protect their production molds and tooling. Earlier today, we did a post, entitled, China Consultant: Protect Thyself, focusing on how China consultants without good contracts with their clients are setting themselves up for legal problems.

I never expected to be proven so right. So soon. And certainly not in the same lawsuit.

The Bowling Green (Kentucky) Daily News just ran a story, entitled, Holley in Midst of Legal Struggle Over China Deal, that goes a long way in proving the importance of having good contracts when doing business in China, particularly when that business involves molds or consultants.

According to the article, about two years ago, Holley Performance Products began securing materials from China. Holley’s website describes itself as “the undisputed leader in fuel systems for over 100 years. Holley carburetors power every NASCAR team and every NHRA Pro’Stock champion. The Holley line also includes performance fuel pumps, fuel injection, intake manifolds, cylinder heads & engine dress’up products for street performance, race and marine applications.”

Seems that in February of this year, Holley was sued by Doug Smith, “an Ohio-based consultant who helped the company [Holley] secure a supplier in China.” Smith sued Holley for allegedly circumventing Smith by “using his supplier in China without his authorization.” Smith claims to be “on the losing end of the deal after spending more than 185 days in China helping Holley.”

Apparently angered about the alleged circumvention by Holley (see our consultant post to avoid this happening to you), Smith decided to”repossess” Holley’s tooling.  Holley did not take too kindly to Smith’s actions and sued for the return of its tooling:

‘In my last trip to China, I went to all the suppliers and repossessed their tooling,’ Smith said. ‘We had a counterproposal on the table on a Thursday night, but by Friday morning, I had a FedEx package on my front porch with a lawsuit to get their tooling back that they didn’t pay for.’

On November 9, 2006, United States District Court Judge Joseph McKinley issued an injunction ordering Smith return the tooling:

‘The judge gave them a temporary restraining order to give the tools back that Holley hasn’t paid for,’ Smith said. ‘And they’re trying to put me in jail right now. It’s absolutely amazing, they’re trying to put me out of business. It’s like legal stealing.’

Attorney Todd Olhms, who represents Holley, said that Judge McKinley issued a contempt order against Smith for not returning the equipment. The judgment ordered Smith pay Holley $10,000 per day until Smith complies with the court’s order to return the equipment.

Oh, and one more bit of advice for consultants and EVERYONE else: when a Federal Court judge issues an order requiring you to do something, you do it, and you do it even if you do not really want to do it and even if you do not think it is fair. Failing to obey a court order constitutes contempt of court and, as Mr. Smith has learned, the penalties for that can be quite severe.

  • Robert Luedeman

    Have you looked at the pleadings in PACER yet? That could prove interesting.
    And yes. When a judge tells you to do something, please do it.

  • Mr. Luedeman —
    I tried last night to see this case on Pacer, but for some reason I could not get on. Thought it might be something with my Pacer account, so I tried the Western District of Washington and it worked fine. Will try again tomorrow. Like you, I suspect the case itself will reveal plenty more good nuggets. And yes, it is generally (make that always) a good idea to mind the judge.

  • Douglas R Smith

    What rights does a consultant have when there is a clear breach of contract and has not been paid.
    I used the mold lein law. But the judge didn’t agree.
    Doug Smith

  • Douglas R Smith

    Mr Luedeeman:
    Can you recomend a expert witness in this field?
    The Judge said i didn’t fit the technical description for a molder even though my equipment was used to make the parts.

  • Mr. Smith —
    A Chinese judge? There is no way to comment on contractual rights without first completely reviewing the contract, then learning the facts, and then researching the law. Sorry.
    Why did it even matter whether you fit the “technical description for a molder?” There are companies out there that have huge numbers of experts on their rosters. You should do a google search and find some of them.

  • Douglas R Smith

    The Judge that made that decision was Judge Joseph McKinley. That was his reason for not granting my lein. And granting a TRO.
    The biggest problem is we had a week to get a new attonery up to speed and Holley had been putting this together for weeks.
    In the second hearing much more informtion came out but it was to late. The judge did however dismis the fines. This is not scheduled for trial till sept 08.

  • Mr. Smith —
    Until I went back and read my own post just now, I had no idea you are the Doug Smith in my post and and I had no idea you are talking about the case in my post. Sorry.
    US law can be funny sometimes regarding ownership. Here’s an example I often use. Let’s say you sell your used car to a neighbor for $30,000. You and your neighbor sign an agreement whereby your neighbor is to pay you the full amount in two weeks, but then never pays you a penny. Who owns the car? Probably your neighbor, and all you own is the right to sue the neighbor for $30,000 or the return of the car. If your agreement did not grant you a lien on the car (and your state does not have a statute automatically providing for such a lien), you cannot just take the car because it is not yours. I am guessing that’s what happened here.
    What made you think you had the right to just take the molds back? It SOUNDS to me like the lien issue was your biggest problem in the case, but that SHOULD not affect the breach of contract aspects of your case. It also SOUNDS to me like the next time you enter into a similar contract, you should consider writing into the contract that the molds belong to you until fully paid for or something else along those lines.
    We have a company that sells huge amounts of fuel to large ships and their contracts provide that until the fuel is paid for, it belongs to the seller. You cannot believe how many times this has come in handy. Ships are often seized/arrested by those with maritime liens or mortgages on the ships, but our client always has power because it can say, hey, we want our fuel back as it still belongs to us. In the end, those interested in the ship pay our client for the fuel in the tank because it is easier/cheaper than having it all pumped and then having to buy more.

  • Douglas R Smith

    Thanks for your Comments. My previous attonery did not do a very good job with the contract.
    Ownership until paid for is a good idea.
    It will be interesting to see how this plays out. It is far from over.

  • Mr. Smith —
    No guarantees though that such a provision works everywhere. In fact, this is a great example of a provision that we often put in international contracts without doing the research on its efficacy. For example, we just put that in for a client who sells its products into 40 some countries. We could have charged thousands of dollars per country to figure out if it would work or not, but we decided it would not be worth the money to do that research for all those countries. Instead, we can do the research for any one country, IF the need arises.
    There are, however, some times where it may not make sense to have such a provision. For example, this is not a good thing if you do not want your product back.

  • Mel Lamelas

    Does anyone have a good sample consultant agreement to retain a company to act as a sourcing consultant in China (e.g., finding supplier, negotiating terms, overseeing manufacture, coordinating transport to the USA?

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