Our China lawyers have been seeing an increase in work for foreign companies entering into distribution contracts with Chinese distributors, due mostly to China’s rapid growth as a consumer market and to the difficulties and risks foreign companies are seeing when they go into China directly these days. Many of the companies that come to us to draft their distribution contracts with Chinese distributors are already experienced with distributor relationships and already have a “standard” distribution contract. Though China distribution agreements have much in common with American/European/Australasian distribution agreements, they also have stark and interesting differences.
Our clients’ standard distribution agreements (usually with a United States, Canadian, or European company) typically make for an excellent starting point in our drafting of their Chinese distribution agreements. These standard distribution contracts have usually been honed and customized over the years to match what our client wants and needs from its relationships with its distributors around the world.
But we also always need to substantially modify those distribution agreements to make them work for China.
One reason for this is that the United States/Europe generally provide distributors with all sorts of legal protections. These countries often make it difficult or expensive to terminate a distributor and it is common for distributors in these countries to sue or threaten to sue when a distribution relationship sours.
Chinese law has virtually no special protections for distributors. In particular, there is no Chinese legal requirement for payment of any special compensation to a distributor upon termination of the distribution agreement. All of our China distribution agreements call for applying Chinese law and we usually remove these sorts of payment provisions from our client’s US/European distribution contracts when we re-write them for China.
We also add in what we call a “no registration” provision to further protect our clients’ China trademarks. In this provision, the distributor agrees that our client has exclusive ownership of all trademarks and it merely has the right to use those trademarks on our client’s behalf. This provision is important because under Chinese law, you lose your trademark if you go three years without using it and Chinese courts usually find that your distributer using your trademark is NOT the same thing as you using your trademark. We also put in a provision making clear that the distributor gains no rights to those trademarks, and that the distributor will not register any trademarks in any way related to our client’s trademarks.
I use the words “further protect” because the first line of protection for your trademarks in China is to register them properly in China. This provision is important because under Chinese law, you lose your trademark if you go three years without using it and Chinese courts usually find that your distributer using your trademark is NOT the same thing as you using your trademark. See also How And Why To Trademark In China.
One other difference between Chinese distribution agreements and those for America, Europe or Australia is that the signature line in a Chinese distribution contract should provide a place for the distributor to affix its company seal. See China Company Chops: The Basics.