When foreign companies request our international manufacturing lawyers draft their China Manufacturing Agreements, we explain generally how we do these, and that usually consists of the following:
1. We like the official version to be in Chinese. If something goes wrong, you will want it to be enforced in a Chinese court (because that is where your Chinese supplier is located) and putting them in Chinese will make things go faster and easier. Putting them in Chinese has the added benefit of preventing the Chinese supplier from claiming not to have understood it.
2. We usually put in non-disclosure/non-compete/non-circumvent (NNN) provisions.
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 Seven Keys to Product Quality When Manufacturing Overseas.
I then quote a flat fee for doing the manufacturing agreement, figuring that by this point the potential client now realizes China OEM Agreements are nothing like the supplier agreements it normally uses.
We tend to have more issues when dealing with lawyers.
The problem is that lawyers typically send us an already completed OEM Manufacturing 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 our international manufacturing lawyers will need to start over. We are going to charge you our regular flat fee for this, though if you mention one more time how you want us to “try to track what has already been done” we will charge you a 100% premium because trying to write a good China Manufacturing Agreement while trying to track what has already been done is just going to double our time on this.
But what I usually do is something like the following:
This agreement does not work for China. 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 win in Topeka and then it will want to take its 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 it sued 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. 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.
4. It should set forth liquidated damages for breaches. See China Manufacturing Agreements: Make Liquidated Damages Your Friend.
5. 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 When Manufacturing Overseas.
6. It uses words like “good quality,” which do not work at all for China. What Chinese courts consider “good quality” has absolutely nothing in common with what we consider good quality. You must specify absolutely everything in a China contract.
I came up with the above with a three minute review and I am sure there are other issues with this contract as well. I hate to say this, but there is nothing we can do with this document short of starting all over. We do 4 to 5 China Manufacturing 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 with trademark, copyright and/or patent registrations.
This usually works.