China Manufacturing Contracts and Mistakes to Avoid

China Manufacturing

Got the following email this morning from a domestic lawyer friend of mine (changed slightly to avoid revealing anyone):

I have a client that wants me to draft an NDA or confidentiality agreement with an exclusivity clause as to items it introduces to its Chinese factory.  After reading the China Law Blog, I’m not sure if this can be done so easily.

If it can be done, what do I need to put in there so it is enforceable?

Can the choice of law provision be Illinois or does it have to be China?

I immediately modified one of my email templates and responded as follows:

A US-style NDA agreement is worse than nothing for China. See here. Basically, if the contract isn’t in Chinese under Chinese law ,with China as the place of enforcement, (see this) your client would be better off with nothing at all.

The below is what we send to companies that ask what they need when manufacturing in China.

1. A China NNN Agreement

We do these in Chinese (the official version) and in English (for you) and they typically take us 4-5 business days to complete. You can learn more about our NNN Agreements here. We draft our NNN Agreements to protect confidentiality and to prevent the Chinese counter-party from competing with or circumventing you or revealing any of your confidential information. They make sense before you reveal any confidences. If you choose to have us draft an NNN Agreement, we start by sending you a questionnaire and when we have your answers to that we draft the NNN in English for your approval. Once you approve the English language version, one of our lawyers drafts the Chinese portion of the NNN Agreement and then we send that to you. You then send the full NNN Agreement to your Chinese counter-party and if they propose any changes we will revise it. If your manufacturer does not sign an appropriate and enforceable agreement making clear that it is not to copy and sell your product to others, there is nothing to stop it from doing so, and many (most?) do.

2. A China Manufacturing Agreement

Once you have chosen your manufacturer, you need a Contract Manufacturing Agreement (a/k/a OEM Agreement or Product Supply Agreement). These typically take us 10-14 days to complete. You can find out more about our Manufacturing Agreements here. Our drafting process for these agreements is similar to our drafting process for our NNN Agreements. If you are already certain who you will be using as your Chinese manufacturer you can skip the NNN Agreement and go straight to the Manufacturing Agreement as our Manufacturing Agreements contain all the substantive provisions of our NNN Agreements.

3. China Trademarks

If you plan to put your company name or your brand name or your product name or your logo on your products or on their packaging, you need to register those as trademarks in China. As we discuss here, this is true even if you will not be selling your products in China. It also generally makes sense for you to have a trademark in those countries in which you have or expect to have substantial sales and we can help you with that also.

It is also quite possible your client will need a product development agreement as well and it may also make sense for it to consider patents too. These are usually not required, but when they are and the client fails to get these it can be disastrous. I hope the above convinces you not to undertake this on your own.

 There you have it.

UPDATE: My lawyer friend responded with the following:

So to clarify, you can have a US choice of law provision in an NDA or Exclusivity agreement with HK and Singapore factory, but not a factory in Taiwan or China?

To which I responded as follows:

There are virtually no factories in Singapore or HK and it is generally a bad idea to enter into agreements with a “factory” in either country. This is usually (but not always) true of Taiwan as well. You must always be on guard for shell companies and choice of law isn’t what matters. What matters is jurisdiction and enforcement.

If you are going to do a deal with an HK company you will usually want HK Law and HK court (or arbitration anywhere HK recognizes) and with Singapore companies you will usually want Singapore law and Singapore court (or arbitration anywhere Singapore recognizes) and with Taiwan companies, you will usually want a Taiwan court (or arbitration anywhere Taiwan recognizes) but this can greatly vary, depending on all sorts of things. But again, if the factory is in the PRC, having a contract with its alleged owner in Singapore or Hong Kong or Taiwan could very well be the equivalent of having no contract at all, or worse.

The keys are to make sure the contract is with the right company and under the right law and written in the right language and with the right dispute resolution clause. This is all complicated, fact-specific, and risky, and not for first-timers. I urge you to read China Contract Templates and Getting your China Counterparty Right and The Proview v. Apple China Trademark Dispute. Wanna Buy The Brooklyn Bridge? for more on what can (and often does) go wrong when you do not choose wisely on these things.

He referred his client to our China legal team.

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