China Manufacturing: It’s All About the Contract

I saw this headline and I could not resist reading the article by the Moneyist on MarketWatch: “I bought a store for $80K. It quadrupled in value. My friend gave $7K for the purchase and $6.7K for repairs. Does he get back 4 times both investments?” I could not resist because it is so similar to the questions my law firm’s China lawyers regularly receive, from both existing and potential clients. Before I explain why this article is so relevant for China (really for any international business) I am going to explain a bit more about the article.

The person in the article who posed the question had bought a store for $80,000 with a friend. The friend put in 7,000 towards the $80,000 total price and over the years contributed an additional $6,7000 to fix up the store. The questioner wanted to know how much he should pay for the friend’s shares.

The Moneyist appropriately responded with the following, before trying to parse out what would be fair:

When entering into a business arrangement with friends, family or any third party, never rely on a friendship, goodwill or a handshake over a contract.

This is a textbook example of what happens when two friends get together and hit pay dirt. The nature of the relationship is irrevocably changed when you go into business. Large sums of money can shift loyalties further.

The more legalistic answer would be that if your contract says the friend contributed the $13,700 as a loan, the questioner owes the friend $13,700, plus interest. But if the friend contributed the $13,700 as an investor in the business, the friend is likely entitled to payment based on the business’s current worth. BUT, there really should have been a contract that made all of this clear. In other words, it all comes down to the contract.

One of the reasons I read the Moneyist article was because I just last week spoke at a webinar on diversifying manufacturing away from China webinar where a listener asked about getting molds/tooling back from Chinese manufacturers when moving manufacturing from China to I think it was Mexico. If I recall correctly, the webinar questioner mentioned how it seems impossible to get molds and tooling back from Chinese manufacturers and asked if that was what I too had been seeing. My answer was that if you have a good contract that makes clear that you own the molds and tooling and provides for the manufacturer to be penalized if it does not return your molds and tooling within X number of days, getting the molds and tooling back will likely be no problem. But without such a contract, it will likely be impossible. In other words, it all comes down to the contract. See How To Hang On To YOUR Tooling and Molds When Manufacturing Overseas.

Two to three times a week, our international manufacturing lawyers get emails or phone calls from someone who got defective product from their foreign manufacturer and they want to know what our law firm can do to help them and what it will cost. Again, our questions focus on the contract they have with their manufacturer. Generally, if you have a good manufacturing contract with your manufacturer, the odds of you getting defective product go way down, and if you do get bad product, the odds of you having recourse against your manufacturer go way up. See How to Avoid Getting Bad Product from your Foreign Manufacturer. In other words, it all depends on the contract.

The same is true regarding preventing your manufacturer from competing with you by selling “your” product around the world. Generally, if you have a good NNN Agreement or a good NNN provision in your manufacturing contract, the odds of your foreign manufacturer competing with you go way down, and if they do compete, the odds of you having recourse against them go way up. See How to Avoid Inadvertently Gifting your IP to your Foreign Manufacturer.

In other words, it’s all about the contract.