Getting the Companies Straight When Manufacturing Overseas

One of my law firm’s international manufacturing lawyers got this email the other day, which is actually an incredibly typical one, both for China and for various other leading manufacturing countries (such as Taiwan, Thailand, Mexico, Poland, Vietnam, India, etc.):

I am inquiring if I could ask you a question if I may, as we are searching for a new manufacturer, we are looking into China to source our products to be manufactured. However, the Chinese manufacturer we are most interested in has an office in New York that organizes new clients etc., for their factory.

Have you come across this before?

Inquiring if you could share your thoughts on this and if you know with which company we should enter into our contract and what the governing law should be. If we are to write our agreement with the Chinese factory, do we direct it to the office in New York or do we direct it to the person in charge at the factory itself?

This lawyer responded as follows:

Thanks for writing. We come across this all the time. It makes everything much more complicated and there is no way to answer your questions without, at minimum, knowing the following:

    1. The relationship between the New York Company and the Chinese company.
    2. Information about both the New York and the Chinese companies.
    3. What each of the two companies will be doing for you.
    4. What sorts of protections you already have on your product.
    5. The financial resources of the New York and Chinese companies.
    6. What exactly it is you are trying to protect and why.
    7. What is most important for you to protect and why.
    8. What the New York company will sign and what the Chinese company will sign.

If you do not wish to figure out how to divide responsibilities between the two companies, the safest thing would be to have two separate agreements, one drafted for disputes involving the New York company and a very different one drafted for disputes involving the Chinese company, with each contract tailored per the factual information we list above.

Typically, but not always, the U.S. company in this sort of situation is usually little more than a one person import or sales office and so it usually (but not always) makes sense to just deal directly with the Chinese company in terms of your contracts and essentially just pretend the US company does not exist. I say this because it will be the Chinese company that will be making your widgets and it will also be that company that is most likely to steal your IP. Therefore it is against that company that you most likely need protection. Every so often companies come to us with a problem with their Chinese manufacturer, believing that they have a good case against the U.S. entity with which they have a contract. Never once has that been true. On top of that, without a good contract with the Chinese company, they virtually never have a good case against the Chinese company either.

On the flip side, if you have a good contract with your Chinese manufacturer and you are wronged, the odds are overwhelming that you have a good case against the Chinese company with which you have the contract.

So while there is no universal answer to your questions, I would say that almost always the best way to go is to deal with the Chinese company only. Sometimes it can help to get both the Chinese and the U.S. company on the hook for liability, but usually it’s not even worth the pain to try that, both because both companies rarely will go along with that and because it rarely matters.

For information on what your contracts with your Chinese manufacturer should look like, I urge you to check out the following:

International Manufacturing Contracts: Know These Nine Things

Effective China Manufacturing Contracts: Watching the Sausage Get Made

China NNN Agreements: The Initial Questions We Ask