International Manufacturing Contracts: Know These Nine Things

Our international manufacturing lawyers get a steady stream of emails from (mostly American/European/Australasian) companies wanting to sue their overseas manufacturers. Depending on the country, we typically respond by asking the potential client whether it has a written OEM Agreement with their manufacturer, whether that agreement is in the language of the country in which the manufacturer is based, and whether the manufacturer signed and chopped that agreement.

If there is a signed written agreement (preferably in the manufacturer’s own language – see China OEM Agreements. Why Ours Are In Chinese. Flat Out), one of our international litigators will review it, but much of the time we decline to take on the case because the agreement was simply not written to protect the potential client company from its foreign manufacturer. A well-crafted manufacturing agreement with your foreign manufacturer should usually contain some or all of the following:

1. You (or anyone you designate) should be free to inspect your goods at any time before the goods are shipped and before you make your final payment.

2. All tooling, jigs and molds belongs to you, and if your manufacturer delays in returning them to you, it should be required to pay a sum certain in contract damages. You cannot believe how often we get called by companies that have informed their overseas manufacturer that they will be switching to a new manufacturer, only to have that manufacturer keep the tools and molds and thus delay new production by months.

3. Your manufacturer should not market or sell your product (or any close variation thereof) to anyone but you. What we often see instead of this is a completely inapplicable non-disclosure provision (NDA). If you have a marketable product, your manufacturer usually has no interest in disclosing your IP to the public, but it has a very strong interest in stealing your IP so it can make money from it. Most NDAs do not stop this.

4. Your manufacturer should not circumvent you by selling directly to your customers. Same rationale as the previous point. Appropriately drafted and country specific NNN provisions provide for this.

5. When dealing with most of the leading manufacturing countries contract damages will be a better remedy for IP infringement than injunctive relief, yet far too often our international manufacturing lawyers see agreements that rely inappropriately on injunctive relief. For more on this, see China NNN Agreements and How To Give Them Real Teeth.

6. If your manufacturer changes suppliers, it should inform you and get permission before using a new supplier. You’ll have to make your own determination as to how far down the supply chain you need (or want) to go. Do you really need to know from where your manufacturer gets its diodes or its glue?

7. Your manufacturer should be required to identify all subcontractors working on your product, and remain liable for any of their actions. We’ve seen numerous instances where the supposed manufacturer is no longer doing ANY manufacturing and has subcontracted all of it to another factory. Subcontractors are also a major source of counterfeit and gray market goods.

8. The agreement should usually be governed by the local law and enforceable in the local courts. See China Contracts: Make Them Enforceable or Don’t Bother. This also means it should usually be in the local language as well. Our international manufacturing lawyers choose local law/local courts/local language roughly 80 percent of the time, but about 50 percent of the time, these decisions are some of the most complicated and important they have to make because these choices depend on an incredibly wide-range of situation-specific factors, starting off with the country of manufacture and the nature and footprint of the manufacturer. See e.g., Arbitration Versus Litigation and How to Write a Bad International Arbitration Clause. I estimate that about half the cases our law firm declines to pursue against an international manufacturer were because of a poorly written international dispute resolution clause.  See International Dispute Resolution Clauses: Context is Everything.

9. Your Manufacturing Agreement should be written so as to protect you and yet not written so “perfectly” for you that no manufacturer would ever sign it. See International Manufacturing Contracts: Perfection Should Cost Less. We have lately been seeing cheap template contracts that greatly favor the manufacturer — either because the drafter of these contracts is getting a kickback from the manufacturer or because the drafter only cares about the short term happiness of their customers. The template companies (these are rarely law firms) figure that a signed contract (no matter how bad it is for their customers) is the way to repeat business in the short term. In the long term, when the problems with their contracts have become widely apparent, they simply put up a new website. See China Contract Drafting Scams: From Bad to Much Worse.

Any questions?