The Contract Basics When Selling Your Product Internationally

The below is an email from one of our international attorneys, written to gather information to draft a product sales agreement to sell products from an American company to a number of Asian (mostly Chinese) automobile component companies.

I am running this email (stripped of any identifiers) because it addresses many of the issues you should be thinking about if you are selling your products internationally. Though the below email is on selling products into China, much of it is relevant to selling services into China as well and virtually all of it is relevant to selling your products internationally.

Please find below an outline of a PRC product sales agreement with questions designed to provide us with the information required to draft the document.

The first step for drafting an international product sales agreement is to deal with the basic sales terms. The terms for customization and cooperative design can come later. For this reason, the outline and questions below apply only to sales of your _________ product [customized for each buyer] and your other standard product from your China catalogue. Please consider the questions below and provide answers where you can. We will draft a sales agreement based on your answers and where you do not have an answer, we will either insert a standard provision or provide for resolution by a separate document.

If you have any questions or you need further clarification about any of these items, please email me or arrange for a phone conference.

Product. How do you identify the Product? Do you simply use a catalogue part number or do you provide specifications? Or do you use some combination of these two? Do you do any customization of the product, or are all sales straight from your line?

Price Terms. How do you work with prices? Are your prices based on your catalogue price, or do they vary for each of your customers? How do you deal with price changes? That is, for how long are your prices effective? Do you have the right to raise prices at any time?

Payment terms. What are your standard payment terms? Do you require an upfront deposit? When is payment due and upon submission of what documents? How do you typically respond when a customer requests a variation from your normal terms?

Shipping Terms. What are your standard shipping terms? Does your pricing include freight, insurance and similar? Do you use a standard shipping term such as Ex Works or FOB or DDP?

Purchase Order Processing and Ccceptance Procedures. How do you work with purchase orders? How many days do you allow for processing and acceptance? What happens when you do not formally accept a purchase order in writing? Without acceptance, is the PO considered to have been rejected? Are you required to accept all purchase orders submitted, or do you have the right to reject POs? If you have the right to reject a purchase order, are there limitations to this right, and if so, what are they?

Scheduling and Timing. How do you deal with scheduling regarding timing and quantity of shipments? In our experience, China buyers often do not want to be tied down to any sort of schedule, while others want to tightly schedule both quantity and time of delivery. Still others want to treat their arrangement as a “requirements contract,” meaning they are not obligated to purchase anything from you, but you are obligated to fill all their orders, no matter how unreasonable in terms of quantity or timing.

Facility, Subcontractors and Component Suppliers. Do your buyers have the right to inspect your manufacturing facility? Do they have the right to limit what manufacturing facility you can use for their products? Do they have any grounds for blocking you from using subcontractors? Do they have the right to approve your component suppliers? Are they able to review and approve a bill of materials?

Packaging and Labeling. Does your quoted price include packaging? What are your company specific policies concerning product packaging and labeling? How do you respond to customer requests concerning packaging and labeling? Do you ever custom package and label? That is, do you ever package, label and mark using the name and logo of your customer?

Molds and Tooling. Are customer designed/customer owned molds and tooling used in producing your product? If yes, please describe.

Quality Control. How do you normally work with your buyers regarding quality control? For example, do your buyers have the right to conduct inspections and/or QC tests in your facility? How do you deal with special requests for quality control procedures from your customers. What form of testing or inspection do you use (if any) to confirm that your products conform to QC standards upon delivery to a customer? Are your buyers permitted to delay acceptance and payment for product until after they have conducted their own QC inspection and testing?

Warranty. Do you have a standard warranty? If yes, please provide that to us. If you do not have a standard warranty, China/Asia standard seller warranty terms for products similar to yours are generally as follows:

a. Seller warrants product will meet specifications for a period of one year from delivery to buyer.

b. Warranty remedy is as follows:

1. For general warranty claims, remedy is limited to either a refund of the purchase price or the seller repairs or replaces the defective item at no cost to the buyer.

2. If the defect rate exceeds 3% in any specific time period (Epidemic Failure), seller is additionally liable for the direct costs of dealing with the failure.

3. The seller is not liable for consequential damages of any kind.

Your buyers are likely going to want pretty much the “opposite” warranty; they will want you to be liable for all damages, direct or consequential, of any kind.

Warranty Service. There are generally two types of warranty service:

a. For product defects identified at the factory, before the product is incorporated into a manufactured item.

b. For defects identified in the field, in a manufactured product that fails while in the possession of a third party purchaser.

What are your procedures for dealing with warranty claims in both situations? Note that for product defects identified in the field, the most common approach is for the buyer to be responsible for dealing with the claim and for the seller to provide an appropriate reimbursement.

General Service and Training. What form of service/training do you provide in connection with your product? What service manuals or other written material do you provide in connection with the product? What other service do you provide in connection with the sale of the product? Do you charge your customer for any of this?

Intellectual Property. What registered intellectual property (if any) is used in selling your product: trademark, logo, design patent, utility patent? Will any buyer IP (such as buyer trademark and/or logo) be used with the product? Do you have proprietary (copyright) package designs you will use? Will you use buyer package designs? Will you exchange any information with buyers that should be treated as confidential information by your buyers? Will you require the buyer to identify your product/trademark in selling their product?

Dispute Resolution. There is no one-size fits all dispute resolution provision for these sorts of contracts. We sometimes go with China courts. We sometimes go with foreign courts. And we sometimes go with China or foreign arbitration. Once we become more familiar with your situation we will discuss your various options here, and the pros and cons of each.