Selling Your Product or Service Into China: The Contract Basics

Ten years ago, our China lawyers wrote two or three product sales agreements a year for our Western clients selling their products or services into China. These days with Chinese companies having become serious consumers of Western products and services, we probably write two or three a month. The below is an email from one of our China attorneys to a client, written to gather sufficient information to create a first draft of a product sales agreement to sell products from an American company to a host of Chinese automobile companies.

I am running this email (long after the fact and stripped of any identifiers) because it addresses many key points you should be thinking about if you are selling into China. The below email is to a client that was selling its products into China, but much of the email is relevant to those selling services into China as well.

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 a sales agreement for China 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. I will draft a sales agreement based on your answers. Where you do not have an answer, I will either a) insert a standard provision or b) provide for resolution by a separate document.

If you have questions or 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? For __________, 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 Chinese 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 Chinese 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?
  • P.O. Processing and acceptance 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, some China buyers 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 of their orders, no matter how unreasonable in terms of quantity or timing.
  • Facility, subcontractors and component suppliers. Do your China 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 any 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 packaging and labeling of your products? How do you respond if a customer makes specific 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 China customer?
  • Molds and tooling. Are customer designed/customer owned molds and tooling used in your producing your_________ products? If yes, please describe.
  • Quality Control. How do you normally work with your China buyers in terms of quality control for your products? For example, do your buyers have the right 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. If you do not have a standard warranty, PRC 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 two types of warranty service:

a. For 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 b), 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. What form of service/training do you provide in connection with the 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?
  • Intellectual property. What registered intellectual property (if any) is used in the sale of the 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 that 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 the sale of their product? That is, when a special product like the _________ is used, it is sometimes required that the buyer identify that item in their description of their own product. For example, intel often requires this on computers sold in the U.S.
  • Dispute resolution. Since you are operating in China with Chinese entities, for dispute resolution we normally provide for litigation in the PRC People’s Court in the district where the defendant is located. Note that this particular client had a China WFOE through which it was making the bulk of its China sales. Many of our clients that sell their products or services into China do so from the United States or from Canada or from Australia or from Europe and our dispute resolution analysis for them might be very different. There is no one-size-fits-all dispute resolution clause.
  • Other special matters. If there are other matters you think we should be addressing for your products, please specify.