You Need a China Manufacturing Contract!

I had no idea what I was going to write about this morning, but thanks to one of our international manufacturing lawyers updating me regarding the following email exchange, I have a ready-made post.

The email exchange started with the following email (modified to hide any identifiers) from a U.S. company having problems with its China manufacturer:

What do you suggest when a supplier is holding products hostage on a PO to try to get us to place larger future orders at inflated prices.

Our China attorney responded as follows:

That you are writing us (and not your regular attorney) makes me think you have almost no grounds on which to stand. I say this because this is almost always true of those who write us with manufacturing problems. You are probably too late to remedy this problem with this manufacturer because the only good fix of which I am aware is a manufacturing contract (in Chinese, sealed by your Chinese manufacturer, and with a China court jurisdiction provision) that explicitly prevents this.

POs are pretty worthless.

Unless you have a contract (in Chinese) that clearly lists out this and that, there is probably little to nothing you can do. See China Contracts that Work. A good China manufacturing contract should also contain a liquidated damages provision and a mold protection provision (so the factory does not keep your molds if there is a dispute), and be properly chopped/sealed (see The 101 on Signing and Chopping China Contracts). It is also critical your contract be with the right Chinese company as Chinese companies are notorious for signing agreements with an essentially empty shell company, usually based in Hong Kong. And as you have learned here, it also must include pricing and product delivery provisions.

If someone were to contact us with all (or at least most) of the above in line, we would be happy to assist them in dealing with their China manufacturer. But — and here is the kicker — this rarely happens, and there are three simple reasons for that. One, if they had a contract that contained all these things they almost certainly would not have had the problem in the first place. Two, if they had a contract that contained all of these things and they did have a problem, they would be in a position of sufficient power that they probably could get their Chinese manufacturer to capitulate without the need for an attorney. And three, if they had a contract that contained all of these things, they would simply go back to the lawyer that drafted it (and not to a new lawyer) for assistance.

There is typically an even bigger issue we always point out when someone comes to us with a manufacturing problem like the above. Whenever someone has a problem with their manufacturer, one of the first questions we ask is whether they have registered their trade names and logos as China trademarks. We ask this because many times (well over half) when foreign companies start having problems with their Chinese manufacturer, their Chinese manufacturer has already gone off (using an apparently unrelated third party) and registered the trade names and the logos of the Western company with which it is having the dispute.

Chinese manufacturers do this to gain leverage and this really works because your Chinese manufacturer can use “your” trademarks to stop you from having your products manufactured in China or shipped out of China with your own brands and logos on them. See China Manufacturing: China Trademarks are the Most Important Thing of All. Or, as is usually the case, it will use “your” brand name and logo to sell your products in countries where you do not have trademark protection. So if you have not already registered your brand names and logos in China, you should do this IMMEDIATELY (you might already be too late) and you should do so before you complain to anyone there. And you also should register your brand names and logos in whatever countries in which you sell (or will sell) your products as well.

China manufacturing protection is possible, but just sending out POs and thinking you have it is just wrong. Sorry.