6 Contract-Related Mistakes Importers Make in China
6 typical contract-related mistakes that many buyers make when sourcing in China.
So you found a supplier in China. Maybe you sent them money for preparing some tooling, maybe you sent them a deposit. Then you find that production quality is not acceptable, or the shipment keeps getting delayed.
You request that the supplier make changes, but they simply ignore you, or they don’t act. You find there is very little you can do – you have no leverage over them.
You are not an isolated case – from my experience, this is the norm rather than the exception. Most first-time importers make at least 4 of the following 6 mistakes.
Mistake #1: Discarding contracts when China Sourcing
You have read and heard that China is the ‘land of lawlessness’. People are not used to being held accountable by a contract – they see it as the starting point for ongoing negotiations rather than a significant document. And, of course, local courts are useless and favor local parties, the saying goes.
Well, this is not entirely true. Chinese companies are generally careful about what they sign. And a demand letter sent by a lawyer usually has a strong effect.
On top of that, Chinese courts in the large cities have gotten much more professional and impartial. And, besides litigation, you have the option of arbitration (which can include foreign arbitrators).
Mistake #2: Thinking that contracts will make you look like a bad customer when buying from China
You heard that Chinese business runs on relationships and that hurting the feelings of a supplier is the best way of being treated unfavorably. Surely asking them to sign a contract, when most other customers simply send a purchase order, will project a bad image, right?
I don’t think this is the right thinking process. If you tell them from the very first meeting that doing business with you requires the signature of a contract, they will not be surprised. It will actually give the impression that you are a seasoned buyer – in other words, that your projections have a fair chance of becoming a real order.
Remember, most Chinese suppliers that advertise on directories like globalsources.com or on trade shows are inundated with inquiries and they have to sort out any buyer that doesn’t look serious. The less organized an importer is, the lower their chances of motivating a manufacturer to prepare and send samples.
Mistake #3: Writing a supplier contract that is not enforceable
There are basically 5 ways to get to that result:
- Targeting the wrong company – make sure you sign the contract with a manufacturer or with a large trading company. Don’t sign with a small company that has no assets and can fold anytime.
- Get someone with NO legal authority to sign and stamp the contract.
- Get someone with legal authority to sign but NOT stamp the contract.
- Writing the contract in a way that a Chinese court will never enforce. For example, calling for damages that have nothing to do with real damages, or invoking quality standards without precise descriptions.
- Requesting litigation in your country in case of dispute – are you sure Chinese courts will enforce the judgment in that case? For example, it won’t work if you are in the USA.
Mistake #4: Using your company’s standard NDA template when buying from China
Let’s face it – Chinese companies are not very good at keeping juicy information strictly confidential. They might pass your designs, or a few samples, to other companies within their network. Or they might try to sell your own products to your competitors or to your customers.
In other words, you need to adopt some legal and non-legal tactics to prevent leakages in case your product/process design is proprietary. And an NDA is nearly guaranteed not to address the risks I outlined above.
I could have listed one more mistake – namely, not working with a lawyer that is familiar with the way business is done in China. But this is the same issue really. You need to adopt a different approach for China.
Mistake #5: No contract for covering tooling, code, film, or other assets in China
Let’s say your widget needs a special, custom-designed casing. A mold needs to be made before production starts. Do you just wire the money to the supplier and assume they will recognize that the mold is yours? You are throwing the dice!
The handover of tooling is often ugly when the relationship has turned sour. And the handover of source code virtually never happens. The supplier keeps those elements in their hands, unless they signed an enforceable contract that spells out a certain procedure to follow.
Mistake #6: Using only a PO and not an OEM/ODM agreement when China Sourcing
Many importers send a purchase order (PO) and assume it is a contract. A PO might include many important terms such as late shipment penalties, a procedure to deal with rejected inspections, and so on, but it is not exactly a contract.
For example, if product quality is not acceptable, you need to define the course of action beforehand. In substance it could say: ‘the factory has to cooperate with a consulting company to improve their processes, and then they have to pay for a re-inspection; payment will only be triggered after quality is found to be acceptable, and the supplier will have to ship the whole quantity within one week’.
Question for discussion:
Have you made some of these mistakes? Have you worked with a local lawyer to get your paperwork in order and avoid being held hostage by an unscrupulous supplier?
Have you found other ways to have leverage in your relationship, for example by adding them to the supplier blacklist?
About the Author
Renaud Anjoran is president of China Manufacturing Consultants and helps factories improve quality, reduce costs, increase capacity, and more generally put systems in place. He is also a certified ISO 9001 lead auditor and an ASQ certified quality engineer.
Author’s Consultancy: China Manufacturing Consultants
Affordable Chinese Lawyers: AsiaBridge Law
Video tutorial: Contracts with Chinese Suppliers