I learned tons from your AnotherChinaBlog.com so far, so thanks a lot for that. Here are some questions. When I place the order with the supplier, do I bring in my own contract? Do I have to go to a lawyer to write one for me? Or will the supplier come in with a contract in which everything we discussed is written down? And how does ‘signing the contract’ work when one cannot actually go to China? I will head over to China for the first purchase, but I am afraid I won’t be able to do that with regular purchases. Any info on how these issues are normally being handled is very welcome.
I am only a small buyer (first order approx. 3000 euro), so I hope you can advise me on the best solution that makes sense for my budget.
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Now get ready for a long reply to your questions. In order to do justice to the issues you have raised I need to first give you and other readers some background. I think you will find this extra information of value and worth a bit more reading.
Big enough to go direct to China?
Before we start, note that I wrote the blog post “Too small to go factory direct?” a while ago to offer some thoughts on how to determine if a project is right for a factory direct relationship. That article may be of interest to you. But for the sake of answering your question, let’s assume that your project has enough potential to make the effort and expense to develop a China supply chain (factory direct or via a trading company) worthwhile.
PO vs Contract vs T&C
The simple act of even using a purchase order (PO) is a major step in the right direction. You would be amazed at the number of new buyers who place an order via e-mail or phone call without any supporting documents. You probably will not be amazed to learn that the failure rate on projects with no PO is significantly higher than with projects that the employee has a proper PO. The reason a Purchase Order is so valuable is because “if you are not crystal clear about what you want with Chinese suppliers, you will get exactly what you didn’t expect.”
A Purchase Order is defined as a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a Purchase Order to a supplier constitutes a legal offer to buy products or services. Acceptance of a Purchase Order by a seller forms a one-off contract between the buyer and seller, so no contract exists until the Purchase Order is accepted. (Dobler, Donald W; Burt, David N (1996). Purchasing and Supply Management, Text and Cases (Sixth Edition ed.). Singapore: McGraw-Hill. pp. 70. )
Because of the mature legal system most businesses enjoy back in their home countries, a PO has implied warranty and product quality expectations that are often not stated explicitly in a domestic Purchase Order.
When it comes to PO’s with China based suppliers, it is essential to get every detail (no matter how seemingly minuscule the detail might be) in print because the safety net of a legal system that protects the buyer as found in the West, simply does not exist in China. For example, delivery dates, warranty terms, material specs may not be stated in all domestic PO’s, but they should be specified in a China PO.
Notice in the definition above that the Purchase Order is referred to as a type of contract. That is an excellent frame of mind to have. The PO is not just a commitment to buy something, but rather it should be viewed as a very serious, contractual document which will define the relationship as a whole between the two parties. Many large firms back in the West have a set “terms and conditions” template which can be dozens of pages of small-print legal wording about the relationship. This long “T & C” form as it is casually called, often includes not only the warranty expectations but also important clauses about non-disclosure and non-compete. Because the document is so long, most buyers simply have the T & C signed once by the supplier as a blanket document covering all future PO’s to that given supplier. But this strategy has 2 major faults:
1) The false assumption of Western lawyers who draft these (sometimes) absurdly long and incomprehensible (for us common folk) T & Cs is that getting a signature on a “water tight” document by Western Standards provides coverage for the buy side in China. Especially for the small and medium sized buyers, by the time the battle reaches the court the buy side has missed orders, lost revenue and now needs to cover the costs of a court case. Even if the buy side wins, enforcement and actual recovery of damages in China is very rare. If you are dealing with a small sized supplier, I have seen cases where they simply declare bankruptcy to avoid paying the damages and even have the audacity to open up a “new factory” under a new name in the same building with same staff a few weeks after the court case. So relying solely on the legal system in China for protection is a dangerous strategy.
2) Another false assumption is that the T& C is read and understood by the sell side before their signature is added to the document. I have found that most suppliers in China, especially for what they feel are small orders, don’t make the effort to translate let alone comprehend the intimate details of a long wordy document. They realize that the funds accompanying the PO will flow to them once the T & C is signed, so they see their signature as a small formality rather than a mandatory read, and add their signature without even a cursory review in many cases. This puts into motion a sad chain of events. The buy side assumes the sell side is following the desired terms and conditions while the sell side is operating under Chinese business as usual. When it comes to service, payment terms, warranty and especially intellectual property protection and non-compete terms, China business as usual is very much a world apart from the buyer’s expectation.
To summarize, you want both your PO and supporting Contract (T&C) to be easy to understand. It is essential that you get confirmation that your supplier really understands as signature alone is no sufficient.
Now let’s take a look at your specific questions, keeping in mind your tight budget.
“When I place the order with the supplier, do I bring in my own contract? Do I have to go to a lawyer to write me one? Or will the supplier come in with a contract in which everything we discussed is written down? “
I always use my own PO and Contract template which has been fine tuned over the past 12 years. If you are just getting started and are looking at a blank piece of paper, not sure how to draft you documents, here are some options
- Ask other companies that are successfully sourcing from China to see if they would do you a favor and let you cut and paste from their documents.
- If you hire a purchasing agent like www.PSSchina.com, their fees include provision of a PO and Contract template to their clients as part of the service package.
- English speaking Chinese lawyers like www.AsiaBridgeLaw.com can help you set up a PO and Contract tailor made for your specific needs. This can be done for a fraction of the cost of a lawyer back home.
- I spend a full chapter on POs/Contract issue in “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book). Along with a detailed description of what to put in your PO and Contract, there is also a digital template available which you can cut and paste onto your letterhead.
- Be very careful if the supplier provides you a template. This will generally be in Chinese and if there is English translation provided, I have often found the terms do not match up exactly for both languages. This can really put you in a jam later.
“And how does ‘signing the contract’ work when one cannot actually go to China?”
First off, make very sure the name of the supplier is the same for the following:
- on your contract
- the bank account where you send them the money
- the business license of the location of production.
If these do not match up, you will have a hard time enforcing the contract/PO should anything go wrong.
You don’t have to sign the contract in person for it to be valid. Copies can be sent back and forth via fed ex so you have a copy and they have a copy. If you really are on a tight budget, then send each other scanned copies via email while the originals go back and forth via slow mail.
I will head over to China for the first purchase, but I am afraid I won’t be able to do that with regular purchases.
You are wise to plan for some China visits. You will learn a lot about your supplier in the process and start to build a good relationship. Even for big buyers, it is not realistic to fly back and forth for every order. While I encourage you to consider the services of a purchasing agent to look after your business in China, if you are on a really tight budget, at the very minimum, you need to get some 3rd party inspection done before you make the final payments on your order, BEFORE the goods ship out. You can find a list of reputable companies at http://chinasourcinginfo.org/endorsed-service-providers/ who can help you. If you like, I would be happy to make a personal introduction to relevant agents for you.
In my experience, I have found that the smaller orders are harder to manage than large order because the buyer doesn’t have as much leverage with the seller. So it is very important for the small buyer to have a well defined and mutually agreed upon PO and Contract in place.
It would be very dangerous to think that because the order is small, you don’t need to be as concerned about the PO details. Unfortunately, in reality, the opposite is true. So you are wise to be asking the questions you are asking. Well done!
Wishing you successful China sourcing!
Question answered by Mike Bellamy, host of “Ask the Experts” at the China Sourcing Information Center.
Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). He is also the author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)