7 Must-Ask (and Answered) Questions When Signing an Agreement with A Chinese Manufacturer
One of the most common questions I’ve received is about PO (“purchase orders”). Specifically:
Should I sign a formal contract with my Chinese manufacturer or is a PO sufficient?
Must the contract be written in Chinese?
Is a PO better or a contract better?
I am not a Chinese company – am I protected under the Chinese law?
I am not a Chinese company – what are the key differences between Chinese and Western contracts and the key terms I must know?
What is a Purchase Order or “PO”?
A PO is an offer; if you respond to a PO, it’s an acceptance. An offer and an acceptance form a contract.
It is similar to me going to Lowes or Home Depot to buy a washer and dryer. Once I pick out a SAMSUNG or LG washer and dryer, the nice friendly customer service representative will give me a printout with all the specifics – that is a PO. Once I take the PO to the cashier and pay, that’s acceptance. I now have a contract with Lowes/Home Depot for a specific set of SAMSUNG / LG washer and dryer.
So, is a PO better or a contract better?
Well, it depends (I hate to give a lawyer’s answer, but the answer truly depends on a number of factors). The variables include: is this a one-time thing with this manufacturer? How big is the purchase? If the contract is US $300 million in value and will govern the parties’ behavior for the next three years, I will opt for a formal contract – a Master Purchase Agreement or a Distribution Agreement (once it’s done, multiple POs will be spun from these formal contracts).
If, however, the relationship is one-off, a quick PO would probably be sufficient.
Typically, if there are recurring deliveries and you expect the relationship to last and you want the supplier to be absolutely (and legally) dependable, I would opt for a formal purchase agreement or distribution contract.
Just FYI – There is a UN treaty governing this aspect of legal exchange. So, if you do not want a UN treaty to be meddling with your business in China, it is important to have a clear disclaimer specifically saying so in the contract.
Must the contract be in Chinese?
The quick answer is – NO.
However, despite the clear answer, the issue I’ve seen the most is “people simply don’t know what they don’t know”. Ignorance does cost money in this instance. Unfortunately, the ignorance here may also cost your brand, your market share, or even the supply chain to the rest of the world.
This is usually what happens – the contract is being translated and reviewed in English; however, the contract that is actually being signed is in Chinese.
So, when legal troubles start to arrive in paradise, guess which language version the Chinese courts will review to make a decision? Chinese!
However – and this is the sad part – a lot of the Western companies / business owners do not pay attention to the quality of translation. A lot of them either rely on Google translation, grab the first person they see in Chinatown or call whatever Chinese friends they happen to have to provide a translation. This logic makes no sense just as if I relied on someone I grabbed on the street in LA to give me translation of a legal document written in English!
Needless to say, there IS a difference in the way things are written in a legal Chinese document versus the everyday conversation Chinese – if we could not expect the average Moe and Curly to understand legalese in English, why would you rely on the average Wang or Lin to decipher the Chinese legalese when a mistake could easily jeopardize your factory or supply chain to the world?
By the same token, Google translation is great when you want to shop online or understand roughly what a Chinese website says – it is, however, not the tool I would rely on if the life or death of my business hinges upon the quality of this very translation.
To complicate things even more, the meaning of Chinese character changes based on context. A lot of the translation tools, however, offer translations based on the FIXED meaning of a character – there is simply NO fixed meaning of characters; it’s a fluid language.
Here’s an example. The whole point of a NDA (Non-Disclosure Agreement) is to make sure the parties will not disclose confidential information; and will use the HIGHEST standard to safeguard the information when disclosure is required.
The NDA English version says this:
“if A is required to disclose any confidential information related to this transaction in response to a valid court or government order, A will use the highest level of protection available to ensure disclosure is under confidentiality terms that are no less protection than this Agreement”
This, however, is what the Chinese NDA actually says when translated correctly:
“if A is required to disclose any confidential information related to this transaction in response to a valid court or government order, A is only required to use appropriate level of protection. available to ensure disclosure is under confidentiality terms that are no less protection than this Agreement”.
Let me complicate things a bit more:
Unlike the clean and above-the-table ways Western law firms handle comments to agreements (usually by redlines so you know exactly what has been accepted/rejected in the last draft), the Chinese lawyers do not usually use track-changes. So, most of the time, you send them changes to a draft, they simply send you back a clean copy. On the surface, it appears that ALL comments have been accepted – but this cannot be farther from truth. To make matters worse, they may change other parts of the agreement that are totally not related to the current discussion topic or a topic that has ever been raised for discussion before!
For example, just recently, my client and his Chinese supplier were exchanging documents about the right amount of liquidated damages if there was a late delivery, or consistent “epidemic” failure to the delivery of the products. The parties have exchanged multiple drafts and had calls about this topic – however, in the last exchange, the manufacturer took out the entire reps and warranty section. Without a careful review, the client would have signed a contract where the supplier gives absolutely no representation nor warranties!
So, what are the seven important questions that you must ask and have them answered when it comes to negotiating a contract with a Chinese supplier:
Here you go:
What to do when there’s a delay in delivery? (especially during the Chinese New Year holiday time)
What to do where there’s a shortage of supply? (i.e., are you absolutely your supplier’s favorite customer or can they supply the materials to other customers first and leave you high and dry? Bear in mind that your supplier – just like a contractor building a house – typically juggles multiple clients at one time.)
What to do when your supplier repeatedly fails inspections?
What to do when your supplier’s products result in personal injury back in the US? (remember those lithium cell phone batteries that simply blow up and set a house on fire?)
What to do when there’s a dispute? Should the parties resolve the dispute through Chinese courts only or is there an alternative forum – such as an arbitration in say Switzerland – that may be more neutral? (Enforcement is a big issue when it comes to an agreement with Chinese parties. Are you willing to subject yourselves – and your business – to the Chinese courts and the decisions?)
What is the specific governing law? (if your contract simply says “the appropriate international law applies”, you might as well delete the whole section)
Is the language broad enough to protect your IP rights in China? In the rest of the world? For example, if the manufacturer does not copy your exact trademark or logo, but yet sells the same products with the exact color combination or unique packaging – is that a violation? (remember, China – unlike the US – does not have trade dress law)