2021 How to Create a Valid Manufacturing Contract China(NNN Download)
It’s a good idea to make your new product in China, but it needs legal Manufacturing Contract China protection.
In general, you would think that if you pay for the above, you will have 100% of the IP of the product (e.g. design, mold and tool), but is that actually the case?
I’m afraid that’s far from it.
In supplyia’s case, the factory, which produces products for our customers, secretly registered our customers’ trademarks in China, while producing very similar products for our customers’ main competitors.
Our customers only stumbled upon this, and it turned out that they couldn’t do anything because there was no formal NNN contract between their Chinese suppliers.
What should be included in your manufacturing contract in China?
Ideally, your manufacturing contract with your Chinese supplier should include three elements:
China NDA or more comprehensive NNN agreement
Product Development Agreement (PDA) – (if developing a product with your supplier)
Manufacturing Agreement (MA)
The contract can be translated in English, which is available, however, the Chinese should be the main language of the contract and should be stamped on your official red seal (or the sealed company or agent).
Let’s take a brief look at each section.
1. China NDA or NNN Agreement
China NDA protect your IP or trade secrets. Sometimes that’s enough to help you safely outsource to China.
However, the more comprehensive NNN agreement is an upgraded version of the NDA because it provides three types of protection, namely:
Do Not Use – Suppliers cannot use your IP in any way
Confidentiality – Suppliers cannot disclose your IP or share it with others (e.g., a friend’s factory or through an unauthorized subcontract)
No supplier can start making this products and sell them to your customer.
Ideally, an agreement should be reached before any product information is provided to the supplier, especially if you have a very unique product in hand.
2. Product Development Agreement (PDA)
PDA will come in play when Chinese suppliers work together to develop products in China. Many Chinese factories can help foreign and small and medium-sized enterprises design and develop their products.
However, if you do not agree to PDA, you may find that Chinese “partners” claim that your IP is now their own because they play a role in developing products for you.
To avoid pulling carpets down from the foot in the configuration, it is important to agree in advance before the supplier can start developing any prototypes:
1. Products to be developed.
2. Technology contributed by foreign companies and Chinese manufacturers (costs are also mentioned).
3. Who will provide product specifications in what form.
4. Who will own the intellectual property rights of the final product.
This is especially important if it takes a long time to start the development and/or custom mold and tool replacement costs with the new supplier.
If your product is fully developed and you only use a Chinese factory to put the product into production, you may not need to add such an agreement.
3. Manufacturing Agreement (MA)
Your manufacturing agreement strictly defines the benefits of your cooperation and relationships with customers and suppliers, and there is no room for explanation on the supplier side.
These will be like this:
- Supplier exclusive
- The production equipment used
- Supply obligations
- Product documents and payment terms
- Quality control and inspection procedures
- Allowed or unacceptable subcontracts
- Mold and mold regulations
- Breach of contract
- and more…
As described in this article, MA must be established before production.
Breach of Manufacturing Contract China –Your Legal Options
Clearly, this case leads to a conflict with your supplier. But what can you do? And what are your legal options in China? In this article, I will explain some of your legal options in case of a conflict over goods sales.
For instance, if you’ve set a deal with a China supplier for almost 2,000 kitchen sinks for a construction project. And you are agreed to pay 70% upfront and 30% remaining after the final delivery. Now open receiving the order, you find that all sinks’ hole size is incorrect, or smaller than the agreed one. Maybe the material used in manufacturing is not the same. This will create conflict with the supplier. Now the question is, what can you do in this situation? What legal actions can you take?
Worry no more; let us help you.
Do You Have a Valid Manufacturing Contract in China of Sale?
This is the first and important question, do you have a valid manufacturing contract China? It’s basically an agreement between the two parties, in which the seller has made a legal offer, and you have accepted it. This contract base on the main 3 conditions:
To describe it clearly, if the product quality is not described, then the contract of sale is not valid. We’ve described it for quality, but most contracts contain more other items, like payment, defect terms, and delivery. But if the quality is missing, then it’s not a legal offer.
It all depends on the agreement with the supplier. If you have a signed choice of law clause, then it must clear what law to apply. However, if a good choice has been made, it will be the court that will decide the law.
It doesn’t matter which law has been applied, Chinese or domestic, fair chances are maybe your own country is part of the CISG. And as you know, China is also part of this convention; the court will definitely apply the CISG provisions to fix the conflict.
CISG –Convention on International Sale of Goods
It’s an agreement signed between states on resolving the international conflicts over the sales of goods. It depends on the formation of international sales contracts and the obligations of sellers and buyers. It further defines how to settle a conflict by either party. Right now, CISG has almost 89 member states.
Although the court will handle the conflict, before that, it’s necessary to ensure whether the contract actually meets the CISG requirements. Those requirements are well described in articles 1-6 of the convention.
Once you’re all set with the requirements, the court will figure out the contract breach and check if the supplier has actually violated any of the obligations.
Obligations of the Seller Under the CISG
You can find about obligations in articles 30-44 of the CISG. Articles 31-34 accurately define the legal obligations regarding the goods delivery and following documents. While articles 35-44 define everything about legal obligations regarding the conformity of all the goods and the third-party claims.
Here we have defined some necessary obligations:
Art. 31: Where to deliver items
Art. 32: How to deliver the items to a carrier
Art. 33: When to deliver the items
Art. 35: Quality, quantity, and characteristics of the items
If you find any violation of these legal obligations, where the seller is breaching, then you can instantly demand remedial action against the seller.
What Remedial Action Can You Propose?
A buyer has four remedial actions at its disposal under the CISG. Below here, all four legal options are listed, and a brief description of each option follows.
- Art. 46-48: Require additional performance.
- Art. 49: Void the contract.
- Art. 50: Reduce the price.
- Art. 74: Claiming damages.
- The first legal option you have is to request additional performance from the seller, e.g., you can request the seller to repair the delivery or deliver alternate goods.
- The second remedy you have is to null & void the contract. You can utilize this option when the seller disobeys the contract’s commitments or when the goods are not delivered.
- Utilizing the third legal option, you can request a reduction in the price. The price can only be reduced at the time of delivery only to the actual value of the goods, and this can also be done after you paid for the goods.
- The fourth legal option you have is about claiming damages. You can claim an amount equal to your loss that you bore.
Keep one thing in mind that you can not use all these legal remedies simultaneously, so it’s up to you which remedy you choose. For example, you can not request a reduction in price after voiding the contract. On the contrary, you can claim damages simultaneously with any of the other legal options. Any option you think might be best if there is a contract violation, it is always wise to conduct a legal counsel before taking any action.
Contract Manufacturing in China Conclusion
There are several legal options available for you in China if your supplier does not deliver on time or stick to the promise. If you want to be eligible for the described legal options in this article, you must have the following:
- A valid contract of sale.
- Your country should be a part of CISG.
If you meet these requirements, and you fulfill the criteria of articles 1-6 of the CISG, you are allowed to utilize four remedial actions at your disposal. Keep one thing in mind, whichever remedy you choose; it could be a real challenge to enforce action in a foreign country. A wise thing you should do is to hire a supplyia to help you sign manufacturing contract China.