How to Create a Valid Manufacturing Contract in China (NNN Download)
In this post, we’re discussing how to sign a valid manufacturing contract in China.
It’s fair to say that many of today’s buyers still start working with a supplier in China (or other Asian countries) without a valid China manufacturing contract.
Perhaps you may have already dealt with China suppliers and everything has been fine so far. But it’s still a good idea to Create a legal Manufacturing Contract in China to plan everything ahead.
Next, we will let you understand what makes up an Enforceable exclusive manufacturing contract in China and its benefits.
Please note, we are NOT lawyers. Any information provided in this post is casually informative, but we recommend contacting a lawyer who is familiar with China/Asian law to help you produce your manufacturing contract. Of course, if you are a small business owner and find this troublesome, Alibaba Trade Insurance is also a good choice.
What are the Benefits of having a Valid and Enforceable Manufacturing Contract in China?
-Summarize the main benefits.
- Be able to outline and clarify your expectations of your suppliers and have them commit in writing. It is also important to use clear quality standards here.
- The major benefit is the additional leverage that the contract provides buyers in the event of problems.
- Manufacturing contracts in China will also be used to prevent unauthorized subcontracting
- You will also be protected when switch suppliers and move the original design molds
What Should be Included in Your Manufacturing Contract in China?
Ideally, A legal China manufacturing contract with your supplier could include 3 elements and we’ll go through them one by one:
1. Confidentiality agreement – China NDA or more comprehensive China NNN agreement – this will prevent the supplier from sharing your IP, using it to compete against you, or reaching out to your customers behind your back. Note – keeping penalties sensible is important.
2. Product Development Agreement (PDA) – (if developing product/s with your supplier) – this controls who will own the IP and outlines who financed what, etc. This will help you to move to new suppliers and take tooling and designs with you if needed.
3. Manufacturing Agreement (MA) – this outlines what you want the supplier to commit to. Product, spec, quality standard, price, shipment date, etc. It takes away any ambiguity and makes your requirements 100% clear.
Let’s take a brief look at each section.
1. China NDA or NNN Agreement
Chinese NNN/NDA agreement protects your IP or trade secrets. Sometimes that’s enough to help you safely outsource to China.
However, the more comprehensive Chinese 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 product 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.
Reference Chinese NNN agreement template: Download Chinese/English NNN Agreement
2. Product Development Agreement (PDA)
PDA will come into 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 an 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…
Reference China Manufacturing Contract Template: China Manufacturing Contract Template
As described in this article, MA must be established before production.
Manufacturing contract in China template and contract depth? The length and depth of the contract are affected by the capacity and type of suppliers you work with and the amount and complexity of the order. A small supplier may not have enough availability to handle a very long and detailed contract.
In general, you would think that if you pay attention to the above points, 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 were no formal/enforceable China manufacturing contracts signed. A reference is like a legal NNN contract between their Chinese suppliers.
Build 2 POINTS into the Terms and Conditions of Your China Manufacturing Contract
As a China sourcing company, it is very convenient for us usually sign contracts online. If you do not have a company or business license in China, you may need to know 2 Essential items to build into the terms and conditions of your contract.
1 Make Your Contract in China Enforceable
1.1-The contract must be in Chinese or bilingual.
There are many reasons for this arrangement. First of all, to have a legal effect in China, you must list the Chinese name of the supplier. I’m talking about their Chinese name on the Chinese business license. Local authorities and courts only recognize registered Chinese names. So this English name, or whatever they call themselves, is not an official name. You cannot sue a company called “Best Good Star Manufacturer”. “In China. But you can sue “最好有限公司”.
If your key documents are in English, then things are much more complicated. For example, before the court makes a decision, English documents/supporting evidence will need to be translated into Chinese by a translator approved by the court for review. This can be expensive and very time-consuming. In addition, the defense can use delaying tactics to quarrel over the wording of the translation itself. It is best to ask your lawyer to organize the language in Chinese in advance, rather than expect the court’s translation to be accurate. It is safe. Use bilingual contracts, even only Chinese.
1.2 -Your Contract should usually be written to be enforceable in a Chinese court.
This means that Chinese law is the governing law, Chinese is the governing language, and exclusive jurisdiction is in a Chinese court with jurisdiction over the defendant. The fundamental reason for this China-focused approach is that in cases of infringement or circumvention, you must be able to move quickly against the Chinese defendant.
Litigation must occur in the court with jurisdiction over the defendant, usually the city where the defendant is registered or where it normally conducts business. Any provision that provides for jurisdiction in another court will be ignored.
2 Include Penalty Clauses in Chinese Contracts
Contracts should have a reasonable penalty about what happens if the terms regarding exclusivity are broken.
If the clause on exclusivity is broken, the contract should have a reasonable penalty. This kind of penalty needs to be stated in the contract in advance, so that not only can the seller know that you are serious, but also can make you easier in future litigation.
The main value of setting a penalty in a manufacturing contract in China is that it will prompt the supplier to comply with the terms so that you don’t actually have to enforce it.
Details of liquidated damages clauses in Chinese manufacturing contracts.
Ensure that the penalty is strong enough for the supplier to take it seriously but not scare them away. As long as the penalty is reasonable, the contract can be enforced in the Chinese courts directly, which will save you a lot of trouble because it is difficult to prove how much loss you have suffered without a pre-agreed compensation clause. In addition, the fines agreed in advance save the judge a lot of time and make his job more manageable. If you don’t state the penalty, he may ask both parties to give an amount they think is fair, and the judge will compromise. This method rarely benefits the injured party. So obviously, it would be better to have a penalty in front.
If a supplier sees a manufacturing Contract in China drafted by a professional lawyer or company with an official red seal(signature), it is a different matter; they know that you attach great importance to intellectual property protection.
How Realistic is the Litigation if There are Some Problems?
Compared with the United States and Europe, litigation in China is quite simple and affordable. If there are suitable lawyers and reliable evidence, overseas companies can indeed win the lawsuits of local companies and individuals.
It is important to find a local lawyer who understands the nuances of the legal system in a particular jurisdiction (city or provincial level). Perhaps it is more important to prepare everything in advance. If you can show a Chinese contract with a pre-agreed penalty clause to the court, the lawsuit can be resolved quickly.
It is basically meaningless to go to court outside of China. Most Chinese companies do not have any assets abroad, and Chinese courts will not enforce foreign judgments, so this means that even if you win in the courts outside of China, you will actually not get anything (except for wasted litigation bills). Therefore, if litigation is the only option to resolve disputes, it should be filed in a Chinese court.
What about PIs and POs? Are they still needed?
Once the contract is signed, you can issue the PO, or you can ask the supplier to issue a proforma invoice (PI) and confirm it.
In fact, this is not important. Your protection comes from the contract. Make sure there is no mention of cancellation or replacement of contract terms in the PO or PI. This is the most important point to remember in the future.
Consider paying close attention to suppliers to make sure they stick to the Contracts. Periodically check their trade fair activities, their warehouses, their catalogs, Alibaba. Even contact them with a different name to see if they will sell the items be protected in the manufacturing agreement.
A valid manufacturing contract in China is necessary because Western importers often create and use English contracts that are valid in their country without realizing that they are directly falling into the hands of Chinese suppliers. They know that, for example, Western contracts will not be supported in Chinese courts, so they usually sign such documents without hesitation.
To protect your product at the early stage, it is a good option to ask the suppliers to sign an appropriate manufacturing contract in China before you disclose any information. The manufacturing contract in China must comply with three basic rules: 1, Do not directly use an American-style agreement. 2, Include Penalty Clauses in Chinese Contracts. 3, Draft the China manufacturing contract to make it enforceable in China.
You can also ask a product sourcing company to help import from China to ensure the safety of your intellectual property information and production.
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