Are you researching how to set up a China Supplier Contracts? Looking for strategies for the negotiations?
In this article, I’d like to share some of the best practices and common pitfalls I have learned while spending 20 years living in Asia around dealing with China supplier contracts.
You probably are clear on the concept of “contract” and what it means, but not everybody knows why it is so important to have a bilingual, formal contract, under signature, especially when dealing with China.
An effective contract in China is much more than just a service agreement or cooperation plan put in very broad terms. When we say “China Supplier Contracts”, some of you might be thinking “purchase order” and some of you might be thinking about the “non-compete clause” in a nondisclosure agreement.
China Supplier Contracts: PO vs Purchase Contract
For the sake of this discussion, let’s say that “contract” is anything that’s a binding document under signature from both parties. Yes, technically a purchase order (if signed) is a contract but it simply defines very basic items such as the number of units, what the price is and what the Incoterms are and where it’s shipping to. A PO offers limited protection to the buyer if something were to go wrong. For that reason, a formal contract should support the PO.
This article will circle back to more details on that key point, but first, let’s explain a bit about the legal system in China and why your standard overseas contract probably isn’t sufficient for use in China.
The Difference Between East and West Contract Standards
For newcomers to the China market as well as for those with established business relationships, this blog post is designed to give you an understanding on the circumstances and the environment in which negotiations with your Chinese partners take place. The background context in China can differ greatly from what Westerners are used to or expect.
The Importance of Due Diligence in China
Back home you may not even conduct much due diligence on the local supplier before signing a contract. In the US for example, we have a strong legal system that protects the buyer and automatically applies basic expectation upon the seller. In American, if a supplier sends you “junk” that is not fit for form or function, you have the law on your side. No so in China! In the view of many judges in China, it is the buyer’s responsibility to work with the supplier to make sure the right level of quality and lead time is achieved.
Additionally, because Chinese suppliers are not as stable as their western counterparts ( a great supplier can turn bad almost overnight due to changes in key staff, regulatory adjustments or financial situation), it is essential to due upfront due diligence to confirm that the seller is a legit business with the ability to produce the given widget in the desired time frame. “Taking their word for it” is not sufficient due diligence. When it comes to doing business in China, any experienced businessperson will agree that the costs of due diligence are money well spent. Next, let’s take a look at why contracts from home need to have different terms and conditions when doing business in Asia.
Let’s take an Australia buyer for example. The “contract” is usually a one-page document when they buy from another Australian company or sell to their Australian customers. The PO is the contract because if any of the terms are broken there’s an implied warranty. The Australian seller has legal exposure if they do things wrong like failing to ship the item or not making a refund on defects. In Australia, there’s a legal system to protect you and for simple orders, you may not need the buyer and seller in Australia to have a long contract listing all the term and condition sheet.
But in China, no matter if the purchase is small, you are crazy not to have a well-defined contract. When you’re buying from Asia you don’t have that seller doesn’t have the burden of an implied warranty, so it’s your job as the buyer to specify what terms and conditions are important for you. Thus, in practice, I often end up having a simple purchase order but attach to it as a four or five bilingual pages’ document that describes things that are important to me, such as my vendor standards & code of conduct.
IMHO, you are very wise to include what are the penalties for mislead times and poor quality upfront. Some buyers make the mistake of issuing the terms and conditions at one time and then place a purchase order with the with each shipment. I actually do things the other way around. Since I’ve made the effort to create the terms and conditions, it’s pretty simple for me to just attached those terms and conditions with the purchase order on each and every order. So the supplier can’t say oh “I forgot about that clause for non-compete” that we signed a few years ago.
Sometimes they’re actually not trying to trick you, they just forgot about. But if the item is important to you, you can’t let the supplier forget about it. So for me, my standard practice is that every time I place an order, the supplier also adds their signature and their corporate “chop” to not only the PO, but also all the terms and conditions. Many buyers just put on the PO that “PO is placed under the terms and conditions of Contract signed DD/MM/YYYY”. That may protect you legally, but I believe a good China supplier contract prevents problems rather than just offer protection. I believe you will find that saves you headaches, time and money to simply attached the contract to the PO and get it signed EVERY time you place an order.
Coming soon… more on Due Diligence and Contracts with Chinese suppliers
In the next blog post, let’s talk in detail about what the upfront work entails to get your due diligence and contract terms done right.
Video tutorial on China Supplier Contracts & Negotiation is found here.