Dangers of not being formal with your China supplier contracts

when sourcing during the Covid-19 pandemic

Dangers of not being formal with your China supplier contracts when sourcing during the Covid-19 pandemic

I received an interesting question from a reader of my blog.  I hope my answer will encourage you to be careful with your China supplier contracts.

Question:

Mike,

My friend put me in touch with a supplier than can provide the PPE I have been searching for. I will follow your advice about conducting due diligence to make sure they are legit.  In the meantime, you could help me understand if sending a “working” Purchase Order is a good idea?

The suppliers in China are flooded with overseas orders for PPE. The supplier is asking me to submit what they call a "working" purchase order to show intent to purchase and also to get the price and quantity.  They say they will start production if I can show I am serious. What is the difference between the “working purchase order” and a contract? When should I get an attorney involved?   I thought a purchase agreement was like a legal binding contract.

Answer:

I have not heard of the term “working PO” but I suspect they mean a “Proforma Invoice” which is a form that is sent between buyers and sellers before the formal contract is signed.

The proforma is used to show an intent to buy and confirm key items like # of units, lead time, price…

If the “proforma” is not signed by either party, then technically it is not legally binding.  BUT, in China the seller may prepare materials or even start internal production upon receipt of the proforma in hopes of getting the order rolling.

That sounds good at first, but it’s a real problem if the buyer needs to change any details or if the buyer just wanted to get a quote for reference.  You can’t “unstart” production.

Perhaps you could show you are serious using a letter of intent or other means. If you must issue a proforma, make it crystal clear that the proforma is part of the Request for Quotation (RFQ), not the actual placement of the order.  Here are tips for placing the actual order.

  1. Almost all our clients opt for the “holy trinity” of PO/PC/NNN
    .... Purchase Order
    .... Purchase Contract
    .... Non-disclosure, Non-compete, Non-circumvention
    in one sweep so the wording of the templates matches up and can be used over and over again as a set by the client.
  2. A 10-hour block should be enough time for the lawyer to customize all 3, assuming your project is straight forward. If you are on a tight budget, and the project is not complex, we could try to do it in 4. But the per-hour rate is better with the 10-hour block of General Counsel than the 4-hour block. Also, if you have extra hours left in a block, they can be used for other tasks you may have for a lawyer.
  3. Service details are listed at  http://www.asiabridgelaw.com/bilingual-contract-templates-customization/.  Be sure to check out that page as it answers a lot of common questions about Chinese contracts.
  4. Here is a screenshot for the current rate to have the “holy trinity + block of 10 hours of legal counsel”.  Note that these are preferential rates in place temporarily to help out during the covid-19 pandemic. BTW, the rates are listed in Chinese CNY (also known as RMB), but payment can be made in any major currency at the day’s exchange rate.
Click for larger image

Welcome any additional questions you may have.

Glad to help!

About the Author: Michael J. Bellamy

About the Author: Michael J. Bellamy

Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses.  Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.

A featured presenter on China issues at seminars, trade shows and corporate events across the globe.

Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/

Mike is the author of “The Essential Reference Guide to China Sourcing
(available on Amazon).

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