Using bilingual contracts to protect your interests in China
Using China bilingual contracts to protect your interests-even during a trade war! An effective & affordable tool to enforce quality, price & lead time. Top 10 lessons for Supplier Contracts- learned the hard way during 20 years in China
Introduction:
In an earlier blog post “Trade War Strategies: Preventing your suppliers from violating your patents” we covered how to set up multiple layers of protection with the focus on the first layer- registering your Intellectual Property in China.
The third layer was covered in “How to monitor your intellectual property rights in China”
Today, let’s dive deep into the second layer: Contracts.
Using China contracts as an effective & affordable tool to enforce quality, price & lead time
It has always been a challenge to ensure suppliers ship on time at the agreed price and quality. Not easy to monitor intellectual property rights in China either. The situation has been exacerbated by the trade war.
Problem 1: How the trade war impacts price, quality and lead time
President Trump has made the argument that US importers will pressure Chinese suppliers for price concessions rather than pass on the tariff to the US consumer. That’s difficult to do when the margins are razor-thin at each stage of distribution and next to impossible if the US importer happens to be small with limited leverage over the seller. But US companies will certainly try their best to get Chinese suppliers to absorb the tariff.
In cases where the Asian factories have offered price concessions, the sad reality is that corners were probably cut in order to achieve a lower price point as suppliers have many tricks to protect their internal profit margins. Most buyers won’t know the impact on the quality until it’s too late.
Later in the article we explore the strategies successful importers use to control quality during times of intense cost-down pressure.
Problem 2: Intellectual Property Rights: Increased disrespect during the trade war
As the China-US trade war continues to heat up, Chinese suppliers are actively looking for new orders outside of the US. That could mean your supplier is about to jump into bed with your European, Canadian or Australian competitors. How to ensure your competition doesn’t gain access to proprietary designs and information?
Solution: Register your IP in China & Have the right China bilingual contracts to protect your interests.
In an earlier blog post “Trade War Strategies: Preventing your suppliers from violating your patents” we covered in detail how to register your Intellectual Property in China. Now let’s talk about how to use contracts in China to protect your interests- respect your intellectual property and realize promises for price, quality & lead time.
The full answer (bilingual contracts to protect your interests):
For a full examination of how to draft contracts and monitor compliance, check out this tutorial I created based on 20 years’ experience living in China. Watch them in order for the full tutorial or skip around to each of the bite-sized videos if you are short on time.
Key Sections:
The short answer (bilingual contracts to protect your interests):
Have a bilingual agreement! In writing, under signature/chop!
If you don’t have a contract, you can’t expect a court to rule in your favor. The contract should be bilingual & written per local laws.
Bilingual NNN (Non-Disclosure Non-Usage Non-Compete) terms should be built into your contract.
The contract should also state penalty clauses. In the event a contract term is broken, the penalty clause will make it easy for a Chinese court to rule in your favor and award damages.
Related Content:
My Top 10 lessons for Supplier Contracts- learned the hard way during 20 years in China:
- Use a Purchase Order! Get it chopped.
- State lead times & penalties
- Plan for IP protection
- Plan for non-conforming goods
- Know your risk as importer of record
- Clarify ownership of tooling
- Appropriate legal jurisdiction
- Bilingual contract
- Payment linked to performance
- Written QC Plan is integrated into contract
(reference: “PQM” template at www.PSSchina.com)
Bonus 11. “Same Name” on Contract, Bank Account & Factory Gate
If you would like full details on each of the 11 items, check out this video tutorial as the section on contracts starts at minute 31.
Pro Tip: Don’t be afraid to enforce the agreement!
Foreigners CAN get a fair shake in a Chinese court of law: “learn from this buyer’s experience in Chinese courts”
Additional Resources
- More whitepapers & video tutorials on related subjects can be found https://www.asiabridgelaw.com/resources/
- 10 short videos covering 10 Common Mistakes when conducting business in China.
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ABL Blog: Sr. Editor and Primary Content Creator: 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).
Revised from Jan. 14, 2020.