China business

5 crucial documents to sign with your Chinese Supplier before starting cooperation.

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Congratulations!

You found a suitable manufacturer in China — the cooperation terms and prices are great, the manufacturing facilities qualify to your standards, the sales team is very professional, quick to respond, and speaks good English, the communication with the company’s higher management is efficient and of mutual interest, and you are eager to start your cooperation with this Chinese supplier.

However, we suggest you STOP right there because your next steps will determine whether your dreams will turn into SUCCESS or your worst NIGHTMARE!

Before moving any further in your cooperation with your New Chinese Supplier, make sure to sign these 5 crucial documents :

1. Contract
2. NDA or NNN Agreement
3. Manufacturing Agreement
4. Product Development Agreement
5. Quality Assurance Agreement

Now let us get into details of why these documents are crucial, what benefits they may serve you in a long run, the risks of not having these documents signed from the very beginning, and point out the key conditions that make these documents enforceable by law in Mainland China.

DISCLAIMER: Please note we are NOT lawyers. Any information provided in this article is casually informative. We recommend you to contact a certified Lawyer to assist you in drafting a valid required document.

1. Contract

The contract is probably one of the most important documents to sign with your new partner in China. It enables you to summarise, specify and get both parties to legally commit to agreed-upon cooperation terms. A correctly drawn manufacturing contract under China Mainland law can legally protect your transactions, business and intellectual property.

Moreover, valid and enforceable manufacturing contract in China can include all important cooperation terms and conditions in it.

For instance, the contract can include NDA and NNN conditions, Manufacturing and Product development terms, Quality standard requirements, and so on.

The contract content may vary, depending on the business nature, size of the order, expected cooperation period, and many other circumstances.

Manufacturing contract in China is enforceable by law if you watch out for these key conditions:

A) The contact must be chopped with the company’s official red seal.

• The information on the company’s official red seal must correspond with the legally registered information on the company’s business license (营业执照）.

B) The enforceable in Mainland China manufacturing contract must be correctly chopped.

• There are two ways to correctly chop the document; First way is for both parties to chop each page of the contract. The second way is to fold all pages of the contract in a fan-style way and chop all pages at once, making sure that the cop gets its ink stain on all pages. Both of these ways must be finalised with the main chop on the last page of the contract in a specified stamp, signature, date field.

C) The contract must be signed by the company’s representative who has the authority to sign legally enforceable documents on behalf of the company.

• If you dealing with a big manufacturer and your order is relatively big, then make sure to ask your supplier for an officially issued internal document that proves that this person is legally authorised to sign documents on behalf of this company.

(We are going to show you an example of how this document should look like in our next article `Enforceable manufacturing contract in China`, in which we will dive into a more detailed analysis of what makes the manufacturing contract legally enforceable and valid in Mainland China.)

D) The contract must be both in Chinese (Simplified Chinese for Mainland China) and your country’s official language.

• For example if your company operates in France, then the contract must be drafted in the French-Chinese language pair.

These are just a few key conditions to watch out for when drafting and signing the contract with your Chinese supplier. Please see our next article `Enforceable manufacturing contract in China` for a more detailed analysis.

2. NDA and NNN Agreement

What is an NDA agreement? NDA stands for Non-Disclosure Agreement or may also be referred to as a confidentiality agreement.

What is an NNN agreement? NNN stands for Non-Disclosure, Non-Use, Non-Compete Agreement. Legally enforceable NDA and NNN agreements are essential documents to protect your intellectual property (IP), allow you to share sensitive information without fear that it will end up in the hands of competitors, and prevent your unique product from being copied and used later on to compete against you in your market.

If an NDA or NNN is breached you may seek court action to prevent any further disclosures and may sue the offending party for monetary damages.

3. Manufacturing Agreement

The manufacturing agreement clearly defines the responsibilities of both parties throughout the whole product manufacturing process.

A well-drafted manufacturing agreement may specify the following terms:

• Payment terms
• Cooperation terms
• MOQs
• Provided certifications, test reports, and other documents from the manufacturers` side
• Provided information and documents from the buyers` side
• Lead time
• Shipment time
• Delivery date
• Product quality standards
• Record of the approved sample
• Quality control procedures (by buyers third-party quality inspection company)
• In house QA/QC procedures
• Defect ratio
• Reclamation terms and procedures
• List of responsible staff throughout whole manufacturing process (managers, engineers, leaders, etc.,)
• List of subcontractors
• List of raw material suppliers
• Facilities/machinery/manufacturing sites used for manufacturing of the product
• Mould development, usage, ownership, and transfer in case of cooperation breach.

More terms and conditions could be added or removed depending on case specifics.

All of the above terms have to be backed up by penalties that both parties would face in case of failure to comply with agreed-upon terms.

* Bear in mind that the penalties have to be reasonable, otherwise it would be hard to enforce them legally.

For example, you manufacture fountain pens at a Chinese factory, with an agreed-upon defect ratio for each batch, not more than 5%. You receive the batch in your country and realise that the defect ratio is 12%. You specified penalty for such case in your manufacturing agreement as whole batch free in case of exceeding the agreed-upon defect ratio.

Now, can you ask your supplier to provide you a whole batch for free, even if they signed that manufacturer agreement and agreed on this term… probably not!

In case this dispute goes to court, most likely the penalty would be revised by the judge and set with a more realistic penalty. For instance, the manufacturer to bear responsibility for the exceeded defect ratio of 7% and replace them with up to quality standards items.

4. Product Development Agreement

The product development agreement comes in handy when you develop a new product from scratch with your Chinese manufacturer.

It can include such specifications as:

List of products to be developed, mould investment ratio by manufacturer and buyer, who owns the mould in case of breach of cooperation, who owns the intellectual property rights for the developed final product, what buyer and manufacturer contribute to development (information, design, ideas, costs, fulfillments), expected monthly/yearly turnovers, etc.

From China Look Group experience, we strongly suggest buyers take most of the responsibility for product development, such as mould design, product adjustments to a specific distribution market, costs, ideas; and negotiate 100% intellectual property ownership of the developed final product. Meanwhile, if you are sure that this product will be one of a kind and most likely bring you good revenues in the future, act quickly, register the trademarks in Mainland China and in the intended distribution market country.

5. Quality Assurance Agreement

Quality assurance agreement or as it’s also sometimes called Quality control checklist, is an agreement between the manufacturer and the buyer on term and conditions of the manufacturing process that directly impacts final product quality.

Quality Assurance Agreement may specify the following terms:

• Review of the manufacturers technical documentation / in-house SOP / certifications / test reports
• Manufacturing Process flow diagram
• In-house Quality control plan
• In-house Quality control Staff qualification
• Production materials planning
• Production materials standards and approved samples
• Production Trial Run Staff qualification
• Packaging and conservation planning
• Packaging approved design, labelling, barcodes, measurements, capacity.
• Overseas transportation packaging solutions
• Product defect specifications (what is considered as a defective product)
• Defect ration per batch
• Inspection schedule for pre-production monitoring Methodical implementation of buyers’ wishes (if Supplier is responsible for design)

BONUS

Other essential documents for smooth cooperation with your Chinese supplier, though they are in most cases not enforceable by law. These documents can support other enforceable by-law documents such as those 5 that we mentioned above.

1. POs and PIs

2. MOU

3. Agreements

Well, Thank you for sticking with us till the end. We encourage you to take bold but smartly calculated actions in your China business. Learn constantly and take your business to new heights everyday!

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