Quick Question Friday: China Law Answers, Part XLVII

China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Our China attorneys frequently get phone calls and emails from people wanting to know what they should discuss with Chinese manufacturers they are considering for their manufacturing.

In response to this question, I usually send out the below list which succinctly sets forth the bulk of the terms most companies should be concerning themselves with when outsourcing their manufacturing to China. These are the sorts of things that need to  go into your China Manufacturing Agreement.

Not everything on this list will be relevant to your company and obviously some items will be more important to  you than others. This list is in English only and once you have honed it to suit your particular situation, it oftentimes will make  sense for you to put it into Chinese as well, so as to  reduce the likelihood of any misunderstandings. The terms set forth below come from a very lage and very sophisticated  client of ours and they are very much particularized to the particular industry, the particular situation, and the particular company. Your mileage will most definitely vary. My goal in providing this list is more to get you thinking about what’s important for your company than anything  else.

For more on China manufacturing term sheets, check out China OEM Manufacturing Agreements. What Should Go In Your Term Sheet? and China OEM Agreements. Ten Things To Consider.

 

PRODUCTS

 

Very short description of product goes here.
TERM OF AGREEMENT

1 year with automatic annual renewal; provided BUYER may terminate without cause on 60 days written notice and SELLER can terminate without cause on 180 days written notice.

 

EXCLUSIVITY 

Yes, during the term of the agreement, as long as SELLER can meet capacity and quality requirements; provided, BUYER may manufacture its own devices at its own manufacturing facility.

 

QUANTITIES

BUYER’s requirements; provided, BUYER supplies a 6-month, non-binding rolling forecast and a 3 month binding forecast.  Forecast will be provided 3rd day of each month.   BUYER willing to agree to a reasonable production cap reflecting anticipated demand.

 

ORDERS

Must be placed no later than 45 days prior to requested delivery date; SELLER may not reject any order.

 

PAYMENT TERMS 

First 2 POs, we will pay 30% of purchase price when PO placed and the remaining 70% will be paid 30 days after the shipment received.  Remaining shipments in first  year net 30 days from receipt of invoice.  After first year, net 60 days from receipt of invoice.

 

DELIVERY TERMS 

FOB Port (Shanghai) to BUYER’s designated marine carrier; risk of loss and title to pass to BUYER upon delivery to carrier.  Time is of the essence.  SELLER responsible for any fines incurred by BUYER from retailers for late delivery caused by SELLER (as long as PO placed sufficiently in advance of required lead time).  SELLER will properly complete all shipping documents and maintain a record of such documents for 3 years after delivery.

 

CUSTOMS

SELLER will properly label all shipping documents with the customs classifications codes supplied by BUYER.

 

PRICING 

To be agreed upon and will be set forth in schedule. SELLER cannot increase pricing without BUYER consent.  All prices stated in US dollars and payments made in US dollars.  Parties will meet and confer every 6 months to review pricing and determine whether price change warranted. 

 

COST SAVINGS

SELLER will continually endeavor to reduce costs of manufacturing, packaging and shipping to port.  All savings to be split 50/50 between SELLER and BUYER (savings already addressed in development agreement)

 

SPECIFICATIONS

All finished products and every individual part used to manufacture or package the products must meet BUYER specifications, which will be attached to and form a portion of the agreement.  If a supplier changes a specification to a commodity or part used to manufacture product, the change must be communicated to and approved in writing by BUYER.

 

PARTS & SUPPLIERS 

Each and every part used to manufacture, label, or package the products must be approved in writing by BUYER. SELLER may not change a part without BUYER’s written consent.  All materials and parts suppliers must also be approved in writing by BUYER and represent in writing that are in compliance with wage regulations of their jurisdiction of manufacture and that they do not use child, slave or prison labor to make their materials and parts.

 

QUALITY   CONTROL

 

Must meet all BUYER requirements (to be supplied by engineering).

 

FCPA     COMPLIANCE

BUYER shall provide SELLER with FCPA compliance manual and SELLER shall abide by it.

 

INVENTORY

SELLER will be responsible for ordering all materials and parts and maintaining an adequate inventory to meet forecasted demand.  SELLER will be responsible for all costs of storing and maintaining inventory.  In the event of termination or expiration, BUYER shall pay SELLER for the reasonable wholesale cost of any materials or parts that are custom made or unique to the BUYER products.

 

SAFETY STOCK

SELLER to maintain 30 day supply of each type of product at all times at its cost.  BUYER has no obligation to pay for it until it is delivered to BUYER’s carrier.  BUYER will buy back safety stock remaining within 60 days of expiration or termination of agreement.

 

TOOLING 

Addressed in Development Agreement

 

INSPECTIONS

BUYER will have the right, no less than twice annually, to conduct unannounced quality assurance inspections of SELLER’s facilities and books and records to ensure compliance with this agreement.

 

NON-COMPETE 

Addressed in Development Agreement.

 

WARRANTY

All parts and finished product shall be warranted free from defects in materials, workmanship and manufacturing for a period of one year from date of manufacture.  BUYER will have option of repair, replacement or refund and can return defective product at any time within 1st year regardless of when discovered by BUYER or its customers.  SELLER responsible for all costs to return defective product to SELLER.

 

INDEMNIFICATION 

SELLER to indemnify BUYER for:  (1) all actions and omissions of SELLER and Employees; (2) manufacturing and materials defects; (3) BUYER’s breach of agreement, reps and warranties; and (4) damage to Tooling caused by SELLER.

 

INSURANCE 

SELLER will maintain a US-based policy of insurance, including CGL, products and completed operations of not less than $1MM per occurrence with an umbrella of not less than $30MM.  Must maintain during agreement and for 10 years thereafter.

 

LIMITATION OF LIABILITY

Neither party liable for consequential, special or incidental damages or lost profits, or business opportunity.

 

 

CONFIDENTIALITY  Subject to NNN Agreement and will tie the OEM to NNN.
USE OF BUYER’S PRODUCT IP 

Limited to manufacturing only.  SELLER can’t use for own benefit and will inform BUYER if it discovers use of BUYER’s IP by any 3P.  Will reasonably assist BUYER in asserting any rights BUYER may have against such 3P.

 

ASSIGNMENT

SELLER may not assign obligations under agreement (even in connection with change of control) without BUYER consent.  BUYER may freely assign.

 

LABOR No slave, prison, child labor.  Wages in accordance with all applicable laws.
This article was written by Dan Harris and published on China Law Blog. Original Post: https://www.chinalawblog.com/2018/02/quick-question-friday-china-law-answers-part-xlvii.html      

View the original article here.

Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.