OEM Manufacturing Agreements in China

Need less to sayChina has been the world’s leading manufacturing base. So how can a foreign company minimize the risks of tainted/substandard products manufactured in China? In this article, we talk contract provisions that foreign businesses should consider when entering into OEM relations with Chinese suppliers. (While we highlight a few of what we feel are the principal issues to be included in the agreement, we realize each circumstance is unique and there is no such thing as a’typical’ OEM arrangement.)

Standard Form Controls

An OEM can have a normal form how to manufacture a product in china agreement that they’ll be more than prepared to provide to foreign companies who would like to use their own services. Though this might lower costs at the outset and enable the foreign organization to’build favor’ with their Chinese counterpart, using this kind of agreement is almost never advisable, and foreign companies will be sensible to consult with counsel, that will aid the foreign business to properly negotiate and prepare agreements.Note that we often advise that the written agreement is completed by preparation and negotiation on the grounds of a business term sheet, and this will outline the significant terms of alliance. The consented points in the term sheet afterward serve as the basis for the written agreement.

Significant Terms of Agreement

Below, we emphasize several important (although non-exhaustive) terms which should be included in an OEM Agreement:

Inch. Products and Specifications: The services and products to be manufactured ought to be mimicked in the agreement, together with product specifications which ought to be described at length from relevant appendix(es).

2. Forecasts and Binding Purchase/Supply Commitments: As OEM Agreements often require that business orders have been placed through Purchase Orders, so as to make sure there is actually a binding supply/purchase commitment from the agreement , the parties will frequently designate a particular minimum commitment on both sides, to produce and buy a certain amount of product in just a given time frame. Aside from the minimum requirement, the purchaser will usually provide a non-binding forecast to supplier, for example supplier can plan and devote adequate resources (frequently 6-, 12-, 18-, 2 4 – month provisions ).

3. Price: for all those products designated as described above, the parties should determine business costs, which will be effective through the entire term of this agreement, or at the very least a portion thereof, subject to (we urge ) highest periodic cost rises. Further, it is helpful to include for discounts upon fulfilling certain pre determined purchase volumes.

4. Quality Control: Buyer and supplier will agree on certain terms afforded to buyer/required of seller for conducting quality control. Normal terms include I) access (often on no or short notice) to production sites, and ii) arbitrary testing of each batch of products before sending to buyer. Further, the parties may, based on the worth of this contract, give an agent of the buyer to be on-site on a full-time/regular basis, for the purposes of assisting in quality control. (The buyer’s representative might additionally monitor supplier’s utilization of intellectual property along with other improper relations, though their effectiveness will automatically depend on his/her loyalty to the buyer.)

5. Term: The parties may determine an appropriate duration for their own contract, and may produce the agreement renewable on petition by buyer. This duration should be sufficiently long so as to guarantee buyer’s initial investment can be adequately recovered.

6. Termination: Termination events, as in most agreements, should incorporate those events which contribute to immediate conclusion rights (by way of example, unauthorized utilization of buyer’s intellectual property and violation of non-compete terms), and those that need a brief span and the breaching party’s right to remedy the breach (collapse to furnish services and products fitting specifications).

7. Consequences of Termination: In the event of termination, it is necessary for buyer specify those procedures necessary to protect its rights in the event of this occurrence. Often terms should include: sale of completed services and products to buyer, allowance for conclusion of partly finished products and selling into buyer, destruction or lack of confidential information, and destruction or return of trademarks, logos, brochures, and other advertising materials.

8. Examination and Acceptance: Upon delivery of their products to buyer, it will soon be given a particular period to conduct inspection, subject to deemed approval in the event that a claim isn’t made in a definite period. Further, it’s common for providers to take that upon customer’s approval of the services and products, they are going to soon be absolved of all further liabilities. Be aware that we do not recommend that buyers entirely accept such terms (and offer the absolute minimum carveout and continued warranty), as client, after acceptance, could have little grounds for a promise (even for the use of sub-standard materials that can be tricky to visually detect).

9. Raw Materials/Components: As part of this standard control process, buyer should take that supplier provide a set of its providers together side purchase orders over a pre-set period to ensure that the agreed upon raw materials/components are being used.

10. Insurance: Because of this relatively unsophisticated nature of manufacturers/insurance industry in China, factories are often severely under-insured out of risks. Because of this, it is a good idea for buyer to require that supplier get yourself the absolute minimum amount of insurance.

1-1. Further, the buyer should carefully draft related provisions so as to confine supplier from conducting any rights of ownership to the licensed IP.

12. Non-compete: As an OEM relationship inevitably involves substantial transfer of intellectual property and confidential data, buyer shouldn’t just be mindful to be certain additional products aren’t produced by the supplier, but also by its own affiliated companies and directors and direction. (Note that the implications of a failure to adequately offer such terms might lead to not only the item currently being sold in China but more significantly in the same markets as consumer, also at somewhat lower prices )

1 3. Arbitration: As manufacturing tends to be focused in lesser-developed places in China in addition to cost/time/reliability benefits frequently associated with arbitration, we advise clients to select arbitration for dispute resolution. Arbitration might be conducted in China or globally (in any New York Convention signatory country ), though domestic arbitration allows buyer access to Chinese courts for injunctive relief.

Arguably more or less equally as important as negotiating and finishing a contract, is buyers careful observation and authorities of their agreed terms.

Finally, even though long term relations are often desired and also we encourage buyers to locate and utilize a dependable supplier, being a practical matter, it is imperative that buyers possess more alternatives, at the event of mandatory conclusion of the principal OEM distribution agreement.

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