Most people got stuck while making their China Manufacturing contracts. Basically, it is due to their lack of understanding of what to look for.
No worries if you are facing the same thing. Our Sourcing and Business experts have compiled this Guidebook for you. You learn about the significance of different things in your legal Contract.
Make contracts with your China suppliers after a deep understanding. Experts have explained each clause with its effect on your business.
Keep reading to learn about Manufacturing contracts & their important clauses.
Importance of signing a valid China manufacturing contracts
Here are some reasons to create a valid manufacturing contract with Chinese manufacturers:
1. Make Clear Expectations
You can enlist detailed requirements towards your Chinese manufacturer and quality standard. Mention your quality standards in clear and easy-to-understand ways.
2. Avoid Unapproved Subcontracts
The contract prevents problems of unethical sub-suppliers that cause inferior qualities and delays.
3. Protection To Switch Suppliers
These contracts are also crucial when changing to a new supplier. It allows you to shift the molds and tooling to your new Chinese manufacturer.
4. IP Protection
Besides, a foreign company can safeguard its IP or trade secrets with these contracts.
Suggested reading: Find china manufacturers
Suggested reading: Top 10 Chinese Manufacturing Companies
Main clauses in China Manufacturing contract
Let’s look at the important contract terms in your manufacturing contracts:
1. Product Specifications
You should mention the detailed product and quality requirements in the contract. Mention your product’s size, notable features, and functionality.
2. Binding Supply or Purchase Commitment
It is the least commitment for the buyer and Chinese supplier within a timeframe. Each party should manufacture or buy a specific number of goods.
3. Pricing Model
The contract should list detailed pricing provisions, payment terms, and a fixed price. It also includes the pricing adjustment mechanism like a volume discount.
You should have more pricing models to adjust for the title transfer rules and VAT.
4. Quality Control
Buyers and suppliers should agree on the quality control terms. For instance, access to the Chinese manufacturers and inspection procedures.
5. Raw Materials
The Chinese factory has to provide lists of raw material suppliers as per buyer requests. It is to make sure they don’t use cheaper materials of poor quality.
6. Intellectual Property
You should also include the intellectual property rights, like trademarks, copyrights, and patents. It is for your intellectual property protection. Better to file your patent and copyrights before approaching any supplier. Then approach the supplier and mention your copyrights in it.
7. Contract Terms
All parties must decide the suitable terms and ensure the agreement’s renewability. The terms should be long enough to recover their initial capital.
8. Contract Termination
It should outline the immediate termination conditions and notice period. You should also enlist the rights to remedy the contract breach in this contract.
9. Non-Compete Terms
You must ensure no party manufactures extra products from your order. It is not right whether done by your Chinese suppliers, their affiliated or friend’s factory.
Otherwise, you’ll find more competitors selling similar products at lower prices.
10. Arbitration
The Chinese courts might resist accepting judgments by the American courts. So, you should include an arbitration clause in your manufacturing contracts. It needs to be explicit in mentioning the presiding arbitral body.
Suggested reading: Verify Chinese company
How to protect your IP with a China manufacturing contract?
An intellectual property right is given to the creators over the creation of their minds. It protects your innovation so no one misuses it without your authorization.
You should prepare an enforceable manufacturing contract when outsourcing manufacturing in China. These manufacturing contracts prevent infringement of your company’s IP rights. You can hire a Chinese law firm to help in this process.
Let’s see the types of manufacturing contracts you need when manufacturing in China:
1. China NNN Agreement
It is the China NDA for your China production teams. It is like the Non-Disclosure Agreement in western countries.
The NNN agreement contains the information below:
- Non-Use: To not use your business ideas where will be competitive to your businesses
- Non-Disclosure: To keep your information strictly confidential
- Non-Circumvention: To not produce additional goods similar to yours, which are often sold at a cheaper price.
You should prepare this China NDA in both Chinese and English. Without this agreement, many Chinese factories might duplicate and sell your products. Also, File your patent and copyrights in China & targeted countries before contacting the supplier. It prevents them from duplicating your product and sell in your targeted countries.
Suggested reading: Nnn agreement
2. China Manufacturing Agreement
These contract manufacturing agreements are also called product supply agreements. You can skip the NNN contract if you already have a preferred supplier.
The contract manufacturing agreement states the terms for sellers to sell to buyers.
For instance, the final payment terms and delivery date. It should mention timely delivery with minimal complications.
3. China Trademarks
It is crucial to register your logo, brand name, and product name as trademarks in China. Though not selling in China, it can help having the Chinese law protect your IP rights.
The China governing law has three types of trademark licensing. They are exclusive licensing, sole licensing, and general licensing.
You should prepare suitable trademark licenses to ensure dispute resolution. These licenses protect your IP rights as the first company to use these trademarks.
4.Product Development Agreement
This enforceable manufacturing contract will cover several provisions. It includes goods specifications for manufacturing to ensure quality control.
Besides, it should mention who contributes to the technology and pays for the production process. For instance, the product development costs, molds, and tooling. It involves the steps like how they make your product. Set an achievable deadline and mention your inspection too. They would be aware of it before making it a final product.
Suggested reading: China Shoe Manufacturers
Looking for a reliable China manufacturer?
Leeline Sourcing helps buyers verify the manufacturing companies to protect their IP.
FAQs
What about PIs and POs? Are they still necessary?
The answer is no. It is because your protection is from the manufacturing contract.
Still, you can generate Purchase Orders (PO) or get the supplier to issue the Proforma Invoice (PI).
Prevent a sloppy purchase order. Also, avoid those that mention replacing or canceling the contract.
What is an “epidemic failure” in manufacturing contracts?
It is the set of defects caused by specific reasons. For instance, the materials defect, workmanship, design deficiencies, or manufacturing process.
This failure happens when the above reasons lead to 25% or more defects. Besides, it occurs within a specific time after the goods delivery.
What is an “epidemic failure” in manufacturing contracts?
You should write details about the warranty provisions. Both parties must know what to do with a defective product.
The details include how to execute it and the warranty period. Besides, the agreement needs to mention whom to pay for the shipping due to product defects.
What are other important factors when finding a contract manufacturer?
You should request the business license for verification. Also, it is crucial to know their minimum order quantity and quality control method.
Remember to research websites or forums to know their credibility. If you are a beginner in product sourcing, consider hiring a sourcing agent to ease the process.
Suggested reading: China suppliers
Final thoughts
To conclude, you should prepare manufacturing contracts when manufacturing in China.
Dealing with contract manufacturing can help prevent possible loopholes issues. It will save you many hassles from dealing with immoral Chinese companies.
You’ll need to stamp the manufacturing contract with your company’s official red seal.
If you are a novice China goods buyer, you could consider hiring a sourcing agent. Talk to sourcing agents like Leeline Sourcing to assist your China sourcing process.
