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I want to ask you a question. Would you consider setting up a valid manufacturing contract in China before working with Chinese suppliers? If your answer is “no”. It’s a shame because this is a very important step when sourcing products from China. Missing this step increases the likelihood that you will be deceived by a Chinese supplier.
If your answer is “yes”. Congratulations, you are right to have this consideration in mind. The second question. Do you know how to set up a valid manufacturing contract in China? Whatever your answer is. Please don’t worry. In this article, we will show you the importance of legal contracts in the sourcing process. And I will provide you with an Example of a valid manufacturing contract in China in the article.
What is A Valid Manufacturing Contract in China
Maybe this is your first time hearing about a manufacturing contract. So, what is a valid manufacturing contract in China? Don’t worry, we will introduce it to you below.
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.
This is a quote from Medium. Yes, this contract can legally protect your trade.
What is Contract Manufacturing?
Contract manufacturing is a business model. That is, one company hires another company to produce that company’s products or components.
You can understand it as hiring a company in China to produce products on your behalf. This arrangement allows you to focus on other aspects of their business, such as design, branding, and marketing. The contract manufacturer is only responsible for the production process.
This model is particularly popular in industries such as electronics, pharmaceuticals, and automobiles. Because in these industries, the expertise and equipment required for production are highly specialized.
Let me show you an example of contract manufacturing:
Imagine a company called “Sunshine Electronics,” which specializes in the development of innovative home automation systems, like smart thermostats and security cameras. Sunshine Electronics has a strong research and development team and is known for its cutting-edge technology. However, Sunshine does not have the facilities or resources to mass-produce its products.
To manufacture its devices, Sunshine partners with a Chinese contract manufacturer named “DragonTech Manufacturing.” DragonTech has state-of-the-art production facilities, experienced workers, and the capacity to produce high volumes of electronic products efficiently and cost-effectively.
Under their agreement, Sunshine provides DragonTech with detailed specifications and quality requirements for its home automation products. DragonTech is then responsible for sourcing all necessary components, assembling the products, and conducting rigorous quality assurance tests to ensure they meet Sunshine’s high standards.
In this scenario, Sunshine Electronics leverages DragonTech’s specialized manufacturing capabilities and efficiency. This arrangement allows Sunshine to concentrate more on its core competencies like innovation, design, and technology development. On the other hand, DragonTech benefits from the consistent business provided by Sunshine without needing to focus on product design and development.
What Are the Types of Contract Manufacturing in China?
- OEM (Original Equipment Manufacturing): In this model, a Chinese company manufactures products as per the specifications provided by the hiring company. The hiring company owns the design and brand, while the Chinese manufacturer is responsible for producing the product.
- ODM (Original Design Manufacturing): Under ODM, the Chinese manufacturer not only produces the product but also provides the design. The hiring company may modify or brand these designs under its own name. This company might use a standard design for a product but brand it as its own.
What are the differences between OEM and ODM?
| OEM VS ODM | OEM | ODM |
| Design | The design is provided by the hiring company. | The design is provided by the manufacturer. |
| Ownership | The hiring company owns the product design and brand. | The manufacturer owns the product design, but the brand is owned by the hiring company. |
| Expertise | Requires the hiring company to have design and development capabilities. | The hiring company can leverage the manufacturer’s design and development expertise. |
| Flexibility | High flexibility in product customization as per the hiring company’s needs. | Less flexibility, as products are often based on existing designs. |
| Cost | Potentially higher costs due to custom design and development. | Usually, lower costs are due to standardized design and production processes. |
| Ideal For | Companies that want unique products and can design them. | Companies that want to market products quickly without investing in design and development. |
- EMS (Electronics Manufacturing Services): EMS providers offer a range of services around the manufacturing of electronic components, products, and assemblies. This can include design, assembly, supply chain management, and after-sales services.
- Private Label Manufacturing: Here, a Chinese manufacturer produces goods that the hiring company sells under its own brand name.
What Basic Contents Should be Included in A Valid Manufacturing Contract in China?
When setting up a valid manufacturing contract in China with your supplier, you should consider the following.
1. NDA or NNN Agreement in China: In China, an NDA (non-disclosure agreement) is a legal document used to keep business information and intellectual property confidential, ensuring that sensitive information will not be leaked when both parties exchange it. The NNN agreement (non-compete, non-disclosure, non-circumvention) is stricter. It not only includes non-disclosure clauses but also prohibits partners from competing and bypassing the original partner to deal directly with customers or suppliers.
2. Product Development Agreement: A product development agreement is a legal document that outlines the responsibilities, rights, and obligations of the parties involved in developing a new product or improving an existing one.
3. China Manufacturing Agreement: A China Manufacturing Agreement is a legal contract for the production of goods in China, detailing terms such as quality standards, delivery timelines, intellectual property protection, and liabilities in case of breach.
Next, I will introduce each part to you in detail,
1. NDA or NNN Agreement in China
In the Chinese business environment, protecting trade secrets and intellectual property rights is very important. An NDA (non-disclosure agreement) can provide basic protection, ensuring that manufacturers don’t reveal your sensitive information and technology. Therefore, in many cases, it is wise to include an NDA as part of the contract, especially in projects involving high technology or proprietary technology.
For further information, read this article: Do NDAs Work When Importing from China
However, NDA agreements usually only cover aspects of information leakage and are not sufficient to fully protect companies from unfair competition or potential market bypassing. Here the importance of the NNN (non-compete, non-disclosure, non-circumvention) agreement comes to the fore. Yes, the scope of NNN protocol protection is more comprehensive.
The NNN agreement not only includes all the terms of the NDA, but also prohibits manufacturers from working directly or indirectly with your competitors. This provides more comprehensive protection.
In the Chinese legal environment, a valid manufacturing contract should clarify the rights and obligations of all parties. Including quality standards, delivery time, price terms, liability for breach of contract, etc.
While an NDA or NNN agreement can add an extra layer of protection to a contract, they are not legally required to create a valid contract. The key is whether the contract can clearly define the commercial relationship and expected cooperation results between the two parties, and provide solutions in the event of disputes.
Therefore, when you enter into a contract with a Chinese manufacturer, the decision to include these additional confidentiality and protection measures should be made on a case-by-case basis and a risk assessment.
2. Product Development Agreement
This type of agreement focuses on the entire development process of a product from concept to market. Including product design, prototyping, testing, and some necessary modifications. The existence of a product development agreement ensures transparency in the development process and clarity of responsibilities between both parties. In particular, there is a shared understanding of product specifications, performance requirements, and any specific technical standards.
By including such an agreement in the manufacturing contract, possible misunderstandings and mismatches in expectations can be avoided in the early stages of the project. This also provides a clear and solid basis for the subsequent production phases.
3. China Manufacturing Agreement
The China Manufacturing Agreement is a core document that stipulates key aspects such as manufacturing processes, quality standards, delivery timelines, price terms, and liability for breach of contract.
This type of agreement focuses specifically on the specific details of the production process to ensure that the product meets predetermined specifications and quality requirements. It also clarifies the responsibilities and remedies in case of non-compliance with these requirements.
The Chinese unique legal and business environment also needs to be taken into consideration when formulating a manufacturing agreement in China. Such as intellectual property protection, labor regulations, and local supply chain characteristics.
In addition, such agreements often include provisions for the selection and management of suppliers. Ensure that the production process complies with international trade regulations and standards.
What Should You Consider When Creating a Valid Manufacturing Contract in China?
Please note that a valid manufacturing contract in China also needs to consider some of the following requirements.
1. Familiar with Chinese Laws
A very important point: you are working with Chinese manufacturers. At the same time, you also need to consider the possibility of legal disputes and how to resolve them. The laws of China and the legal requirements of your country may not be the same.
So please make sure you are familiar with Chinese laws before creating a valid manufacturing contract in China.
2. The Contract Language is Chinese or Bilingual
When creating an effective China manufacturing contract, you need to consider using a common language.
Generally, when conducting business activities in China, it is a common practice to use Chinese as the contract language. And most Chinese manufacturers and courts are more familiar with Chinese contracts. Using Chinese can reduce misunderstandings in contract interpretation and ensure that all terms comply with Chinese legal regulations.
You may also consider using both Chinese and English on the contract. It is easy for Chinese manufacturers and courts to understand. You can also confirm whether there are any errors in the contract in English.
However, it is crucial to ensure that the two versions of a bilingual contract are consistent in a legal sense. This requires professional legal knowledge and experience. No matter which language version is ultimately chosen, ensuring the accuracy and legality of the contract should be the top priority.
At the end of the article, I will provide you with a template for a valid manufacturing contract in China. You can modify and use it according to your specific needs.
3. Penalty Measures After Determining Breach of Contract
Clearly defining the conditions for breach of contract is one of the fundamental factors. This includes but is not limited to, late delivery, product quality not meeting required standards, or failure to comply with other material terms specified in the contract. A clear definition of breach not only helps prevent misunderstandings and disputes but also provides a clear basis for subsequent punitive measures.
In the Chinese legal environment, the definition of breach of contract should comply with the relevant provisions of the Chinese Contract Law. And it should be ensured that these definitions are clear and fair to all parties involved.
Appropriate penalties also need to be built into this valid manufacturing contract. Common penalties include fines, liquidated damages, or compensation. These measures should be determined based on the seriousness of the contractual terms and the actual impact of the breach on the affected party. It is important to ensure that these punitive measures have a deterrent effect and are consistent with Chinese laws and regulations.
Punishments that are too severe may be considered unfair or unreasonable and therefore legally challenged. Therefore, punitive measures should be reasonable and commensurate with the nature and consequences of the breach. This may require your own judgment and decision based on the size of the project.
4. Add Force Majeure Clause
Force majeure clauses generally define what happens when a natural disaster, war, political unrest, or other unforeseen and uncontrollable event occurs. Determine the obligations and responsibilities of both parties to the contract.
This type of clause provides legal protection to the contracting parties in the face of unforeseen major events. Ensure that neither party is held liable due to circumstances beyond its control when these events impede or completely prevent the performance of the contract.
5. Contact a Chinese Sourcing Agent
Contacting a China sourcing agent is a clear choice. Such as Owlsourcing. Although we cannot produce products directly in the factory. But we can help you set up a valid manufacturing contract in China and find a contract manufacturing in China. If you need to source or ship products in China. Feel free to contact us any time.
The Example of a Valid Manufacturing Contract in China
As mentioned above, I will provide you with a template of a valid manufacturing contract in China. You can modify and use it according to your specific needs.
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Final Thoughts
At the end of the article, do you know how to set up a valid manufacturing contract in China? In particular, please add the Chinese language to this document. This aspect helps Chinese manufacturers understand your product needs. On the other hand, it is convenient to use Chinese legal rights protection.
Of course, if you have any other questions about this article. You can comment below or contact us directly. We will answer your questions promptly.
