A China Manufacturing Term Sheet

Just got off the phone with a client who asked me to provide it with a “term sheet template” for buying product from a Chinese manufacturer. We generally advise our clients to reach agreement on “key terms” before having one of my firm’s China lawyers draft the OEM manufacturing contract between our client and the Chinese manufacturer.  We long ago learned that in most instances it is not productive for us to start drafting a manufacturing contract if our client and the manufacturer are not yet on the same page (much less in complete agreement) on something as critical as price and delivery times.

Many years ago, I did a one page, ten item list of what I thought were the essentials for a China manufacturing term sheet.  My intention with this term sheet was not to achieve agreement between the U.S. company and the Chinese manufacturer, but to achieve enough agreement that the odds were now overwhelming that the two of them would be doing the deal. I can no longer find that term sheet.

But in searching for it, I came across the one below, which is more comprehensive than my own, and therefore both more and less helpful that mine. It is more helpful simply because it includes more and so anyone who looks at it will have more from which to pick and choose the terms that it finds important. It is less helpful because it really does include more than it needs to include and therefore could cause the parties to get bogged down too early in minutiae.  For example, I do not think it necessary to put in a term sheet that the Chinese manufacturer will not be violating the FCPA or China labor laws. Both of those things are incredibly important, but better suited for the OEM Agreement itself, not for the term sheet.

I will say though that the below term sheet does an excellent job of succinctly setting forth the bulk of the terms most companies should be concerning themselves with when outsourcing their manufacturing to China. The client company that drafted this term sheet is a very well-known and very internationally sophisticated company and I do not doubt that this term sheet is the result of much high level thought and to the extent that you have the ability to pick and choose what makes sense for your company’s own China term sheets, you probably could do a lot worse than using this as your term sheet template. Note though that some of the items in this term sheet had already been agreed to/resolved in a previously signed development agreement between the parties.  Note also that the version of this template given to the Chinese manufacturer (per my firm’s recommendation) was in Chinese as well as in English.  We advise this so as to reduce the likelihood of any misunderstandings.

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.