China Manufacturing Contracts: The Questions We Ask

When we first began drafting manufacturing agreements for clients outsourcing their manufacturing to China, one of our China lawyers would send the client a six page questionaire to tease out the client’s China manufacturing plans. But no matter how hard we tried, there were almost always important questions our client either did not understand or unable to answer. We quickly realized that dumping six pages of questions on our clients was too much, especially since a particular answer to one question might mean a few other questions had become irrelevant.

We met with legal tech people to see about using technology to simplifying the process but we soon determined that would hardly help at all. These are not the sort of contracts that can be automated. Rather these contracts require the China attorney working on the manufacturing agreement to be in constant “live contact” with the client to help the client determine what makes sense for its industry, its company, and its product. So we instead switched to a system where we ask questions in “waves.” When we get answers to the first wave, we review those answers and ask a second wave and we keep going until we have all the information we need to start drafting the contract. We then draft the contract in English for our client to review and then we draft it in Chinese as the official version, with an English language version as a translation for our client. See Get Your China Contracts Written In Chinese, Not Translated and How To Draft A Contract For China. This has also become our standard operating procedure for our China NNN Agreements and our China Product Development Agreements as well.

I thought of all this today while reviewing a client’s email response to the first wave of questions for its China manufacturing agreement. The answers made so much sense that drafting wave two of questions will be a breeze. I am going to share this first wave of questions because they should make for a good starting point for Western companies seeking to determine how to have their products manufactured in China. Note that even our first wave of questions is tailored to the specific client so a few of the below questions are not relevant to every industry, company or product.

This is ____________ from Harris Bricken. I will be drafting your manufacturing agreement for China. To kick off this project, I have some preliminary questions. I will have other more specific questions based on your answers.

1. I note from your website that you have an extensive product line. Which specific products from that line do you want this manufacturing agreement to cover?

2. Do you have a specific set of factories in China with which you are already working? Or do you want this manufacturing agreement to be used for new factories? Or both?

3. In what PRC region(s) are your factories located?

4. When you work with factories, do you set a specific product amount on an annual or other fixed basis? Or do you work on a per purchase order basis, with no fixed annual order amounts?

5. What is your pricing arrangement with the factories? Is there a set price fixed for a specific period? If there is a set price, how is that price level enforced?

6. What are your payment terms? Do you pay an initial deposit? When is the final payment made?

7. How do you provide for submission and maintenance of samples? I know that in your industry, products are normally made in reference to a physical sample, rather than to a drawing or CAD diagram or similar. What system do you use?

8. What is your system for inspection and quality control? Do you inspect during production? Prior to shipment? After you receive the products in the United States and in Europe? After delivery to your customer? What is the specific system for dealing with defective/non-conforming product discovered at any of these four points in the system?

9. Do you have a system for dealing with inspection and related specific safety standards in place in the U.S. and in Europe? For example, flammable fabrics, non-lead paints, small pieces on toys and related. If so, what is the division of responsibility between your company and the Chinese factory?

10. Do you have a system for dealing with the quantity of orders made over time? Since many of your products are seasonal in demand, do you have some form of scheduling system to ensure that the factory will have capacity to deliver your orders during peak seasons?

11. What is your procedure for packaging and shipping? What are the shipping terms? How is pricing linked to shipping terms? To where is the product shipped? To your warehouses in the U.S. and in Europe, or directly to your customers?

12. I understand that you distribute some of your products for sale in China. Have you considered how the China side of your operations might impact this agreement, if at all? If we can ignore the China entity/sales issue at this time, that is fine, but we should discuss this.

13. I understand that you have been having products manufactured in China for more than a decade. What specific problems have you encountered that you want your new manufacturing agreements to resolve?

If you would like to discuss any of these matters over the phone or by Skype, and I would be pleased to speak with you.

For more on what goes into China manufacturing agreements I urge you to check out Having Your Product Made In China: The Basics on Protecting It and You and the links within that post.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.