China Manufacturing Warranties

One of our China lawyers was asked by a client about the warranty it should seek from its China manufacturer to go into the OEM Agreement our lawyer is drafting for this client. Our lawyer responded by email as follows, and I am using that email as today’s post.

There are two separate warranty issues. The first is warranty for defects in the product as delivered. The second is warranty on defects that appear only after use. I will discuss each in turn.

1. For warranty defects that can be discovered on inspection, there are three options generally used in China:

Option 1:

a. The manufacturer warrants the the product will meet specifications.

b. The product is inspected in China prior to shipment.

c. If a defect is discovered, the general procedure is as follows:

i. Defective product is not shipped. In some cases product is destroyed. In your case, product may be recycled.

ii. There are two possible responses to the shortfall that results from defect:

a) Reduce the amount of the invoice by the amount of product rejected.

b) The manufacturer is required to make-up the shortfall with compliant product within a specific time frame.

This is the preferred option.

Option 2:

You inspect your product in the U.S. No payment is made until after the product has been inspected. Under this approach, the product is inspected within a specific time frame, usually 60 days. If defects are discovered, the procedure outlined in Option 1.c. above is followed. This is the approach the major “big box” retailers use. However, Chinese manufacturers normally agree to this approach only where there are large purchases in fixed amounts for a fixed time period; They normally will not agree for unspecified “per purchase order” purchase arrangements.

Option 3:

The product is inspected in the U.S. but payment is made prior to shipment. Under this approach the general procedure is as follows:

1. Chinese manufacturer agrees to warrant that product will meet specifications.

2. Buyer has 30 days to inspect. If defects are discovered, the buyer is provided a credit against future purchases. The factory does not repair, does not replace and does not provide a cash refund for the defective product.

Though there are many possible variations, the above approach is used in the vast majority of “per purchase order” type purchases from China. The problem with this approach is that you cannot collect on your credit without making a subsequent purchase. This means you are trapped into making purchases from a company that has proved to make defective product. However, no one has worked out a good alternative for the situation where the price is paid before inspection.

2. It has been traditional for Chinese factories not to offer any after purchase warranty. In other words, the traditional approach in China has been to say: you must find the defect on inspection and if you find one that is the end of the matter. Lately, U.S. companies have asked for an extended warranty on the following terms [for the particular product our client would be buying]:

a. One or two year warranty.

b. Warranty to repair or replace at the expense of the Chinese factory. No cash payment made from the Chinese factory and credit against future purchase is at the option of the buyer.

c. If the defect rate exceeds f 3%, this is considered an epidemic failure and under these circumstances, the factory is liable for all costs incurred by the buyer in response to the defect, in addition to repair and replace.

Though many Chinese factories will agree to this type of extended warranty, it is not typical for them to live up to the commitment.

As you can see, the warranty issue for China is quite complex and much of the procedure depends on payment terms and the place of inspection.

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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.