International Product Sourcing Consultants and the Liabilities They Face

OurMy law firm’s  international lawyers often work with many really experienced and really good product sourcing consultants. These consultants are usually really good for the following reasons:

• They know the ins and outs on doing business in/with a particular foreign country.
• They know the ins and on finding good foreign companies for whatever transaction it is their clients are seeking to do.
• They know the ins and outs on negotiating with companies in the particular foreign country.
• They know when to bring in a lawyer to assist.

Of course I had to add that last on  and — no surprise — it is on this last one of which I am writing.

Product sourcing consultants too often fall short in the legal aspects of their own businesses. They have been “doing international product sourcing” for so long they too often fail to realize that when push comes to shove (or as we lawyers like to say, when a deep and easy pocket needs to be found) they are the American/British/Canadian/Australian/EU company that may need to answer for what happened.

If you are a Western consultant hired by a Western company to assist in international product sourcing, you need to understand that if something goes wrong for your client you could be your client’s choice for legal redress. Not only is there a good chance you have the deeper pocket, you will almost certainly be easier to sue than the product manufacturer itself for the simple reason that you are probably in the same country as the Western company, not on the other side of the earth.

What can go wrong for international product sourcing consultants that can lead to their incurring liability? And what can you as a international product sourcing consultant do to prevent or ameliorate such a problem? Our first advice whenever any company comes to us with concerns about protecting against future liabilities is usually to engage in corporate structuring to protect company and personal assets. This is typically an absolutely necessary first step. Looking at securing insurance protections is oftentimes a good second step. Beyond that, you can do a lot to protect your client and thereby protect yourself.

A typical international product sourcing project might go down as follows:

1. Western company retains a product sourcing consultant to find the best widget (PPE?) manufacturer, based on cost, quality, and dependability.
2. International product sourcing consultant requests and secures a sample widget (PPE) from a number of foreign manufacturers, many of which it did business previously.
3. Consultant meets with countless manufacturers in search of the “best” one.
4. Consultant recommends manufacturing Company Z in to manufacture 200 million widgets (face-masks, medical gloves, etc.).
5. Consultant is to be paid a percentage of the manufacturing costs, oftentimes with that percentage set to decline over time.
6. Company Z starts manufacturing the widgets.

Now let’s deconstruct this hypothetical project above and note where the consultant has potentially harmed the client and needlessly taken on huge liabilities.

The consultant agreed to find “the best widget manufacturer.” Is that the best widget manufacturer in China or in Mexico or in Thailand or in Vietnam or some other country, or is that the best widget manufacturer in the world? Is that the best widget manufacturer, regardless of price? What if one widget manufacturer charges one hundred dollars per widget, but your client’s competitor finds another widget manufacturer who will do it for ninety dollars? Is the consultant liable for the ten dollar difference? Even worse, what if a competitor of the consultant’s client gets the same widget manufacturer to manufacture its widgets for ten dollars less? Will a court believe the consultant was doing its best on pricing when its fee ended up being larger because the  manufacturer was able to charge more? Is the consultant responsible for the manufacturer’s late deliveries? Is the consultant responsible for the manufacturer’s bad product? Whose fault is it if 100 people are badly injured due to the widgets being defective? Is it clear exactly on what the consultant’s percentage is based? Is there anything to prevent the consultant’s client from entering into a new deal with the manufacturer (Company Z) the consultant found and negotiated the manufacturing arrangement?

If you as the consultant take a product sample to Thailand or Mexico or China or wherever and start showing it to potential manufacturers without having FIRST put various intellectual property safeguards in place, you are courting disaster. Your sample could be used for counterfeiting and the trademark on the sample (or your client’s name) could also be stolen. Or more likely, the sample could simply be legally copied and sold around the world.

Many years ago, I wrote an article for Forbes Magazine, Why Your NDA Does Not Work For China, explaining why Western-style non disclosure agreements are usually worthless in China. That article alone got me a slew calls from product sourcing consultants (who had been using NDAs to try to protect their clients) in a panic asking whether they could be held liable if their client’s lose their IP to China. My answer was that would likely depend on the contract they have with their clients and the role they play for their clients.

And this right here is the big trap into which international sourcing consultants often fall. In trying to secure clients they encourage their clients to believe they are experts on everything at all related to product sourcing and this is what can so easily come back to bite them.

My law firm’s lawyers often have to remind our product sourcing clients to stay away from giving legal advice to their clients and the below email is a fairly typical one we send them:

This is a very complicated international intellectual property issue and your solution for how your client handle this could open them up to losing their IP forever. My advice to you would be to stay completely away from all legal issues and let your client deal with these issues itself. Your client should not expect you to be giving legal advice and you doing so will greatly increase the odds of you being blamed when things go wrong.

And that is the point. As a consultant it rarely behooves you to get in the middle of your client’s complicated international legal issues and they should not expect that of you. Even if you as their international product sourcing consultant caused your client’s complicated international legal issues, you trying to solve them will more often than not simply compound them.

So what is the solution for international consultants? A written contract between your consulting company and your client before you start work that makes clear exactly what your consulting company will be doing and that makes clear these enumerated items will be your only responsibilities.

The problem we consistently see is that product sourcing consultants usually oversee their clients’ International Manufacturing Agreements and by doing so, they subject themselves to major liability issues if that contract is not up to snuff — and it virtually never is.

If your company is selling itself as international product sourcing experts and your clients are counting on you to guide them through the international manufacturing minefields, then your company will be expected to know anything and everything about what it takes to do that. And if something goes wrong anywhere along the supply chain or with its own clients, a Western court deem you to be the one who should have known better. For example, if your client loses its IP in Vietnam because it believed its US or Canada or Australian or EU patents and trademarks extended to Vietnam (they don’t), you as their international product sourcing consultant may find yourself on the hook for not having warned them otherwise.

Bottom Line: At minimum, international product sourcing consultants should put in writing that they do not provide legal advice and their clients should retain their own lawyers for that. And then stick by that and refuse to provide any such advice.

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.