China Distribution Agreements: The Additional Questions We Ask

In China Distribution Contracts: The Questions We Ask, we wrote about some of the initial questions we ask our clients for whom we are drafting China distribution contracts. That post started out discussing how forming and then operating a China WFOE is difficult and expensive — see Forming a China WFOE: Ten Things To Consider and Doing Business in China with Deportation or Worse Hanging Over Your Head on why having a WFOE is a must if you will be doing business within China. It then discussed how our China lawyers have been seeing many more foreign companies choosing to sell their products to China via distribution relationships rather than via a WFOE.  For the basics on what it takes to establish and document distribution relationships with Chinese companies, check out the following:

• China Trademarks and Your Chinese Distributor
• Getting Your Product Into China Via Distributorship
• China Distribution Contracts: The Basics
• Exclusivity In China Distribution Agreements

Today’s post focuses on some of the additional questions we often ask our clients who retain us to draft their distribution agreement with a Chinese company or companies. The below is a portion of an email from one of our lawyers to a client for whom we were in the process of drafting a China distribution contract.

1. How are you planning to deal with warranties? A standard approach is for you to draft the warranty and then have your distributer pass on this warranty to consumers without any changes. Under this approach you will need to work with your distributor to design an appropriate warranty that a) works for your products, b) works for your company and your distributer, c) meets market demands, and d) complies with Chinese law.

The alternative is to allow your distributor to provide whatever warranty it wants to consumers. Your warranty is with the distributor and you will not cover any warranty beyond that which you have specifically agreed with your distributor. Under this sort of arrangement you have no contractual relationship with the consumers and the consumers have no legal basis to assert warranty claims against you. They are limited to making claims only against your distributor. This option is consistent with the legal status of a distributor that buys and then resells your products. However, under this approach you no longer control the nature of the warranty and many of our clients do not want to give up this control.

Much can depend on the nature of your product, your consumers and your trust in your distributer. We should discuss all of these things by telephone.

2. Determining the sales price to consumers. Normally, the distributor is free to set the prices it wants for the products, since it has purchased the product and therefore owns them. However, many of our clients wish to exercise at least some pricing. Absolute resale price maintenance is not legal in China so you cannot dictate the sales price. You can, however, require your distributor to work with you on pricing and even set a pricing product range, both maximum and minimum. Please advise on how you want to proceed on the pricing issue.

3. What form training will you provide to your distributor? Where will your provided this (in China or in your home country)? How will training costs be determined and who will pay those costs?

4. Do you want to require all communications from your distributor be in English?

5. Will your technical documents be translated into Chinese? If yes, who will do this? You or your distributor and who will cover these costs? 

Please advise on the above. We will begin drafting your distribution agreement when we get your responses to the above.

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.