One of the most important matters our China lawyers do with every contract we write is to decide who exactly it is on the other facet. Oftentimes, that is no small feat.
If things cross easily, our purchaser asks us to jot down a contract with XYZ Mainland Chinese Company, and we study XYZ Mainland Chinese Company and determine there is any such agency. Once we’ve completed that, there is hardly ever a problem. This type of smoothness happens around 85% of the time.
The different 15% of the time, we find really funky things. Oftentimes we find there may be no XYZ Mainland Chinese Company, and in that situation, we tell our client to move again to the alleged XYZ Mainland Chinese Company and ask them why there is not. Their regular solution is that their enterprise is genuinely XYZ Hong Kong Company or XYZ Taiwan Company. This difference can make the entire transaction unlawful for the easy motive that doing business in China without a Chinese organization can be unlawful. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. This distinction can also mean that you have 0 contractual protection in opposition to whether HK or Taiwan or anything a corporation would do. See e.G., Hong Kong: Toto; We’re Not in Mainland China anymore.
With the downturn in China’s economy, our China lawyers increasingly more have to parse China deals that do not have a valid Chinese business enterprise on the alternative facet? Why is that this? Tax avoidance. The new issue we are seeing is individuals from organizations wanting to be the signatories to offers with overseas agencies. When we query why this is being proposed and clarify that our clients cannot do this, the person every so often responds by claiming that he (thus far it’s been only males) is registered with the neighborhood tax authorities as a sole owner or 个体户. If authentic, this registration would probably resolve the hassle; however, thus far, it has not once been authentic.
If you do commercial enterprise with a character not registered as a sole proprietor or with an overseas organization without its own China organization entity, you disclose your business enterprise to the subsequent real risks:
Suppose you do an enterprise with a character not registered as a sole proprietor; you will probably be deemed to be that person’s business enterprise. This way, you need to pay approximately forty% in agency taxes and advantages, and also, you should withhold and pay to the government an extra 25% (or so) in worker withholding. You could be deemed to be doing enterprise in China illegally, meaning you need to pay corporate income taxes, which can be even worse. See Doing Business in China with Deportation or Worse Hanging Over Your Head. The man or woman or overseas enterprise can likely breach your agreement with no prison repercussions, at the least in China. For instance, if this person or organization steals your IP, are you honestly going to sue in China based on a virtually illegal contract? This is one (of many) reasons why every time a person requests that we sell them a template contract, our solution is ALWAYS equal: Not going to do it. Not at any fee. Too unstable for you and us. See China Contract Templates for $ ninety-nine Each.
Needless to say, China has ended up the arena’s leading manufacturing base. However, with the recent product safety scares and the regular media interest, “Made in China” has to turn out to be an excessive-profile issue for clients and shops. So how does a foreign agency decrease the risks of tainted/substandard products manufactured in China? This text discusses agreement terms that foreign corporations need to don’t forget while stepping into OEM relationships with Chinese suppliers. (While we highlight several of what we feel are the primary troubles to be covered by the agreement, we apprehend that each case is specific, and there is no such aspect as a ‘traditional’ OEM arrangement.)
Standard Form Agreements
An OEM might also have a trendy shape agreement which they’ll be extra than willing to offer to foreign corporations who desire to use their offerings. While this will lower costs on the outset and permit the foreign organization to ‘build favor’ with their Chinese counterpart, using such an agreement is nearly by no means really helpful, and foreign agencies would be sensible to seek advice from counsel, who will help the overseas business enterprise to negotiate and prepare agreements correctly. Note that we frequently advise that the written settlement is preceded by preparation and negotiation on the premise of a business time period sheet, a good way to outline the foremost terms of cooperation. The agreed factors within the time period sheet then serve as the basis for the written agreement.
Major Terms of Agreement
Below, we highlight several foremost (although non-exhaustive) terms which need to be blanketed in an OEM Agreement:
1. Products and Specifications: The merchandise to be synthetic needs to be nicely described inside the settlement, alongside product specifications which need to be defined in detail in the applicable appendix(es).
2. Forecasts and Binding Purchase/Supply Commitments: As OEM Agreements frequently require that company orders are placed thru Purchase Orders, that allows you to make sure that there’s a binding supply/purchase commitment in the settlement itself, the events will often designate a certain minimal dedication on each side, to produce and buy a certain quantity of product within a given term. Aside from the minimal requirement, the client will regularly offer a non-binding forecast to the provider, such that the dealer can plan and allocate ok sources (regularly 6-, 12-, 18-, 24- month phrases).
3. Price: For the one’s products precise as described previously, the events have to determine firm expenses, to both be powerful at some stage in the time period of the settlement, or as a minimum, a portion thereof, challenge to (we endorse) maximum periodic price increases. Further, it is beneficial to include discounts upon the assembly of certain pre-determined purchase volumes.
4. Quality Control: Buyer and dealer will agree on certain phrases afforded to the customer/required of the dealer to engage in product first-class control. Typical phrases consist of i) get right of entry to (often on quick or no notice) to production websites, and ii) random testing of each batch of products before dispatch to the buyer. Further, the events may also, relying on the cost of the agreement, provide for a customer consultant to be on-website on a complete-time/ordinary basis to help in satisfactory manipulation. (The consumer’s representative may additionally display the supplier’s use of the highbrow property and other mistaken dealings, even though their effectiveness will continually depend on their loyalty to the buyer.)
5. Term: The parties will determine the correct time period for their settlement and might make the settlement renewable on request through the consumer. This term has to be sufficiently long to ensure that the customer’s initial investment may be adequately recovered.
6. Termination: Termination activities, as in maximum agreements, will consist of the one’s activities which provide upward push to immediate termination rights (for instance, unauthorized use of buyer’s highbrow belongings and violation of non-compete terms), and people who require a observe length and the breaching birthday party’s right to treat the breach (failure to deliver products meeting specifications).
7. Consequences of Termination: On the occasion of termination, it’s far important for the customer to specify those strategies necessary to shield its rights on the occasion of such occurrence. Often phrases will include the sale of completed merchandise to a buyer, allowance for finishing touch of partly finished merchandise and sale to buyer, destruction or return of exclusive facts, and destruction or return of trademarks, logos, brochures, and other advertising substances.
8. Examination and Acceptance: Upon transporting the goods to the customer, it’ll be afforded a sure period to conduct an inspection, the problem to deemed reputation inside the event that a claim isn’t made inside a certain length. Further, it is not unusual for suppliers to require that upon buyer’s recognition of the products, they’ll be absolved of all in additional liabilities. Note that we do now not endorse that customers fully accept such terms (and provide a minimal carve-out and persisted assurance), as a client, after recognition, will have little grounds for a claim (even for using sub-general materials which might be regularly tough to stumble on visually).
9. Raw Materials/Components: As part of the excellent control technique, the consumer must require that the dealer provide a list of its suppliers in conjunction with purchase orders over a pre-set length to ensure that the agreed-upon raw materials/components are getting used.
10. Insurance: Due to the surprisingly unsophisticated nature of producers/coverage enterprises in China, factories are regularly severely beneath-insured from dangers. As a result, it’s miles really helpful for the consumer to require that supplier gain a minimum level of insurance.
11. Intellectual Property: All highbrow property used to manufacture the product, such as trademarks, patents, copyrights, and other enterprise secrets, should be licensed to the dealer for the restrained functions of complying with its responsibilities underneath the agreement. Further, the customer has to carefully draft associated phrases to restrict the supplier from exercising any rights of possession to the licensed IP.