Tips & Traps of Contracting in China

Tips & Traps of Contracting in China

There are a number of considerations to take when drafting, negotiating and entering into a supply or manufacture agreement with a Chinese supplier.  Although the due diligence and practical management of the arrangement is vital, it is just as important to ask yourself some key questions about your contracts with your Chinese manufacturer to ensure that you are protected.

China is home to key manufacturers and suppliers for many businesses, particularly in the retail sector.  When you contract with an overseas entity, it is essential to consider how the law will operate between jurisdictions – the laws overseas can be completely different to the laws at home.

Where can you sue if there is a dispute?

If you don’t know where you can sue, consider reviewing your supplier contracts.  It is important that your contract specifies where you can sue and what law should apply to your agreement – whether it is foreign or Australian law. Identify your avenues for dispute resolution early, so that there is no delay or further damage when something goes wrong.  Ideally you should specify that your agreement will allow you to sue in your home jurisdiction.

If you know that your agreement only allows you to sue in a foreign country, consider the risks involved: are you aware of the law that applies to your operations and that of your suppliers?  You may be used to applying Australian law principles, but have you considered that it might be different in the foreign jurisdiction?

 As aforementioned, the law can be vastly different overseas, so you may wish to engage with foreign lawyers to help you better understand your rights and deal with language issues.  However, in many cases, the cost of legal action overseas can be higher than those at home so be mindful in your selection.

Even if you can take action against the supplier, there are no guarantees that the foreign entity will have the assets to make good on the court order or pay for your legal costs.  In many instances, if you sue a foreign company from within Australia, it can be difficult to enforce any court orders if the foreign entity has no assets in Australia.  It is important to get to know your suppliers so that you are aware of their assets and what jurisdiction best suits your needs.

 Is your Intellectual Property (IP) protected?

When you are contracting in a foreign jurisdiction, protecting the confidentiality and privacy of your business and intellectual property is essential – often, you are dealing in an unknown market that is difficult for you to keep a close eye on.  Our quick tips for protecting your IP when contracting overseas:

  1. Ensure that you retain legal ownership of your IP. You contract should clearly state who owns the intellectual property that is brought to or developed under the arrangement.  It is also prudent to make certain that you have full ownership of all samples, excess product and rejected stock.  It is essential that you specify how these materials are to be dealt with, for example requiring the supplier to destroy the stock at your request, to prevent nasty IP disputes later.
  1. Protect confidentiality by having specific employees in the foreign entity sign confidentiality and IP assignment deeds. This will help to ensure that all parties understand their obligations under contract, and give you more avenues to sue if a party is unable to make good their court order.  There are limitations to this if the confidential information is provided to lots of factory staff who do not understand English.
  1. Consider entering an exclusivity arrangement with your supplier or manufacturer (subject to competition restrictions) to prevent them acting for your market competitors.

There are many benefits to contracting overseas, but it is important to consider your risk exposure.  Our quick tips to mitigate your exposure to risk are:

  • Spend time getting to know your suppliers
  • Have good contracts in place that can protect you to the extent that you have to take legal measures (have a great lawyer on your team!)

For legal advice or assistance with your supplier or manufacturing arrangements, contact Gladwin Legal at , or on 1300 033 934 for a free chat.

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