PO or Contract? The 7 essential questions to ask when signing an agreement with a Chinese Supplier… Advice from a Trademark Lawyer with over 100 wins

***UPDATE***

Here’s my exclusive webinar with Amy where she reveals how to protect your brand and trademark if you’re manufacturing in China… even if you don’t plan to sell there.  Don’t let what happened to New Balance happen to you!

 

If you’ve already sourced a product and found success selling on Amazon that’s great.  You’re probably concerned about running profitable PPCs campaigns, adding more SKUs to grow sales, and other ways of growing your business.  

But there could be a gaping hole in your business that you’re not aware of.  And this could potentially destroy all the hard work and money you’ve put into it.  To be successful you not only need to play a good offense but you need to protect your assets with a strong DEFENSE.  

As they say in sports “Offense wins games but defense wins championships”

Let me share with you a true story where an Amazon seller came to me with a problem.  Let’s call him “Carter.  

He created a custom product using a supplier he found on Alibaba.  He put a ton of personal time into modifying this product so that it was DIFFERENT from anything else out on the market.  He did careful customer research and found ways to improve upon the competition.  

In the beginning he had good sales to start.  Reviews were mostly positive.  

There was, however, one minor mistake with this product and several customers contacted him about it.  He acted on their feedback and decided to fix these problems in his product by working with his supplier.  At the same time, he was ready to place a larger reorder.  

Sounds good right?  

HOWEVER, soon after that, he noticed a new competitor that offered the SAME product with the SAME modifications he made, with the SAME MISTAKE, but at a lower price.  He went back to Alibaba and found out that they had COPIED his design.  

And the worst part of it was – he had a contract in place with the supplier that they couldn’t sell his designs to anyone else!  But they still did it anyways.

What would you do in this situation?  And how would you protect your product designs from being copied and listed all over Alibaba like what happened to “Carter”?

Good news I’ve invited trademark attorney Amy Hsiao to give us a rapid fire Q&A session on the 7 must-ask questions when signing an agreement with a Chinese manufacturer.  She is a partner at Partner at Swanson & Bratschun, LLC.  In her work, she’s worked with hundreds of US clients who manufacture in China to help them protect their intellectual property, trademarks, patents, and designs and help them win cases when needed.  

This advice is based on her real-world experience so I’m sure it will add a ton of value for you.  

 

 

 

 

 

Here’s Amy’s guest post:

7 Must-Ask (and Answered) Questions When Signing an Agreement with A Chinese Manufacturer

One of the most common questions I’ve received is about PO (“purchase orders”).  Specifically:

  • Should I sign a formal contract with my Chinese manufacturer or is a PO sufficient?
  • Must the contract be written in Chinese?
  • Is a PO better or a contract better?
  • I am not a Chinese company – am I protected under the Chinese law?
  • I am not a Chinese company – what are the key differences between Chinese and Western contracts and the key terms I must know?

What is a Purchase Order or “PO”?

A PO is an offer; if you respond to a PO, it’s an acceptance. An offer and an acceptance form a contract.  

It is similar to me going to Lowes or Home Depot to buy a washer and dryer. Once I pick out a SAMSUNG or LG washer and dryer, the nice friendly customer service representative will give me a printout with all the specifics – that is a PO.  Once I take the PO to the cashier and pay, that’s acceptance. I now have a contract with Lowes/Home Depot for a specific set of SAMSUNG / LG washer and dryer.

So, is a PO better or a contract better?

Well, it depends (I hate to give a lawyer’s answer, but the answer truly depends on a number of factors).  The variables include: is this a one-time thing with this manufacturer? How big is the purchase? If the contract is US $300 million in value and will govern the parties’ behavior for the next three years, I will opt for a formal contract – a Master Purchase Agreement or a Distribution Agreement (once it’s done, multiple POs will be spun from these formal contracts).  

If, however, the relationship is one-off, a quick PO would probably be sufficient.

Typically, if there are recurring deliveries and you expect the relationship to last and you want the supplier to be absolutely (and legally) dependable, I would opt for a formal purchase agreement or distribution contract.  

Just FYI – There is a UN treaty governing this aspect of legal exchange. So, if you do not want a UN treaty to be meddling with your business in China, it is important to have a clear disclaimer specifically saying so in the contract.

Must the contract be in Chinese?

The quick answer is – NO.

However, despite the clear answer, the issue I’ve seen the most is “people simply don’t know what they don’t know”.  Ignorance does cost money in this instance.  Unfortunately, the ignorance here may also cost your brand, your market share, or even the supply chain to the rest of the world.

This is usually what happens – the contract is being translated and reviewed in English; however, the contract that is actually being signed is in Chinese.

So, when legal troubles start to arrive in paradise, guess which language version the Chinese courts will review to make a decision? Chinese!

However – and this is the sad part – a lot of the Western companies / business owners do not pay attention to the quality of translation.  A lot of them either rely on Google translation, grab the first person they see in Chinatown or call whatever Chinese friends they happen to have to provide a translation.  This logic makes no sense just as if I relied on someone I grabbed on the street in LA to give me translation of a legal document written in English!

Needless to say, there IS a difference in the way things are written in a legal Chinese document versus the everyday conversation Chinese – if we could not expect the average Moe and Curly to understand legalese in English, why would you rely on the average Wang or Lin to decipher the Chinese legalese when a mistake could easily jeopardize your factory or supply chain to the world?

By the same token, Google translation is great when you want to shop online or understand roughly what a Chinese website says – it is, however, not the tool I would rely on if the life or death of my business hinges upon the quality of this very translation.

To complicate things even more, the meaning of Chinese character changes based on context. A lot of the translation tools, however, offer translations based on the FIXED meaning of a character – there is simply NO fixed meaning of characters; it’s a fluid language.

Here’s an example. The whole point of a NDA (Non-Disclosure Agreement) is to make sure the parties will not disclose confidential information; and will use the HIGHEST standard to safeguard the information when disclosure is required.

The NDA English version says this:

if A is required to disclose any confidential information related to this transaction in response to a valid court or government order, A will use the highest level of protection available to ensure disclosure is under confidentiality terms that are no less protection than this Agreement”

This, however, is what the Chinese NDA actually says when translated correctly:

if A is required to disclose any confidential information related to this transaction in response to a valid court or government order, A is only required to use appropriate level of protection.  available to ensure disclosure is under confidentiality terms that are no less protection than this Agreement”.

Let me complicate things a bit more:

Unlike the clean and above-the-table ways Western law firms handle comments to agreements (usually by redlines so you know exactly what has been accepted/rejected in the last draft), the Chinese lawyers do not usually use track-changes.  So, most of the time, you send them changes to a draft, they simply send you back a clean copy.  On the surface, it appears that ALL comments have been accepted – but this cannot be farther from truth.  To make matters worse, they may change other parts of the agreement that are totally not related to the current discussion topic or a topic that has ever been raised for discussion before!  

For example, just recently, my client and his Chinese supplier were exchanging documents about the right amount of liquidated damages if there was a late delivery, or consistent “epidemic” failure to the delivery of the products. The parties have exchanged multiple drafts and had calls about this topic – however, in the last exchange, the manufacturer took out the entire reps and warranty section.  Without a careful review, the client would have signed a contract where the supplier gives absolutely no representation nor warranties!

So, what are the seven important questions that you must ask and have them answered when it comes to negotiating a contract with a Chinese supplier:

Here you go:

  1. What to do when there’s a delay in delivery? (especially during the Chinese New Year holiday time)
  2. What to do where there’s a shortage of supply? (i.e., are you absolutely your supplier’s favorite customer or can they supply the materials to other customers first and leave you high and dry? Bear in mind that your supplier – just like a contractor building a house – typically juggles multiple clients at one time.)
  3. What to do when your supplier repeatedly fails inspections?
  4. What to do when your supplier’s products result in personal injury back in the US? (remember those lithium cell phone batteries that simply blow up and set a house on fire?)
  5. What to do when there’s a dispute? Should the parties resolve the dispute through Chinese courts only or is there an alternative forum – such as an arbitration in say Switzerland – that may be more neutral? (Enforcement is a big issue when it comes to an agreement with Chinese parties. Are you willing to subject yourselves – and your business – to the Chinese courts and the decisions?)
  6. What is the specific governing law? (if your contract simply says “the appropriate international law applies”, you might as well delete the whole section)
  7. Is the language broad enough to protect your IP rights in China? In the rest of the world? For example, if the manufacturer does not copy your exact trademark or logo, but yet sells the same products with the exact color combination or unique packaging – is that a violation? (remember, China – unlike the US – does not have trade dress law)

Amy can be reached at amy@sbiplaw.com.  She also has a blog Last Week in China which covers China trademark news and best practices.

There we have it. It makes sense to sit down and spend some time asking yourself how you would answer these questions before signing or amending your contract with your Chinese suppliers.

Remember offense wins games but DEFENSE WINS CHAMPIONSHIPS.  

Don’t let a gaping hole in your defense cause you to stumble on the way to building a 7-figure business.  

Which questions are your struggling with with your supplier agreements?  Hit reply and let me know.  I will choose your top questions and bring back Amy to answer them!   

Talk soon,

Gary

Author: Gary

I work with many Amazon sellers to help them source from China. I’ve managed multimillion dollar sourcing campaigns and have been sourcing from China since 2008. I also am an Amazon Private Label seller myself so I know what you’re going through. My goal is to teach you how to source from China quickly and easily so you can own a 7-figure online business.

Leave a Reply

Your email address will not be published. Required fields are marked *