What to Know When Contracting with Factories in China

Key Guidelines for Contracting with Factories in ChinaWhether you are a sole proprietor or large company, doing business in China requires contracts to cover all your bases and then some, and crafting the paperwork isn’t always easy.

Here are some key guidelines and online resources that can make the difference between success and falling prey to the common practice of lying and other deceptive tactics.

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“Guanxi” is Paramount

In Chinese culture, developing a relationship after the contract is signed is synonymous with putting the cart before the horse. ‘Guanxi,’ translated as mutually beneficial relationships, is extremely important, and must be cultivated before the contract negotiation begins.

This means you must spend time fostering a relationship with a prospective Chinese business partner until a bond of trust and respect are cemented. This could be time consuming, sometimes over a period of several months, but it will lead to fewer obstacles before and after the contract is signed, and can open doors that are otherwise closed to you.

What to Consider:


Check out:
 What it Means to Have Good ‘Guanxi’


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The Art of the Deal

Contract negotiations in China are played by a different set of rules and procedures. U.S. and European companies are known for moving fast, which can stifle the relationship with prospective partners. Patience is consequently critical in all negotiations.

Thoroughness and preparation are also necessary, and any contract needs to be fully explained prior to signing. ‘Losing face’ is equally a no-no, and you should be careful during negotiations not to unintentionally offend. It is very possible that once a contract has been signed further concessions will be required at a future date. Factory China

What to Consider:

  • Make an effort not to offend or criticize the prospective partner in public
  • Take your time to ensure you avoid missteps later
  • Be flexible enough to say yes to concessions requested after the contract is signed

Check out:
 Understanding Chinese values and philosophy in negotiations


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Leave No Stone Unturned in the Contract

Drawing up contracts is definitely not a DIY project, and seeking assistance from legal firms knowledgeable of both Chinese culture and contract law is key. The agreement with a manufacturer must contain precise language and indicate whether or not Chinese law takes precedence or if government review will be necessary.

Ownership of intellectual property, license fees, and import/export issues also need to be considered. It can happen that business cultures clash, so dispute resolution provisions should also be contractually agreed upon.

What to Consider:

  • Research and identify qualified contract law firms based in major manufacturing cities
  • Use precise language and incorporate clauses to cover all possible contingencies, including price adjustments, liability, delivery dates and arbitration

Check out:  The China Law Blog’s 60 practical contract-drafting tips

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Drafting Full-Proof Nondisclosure Agreements (NDAs)

An NDA with a Chinese manufacturer must incorporate more than just the basics. Manufacturers often have no problem cloning your products or letting a subsidiary take a peek at the inner workings of your intellectual property. The worst-case scenario is that a manufacturer will actually sell the finished product directly to your customers.

It’s important to understand that manufacturers don’t feel that they are perpetrators of a crime; They are simply taking advantage of an opportunity that another company unwittingly gave to them.

What to Consider
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  • The NDA must prohibit the disclosure of intellectual property to any subsidiary and 
deny the right to sell a finished product directly to your customers
  • The NDA must clearly state that your intellectual property cannot provide the basis of a similar or ‘copy cat’ product that can be sold to your competitors or customers now or in the future

Check out: China Law Blogs’s on Enforceable ‘NNN’ Agreements (Nondisclosure/Non-Use/Non-Circumvention)

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