Da Gregory Sy e dai rifugi del Currie

Inutile per dire, la Cina si è trasformata in nella base principale di manufacturing del mondo. Tuttavia, con gli spaventi recenti di sicurezza di prodotto e l'attenzione costante di mezzi, “fatta in Cina„ è stato un'edizione di alto-profilo per i consumatori ed i rivenditori. Così come un'azienda straniera minimizza i rischi prodotti alterati/inferiori alla media prodotti in Cina? In questo articolo, discutiamo i termini del contratto che le aziende straniere dovrebbero considerare quando prendpartee ai rapporti dell'OEM con i fornitori cinesi. (Mentre evidenziamo alcuni di che cosa riteniamo sono i punti principali da coprire dall'accordo, noi riconoscono che ogni caso è unico e là sono nessun qualcosa come una disposizione tipica dell'OEM del `'.)

Accordi della forma standard
Un OEM può avere un accordo della forma standard che saranno più del volendo fornire alle aziende straniere che desiderano usare i loro servizi. Mentre questo può bassi costi all'inizio e permettere l'azienda straniera al favore di configurazione del `' con le loro controparti cinesi, usando un tal accordo è quasi mai consigliabile e le aziende straniere sarebbero saggie da consultare i consulenti legali, che aiuteranno l'azienda straniera per negoziare e preparare correttamente gli accordi.
Note that we often advise that the written agreement is preceded by preparation and negotiation on the basis of a business term sheet, which will outline the major terms of cooperation. The agreed points in the term sheet then serve as the basis for the written agreement.

Major Terms of Agreement
Below, we highlight several major (though non-exhaustive) terms which should be included in an OEM Agreement:

1. Products and Specifications

The products to be manufactured should be well-defined in the agreement, along with product specifications which should be described in detail in relevant appendix(es).

2. Forecasts and Binding Purchase/Supply Commitments

As OEM Agreements often require that firm orders are placed through Purchase Orders, in order to ensure that there is a binding supply/purchase commitment in the agreement itself, the parties will often designate a certain minimum commitment on both sides, to produce and purchase a certain amount of product within a given time period. Aside from the minimum requirement, the buyer will often provide a non-binding forecast to supplier, such that supplier can plan and allocate adequate resources (often 6-, 12-, 18-, 24- month terms).

3. Price

For those products designated as described previously, the parties should determine firm prices, which will either be effective throughout the term of the agreement, or at least a portion thereof, subject to (we recommend) maximum periodic price increases. Further, it is beneficial to include for discounts upon meeting certain pre-determined purchase volumes.

4. Quality Control

Buyer and supplier will agree on certain terms afforded to buyer/required of seller for conducting product quality control. Typical terms include i) access (often on short or no notice) to production sites, and ii) random testing of each batch of products before dispatch to buyer. Further, the parties may, depending on the value of the contract, provide for a representative of the buyer to be on-site on a full-time/regular basis, for the purposes of assisting in quality control. (The buyer’s representative may also monitor supplier’s use of intellectual property and other improper dealings, though their effectiveness will invariably depend on his/her loyalty to the buyer.)

5. Term

The parties will determine an appropriate term for their contract, and may make the agreement renewable on request by buyer. This term should be sufficiently long so as to ensure that buyer’s initial investment can be adequately recovered.

6. Termination

Termination events, as in most agreements, will include those events which give rise to immediate termination rights (for example, unauthorized use of buyer’s intellectual property and violation of non-compete terms), and those which require a notice period and the breaching party’s right to remedy the breach (failure to supply products meeting specifications).

7. Consequences of Termination

In the event of termination, it is important for buyer specify those procedures necessary to protect its rights in the event of such occurrence. Often terms will include: sale of completed products to buyer, allowance for completion of partially completed products and sale to buyer, destruction or return of confidential information, and destruction or return of trademarks, logos, brochures, and other advertising materials.

8. Examination and Acceptance

Upon delivery of the products to buyer, it will be afforded a certain period to conduct inspection, subject to deemed acceptance in the event that a claim is not made within a certain period. Further, it is common for suppliers to require that upon buyer’s acceptance of the products, they will be absolved of all further liabilities. Note that we do not recommend that buyers wholly accept such terms (and provide a minimum carve-out and continued warranty), as buyer, after acceptance, will have little grounds for a claim (even for the use of sub-standard materials which are often difficult to visually detect).

9. Raw Materials/Components

As part of the quality control process, buyer should require that supplier provide a list of its suppliers along with purchase orders over a pre-set period to ensure that the agreed upon raw materials/components are being used.

10. Insurance

Due to the relatively unsophisticated nature of manufacturers/insurance industry in China, factories are often severely underinsured from risks. As a result, it is advisable for buyer to require that supplier obtain a minimum level of insurance.

11. Intellectual Property

All intellectual property used to manufacture the product, including trademarks, patents, copyrights, and other business secrets should be licensed to supplier, for the limited purposes of complying with its obligations under the agreement. Further, buyer should carefully draft related terms so as to restrict supplier from exercising any rights of ownership to the licensed IP.

12. Non-compete

As an OEM relationship necessarily involves substantial transfer of intellectual property and confidential information, buyer must not only be careful
to ensure that additional products are not produced by the supplier, but also by its affiliated companies and directors and management. (Note that the implications of failing to adequately provide for such terms may result in not only the product being sold in China but more importantly in the same markets as buyer, and at significantly lower costs.)

13. Arbitration

As manufacturing tends to be concentrated in lesser-developed regions in China in addition to cost/time/reliability benefits often associated with arbitration, we advise clients to select arbitration for dispute resolution. Arbitration can be conducted in China or internationally (in any New York Convention signatory state), though domestic arbitration allows buyer access to Chinese courts for injunctive relief.

Arguably more or at least equally important as negotiating and concluding a strong contract, is buyers careful monitoring and enforcement of the agreed terms.

Finally, although long-term relations are often desirable and we encourage buyers to find and work with a reliable supplier, as a practical matter, it is imperative that buyers have one or more alternatives, in the event of required termination of the primary OEM supply arrangement.

Gregory M. Sy is a partner / foreign counsel with Grandall Legal Group. His practice includes general business advisory for SME’s in China, particularly in the areas of international corporate structuring and transactions. Representative clients include the Consulate of the United States of America in China (Shenyang), Embassy of Brazil, various publicly listed companies (NYSE, LSE, DAX, and BSE), along with numerous other SME’s operating in a wide range of industries. Mr. Sy obtained an LL.B. from the University of Victoria, and is admitted to the New York bar. Gregory publishes extensively on a variety of China legal issues for international and local publications, and has recently acted as chief editor for Martindale’s China Law Digest. You can contact Gregory at gregsy@grandall.com.cn or learn more about the firm at www.grandall-profile.com.