Setting up an exclusivity agreement with a China supplier

Production-monitoring-qc-china-189x3001-157x250

Summary of the 8 key items to consider when setting up an exclusivity agreement

A client recently asked “we have started working with a Chinese supplier and we want to get them to sign an exclusive agreement with us. How we could make this happen?”

6 items for the general relationship between buyer and seller

One:

Frame the discussion in a way that gets the supplier excited about cooperation. But don’t make promises you can’t keep. Be honest about potential growth and leverage your orders to get the supplier’s attention. For example, if you have big volume, explain that you are a major player in the industry and if they play nice, they will get a lot of business. You are willing to share your market and product intelligence in order to have a mutually beneficial partnership, but your require their confidentiality and exclusivity in exchange.

Two:

Make the terms of the exclusivity known to the group (key managers of the supplier) rather than just 1 negotiator. Contracts ideally are negotiated and signed in front of a group (even if via group emails). Loss of face for breaking one’s word is often more effective than fear of legal repercussions. For example, if the GM says to you he would never do business with your competition, then goes out and does that …all his co-workers will know he is a liar and he loses a lot of face. (unless they are all a pack of thieves)

Three:

On that note, to determine if they have a good reputation (not a pack of wolves), in advance of signing a contract:

a) Were you able to visit with some of their references? If they can’t give a reference or two, that is a big red flag.

b) This blog post explains how to do due diligence on a budget. Some of the tools mentioned can be done without them even knowing.

Four:

After the contract is agreed, don’t just let them sign it and forget it. Have the key terms regarding exclusivity attached to each and every PO. This shows you are serious about it and as the supplier’s staff come and go on the project, new people will see this is a key part of the relationship that must be respected. PO’s placed should also have an official chop by the supplier to confirm they accept the PO/ Terms. Since the supplier needs to sign (and “chop”) the bilingual PO/ agreement each time an order is made, he can’t look me in the eye and say he didn’t remember the terms of the contract about exclusivity.

Five:

Consider keeping an eye on the supplier to make sure they are respecting the terms. Periodically check the trade shows, their showroom, their warehouse, their catalogs, taobao, Alibaba and such. Even contact them under a different name now and then to see if they will sell you the items you have protected!

Six:

If you have IP or even brand names to protect. You can register them with Chinese customs and make it clear that only authorized parties are allowed to export. So if the relationship falls apart with the vendor, you can prevent them from exporting under your brand.

2 essential items to build into the terms and conditions of your exclusivity agreement

Seven:

It is essential that the contract is in Chinese or bilingual. There are many reasons for such an arrangement. First, to have any legal validity in China, you have to list the Chinese name of the suppliers. I’m talking about the Chinese name you see in their Chinese business license. Local authorities and courts only recognize registered Chinese names. So the English name, or whatever they call themselves for marketing, is not an official name. You can’t sue some company named “Best Good Star Mfg.” in China. But you can sue “最好星有限公司”.

Keep in mind that to litigate outside of China is for the most part meaningless. The vast majority of Chinese companies do not have any assets outside of China and a court in China does not enforce foreign judgments, so it means that you actually get nothing (except a bill for wasted legal fees) even if you prevail in a court back home. So if litigation is the only option to solve the dispute, a lawsuit should be filed in a Chinese court.

If your key documents are in English, it complicates things a lot. For example, before the courts can make a decision, the English documents/ supporting evidence will need to be translated into Chinese by a court approved translator for the court’s review. This can be expensive and very time consuming. Plus the defense can employ a stall tactic of fighting over the wording of the translation itself. It’s much better to have your attorney structure the wording in advance in Chinese rather than hope the court’s translation will be accurate. Be safe. Use bi-lingual contracts.

Eight:

Contracts should have a reasonable penalty about what happens if the terms regarding exclusivity are broken. This penalty needs to be stated in the contract, in advance, not only so the seller knows you are serious, but to make any potential future litigation go easy for you.

Details about Penalty Clauses in Chinese Contracts

Make sure the penalty is large enough to make the supplier take them seriously but not so large as to scare them away. As long as the penalty is reasonable, damages are enforceable in Chinese court and it will save you lot of trouble as without pre-agreed terms for compensation it is very hard to prove how much loss you have suffered. Plus, a pre-agreed penalty saves the judge a lot of time and makes his job easy. If you don’t state the penalty, he will probably ask both sides for the amount they feel is fair, then the judge will just split the difference. That method rarely benefits the damaged party. So it is obviously much better to have a penalty in place upfront.

The main value of putting a penalty in your contract is that it will motive the supplier to comply with the terms so that actually you never have to enforce it.

Hope these comments help get you pointed in the right direction.

Let me know how your exclusivity arrangements with Chinese suppliers have worked out.

Related Content:

(video) Negotiation, Contracts and Payments – The Ultimate Guide

7 items you probably forgot to put in your contract with the factory.

Protecting your Intellectual Property

Insider’s look at legal services in China: Contracts & Purchase Orders (Part 14)

Purchase Orders or Purchase Contracts?

Are Bilingual Contracts Necessary?

Common Mistake #8: ‘Leaky contracts’

A small buyer placing orders with Chinese Suppliers: contracts, travel, and other issues

I’m Just Getting Started. Tips for China?

What to expect from the courts when things go bad

Insider’s look at legal services in China: supplier in China: Introduction & Process (Negotiations, Demand Letters & Litigation) (Part 15)

1 reply
  1. Kevin Luxon
    Kevin Luxon says:

    Great comments, all very important. Hiring a good inspector or third party firm in China that can visit the factory is very important as well. Always ask for an executive or management level person to be your direct contact during the critical phases. Sales team and project managers that work directly with you are limited in power. For example, during Peak seasons getting your job in line/schedule is difficult.

    Reply

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

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