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

Posted: 2014-04-21

Full Question

In your blog post “How to set up contracts with factories and service providers”, you said - “Many buyers don’t ask about the contract and simply place a PO. Most POs don’t address issues like non-conformance, delivery issues, quality standards, confidentiality…and such.” I have ordered custom products and I want to own the tooling. I’m concerned about non-disclosure, non-compete issues. Can you elaborate on what items I may be missing in my contract?

Answer

I’m not a Chinese lawyer so you should consult with one before placing a PO or signing a contract, but based on my experience here are 7 items specific to your situation that many new buyers forget to cover in their contracts.

  1. Buyer has the right to engage 3rd party inspection firms to check production before the goods leave China and before final payment is made. Supplier is not required to pay the costs of this 3rd party inspection unless the produce fails to meet the pre-agreed quality and quantity. If the order fails inspection, the supplier will cover the costs of additional inspections to confirm quality and quantity of the order. XYZ Company is the appointed inspection agency and inspection fees are listed at XYZ website.

  2. The tools/molds are the property of buyer and can be removed any time at buyer’s discretion.

  3. The product-specific assembly equipment and jigs paid for by the buyer remain the property of the buyer and can be removed at any time at buyer’s discretion.

  4. Supplier will not market or sell buyer’s product or similar variations (including excess stock and defects) to any other individuals or companies in China or any overseas country.

  5. Buyer’s product is not to be shown on the supplier’s website, sample room, brochures, or at trade shows and other marketing activities.

  6. The contract should state penalties for breaking the terms of the PO (quality, order size, lead times…). The POs will be issued separately.

  7. The contract should include standard NDA/NC terms and penalties for breaking them.

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