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Sourcing To China. A Tale Of Two Companies.

By Dan Harris and Steve Dickinson

It was the best of times, it was the worst of times. -- Charles Dickens, from A Tale of Two Cities I recently dealt with two similar calls from decent-sized US companies that source their products to China. Both companies were calling to find out what remedies/leverage they might have in disputes with their Chinese suppliers. The first company is in a seasonal business and it was a calling me for the first time because its Chinese factory was, at the very last minute demanding a pretty substantial "premium" to deliver the product "on time." The US company was threatening the Chinese company with "just walking away and sticking the Chinese factory with the product" but further conversation revealed this made no sense at all and the Chinese factory no doubt knew this. We together determined that the US company really had no choice but to pay the rather large premium and to do things the right way in the future. The problem the US company was facing was that it did not really have a leg to stand on with the Chinese company and the Chinese company knew this and had made it clear to the US company that it knew this. The reason was because the US company had no written contract with the Chinese company setting out clear delivery dates. The owner of the US company asked me if things would have been different had there been a contract and my response was "almost certainly yes:" I went on to tell her the following:

Though an OEM agreement is certainly no guarantee your Chinese supplier will not come back to you seeking more money right when you really need your product, it certainly does reduce the chances of that occurring. And on top of that, if a situation like that does occur, you have real leverage to fight it. Right now you have no leverage and you know it and your Chinese supplier knows it. Heck, it took me all of three minutes to realize you pretty much have no bargaining power and you really have no choice but to pay every Yuan of the requested premium and then figure out what to do the next time. If you had answered "yes" to my question as to whether you had a written OEM [original equipment manufacturing] contract, I would have asked to see it and if (as I would have expected), it had set out date requirements (likely to be supplanted by purchase orders), I would be talking to you now about negotiating strategies, because we would have had an opportunity to employ some. And, again, though there are never guarantees, I am pretty certain that we would have been able to at least reduce the sought-after premium, or maybe even eliminate it entirely.

I then told her about how we had dealt with a very similar situation for a longstanding client of ours, for whom we had written their OEM Agreeement:

In fact, just last week, we dealt with a similar situation for a client who had an excellent OEM agreement and we stood up to the Chinese manufacturer and said that if the product did not arrive on time we would be looking to it for our damages. Did the product get there on time? No. But it arrived only one week late and my client did not have to pay a premium at all. And, amazingly enough, the Chinese factory owner pretty much gushed over our "knowing how to operate in China."

For more on why written OEM contracts are so critical, check out the following: China OEM Agreements. Why Ours Are In Chinese. Flat Out. China OEM Agreements. You Are Naked Without A Good Bill Of Materials. China OEM Agreements. Ten Things To Consider. China OEM Agreements. Yet Another Reason To Have One. Enforcing Contracts In China. Way, Way Better Than You Think.

Full post as published by China Law Blog on May 14, 2010 (boomark / email).