International Law

OEM Agreements With Your China Supplier. Not Just For The Big Boys.

By Dan

A good portion of my law firm's work comes from China outsourcing consultants. The smart ones are sure to tell their clients they need to register their trade names in China and have a China lawyer draft their OEM agreements with their China suppliers.  I say the smart ones do this because those who don't run the very real risk of later being sued for not having made these suggestions.

Once the consultant makes this recommendation though, he or she has to a large extent freed themselves of future legal liability and need not worry all that much about whether their client goes forward with registering their trademark in China or using an OEM agreement or not.  

A consultant from an emerging market country wrote me the other day saying he thought it would be good if his clients were to have well-crafted OEM agreements with their Chinese suppliers, but when I told him what we typically charge to do these agreements in Chinese and in English, he said he questioned the value of such an agreement since most of his clients would not have enough money to sue anyway.  

I then told him that a good OEM agreement is particularly valuable for those sorts of clients:

Ninety percent of the value of a good OEM contract is that it prevents the need to sue. Having one of these in place means the Chinese company KNOWS not to mess around because it will get sued and lose, so it chooses to follow the contract. Not only that, but lawsuits on a strong OEM Agreement don't really cost all that much in China and if you have properly written into the agreement that the prevailing party gets its attorneys' fees, such a lawsuit can end up costing next to nothing. If anything, such an agreement is more important for the small company than for the large one because it acts so well to prevent the one bad shipment that puts the small company under.

We have probably written at least 100 of these and I am not aware of a single time where the client has had to come back to us wanting to sue its Chinese supplier. And if it did, I can tell you that having a really good contract in place (in Chinese) would make going after the Chinese supplier a whole lot easier and cheaper than not having an OEM contract at all.

What do you think?  

Full post as published by China Law Blog on August 05, 2010 (boomark / email).