The export of products to China can be very lucrative. Nevertheless, partnering with a Chinese distributor has its risks. They can, however, be avoided with a good contract. The following lists 10 things any agreement with a Chinese distributor should include.
10 Things any contract with a distributor should include
- It should be written down under which country’s laws the contract is set up and which parties are involved under which conditions. Moreover, you should exactly define the products to be distributed. But possible changes should be possible.
- What are the costs and how is the payment made? Who pays which fees and where should taxes be paid? What happens if the payment is late? All these questions are essential in any contract with a Chinese partner. (Read our article on late payments)
- Since you cannot be sure that the partnership will ultimately pay off, it makes sense to conclude a fixed-term contract sfor one year and extend it if successful. In addition, general conditions and consequences regarding a possible termination of contract or breach of contract should be defined. A chapter in the contract should also cover what happens in a case of “force majeure” and who is liable for it.
- Define the type of cooperation. Is the cooperation an exclusive partnership? In that case, it makes sense to specify that the Chinese partner may not sell similar products from other manufacturers. Moreover, you can decide whether the partner may conclude sales contracts for you and whether additional distributors may be engaged. Overall, the power of the Chinese partner must be well defined (e.g. in advertising, marketing, etc.)
- In which regions would you want to distribute your product? As Hong Kong, Macau and Taiwan have different legal frameworks, you must explicitly exclude these regions (if you only wish to have them distributed in Mainland China). However, changes in the regional scope should be possible.
- Remember to protect yourself during the delivery and transportation. Define the costs of transport and delivery as well as the timeframe!
- The quality assurance of the product is also important. Set an examination period in which your partner confirms the integrity and the subject liable for any damage. Moreover, define the validity period of the guarantee and which conditions apply (e.g. who pays for what).
- A recurrent theme in doing business in China are intellectual property issues. To provide sufficient protection, you should definitively register your trademark in China before you engage a local distributor. The contract should clarify that your partner only distributes your brand and that all rights remain with you. Protect your brand in the contract with precise formulations as well as penalties for attempted fraud.
- A confidentiality agreement should also be included in each contract. Make sure that your partner does not disclose know-how to third parties and always has to consult you, if necessary, before transferring relevant data. This obligation should extend beyond the duration of the contract. Also, define eventual sanctions in case of a breach of contract.
- Finally, it may be beneficial to commit your partner to keep you informed of significant market developments in China. Such a “market report” should include new regulations, market trends or feedback from customers on quality, packaging or price etc.. Define in which intervals you would like to receive the “market report”.
Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: email@example.com
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