6 Key Legal Considerations for Drafting Manufacturing Agreements in China

Introduction

Legal considerations play a crucial role when doing business in China, especially when drafting manufacturing agreements. China’s laws differ from other countries and are unique, just like those in other countries. As such, organizations must pay close attention to how they establish contracts with Chinese manufacturers to ensure enforceability and mitigate risks. Here are six key legal considerations to keep in mind while drafting manufacturing agreements in China:

 

1. Choosing the Jurisdiction: Chinese Courts

Jurisdiction plays a significant role in the enforceability of a manufacturing agreement. Selecting Chinese courts as the jurisdiction in your contract strengthens the enforceability of your manufacturing agreement in China. Jurisdiction refers to the legal system responsible for resolving contract disputes. It can significantly influence the interpretation of the contract and the resolution of disputes.

Choosing Chinese courts as jurisdiction offers several advantages, including consistency with local legal standards and more effective local enforcement. Chinese courts have the power to enforce their judgments within China, ensuring prompt and effective execution of court rulings.

In contrast, manufacturing agreements under foreign jurisdiction may face hurdles for enforcement in China, as Chinese authorities may not necessarily recognize foreign court rulings. Therefore, selecting Chinese courts as jurisdiction simplifies the domestic recognition and enforcement of court judgments.

 

2. Correct Form of Seal/Signature

The correct form of seal or signature is another vital consideration. In China, Chinese companies use their official seal when signing contracts to ensure the contract is valid. Understanding this requirement is important to ensure the validity of the agreement.

Make sure that the seal used in the contract has the correct legal Chinese name of the Chinese company and the correct business registration number.

Make sure that the signature part of the contract includes the correct Chinese name of the legal name of the company and the Chinese name of the legal person in the company, in addition to the business registration number. Do remember that English names of Chinese companies do not have any legal value in the court of China, as there is not one official correct way to translate a Chinese name into English.  Most Chinese companies have a variety of different translated names, so it is important to verify the Chinese legal name of the company and ensure this is used in the contract.

 

3. Contract Language: Mandarin Chinese

The contract language is an essential aspect of manufacturing agreements in China. Mandarin Chinese is the official language of China, and thus contracts in Chinese can help avoid potential misunderstandings or misinterpretations of contract terms. Although an English version may be used alongside, the Chinese version typically takes precedence in case of discrepancies between the two versions.

If you use bilingual contracts, make sure you understand what is written in the Chinese version. We often see Chinese companies adding conditions favoring them in the Chinese version. If you want the English version to rule, this must be pointed out in the Chinese language version. You do not want to end up in a situation where the English version says it is ruling, and then the Chinese version says it is the ruling language. 

If you decide on using a plain English contract, it is important that you at least have a Chinese lawyer go through the contract language to adjust the contract according to Chinese laws. This will give you better protection in China.

 

4. Intellectual Property Protection

Intellectual property protection is critical to manufacturing agreements, given the risks of IP theft or infringement. The contract should clearly define the ownership of intellectual property rights, including patents, trademarks, and copyrights, and stipulate consequences for violations.

Often we see that many Chinese manufacturers companies register hundreds of patents in China. Why do they do this? China’s intellectual property system is based on the “first-to-see” principle. Whoever applies first gets the patent rights first in China. Because of this, many Chinese companies register foreign inventions as patents in China first. That is why it is so important to consider whether it is something you want to protect as early as possible. 

 

5. Specificity of Terms and Provisions for Damages

An effective manufacturing agreement should be specific in defining terms such as product specification, payment, delivery, inspection, warranty, and damages. Clear terms can help prevent future disputes. Furthermore, provisions for damages should be stipulated in case of breaches of contract to provide a means of compensation.

 

6. The importance of verifying your contracts according to Chinese law

To draft a solid and effective manufacturing agreement in China, hiring a Chinese lawyer with a deep understanding of Chinese law is crucial. They can ensure that the contract complies with local laws and regulations, thereby improving the enforceability of your manufacturing contracts. 

While well-versed in their domestic law, many foreign lawyers are not fully aware of the intricacies of Chinese law. This knowledge gap can lead to drafting contracts that do not conform to Chinese legal requirements or may even be illegal under Chinese law. This increases the chances for your contract to be unenforceable in China and puts you at risk of legal penalties.

 

Conclusion

In conclusion, when drafting manufacturing agreements in China, it is crucial to consider jurisdiction, the correct seal type, contract language, intellectual property protection, and the specificity of terms. Understanding these key legal considerations can help mitigate risks and improve the enforceability of your manufacturing agreements in China. Remember, however, that foreign court judgments may not be recognized in China, leading to a complex and expensive enforcement process. Therefore, ensuring your agreement is designed for successful enforcement within the Chinese legal system is essential.

 

Frequently Asked Questions

1. Why should I choose Chinese courts as the jurisdiction in a manufacturing agreement in China?

Choosing Chinese courts as the jurisdiction offers consistency with local legal standards and effective enforcement. Since Chinese courts have the power to enforce their judgments within China, this selection ensures prompt and effective execution of court rulings. Additionally, foreign court judgments are seldom recognized in China, leading to potential enforcement challenges.

2. Why is the seal or signature important in Chinese manufacturing agreements?

In China, Chinese companies must seal contracts with the company’s official seal for the contract to be legally valid. This requirement is an important aspect of Chinese corporate law that can influence the enforceability of your contract. It is important that you verify the Chinese name of the legal person signing, as well as the legal Chinese name of the Chinese company and the business registration number.

3. Why should the contract be written in Mandarin Chinese?

Mandarin Chinese is the official language of China, so contracts written in Mandarin can help avoid potential misunderstandings or misinterpretations of contract terms. While an English version may be used alongside, the Chinese version typically takes precedence in case of discrepancies between the two.

4. How can I ensure intellectual property protection in a manufacturing agreement in China?

The agreement should clearly define the ownership of intellectual property rights, including patents, trademarks, and copyrights. It should also stipulate consequences for violation. Hiring a Chinese lawyer with expertise in intellectual property law can be particularly helpful in this regard.

5. What should I include in the terms of a manufacturing agreement in China?

A manufacturing agreement should specifically define product specification, payment, delivery, inspection, warranty, and damages. It should also include provisions for damages in case of breaches of the contract. The clarity in these terms can help prevent future disputes.

 

Contact us if you need legal help in China, like drafting contracts that follow Chinese law, background investigation of Chinese companies, protecting patents, trademarks, and verification of contracts to the law in China, etc.

If you require our assistance or have further questions about our services, please do not hesitate to contact our Customer Relationship Manager, Jan Erik Christensen, at janerik@ncbhub.com. We look forward to hearing from you and helping your business succeed in China.

Contact us if you need help with drafting of contracts that follows Chinese laws and are enforceable in China, background investigation of Chinese companiesprotecting patents, trademarks, verification of contracts to the law in China, or help with other legal challenges that you have in China.

If you require our assistance or have further questions about our services, please do not hesitate to contact our Customer Relationship Managers Jan Erik Christensen, at janerik@ncbhub.com  or Milla Chen, at huimin.chen@ncbhub.com. We look forward to hearing from you and helping your business succeed in China.