When drafting manufacturing agreements our manufacturing lawyers used to send our clients a six-page questionnaire to tease out the client’s China manufacturing plans. But no matter how hard we tried, there were almost always important questions our client either did not understand or simply could not answer. We eventually realized dumping six pages of questions on our clients was too much, especially since a particular answer to one question might mean a few other questions had become irrelevant.
We consulted with a couple of top-tier legal tech people to see about using technology to simplify the manufacturing contract drafting process and they eventually determined that the attorney-client interactions should not be automated. They determined that the attorney working on these manufacturing agreements should be in “constant contact” with the client to help the client determine what makes sense for its industry, its company, and its product.
They recommended that we instead switch to a system where we ask a much smaller list of questions in “waves.” When we get answers to the first wave, we review those answers and ask a second wave and we keep going until we have the information we need to start drafting the contract. We then draft the contract in English for our client to review and then we draft it in Chinese as the official version, with an English language version as a translation for our client. This has also become our standard operating procedure for our China NNN Agreements and our China Product Development Agreements as well as we have found that this is far more efficient and far less taxing on our clients than our previous method. Most of the time we get the contract drafted with the client answering fewer than half of the questions from the “old days.”
I thought of all this today while reviewing a client’s email response to the first wave of questions for its China manufacturing agreement. The answers made so much sense that drafting wave two of questions will be a breeze and once we get the wave two answers, we likely will have no further questions. I am going to share this first wave of questions because they should make for a good starting point for companies seeking to determine how to have their products manufactured in China. Note that even our first wave of questions is tailored to the specific client so a few of the below questions are not relevant to every industry, company or product.
This is ____________ from Harris Sliwoski. I will be drafting your manufacturing agreement for China. To kick off this project, I have some preliminary questions. I will likely have more specific questions based on your answers.
1. I note from your website that you have an extensive product line. Which specific products from that line do you want this manufacturing agreement to cover?
2. Do you have a specific set of factories in China with which you are already working? Or do you want this manufacturing agreement to be used for new factories? Or both?
3. In what PRC region(s) are your factories located?
4. When you work with factories, do you set a specific product amount on an annual or other fixed basis? Or do you work on a per purchase order basis, with no fixed annual order amounts?
5. What is your pricing arrangement with the factories? Is there a set price fixed for a specific period? If there is a set price, how is that price enforced?
6. What are your payment terms? Do you pay an initial deposit? When is the final payment made?
7. How do you provide for submission and maintenance of samples? I know that in your industry, products are normally made in reference to a physical sample, rather than to a drawing or CAD diagram or similar. What system do you use?
8. What is your system for inspection and quality control? Do you inspect during production? Prior to shipment? After you receive the products in the United States and in Europe? After delivery to your customer? What is the specific system for dealing with defective/non-conforming product discovered at any of these four points in the system?
9. Do you have a system for dealing with inspection and related specific safety standards in place in the U.S. and in Europe? For example, flammable fabrics, non-lead paints, small pieces on toys and related. If so, what is the division of responsibility between your company and the Chinese factory?
10. Do you have a system for dealing with the quantity of orders made over time? Since many of your products have seasonal demand, do you have some form of scheduling system to ensure that the factory will have capacity to deliver your orders during peak seasons?
11. What is your procedure for packaging and shipping? What are the shipping terms? How is pricing linked to shipping terms? To where is the product shipped? To your warehouses in the U.S. and in Europe, or directly to your customers?
12. I understand that you distribute some of your products for sale in China. Have you considered how the China side of your operations might impact this agreement, if at all? If we can ignore the China entity/sales issue at this time, that is fine, but we should discuss this.
13. I understand that you have been having products manufactured in China for more than a decade. What specific problems have you encountered that you want your new manufacturing agreements to resolve?
For more on what goes into China manufacturing agreements check out Protecting Your Product From China: The 101 and the links within that post.
