Bad Contracts Lead to Bad Products

Bad contracts lead to bad products. But you already knew this. This post though will explain the specific types of bad contracts that most often lead to bad products.

In the last six months or so, our international dispute resolution lawyers have seen a massive increase in emails and phone calls from companies seeking our help with defective product/quality control problems. In this post, I explain what you (and they) should have in place to avoid these sorts of problems in the future, and to make it possible to resolve such problems should they occur. Spoiler alert: Most of the problems stem from bad manufacturing contracts and/or a failure to conduct due diligence on their product supplier.

I am going to try to avoid getting preachy here, but I do believe nearly all of the companies that have reached out to us seeking to sue over product problems would have avoided those problems had they used a good contract. In fact, many of the companies that contacted us did not have any contract at all with their factory. And of those that did, not a single one had a contract that even came close to reflecting the legal realities of buying product manufactured overseas.

The below is a classic example of the sort of calls our  international litigators get — modified a bit to remove any identifiers:

A Boston lawyer calls us with an “airtight” $1.5 million breach of contract lawsuit against a Chinese manufacturer. This lawyer had drafted a contract calling for disputes between her client and the Chinese manufacturer to be resolved in Boston Federal Court and she had already sued the Chinese company in Boston and secured a default judgment against it. She was now seeking our help in domesticating the judgment in China, and it was clear she expected us to jump at the opportunity to take this case on a contingency fee basis.

Until we told her China does not enforce U.S. judgments. See How to Sue a Chinese Company: The Long Version.

She then came up with the idea that we “start all over by suing the Chinese company again in China.” We explained how that could not work because the Chinese court would have two strong grounds for throwing out that lawsuit. First, improper jurisdiction because the contract clearly called for the lawsuit to be in Boston. Second, res judicata because the entire case had already been tried and won in Boston — its proper jurisdiction.

Too often, foreign lawyers (American and British and Australian especially) assume that what makes sense for a domestic transaction also makes sense for an international transaction, even when it doesn’t. Boston would have made sense in the above example if the product manufacturer had been in Los Angeles or even Toronto. But what works for Boston or Los Angeles or Toronto might (or might not) be very different for Shenzhen, Puebla or Bangkok. And what works for Shenzhen almost certainly does not work for Bangkok or for Puebla. All this is just another reason why the idea of being able to buy a template manufacturing agreement off the internet is so absurd. See China Manufacturing Template Agreements.

In addition to so many international manufacturing contracts we see not being enforceable, we also often see these contracts fail to address the issue on which the aggrieved party wants to sue. The following are just a small sample of the sorts of problems we see that stem from this:

1. Company wants to sue about “late deliveries” but there is no contract provision addressing delivery dates.

2. Company wants to sue about getting its molds or tooling back but there is no mold/tooling protection provision making clear who owns the molds or tooling.

3. Company wants to sue about its IP having been stolen but there is no IP protection provision.

Then there are the situations where the foreign buyer paid its manufacturer for product it never received, which is becoming increasingly common due to increasingly sophisticated scams, COVID, and international tensions. How can you best protect against that. Two ways. One, due diligence, which would prevent at least 90 percent of these. And two, a contract provision that makes clear exactly what is required of your manufacturer and what happens if it does not fulfill those requirements.

One more thing. When someone contacts our law firm with a factory problem, we ask them whether they have registered trademarks for their brand and logo in the country in which their product supplier is located. We then tell them how common it is for factories (especially in Asia and especially in China and for factories outside China owned by Chinese companies) to register YOUR brand name and YOUR logo as a trademark to use as leverage if and when a problem arises. We have resolved a fair number of product quality dispute cases by negotiating settlements in which our client releases its product quality claim in return for getting its brand name back.

Many times, the trademarks have already been registered to someone else by the time our international litigation lawyers are contacted. This makes it difficult or impossible for the foreign buyer to continue having its products made in the country where its brand name has been hijacked. So if you have not already registered your brand names and logos in the country in which you are manufacturing, you should probably do so BEFORE you complain to anyone there.