China Distribution Agreements: How to Avoid a Bad Deal
My law firm's China lawyers draft far more distribution agreements than they did a few years ago, and we rarely form Chinese companies for clients anymore. I estimate we helped set up more than 100 Chinese entities from 2005 to 2015 and fewer than ten over the next decade. Foreign companies still want Chinese customers, but many have lost their appetite for putting employees and substantial assets in China. A U.S. furniture manufacturer we represent wanted its American employees out of China, and it ended up selling its China business to the manager who ran it and financing most of the sale. I have favored using Chinese distributors for years, and I have watched Western companies spend a fortune trying to sell good products in China on their own, with disappointing results.
Selling in China is hard, and most of the clichés about doing business there have some truth to them. It is not one market, and you can do well in Shanghai and get nowhere in another city. A capable Chinese distributor knows the customers and has people on the ground to deal with the messiness of selling there, but the wrong one can tie up your market for years while selling almost nothing.
Selling in China Without Setting Up a Company There
A distributor takes on much of the sales work and, depending on the agreement, after-sales support. The foreign supplier avoids the cost of a Chinese subsidiary and its employment, tax, and administrative obligations. Some of our clients have well-known products in China and no office or employees there. For other ways to reach Chinese customers without setting up a local company, see 6 Smart Strategies for Selling to China Without Being in China.
Using a distributor does not end the foreign supplier's China obligations. It still has to comply with Chinese product rules and protect its trademarks, and collecting from the distributor is its problem too. For many of our clients, the smaller physical presence is still worth a great deal, and keeping employees out of China also lowers the risk of exit bans arising from commercial disputes.
Find Out Who You Are Dealing With
I start out skeptical of a distributor that approaches you first, because wanting your product says nothing about whether it can sell it. I want to know what a prospective distributor has actually sold, where it has sold it, and who buys from it. "National coverage" often turns out to mean a warehouse and two salespeople, so a company claiming a nationwide network ought to be able to name its salespeople and the customers they cover. Check its ownership and litigation history, and look hard at its finances, including whether it has the money to promote a new product or expects you to pay for the entire launch.
Experience with other foreign suppliers is useful, especially when those relationships have lasted. Ask for references and actually call them. Then ask my favorite question: How does our product fit with what you already sell? A distributor with complementary products can be an excellent choice. If it is making good money selling competing products, look much harder. Good China due diligence catches some of these problems before anyone signs.
Ten Issues We Address in China Distribution Agreements
Clients often bring us distribution agreements that have worked in Europe, the United States, or Australia. We use them as a starting point because they reflect how the client does business, but we almost always rewrite substantial parts of them for China, and the issues below are where most of that rewriting happens. We cover the questions we ask before drafting in China Distribution Contracts: The Questions We Ask.
1. Define the Distributor's Role and Authority
The first question is who sells to the Chinese customer. A conventional distributor buys from the foreign supplier and resells on its own account. An agent finds customers and helps arrange sales for the supplier, usually for a commission. Our clients generally prefer the distributor model because the Chinese company takes direct responsibility for local sales and customer payments, and because it makes clear who handles importation.
Chinese law looks beyond what the contract calls the distributor to how the relationship actually works. A distributor that routinely signs contracts on your behalf can create Chinese tax exposure for you. Depending on the structure, the arrangement can also fall under China's franchise rules, which turn on how the business operates, including the rights the foreign supplier grants and the fees it collects.
I pay close attention to titles and authority. A distributor's key person often needs a serious title, such as China Director, to get meetings, above all with government buyers. We pair that title with a board-approved authorization letter that spells out exactly what the person can and cannot do on the client's behalf, for reasons we explain in Setting Up Your Chinese Distributor for Success: Titles and Authority Matter. The agreement needs to say whether the distributor can use sub-distributors and who answers for their conduct. Anti-bribery provisions belong here too. They matter most when the customers include state-owned enterprises or government bodies, and they need to address both Chinese law and, where it applies, the U.S. Foreign Corrupt Practices Act.
2. Register Your China Trademarks Before Your Distributor Gets Involved
I have lost count of how many problems began with a foreign company assuming that its U.S. or European trademark registration protected it in China. China is primarily a first-to-file country. A distributor can apply to register your brand, and getting it back can be expensive. When a distributor has registered a client's mark, we can usually negotiate an assignment if the distributor wants to keep the relationship, and the odds improve when its real money comes from manufacturing the client's products for export. Refusals tend to come from distributors that do not make the products or that earn more using the brand in China themselves.
A Norwegian company once asked us about suing its former Chinese distributor, which was manufacturing and selling the Norwegian company's products in China. The company believed it owned the Chinese trademark. After all, the distributor had given it a registration certificate. The certificate was fake. The mark had been registered to a Chinese individual who was licensing it to the former distributor. What the company thought was a straightforward breach-of-contract claim had become a much harder case.
Register the mark in your company's own name before the distributor starts using your brand. At the very least, get your application on file first, though a pending application is not the equivalent of an issued registration. Choose your Chinese-language brand name yourself. If you leave that decision entirely to your distributor or the market, Chinese customers can end up knowing your product by a name someone else picked. Our China trademark registration guide explains the filing process, and China Trademarks and Your Chinese Distributor covers what a distributor can do to you by filing first.
We give the distributor only the trademark rights it needs to market and sell our client's products. Those rights end with the distribution agreement, subject to any agreed inventory sell-off rights. The distributor may not register the client's marks, Chinese names, logos, domains, or confusingly similar brands. Where a registered mark is licensed, we address recordal of the license with the Chinese trademark authorities. An unrecorded license is generally valid between the parties but cannot be asserted against good-faith third parties. If the distributor will receive valuable confidential information, we consider the protections in our China NNN agreement guide.
3. Do Not Let Chinese Product Approvals Trap You
Before granting distribution rights, we check whether the product needs testing, certification, registration, Chinese labeling, or import permits. The agreement says who obtains and pays for each approval. If the distributor is responsible, we set a deadline and specify the consequences for missing it. Without that, a foreign supplier can wait indefinitely for sales that cannot legally begin.
I always want to know whose name will appear on each approval. An American medical device company we represented let its Chinese distributor act as its registration agent because the distributor offered to handle the paperwork at no charge. Five years later, the company wanted a stronger distributor. The old one was sitting on the registration certificate and the technical file and had no reason to cooperate. Every month it stalled was a month without sales. Where Chinese rules allow, we usually want the registration in our client's name.
The agreement specifies who handles warranty service and pays for recalls, including whether the supplier warrants directly to end customers or only to the distributor. Those provisions do not automatically shield the manufacturer from Chinese product-liability claims. If the distributor has few assets and inadequate insurance, its promise to indemnify the manufacturer is not worth much after a major product problem.
4. I Am Wary of Nationwide Exclusivity
Chinese distributors often ask for nationwide exclusivity. A distributor that knows the Shanghai market well does not necessarily have useful contacts in Chengdu or Guangzhou, and I rarely like granting rights to all of China without a strong business reason. We define the territory, products, and customers the distributor's rights cover, and whether our client keeps the right to sell directly or appoint other distributors.
We have seen companies sign five-year exclusive agreements and learn, two or three years in, that the distributor never placed a single order. The distributor signed to keep the product off the market while selling its own competing line, a pattern I describe in International Distribution Agreements: Beware the Eager Distributor. When our clients do grant exclusivity, we normally attach minimum purchase requirements, because purchases show up on invoices and claimed retail sales are much harder to verify. The agreement defines how performance is measured, any cure period, and the consequences of missing a target. During the exclusive period, we generally bar the distributor from handling competing products, after checking that restriction against the competition law that applies.
I like to give the supplier the right to end exclusivity without terminating the agreement. Suppose a distributor is selling a reasonable amount in Shanghai but nowhere near enough to justify control over all of China. Our client can appoint another distributor for the uncovered market and keep the Shanghai relationship if it still makes commercial sense.
5. Chinese Competition Law Limits Resale Price Controls
Clients worried about heavy discounting sometimes want to require their Chinese distributors to maintain minimum resale prices. We examine Chinese antitrust law before putting such restrictions in a contract. Article 18 of China's Anti-Monopoly Law restricts agreements that fix resale prices or set minimum resale prices. China's rules effective February 1, 2026 provide only a narrow safe harbor for certain fixed or minimum resale-price restrictions. In general, the party relying on the safe harbor has to prove that each party had less than a 5% share of its respective relevant market in every year of the agreement and that annual turnover of the covered goods stayed below RMB 100 million. Where the supplier has multiple distributors, their market shares in the same relevant market and the turnover of the covered goods are aggregated. Even if those thresholds are met, the safe harbor does not apply where evidence shows the agreement eliminates or restricts competition.
For most clients, we focus on the supplier's wholesale price and let the distributor determine its own resale prices. None of our clients has ever had a real resale-price problem in China, but a number of distributors have threatened to sue our clients or report them to the authorities when relationships turned rocky, claiming minimum prices our clients never imposed. The agreements contained no price restrictions to support those threats. When resale price control matters to the business, we review the specific restriction and the law that applies before anyone signs. Form contracts imported from other countries cause enough trouble that we do not rely on whatever price clause the client's standard agreement contains.
6. Settle the Marketing Budget Before Signing
I keep seeing the same fight start before a single order is placed. The supplier assumes the distributor will pay for advertising in exchange for exclusivity. The distributor expects the supplier to fund trade shows and provide samples, translations, and technical support. Nobody has worked out a budget. Six months later, both sides are annoyed, and sales have barely begun.
We try to settle who pays for what before we start drafting. If the distributor promises to translate manuals by a deadline or demonstrate the product to specified customers, we put those obligations in the agreement, along with our client's marketing commitments. A general promise to "promote the brand" is useless when the first year's sales come in far below expectations.
7. Get Paid and Get the Shipping Terms Right
For a new distributor, I favor payment before shipment. After I wrote about selling into China without being there, two clients emailed me with the same advice. However you structure the deal, get paid enough up front to make it worth your while, because there is a very good chance you will never see another cent. Once the distributor establishes a payment history, a client may decide to offer 30-day terms. If it does, the agreement needs a way to return to advance payment when the distributor pays late or its finances deteriorate. We often put prices in a separate schedule, with a defined procedure for updating them, rather than locking prices into a long-term contract.
Shipping terms create avoidable disputes when the parties use familiar acronyms without understanding what they require, so identify the Incoterms rule and the named place. For many shipments, FCA (Free Carrier) makes more sense than EXW (Ex Works), which puts export clearance on the buyer even when that buyer is in China. For containerized freight, CIP (Carriage and Insurance Paid To) often fits better than CIF (Cost, Insurance and Freight), which was designed for goods loaded on board a vessel.
8. A Good Distributor Needs Time to Build the Market
A foreign supplier understandably wants the right to terminate when things go badly. I have seen draft agreements that allow termination for any reason on 90 days' notice, even though the distributor is expected to spend heavily developing the brand. Ask yourself why a serious distributor would agree to invest in a market it can lose after three months' notice. When a prospective distributor accepts those terms without a murmur, or never asks for automatic renewal once it hits its targets, I get suspicious about how much money it actually intends to spend. The contract term ought to reflect the product and the investment required. We start some relationships with a trial period and others with a longer term and regular purchase targets.
Unlike the law in some other countries, Chinese law generally does not give ordinary distributors a special statutory right to goodwill compensation simply because a distribution agreement ends. A foreign supplier that terminates in breach of its contract still faces a damages claim. A clause allowing termination for "breach" without specifying the grounds, notice requirements, or cure procedures leaves plenty to fight about when the parties disagree over what went wrong.
9. Draft for Enforcement Against a Chinese Company
I distrust China contracts that read beautifully in English and provide for a lawsuit thousands of miles from the distributor's assets. For a mainland Chinese distributor, we ordinarily choose Chinese law and Chinese courts. Nearly all of our China contracts are bilingual, with Chinese as the controlling language. We never make both languages equally authoritative, because that invites an avoidable fight over what the parties agreed to.
When the defendant and its assets are in China, Chinese courts are generally the more direct and less expensive choice. I also think highly of CIETAC arbitration. State-owned enterprises often insist on it, and I prefer it when the distributor is in a smaller city where the local court is a concern. With CIETAC, freezing a distributor's assets still requires a Chinese court. We tend to leave the dispute-resolution provision until late in the drafting, and sometimes have two to five of our lawyers discuss jurisdiction and governing law before settling on it.
An English trading name and an informal signature do not establish which Chinese legal entity agreed to the deal. The agreement needs the distributor's correct registered Chinese legal name, and we normally also require its official company seal, or chop.
If a distributor registers our client's brand, sells outside its agreed territory, or keeps using the trademark after termination, our client needs a contract that clearly prohibits that conduct and provides a remedy that works under Chinese law. We frequently include contract damages provisions for those breaches. Those provisions can help define the monetary claim and support an application for property preservation, including a bank-account freeze. A damages clause does not freeze assets by itself. The court decides whether to grant preservation and can require security. Chinese companies generally understand what a damages clause can lead to in their own courts, which makes it one of the best tools we have for getting them to honor the contract. Pages of broad American-style indemnification language will not cure a contract that lacks usable remedies under Chinese law.
10. Plan the Breakup While the Relationship Is Still Good
When a distribution relationship ends, the distributor is still holding whatever it has not sold. Without an agreed procedure, the parties fight over whether the distributor can sell the remaining inventory, whether the supplier must buy it back, and at what price. We answer those questions in the agreement, along with pending orders and continuing warranty obligations, while the two sides are still on speaking terms.
The foreign supplier needs some of the distributor's customer information to keep selling in China, even if the distributor built those customer relationships. Where those records contain personal information, China's Personal Information Protection Law governs how they are handled and when they can be sent outside China. The agreement must account for those limits instead of promising an unrestricted transfer. We establish who controls the Chinese websites, e-commerce storefronts, social media accounts, and domain names used to sell the brand. If a product approval cannot legally or practically be transferred, the contract needs realistic cooperation obligations rather than a meaningless promise to hand everything over.
