Ensuring China Factory Delivery Dates
Late product deliveries from Chinese factories are incredibly common, but you already knew that.
Here’s something you may not know: late deliveries usually stem from bad communication and bad contracts.
This post will arm you with what you need to reduce your chances of late product delivery from your Chinese factory. It will provide you with practical guidance on drafting Chinese manufacturing contracts that include clear delivery timelines and liquidated damages provisions. Clearly defining delivery terms and setting penalties for late shipments beforehand can help ensure timely receipt of your orders from China.
1. Drafting Clear Delivery Terms in Manufacturing Agreements
Establishing clear delivery terms in manufacturing agreements is crucial for timely deliveries. Specifying delivery dates and including liquidated damages provisions helps ensure adherence to delivery schedules.
a. The Importance of Specific Delivery Dates
When drafting a China Manufacturing Agreement, our law firm’s international manufacturing lawyers always pay close attention to delivery times. Much of the time, our clients come to us with a term sheet or an oral agreement with their Chinese manufacturer dictating something like 30 days for delivery. We like strictly tying the Chinese manufacturer to the “agreed-upon” delivery date with a liquidated damages provision tied to late delivery. See Drafting China Contracts That Work. We often include a clause in the Agreement like “Delivery should be within 30 days, and for every additional day, the Chinese manufacturer will pay the buyer 1% of the purchase order price within ten days.”
b. Liquidated Damages for Late Deliveries
When there’s a set penalty for late delivery, Chinese manufacturers become more realistic about their delivery times and reveal that they cannot make deliveries within the previously “agreed” time frame. Our client usually realizes it is better to get real agreement (even if longer than originally anticipated) before ordering, rather than getting late delivery after ordering.
2. Understanding Liquidated Damages
Liquidated damages are pre-agreed damages that are to be paid if contract terms, like delivery dates, are breached. It’s a way to compensate for potential losses without having to go through a lengthy court process. Liquidated damages provisions act as deterrents to breaches and help in quicker resolution of disputes. Chinese courts look favorably on such provisions, and they will enforce them if written appropriately.
Liquidated damages are sometimes referred to as contract damages or stipulated damages.
a. Setting The Right Liquidated Damage Amount
A typical contract might state that if Chinese Factory X breaches the agreement with late delivery, Party Y would be entitled to $50,000 for each day late as liquidated damages. Most of the liquidated damages provisions the China lawyers at my law firm draft contain multiple such provisions, reflecting various potential scenarios.
Figuring out the right dollar amount for liquidated damages involves more than just pulling a number out of thin air. It’s a blend of legal expertise, extensive real-world experience with China, and the delicate art of negotiation. Our China legal team collaborates extensively when determining these figures and we engage deeply with our clients (and even the opposing party) to ensure the chosen amount accurately represents the stakes involved.
b. The Value of Liquidated Damages in Preventing Late Deliveries
These liquidated damages in contracts with Chinese companies are invaluable, especially for preventing late deliveries They are a crucial instrument in conveying both the importance of the delivery date and the potential consequences for failing to comply with that date. Getting the liquidated damages provision right is crucial when drafting contracts for China, especially regarding delivery dates.
c. Negotiating the Liquidated Damages Amount
In trying to arrive at a number, we frequently account for the overall amount at stake, the potential damages from a breach, the prestige of the Chinese company, and even the location of the court. Our overarching goal is to come to an amount that’s high enough to deter a breach, yet reasonable enough to ensure the contract is both signed and enforceable by the Chinese courts.
3. The Balancing Act with Chinese Courts
A well-crafted liquidated damages provision deters breaches and facilitates dispute resolution. However, a balance must be struck to avoid such provisions being viewed by Chinese courts as punitive rather than compensatory.
a. Walking The Fine Line Between Liquidated Damages Versus Penalties
Our lawyers are always conscious of the fine line that separates liquidated damages from penalties. An excessively high figure might lead a Chinese court to dismiss it, viewing it as punitive measure rather than a compensatory one. Many foreign companies, in their quest to shield themselves from potential losses, set the bar way too high, unwittingly making enforcement a challenge.
b. Liquidated Damages as Delivery Date Game Changer
Chinese companies often prefer signing contracts with high penalty clauses, knowing they may be deemed unenforceable by the Chinese courts. I know this because many Chinese lawyer friends have told me.
Well-structured liquidated damages can be game changer in terms of ensuring your product delivery expectations are met and in providing a strong basis for prejudgment attachment of assets if they are not met. Prejudgment attachment allows for seizing or freezing the other party’s assets before the court decides on the case, making it a powerful means of exerting leverage against your Chinese factory.
Because Chinese companies do not want their assets seized or frozen, well-crafted liquidated damages provisions are a great way to scare them into abiding by their contracts.
4. Clarifying Delivery Timelines: 30 Days From What?
The other, somewhat related issue we face on delivery times is that when our client comes to us and says it has agreed with its Chinese manufacturer to a 30-day delivery schedule, we then have to figure out 30 days from what. We typically go with 30 days from the issuance of the purchase order, but the Chinese company often pushes for it to be 30 days from its receipt of payment or 30 days from its receiving proof of payment.
Clarifying the starting point for delivery timelines is essential to avoid misunderstandings and to ensure that both parties have the same expectations regarding delivery schedules.
5. The Power and Challenges of China Liquidated Damages
Though seemingly straightforward, liquidated damages in Chinese contracts can dictate the trajectory of your China business endeavor. They are a powerful tool when wielded correctly, providing leverage, security, and peace of mind. As always, the little details are important. With China contracts, nailing down the specifics can make or break a deal or even a business. More simply, liquidated damages can be a great thing in a China contract, but only if done right. When well-structured, liquidated damages are a powerful tool for ensuring delivery expectations are met, but the details within these provisions can significantly impact success.
a. Achieving Certainty in Delivery Expectations through Well-Structured Contracts
Certainty is important for delivery dates and the best way to achieve that certainty is with a written contract — in Chinese — that sets out your delivery expectations and the penalties that will accrue if your Chinese manufacturer fails to meet them.
6. Conclusion: A Blueprint for Timely Deliveries
International manufacturing agreements, particularly with Chinese manufacturers, requires well-drafted contracts. Having clear delivery dates and China-centric liquidated damages provisions in your China manufacturing agreement are key to ensuring timely deliveries and providing a pathway for resolving delivery issues that may arise.