Who should sign your China OEM Agreement?
This issue typically presents itself when a Hong Kong or Taiwan entity wants the OEM agreement (a/k/a the contract manufacturing agreement or supplier agreement) to be with it, and not with the PRC entity that will actually be manufacturing the product. Our international manufacturing lawyers constantly deal with this issue when drafting China OEM agreements, usually in one of the following three situations:
1. The Hong Kong/Taiwan entity is the parent company of a PRC WFOE, and that WFOE owns and operates the factory that manufactures the product.
2. The Hong Kong/Taiwan entity has no ownership stake in the PRC entity that owns the factory. Rather, some or all of the owners of Hong Kong/Taiwan entity are also the owners of the PRC entity. Or maybe the owners of the Hong Kong/Taiwan entity and the PRC entity are part of the same extended family.
3. Neither the Hong Kong/Taiwan entity nor its owners have any financial interest in the PRC entity. The Hong Kong/Taiwan entity is merely a sales agent for the Chinese factory.
Though it is nice to know the real relationship between the Hong Kong or Taiwan entity and the PRC factory, it usually is not critical for determining how to write the OEM contract. We generally prefer our clients’ OEM agreements be with the PRC entity and not with the Hong Kong/Taiwan entity for the following reasons:
- We know the PRC entity has assets because we know it owns a factory. Oftentimes the Hong Kong or the Taiwan company has no assets beyond a rented office with a few chairs, desks and computers. We prefer our client have contract and litigation leverage over a company with a factory than a company with some chairs. Also, a company with a factory is more likely to abide by a contract than a company with some chairs.
- Our OEM agreements contain non-disclosure, non-compete and non-circumvention provisions. See China NNN Agreements. The PRC entity, not the Hong Kong/Taiwan entity, is by far the most likely entity to manufacture and sell our clients’ products in competition with our client. We therefore want that manufacturer to sign a contract that prevents it from doing such a thing.
- If the manufactured product is of poor quality or delivered late, it is easier to deal with the entity that actually did the manufacturing.
- We want the payments to go to the entity that actually does the manufacturing, rather than an interposed Hong Kong or Taiwan entity that receives payment for the manufacturing, and we want the OEM agreement to reflect this. For one thing, the PRC factory could claim it was never paid by the Hong Kong or the Taiwan factory, and use that as a reason not to manufacture for our client. Yes, this problem can be dealt with by contract, but doing so complicates things, not least because it brings another jurisdiction into play.
What are you seeing out there?