As the China-US geopolitical environment continues be problematic, our clients and prospective clients have pivoted from joint venture relationships to distribution and similar licensing-type relationships. This is not a one-sided trend. We are seeing an increase in these distributor relationships going both into China and out of China.
From the questions we receive, we see that both Chinese and US companies are aware of the risks of both countries more than in the past. This is also true for companies from countries that have taken concrete steps to ally themselves more closely with the US. In this blog post, I focus on US companies looking to become core distributors for Chinese manufacturers and brands, but these principles can be extended to other jurisdictions.
What Language Should My Distribution Agreement Be In?
Whether a distribution agreement will be negotiated, drafted, and executed entirely in English or Chinese will largely depend on the parties involved. That decision always hinges on the relative negotiating clout of the parties. That negotiation clout, in turn, often depends on which party needs the deal more. In the current business environment, Chinese manufacturers are hurting, but so are distributors looking to sell into countries where inflation continues to be a significant concern for consumers. You should not necessarily shy away from a Chinese-language agreement or conclude that you won the negotiations because the agreement’s official language is English.
Which Country’s Laws Should Govern My Distribution Agreement, and How Should We Resolve Disputes?
After considering the language of choice, you should consider the governing law and dispute resolution provisions of the agreement. The right choices here hinge on which party will most likely breach the agreement.
You may think that my clients are less likely to breach than their Chinese counterparts, but that is not always the case. We work with many small and medium-sized companies who are trying to build or maintain their market share, often in the face of stiff Chinese competition that is using unfair trade practices, including government subsidies.
In situations where my client is more likely to breach the agreement, I want to place as many roadblocks to enforcement as possible. These will provide my client additional time and also decrease the likelihood that the Chinese party will muster and maintain the financial resources and willpower to enforce the contract against my client.
In that instance, I may push to have Chinese as the governing language of the contract and contract enforcement in China where my client has minimal or no assets and no plans to travel to China in their lifetime. But when the Chinese counterparty is more likely to breach the distributor agreement, I want Chinese language, Chinese laws, and Chinese courts involved, to put the enforcement point as close to the Chinese side’s asset base as possible.
Arbitration is a quicker and more reliable dispute resolution resource and makes sense where neither party wants to give the other a potential advantage. Many Chinese companies view Singapore as a favorable neutral arbitration location, and they will often suggest that ahead of any US location or a more neutral location like Vancouver or London.
How to Negotiate Distributor Agreements with Chinese Companies: A Case Study
Negotiation with Chinese companies is rarely straightforward. It may feel straightforward at the outset, and you may feel like you have been irrevocably welcomed into their inner circle, but that is just the beginning. There will be multiple rounds of negotiations and edits to documents, even after you feel that you have settled a particular issue, and sometimes even after signing your agreements.
Below is an excerpt of an email I sent to a client during negotiations with a Chinese manufacturer to try to establish an exclusive US distributor relationship:
Even though this type of back-and-forth, lost-in-translation transactional relationship is frustrating, I think we are getting more certainty about how China Co views its US opportunities.
We know that their ultimate goal is to make as much money in the US market as they can. Like basically all Chinese manufacturers, they don’t care about US (or Chinese) laws or regulations. They also don’t care about your relationship with them or their relationship with any other potential US distributor except as a means to sell more products.
They have zero motivation to change their current shotgun approach of trying to fill the US with wholesalers who will just resell the product for them. They do not want to put themselves in the legal crosshairs when their other unwitting US distributors will do so.
I believe they are not experienced enough with the US market to understand the difficult position they are putting you in. And as long as they have buyers for their products (either you or someone else), they won’t care enough to reassess their US strategy.
Your only viable path forward is to convince them that they will make more money with you than without you and that you are the right partner to invest in for a long-term relationship. I think that the steps you have taken this far have been smart, even if China Co doesn’t fully understand what you are offering to them.
China Co doesn’t appreciate the risk that you are taking on by becoming the importer of record and that their products could easily be kept out of the US market if they get flagged as problematic. But your engagement with them at the upcoming trade show should continue to build goodwill to eventually convince them that you should be their primary US distributor.
From China Co’s email, it sounds like either they have a standard distributor agreement they use with their distributors or they have a significant number of requirements they impose on their distributors through other means. Either way, I don’t see a downside to you asking them for clarification on these points and affirming that you prefer a more structured relationship to a loose one. They may just be waiting for you to put your money where your mouth is by placing some big orders first.
The fact that they didn’t redline this contract we proposed indicates to me that they probably aren’t used to working with lawyers, period. And we can also safely assume that they aren’t used to working with sophisticated and ambitious US companies who want to develop a deeper working relationship beyond just reselling products.
If you think it would be helpful, either I or my native Chinese colleague Emily Chen (or both) could get on a call to discuss this with you and them in both English and Chinese.
The cross-border business environment continues to change away from joint ventures toward relationships that can be more easily established and disassembled. We will continue to see this via distribution agreements and other creative licensing arrangements. These contours will vary depending on whether the business relationship revolves around goods or services and where the owner, distributor, and sub-distributors sit.
What are you seeing in your industry?
For more information, see:
Hong Kong Arbitration: Lawyers and Companies Are Just Saying No
How to Safely Reduce Your China Product Prices Because NOW is the Time
The Uyghur Forced Labor Prevention Act Puts Your China Imports in Danger
