Engaging a contract manufacturer in China is a common practice for businesses looking to leverage cost-effective production capabilities. However, it comes with significant legal risks. This article outlines key legal issues to address in your manufacturing agreement to safeguard your interests.

1. Intellectual Property Protection - One of the most critical concerns is protecting your intellectual property (IP). Ensure the agreement includes clauses that:

• Clearly define ownership of IP, including tooling, molds, and product designs.
• Prohibit the manufacturer from using your IP for other purposes or customers.
• Mandate confidentiality and non-disclosure obligations.

2. Product Quality and Specifications - Set detailed product specifications and quality standards in the agreement. Include:

• Testing and inspection protocols.
• Remedies for defective products, such as repair, replacement, or financial penalties.

3. Payment Terms - Clearly define payment terms, including:

• Advance payments, milestone payments, and final settlement.
• Methods of payment and currency to minimize exposure to exchange rate fluctuations.
• Penalties for delays or non-compliance.

4. Delivery and Logistics - Address delivery obligations, including:

• Incoterms to clarify responsibility for shipping, customs clearance, and insurance.
• Remedies for late delivery or failure to meet agreed-upon timelines.

5. Dispute Resolution - Choose a dispute resolution mechanism, such as arbitration or mediation, and specify the governing law. Many foreign companies prefer arbitration under recognized bodies like CIETAC to avoid potential bias in local courts.

6. Compliance with Local Laws - Ensure the manufacturer complies with:

• Chinese labor and environmental laws.
• Export control and anti-corruption regulations.Include audit rights to verify compliance.

7. Termination Clauses - Clearly outline termination conditions, including:

• Breach of contract.
• Failure to meet quality standards or delivery schedules.
• Insolvency or other financial difficulties.

A well-drafted manufacturing agreement is essential for mitigating risks and ensuring a successful partnership with a Chinese contract manufacturer. Engage experienced legal counsel to navigate the complexities and safeguard your business interests effectively.