Most quality issues are the result of misunderstandings. A Sales contract, can prevent those misunderstandings from occurring in the first place.
In my opinion, the sales contract is the most important mechanism of the entire importing and product development process.
But do Chinese suppliers really care about sales contracts – and how do you make them follow the terms?
And, can you draft a contract on your own?
These, and many other, questions, will be answered in this comprehensive guide on sales contracts for startups and other small businesses importing products from China.
1. Make sure to include these terms in your sales contract
|Manufacturer||The manufacturer name, business license number and address must be defined. This entity is ultimately responsible.|
|Seller||Many suppliers use companies in Hong Kong to receive the payment. This company shall be defined as the seller.|
|Product Specifications||List all product specifications and attachments. Don’t leave any product information out of the sales contract. If it’s not in the contract, you cannot demand a remake from the supplier.|
|Defect list||Write a definition of defective product (i.e., mold or scratches), and an accepted defect rate.|
|Compliance Requirements||List all applicable product safety standards and regulations, to which the product must be compliant.|
|Penalties||Define penalties that apply if the supplier fail to pass the quality inspection and/or compliance testing.|
|Product Packaging||Specify the product packaging design, dimensions and materials|
|Export Packaging||Specify the export packaging type, dimensions and materials (i.e., freight pallets).|
|Quality Control / Testing Terms||Write the quality inspection and lab testing terms|
|Payment Terms||Normally, the buyer pay a 30% deposit, and ties the remaining 70% to the quality control and lab test result.|
|Shipping Terms||Define mode of transportation, incoterms and more|
|Bank Account Details||List all account details of the seller|
|Late Delivery Clause||Penalties for delayed production|
2. Communicate your design and quality requirements to avoid misunderstandings
In my experience, 95% of all quality issues are the result of misunderstandings between the importer and manufacturer.
Many importers assume that their suppliers should have an understanding for what makes a ‘good quality’ product. I can understand this point of view.
However, this is not how manufacturing works.
Chinese suppliers have an OEM perspective. Hence, they expect the buyer to provide them with all relevant product specifications, standards and file attachments.
Nothing is to be taken for granted. No piece of information is too small or unimportant to be left out of the contract – be it a logo file, dimensional tolerances or more.
Further, promises and ‘confirmations’ made on Wechat, Skype or by Email are worth nothing. If it’s not in the contract, it never happened.
As such, the sales contract is primarily a communication tool.
The more (relevant) information you add to the contract, the lower the risk of misunderstandings and resulting quality issues.
3. List all product safety standards and regulations
Importing non-compliant products can result in financial ruin. To avoid such issues, you must list all applicable safety standards and other regulations (i.e., REACH or FCC Part 15) in the sales contract.
If it’s left out, you can’t blame your supplier for using non-compliant (i..e, toxic) materials and components.
And, do your research. Don’t just write that ‘the product must comply with all safety standards and regulations” in your country or market.
A few years ago, a customer in the home and furniture business did just that. And, while the supplier did know which fire safety standards to apply – they did not know about the regulations that apply to furniture for commercial usage (i.e., in hospitals and hotels).
The result was a batch of non-compliant bean bags.
4. Submit artwork, logos, datasheets and other file attachment
Even the simplest product might come with a long a list of file attachments. Design drawings, Logos, washing labels, material datasheets, technical standards, artwork – the list goes on.
Make sure to get every single file attachment printed, signed and stamped by your supplier.
That way you further reduce the risk of misunderstandings.
5. Tie the balance payment to the quality control and compliance test result
A contract is of little value, if there’s no way to enforce its terms.
So, how can you make the supplier think twice about using cheap and substandard components, or delaying your order?
Well, you simply have to give them an incentive to comply with your product specifications and other order terms.
The answer to that, is to tie the final balance payment to the quality control and lab test result.
Fail the quality control or the lab test (or both, and they will not get paid.
Yes, you will have paid the 30% deposit at this stage. And yes, the supplier could perhaps find another buyer for your products. And yes, there’s no way for you to get that money back.
But, the supplier still makes a huge loss, even if they steal your deposit payment (30%) and find another local buyer for the goods.
Local buyers will not pay as much as you (it’s ‘damaged goods’ after all), and the supplier’s profit margin is most likely below 5%.
Hence, the supplier has a very strong incentive to ensure that they get paid by their customers.
As long as you make it clear, that you will not, under any circumstances, pay the remaining balance until the quality control and lab test reports are back – you give the supplier a very strong incentive to comply with the contract terms.
It’s extremely simple, but it works.
Questions & Answers
Should I expect the supplier to present a contract template?
No, your suppliers can provide you with a basic Purchase Order template, at best – with terms that are exclusively to their own benefit.
As such, you must either use a sales contract template, hire a lawyer or draft a contract yourself.
What should I do if the supplier refuse to sign the contract?
Chinese suppliers are hard negotiators, and will do whatever it takes to ensure that they have an advantage. As such, you should expect fierce resistance, when presenting the contract terms to your supplier.
To deflect their attempts to not sign a contract (expect all sorts of reasons), simply refer to company policy or a decision from somebody higher up in the company. Real or imaginary.
In the end, most suppliers in China are find with signing a sales contract, and many will take you a lot more seriously.
They will handle your order with much more care, than those of other novice buyers that they could easily talk into giving up signing a contract.
How do I know that the sales contract is valid?
All pages, including attachments, must be signed by the legal representative and stamped, with the official company stamp.
The legal representative must use their legal name, in Chinese characters, and not a made up ‘English name’. You can use the www.gsxt.gov.cn to confirm the name of the legal representative.
Once signed and stamped, the supplier should send two or three copies of the contract, and all attachments, by post.
Sign each page (no stamp required) and return one copy by post.
What can I do if the supplier breaks the sales contract?
This depends entirely on when this happens. If the supplier violates the contract before you have made the balance payment, you have a strong card at hand.
Failed the compliance test? Remake, or you will not get paid.
But, once the supplier is paid, all bets are off.
China is not a lawless country. In fact, it’s legal system is more developed than most of our readers might assume.
Yet, taking legal action against a company or individual in a foreign country, is always a costly and time consuming enterprise.
Unless you stand to get compensation counted in the hundreds of thousands of dollars, the legal costs themselves will likely exceed what you could get from your supplier.
As such, the contract is instantly rendered a useless piece of paper, once you have settled the balance payment. At least for small businesses buying from China.
If you have the resources to take your supplier to a Chinese court, it’s a completely different story. But most of you reading this, do not have this option.
Can I include warranty terms in the contract?
You can, but can you enforce them?
Most likely, the answer is no.
You can list all the terms you want, but making a supplier repair or replace defective or damaged products several months, or even years, after the production, is practically impossible.
At best, suppliers will offer a warranty stating that they will offer ‘free replacements’ with your next order – and of course, adjust the unit price (upwards) for your next order accordingly.
As mentioned, the contract is only useful as long as the supplier has an incentive to comply with it. Once the balance payment is made, the supplier no longer has any incentive.
Further, keep in mind that replacements are not priced into the unit price.
I understand that this is a big problem for many importers, that are forced to offer year long warranties, while no support can be expected from their suppliers.
As such, you must tie the balance payment to the result of the quality control and lab testing.
You must also work with your quality inspection partner to figure out how you can simulate long term tear and wear of your products – as many quality issues may not be visible until after several weeks or even months of usage.
Use our Sales Contract template when buying from Asia
Not sure where to start with a sales contract? Look no further. We provide a comprehensive and easily modifiable sales contract template as part of our Starter Package.
In addition, you will also get access to tutorials, videos and task lists, guiding you through the entire negotiation, quality assurance and payment process. Visit this page to learn more.