• 4 reasons why importers need to write contracts with their Chinese suppliers

    Posted on 7 Comments

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    Importing from China and other Asian countries is a risky and complex process. Signing a contract can be the antidote against a wide range of common mistakes and issues when importing from China. This article will give an introduction to why a signed and stamped contract with your supplier can make a huge difference on your bottom line.

    Reason 1: Clarity regarding product specifications can prevent disastrous misunderstandings

    Misunderstandings between the supplier and the importer regarding materials, design, components, colors and other product specifications are the most common reason why quality issues arise when importing from China. We list a few reasons below:

    • Important product specifications are easily lost in translation when communicating over email or Skype

    • It is common for sales managers to confirm orders that the supplier doesn’t have the capability to manufacture. For example, using certain materials, components, colors, sizes or CE / FCC compliance. You’re probably communicating with a sales assistant when discussing prices and confirming the order. Unlike the engineers, the salespeople (in China) often lack a deeper product knowledge
    • Many importers assume that the suppliers will “fill in the gaps” on the product specification list. Here, a “gap” is an unspecified part of the product description. It could be a material or a color. The supplier will certainly “fill in the gap” somehow, but it could end up with the supplier using a cheaper, sub-standard material and/or component, potentially ruining the product
    • If your country and/or market requires your product to be compliant with a standard such as CE and RoHS, this compliance must be specified in advance. If your supplier is not aware of your requirements before starting production, then your products are unlikely to be manufactured according to this standard. Never assume that the supplier will ensure compliance just because you are an American or European buyer
    • In a sales agreement, all product specifications such as colors, materials, components, dimensions, etc. shall be clearly specified, for the supplier’s management to confirm. You also can add attachments such as graphical descriptions, logo design prints, color samples and sample photocopies to make it even more clear. This is the best way to minimize the risk of misunderstandings with your Chinese supplier

    Reason 2 Compensation terms for non-compliance makes your supplier think twice about cutting corners

    It’s not uncommon that suppliers in China make huge promises on pricing and product quality to get your order, then cut corners during production by using cheap and sub-standard materials and/or components. The key to avoiding this issue is to make the supplier aware that it is facing a serious risk of losing a lot of money if it tries to cheat you on quality. Your contract should include the following:

    • Specification of defects and damages that will not be accepted
    • How a defect or damaged product shall be compensated (refund, remake or repair) and within what time frame
    • The supplier shall not request the final balance payment until the batch has passed quality inspection and product testing
    • The supplier shall refund the (pre-production) deposit payment if the quality inspection and/or product testing fails

    By adding clear compensation terms in your contract, you will communicate to the supplier that any non-compliance will expose them to great risk. However, this will only work if you hold the final balance payment until after quality control and product testing. Never prepay the whole order before production or you will have no leverage over your supplier in case of a dispute.

    You should tell the supplier from the beginning that you intend to inspect and test the products before the final payment. Some suppliers will quote you a higher price and some will pull out, simply because they base their pricing on products that cannot pass testing or for some other reason are non-compliant with your requirements.

    Reason 3: Avoid delays

    Your contract shall include a “Late Delivery Clause” that becomes active after XX days counting from the date of the deposit payment. Usually this is the stated production time +7 days. A specified amount of money (around 1% of the total order value) shall be deducted from the balance payment daily until the order is ready for delivery.

    Example

    Your supplier have 10 orders in the pipeline and the production schedule is becoming tight. Three of 10 buyers have contracts which specify US$150 will be deducted daily for 35 days after the date of the deposit payment. For natural reasons, the supplier is likely you prioritize these three buyers and let the other seven wait.

    This mindset can be applied not only in the Late Delivery Clause, but also the agreement as a whole. While it’s true that a contract will not guarantee success, it will still to minimize the risk for quality issues, delays and other issues.

    Reason 4: Send the message that you take your business seriously

    If you are not serious with your business, then why should the supplier be? China has been open for business for a few decades by now, and many exporting companies in eastern and southern China are accustomed to signing agreements with new buyers. If you try to “comfort” your supplier by not placing a contract draft on the table, you might look like a disorganized buyer, and can expect to be quoted accordingly!

    Summary

    Why should you lock your bike when a thief can cut the lock open anyway? Because a thief is more likely to steal someone else bike if yours is too much of a hassle. A well-written contract can result in the following:

    • Minimizing risk for misunderstandings
    • The supplier will think twice about cutting corners and cheating you on quality
    • It can establish a framework for how to handle disputes and compensations
    • Avoid delays
    • Makes you look like a serious buyer

    In my opinion, the Sales Agreement is the most important part of the entire purchasing process, when dealing with Chinese suppliers. That’s also why we always include a downloadable Sales Agreement template when you purchase a Starter Package or Supplier Screening on Chinaimportal.com

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  • 7 Responses to “4 reasons why importers need to write contracts with their Chinese suppliers

    1. Jan at 5:36 am

      I’ve a issue with a China supplier.
      We have been talking for more than 1 month to settle the order terms and conditions. Thus, they have agreed to the terms & conditions of the sales. Both the PI and PO has been signed & put company seal for the new order. And we had already paid the 30% Down Payment.

      **But 2 weeks later, they refuse to accept and honour the signed & stamped PI & PO, as they want to change the conditions to insist that we order double the quantity.

      Is there any China government department where we (as Buyer) can complain to? Need help! Thank you.

      1. Nabros at 1:27 pm

        Hi Jan, I am also interested in a reply to your question from Fredrik Grönkvist.

    2. Boris at 5:52 pm

      Hi Fredrik

      When sending PO to supplier, in form itself should I reference supplier’s registered address or operational address when I close deal with sales person? Same thing with PI issued by supplier. What kind of address should be there?

      Now let’s assume it matters for it to be operational address but I receive PI with registered address. Is that a problem and do I need to ask reissue of PI with signature of registered address representative’s signature and round chop as well as factory general manager’s signature from operational address?

      Thanks

      1. Fredrik Grönkvist at 8:28 pm

        Hi Boris,

        1. I don’t think the address is that important on the PO. However, the suppliers registered (as specified on their Business License) address shall be present on the PI. This is, of course, also true for the company name.

        2. Hmm, we only refer to the registered address on the PI. However, when we draft agreements, we always request the supplier to specify the operational address, which is the place where the goods are manufactured.

    3. Tom at 8:39 am

      Hi,

      Thanks for another really useful article.

      Could you let me know how a foreign importer would construct a contract that needs to cover two companies across two legal jurisdictions? Would the foreign importer need to find a Chinese representative company to sign a Chinese contract on their behalf?

      Also, if an issue arrises, how easy is it for a foreign importer to take the Chinese manufacturer to court?

      And one last question, do you consider it necessary to set up a contact regardless of the size of transaction or would manufacturers refuse if you were making a small volume order?

      Many thanks

      Tom

      1. Fredrik Grönkvist at 10:24 am

        Hello Tom,

        You will need to specify a “Choice of Law” clause. Does this transaction involve more companies than a supplier in China and a buyer in a 2nd country?

        I will send you an email with a few questions.

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