- Tools and Molds.
A classic situation that differs between, say, doing business in Chicago and doing business in China might occur if you have molds or tools for manufacturing that were made to your specifications by (for example) a Chicago manufacturer, and you had duly paid for them, and then, if at some point in the future there were an end to your relationship with the people in Chicago, there would be a very good chance that you would be able to retrieve your molds (or tools) from those folks in Chicago. You had paid for them, they were made to your design specifications, and even in the absence of an express written contract on that point, there is a pretty good chance you would be able to get them back or ultimately convince a court to compel those folks in Chicago to ship them to you (or to a new designated manufacturer). This is particularly true after the copyright laws were modified in the early 1990s, so there is less "wiggle room" for claims of their ownership of design plans (or modifications) for the molds or tools, for example, by virtue of a lack of "work for hire" provisions.
This is NOT the case in China. If you do not have a written and enforceable contract in Chinese, with clear provisions regarding your ownership and their return to you of your tools and molds, there is virtually NO chance that any court or tribunal will even address a possible claim for the return of your molds, let alone rule in your favor. There are other provisions that should be negotiated into your written contract, as well—you may want to hold a security deposit in order to secure the return of the molds. If the Chinese party is unable or unwilling to provide money or a bond in advance (or if business has been ongoing already and so it is now “too late” for any advance deposit), then your contract will probably need to specify direct and probably punitive damages that will compound daily or weekly, if and so long as the other party refuses to return the molds. As one can see, without negotiating this now, there can be serious trouble ahead. With apologies to the Wizard of Oz, you must realize that “you aren’t in Kansas (or Chicago) anymore.”
- Supply and Delivery Contracts.
Because China is the primary manufacturer and supplier in the world, many companies in the West are very reliant on manufacturers, suppliers and shippers in China. Any number of problems can potentially arise. Frequent noteworthy problems may involve late or delayed shipments, shipments of nonconforming goods (wrong colors, sizes, parts, etc.), shipments of inferior goods, poor (or nonexistent) repair or warranty service, or sudden price or shipping or packing changes, etc. Again, in the absence of a written contract that clearly addresses all the above terms, a U.S. (or Canadian, Australian or European) buyer will have great difficulty in remedying the problem(s). At best, you might attempt to travel to China and try to use the potential loss of your future business for the Chinese supplier as leverage to try to bring that Chinese party into compliance. If that works (and obviously, that too in reality is but a gamble!), you are best advised to use that opportunity, if in fact it exists, also to leverage the Chinese party into entering into an enforceable written contract. Otherwise, you may only be setting yourself up for repeated trips back to China in the future to attempt to deal with future issues of compliance!
Similarly, I usually advise companies to be open to transparency for “cost plus” pricing or similar flexibility in the terms in their supply contracts. Unquestionably, there are cost fluctuations in China, and often they are much less foreseeable to your Chinese counterparty than would be the case for a manufacturer in the West, where there are much more reliable infrastructures in place and generally less volatility. If you are working with a “true manufacturer” (and not a broker, trader or other “middle person”), who is often operating at low profit margins and high volumes of production and sales, such cost fluctuations may be the difference between its operating at a profit or a loss. A manufacturer’s having to operate at a loss, due to its being bound to set prices, is a fairly predictable situation for its having to cut its production quality or output, or otherwise have production or service interruptions, all of which in turn will affect your business flow. Even with an enforceable master contract, it will cost you a lot of cash (as well as opportunity cost and business cost) to take a manufacturer to court, and (as in the United States) you could also end up with a hollow victory, where you win a judgment against a defendant that ultimately has no capacity to pay you. So careful planning should also maintain a thought as to what is best for your business in the long term, which may be competitive prices that are balanced with uninterrupted and consistent products and service.
- License Agreements.
The whole point of a license agreement is that you are not giving up all of something (but only a part) and/or you are only giving up something for a limited period of time, or for limited purposes, or for limited geographic places, or limited uses. All of those need to be stated clearly in writing in China, and in Chinese. The terms and conditions must be clear and must be in accordance with Chinese laws—if not, the license agreement may be deemed to be unenforceable, and you may therefore be found to have given something away that in fact was and is extremely valuable and that you had never (in your wildest dreams) intended to have given away. This should make the prospect of a junket to Macau seem much less risky and potentially more profitable than entering into a “licensing deal” in China where there is no contract or where the contract may not be valid and enforceable.
- Employment Agreements.
Start with an important concept—employment laws in the United States vary widely, from state to state. So it should not be terribly surprising that employment laws also vary widely from country to country. China has its own unique employment laws and regulations—which are different in Mainland China than in Hong Kong. And the laws in Mainland China have changed dramatically in the past few years and continue to change. Written employment contracts (in Chinese!) are generally required for most employment situations and must contain certain provisions. Employment laws may be more strictly enforced in some cities and in some regions than in others, and they may be enforced more tightly against foreign-owned employers and against employers who are in contracts or are in joint ventures with foreign entities than against strictly domestic employers. So once again, this is a situation where one should be carefully warned not to take a “laissez-faire attitude” of “this is how they handle it here.” Also, nondisclosure and noncompete obligations in China are treated very specifically and (much as may be the case in certain states in the U.S.) should be handled with great care and forethought. By mishandling such provisions, not only might such provisions be unenforceable, but the whole contract may be found to be void, and the employer could then even be subject to substantial penalties for noncompliance.
- Trademark Registrations and Brand/Design Protections.
The fundamental concept to understand is that unlike the United States, China is a “first to file” jurisdiction, so whoever files a trademark registration in China first (as opposed to whoever first uses a trademark—be it a name or logo) has be doing business (and I use that term in the very broadest sense) in China, you are STRONGLY ADVISED to discuss with your lawyer whether you should register trademarks for your business and any products in China. This should be considered even if you have no intention of EVER selling any of your products in China; I have seen examples where manufacturers in China have filed trademark registrations in China for the names of the American companies and the products for which they have either manufactured or assembled parts, and where the products were strictly for export back to America, for sale into non-Chinese markets. At first, the American companies had not been concerned, as (as noted above) they did not have any present intentions to sell their products into the Chinese domestic markets. However, I warned them that the manufacturers in China, if and when they ever obtained the trademarks in question, could charge the American companies license fees for the use of their very own names, even if it was merely for purposes of manufacturing or assembly in China! The resulting fiascoes could cause major business interruptions while new manufacturers in other countries were located by the American companies, and of course any molds and tools in China would have to be abandoned, and “pirated” goods potentially would be flooding the Chinese (and other) markets. All this could happen because the companies would not spend a few thousand dollars to file trademark registrations in China, in advance. the rights to that trademark in China. Subject to very few exceptions, as soon as you have any inkling that you will
