It is no surprise that more and more Australian business owners are arranging to have their goods manufactured in China. As an Australian business owner, if you are considering importing goods from China, you may need a manufacturing agreement. China may be an attractive location for manufacturing due to the: 

  • low labour costs  
  • technically skilled work force; and 
  • good infrastructure. 

This article will unpack the key considerations for your manufacturing agreement, including how you should draft it to ensure you and your business are protected.

Enforceability

One of the key considerations when deciding where to draft your manufacturing agreement is enforceablility. If you are entering into an international manufacturing agreement, and the relationship breaks down, you may run into issues. In cases where you make a payment but the other party does not provide you with your goods, you will want to rely on your manufacturing agreement to enforce the agreement.Therefore, it is important to consider where you draft your manufacturing agreement.

When considering where you want to draft your manufacturing agreement, one issue you may need to consider is which country’s laws will govern the agreement. If you are an Australian company and you have an Australian lawyer prepare your manufacturing agreement, your agreement will be in accordance with Australian laws. This means that if there is a breach of the contract, it will need to be interpreted in line with Australian laws. Similarly, if you have your manufacturing agreement prepared by the manufacturer, it will likely be based on Chinese commercial law.

Jurisdiction

When drafting your manufacturing agreement, the agreement will likely specify the country, state or territory which the manufacturing agreement will be enforced. This means that if Australian law governs your agreement, any legal action taken against your Chinese manufacturer must be held in Australia. If the legal action results in court, your manufacturer will need to come to Australia. Similarly, if the manufacturer drafts the manufacturing agreement in line with Chinese law and states that disputes are to be resolved in the Chinese courts, you will have to go to China to enforce your contract. In situations like these, navigating the Chinese legal system to enforce your contract can be difficult for you and your business.

You will also need to ensure that the manufacturer signs the agreement in accordance with its: 

  • constitution; and 
  • legal requirements in the country which it is incorporated.

Otherwise, you may find it difficult to prove that your manufacturing agreement has been properly authorised by the company and therefore not enforceable. 

International Commercial Arbitration

It is common to see international dispute resolution clauses in manufacturing agreements that are cross-border. This is a process where an arbitrator will hear the case of you and the other party and make a final and binding decision known as an ‘award’. Resolving a dispute through arbitration can be beneficial as the: 

  • proceedings will be confidential; 
  • arbitrators will be neutral; and  
  • award is final.

Rather than agreeing to be bound by the courts of a particular country, the parties may agree to attend international arbitration and be bound by the decision of the arbitration instead. 

International arbitration awards are generally enforceable in any country that is a party to the New York Convention. Australia and China are both parties to this convention. This means that international arbitration is often a popular option for many Australian businesses entering into manufacturing agreements with Chinese manufacturers. Despite the view that there may be a general reluctance from China to follow commercial law principles, there has been an increase in the number of foreign arbitral awards being enforced in China. This is encouraging for those looking to enter into an agreement with Chinese manufacturers.

If you would like any disputes between you and the manufacturer to be resolved through international arbitration, it is critical this is expressly stated in a written manufacturing agreement.

Key Considerations When Negotiating Your Manufacturing Agreement

When negotiating your manufacturing agreement with a Chinese manufacturer, the best way to avoid a dispute is to clearly set out in writing what you and the other party agree to. When negotiating your agreement, the key factors you must consider include: 

  • intellectual property;
  • the scope of engagement; and
  • termination.

Intellectual Property 

Protecting your intellectual property should be one of your key priorities in your manufacturing agreement. If you are investing money into designing and advertising a product, you will need to protect your product. Doing this will allow you to avoid issues of your manufacturer:

  • claiming your product as theirs; and
  • reproducing your products on a mass scale.

Therefore, your manufacturing agreement must be clear in stating that you own the intellectual property in the product being manufactured. Further, the agreement should also state that you provide them with a licence to use your intellectual property solely for the purpose of manufacturing the product for the length of time the agreement is in place.

If you are planning on selling your product internationally and have a registered trade mark in Australia, you will need to register a separate trade mark application in China, and any other countries in which you plan selling.

The Scope of Engagement  

Your manufacturing agreement should be tailored exactly to what you are engaging the manufacturer to do, to avoid confusion as to who can do what. You may engage the manufacturer solely to: 

The scope of engagement will determine what your manufacturer can and cannot do. It is therefore important to consider what you want before amending the agreement.

For example, when a manufacturer is just manufacturing a product for you, it is likely you will be concerned about: 

  • quality assurance; 
  • delivery; 
  • defective goods; 
  • payment; and 
  • insurance. 

If you are also engaging them to distribute your products, then you will need to think about the area they are allowed to do this, how commission will work and if they have any sales targets.

Termination  

There may be times where you will want to terminate your manufacturing agreement, including if:

  • the business relationship goes awry;
  • you no longer want to sell the product; or
  • you find a cheaper manufacturer.

If this is the case, you will need to look at your manufacturing agreement. Typically, the agreement will go for a set period of time. It is also possible that either party may be able to terminate for convenience whenever they please. When negotiating your manufacturing agreement, you will need to think about what will work best for your business.

Key Takeaways

Taking advantage of the international market and importing goods from China or elsewhere overseas is a decision many businesses make. When you do decide to go into business with a Chinese manufacturer, it is important you have a manufacturing agreement in place to clearly set out the relationship including: 

  • who owns the intellectual property; 
  • what the scope of engagement is; and 
  • how long the relationship will last for. 

One of the key decisions will be where you want to draft the manufacturing agreement. It is important to keep in mind that wherever you draft the agreement will be the laws in that country, state or territory, in which your agreement will be subject to. If you need assistance drafting a manufacturing agreement, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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Lauren McKee
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