The Importance of Contracts in International Manufacturing
Ten years ago, our international manufacturing lawyers often spent 10-20 minutes explaining the importance of having NNN Agreements and Manufacturing Agreements with Chinese manufacturers. And then another 10-20 minutes were spent explaining the need for a China trademark — even when NOT selling at all to China. We rarely have to explain these things about China anymore.
Moving Manufacturing from China to New Countries
As many of our clients shift their manufacturing out of China, we are once again providing detailed explanations on how companies can protect themselves in new markets, such as Vietnam, Thailand, Mexico, the Philippines, Indonesia, India, Bangladesh, Pakistan, Taiwan, Poland, and others.
As I advise our clients on these new markets, I notice that the fundamental principles for safeguarding their business interests remain consistent. The same core practices apply, regardless of the country. For example, just this week, I found myself explaining the importance of having a solid contract in place with manufacturers in Bangladesh, Mexico, India, and Vietnam.
These conversations highlight a critical point: regardless of the country, certain legal strategies are universally effective in protecting your business. Chief among these is the use of well-crafted manufacturing contracts.
Manufacturing Contracts Will Protect Your Company
Regardless of the quality of the legal system in the country where you are manufacturing, a well-crafted contract offers substantial advantages and, more importantly, protects your company and its intellectual property (IP). Many Western companies mistakenly think a strong contract's main purpose is to prepare for potential litigation. However, there are three key reasons why having a solid contract with your manufacturer is crucial—regardless of their location—and enforceability is just one of them. A well-constructed contract is vital for the following three reasons:
1. To Achieve Clarity
A well-written contract, in a language your manufacturer fully understands, ensures that the company you are working with comprehends exactly what is expected of it. Put simply, it will put the two of you on the same page.
For instance, if you ask a Vietnamese supplier for a 30-day delivery, they will likely say "yes," even if they can't meet that deadline. However, if your Vietnamese supplier signs a contract written in Vietnamese that specifies they must pay a penalty of 1% of the order's value for each day the shipment is delayed beyond 10 days, you can be confident that they understand the importance of the shipment terms and are committed to meeting them.
2. To Prevent Your Manufacturer from Breaching
The second reason for having a well-drafted contract with your manufacturer is to create a strong incentive for them to comply with its terms rather than risk violating it. A well-written, potentially enforceable contract clearly outlines the manufacturer's obligations and makes it apparent that failing to adhere to these terms could lead to costly legal action, such as a lawsuit or arbitration, which they might not only have to finance but also risk losing.
Take the 30-day shipment time as an example. If a manufacturer is producing widgets for 15 different foreign companies, and five of those companies have explicit deadlines and clear penalties for delays in their contracts, the manufacturer will virtually always prioritize production for these five companies if it starts falling behind. You need to make sure your company is one of those five companies.
Our law firm has worked with several companies that experienced a significant reduction in delivery delays and quality issues after implementing our contracts with specific penalties for non-compliance. One client, a U.S.-based electronics company, recently reported a substantial decrease in late shipments and product quality problems from its suppliers in Vietnam and Thailand after adopting the agreements we prepared for them.
We've drafted over a thousand manufacturing contracts, none of which required litigation, highlighting their effectiveness in preventing breaches. Our contracts use precise language and clear terms that are easily understood by manufacturers, making the expectations and consequences of non-compliance clear. This clarity deters breaches, aligns commitments, and reduces the risk of disputes. The true strength of well-crafted manufacturing contracts is not just their enforceability in court, but their ability to proactively manage risks and maintain strong, cooperative business relationships without the need for legal action.
3. Enforceability
Enforceability is the third key reason for a strong contract. Robust contracts not only prevent problems but also enhance the chances of resolving any issues that may arise. These contracts improve the likelihood of winning in court if a dispute escalates to litigation and also enhance the prospects of achieving a favorable settlement outside of court
Conclusion
A well-drafted contract with your manufacturer provides clarity, reduces the risk of breaches, and strengthens your position if enforcement becomes necessary. By clearly defining expectations and consequences, robust contracts not only safeguard your business interests but also foster stronger, more reliable relationships with your manufacturers. Whether entering a new market or strengthening existing manufacturing partnerships, a comprehensive contract is essential.
Manufacturing Outside China: Why Bother With A Contract?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.