We love contracts in the West. We've all had a grandparent or other older person remind us “I remember when a handshake meant something”. And whenever I'm told this, I remind them that in their days they also never had Legal Zoom!
China isn't necessarily a country frozen in time where handshakes still mean something. However, for smaller importers, contracts with your Supplier are rarely a necessity, at least how we know them in the West. I deal with many of my Suppliers without a “contract”. There's two reasons why:
- If a Supplier takes your money and runs, no contract is going to prevent them from doing that.
- Most of your issues with your Suppliers are going to be quality related and it's difficult to have a contract ensure quality (let alone enforce it)
In reality, every Purchase Order I submit to a Supplier is in fact a contract between me and the Supplier so the title of this article is actually a misnomer. But the point I'm trying illustrate is that you shouldn't concern yourself with crafting a fancy document written in legalese (if you want one, China Law Blog has a great template) to give yourself the illusion that it will give you some type of legal protection.
Every Purchase Order Should Include These Two Things
When you issue a Purchase Order to your Supplier, every PO you create, should include at least a couple of things on it:
- What are the payment terms? (EXW? CIF? FOB? and any of your other favourite incoterms)
- What are your shipping terms? (30% downpayment, 70% upon completion? Wire Transfer? PayPal?)
Including these in your PO forces you and your Supplier to come to some understanding on these two very important facts. It's not necessarily common for a Supplier to be manipulative and deceitful with shipping terms and payment terms; however, it is common for a Buyer to think they're being quoted FOB Shanghai when they're being quoted EXW Shanghai (which is like shopping in a department store and prices being listed including tax versus excluding tax) simply because they ignored what their Supplier quoted or because the Buyer never bothered to ask.
The same is true about payment terms. While these are less likely to have confusion than shipping terms, there are some misunderstandings such as Buyers thinking they can pay via PayPal when in fact their Supplier doesn't accept it or they charge a premium for paying this way (Chinese companies love to add a 3-5% surcharge for credit card related payments).
There's a third thing I also include in every Purchase Order I make which doesn't necessarily ever result in me saving money, but it does result in me getting all of my orders to my doorstep more quickly. I reveal this in the Importing course (I know- I'm cruel for having this teaser to get you to buy the course but I need to pay for my Starbucks somehow).
Beyond the Contract: A Product Checklist
Even though I don't have a contract per se, I often give my Supplier a quality checklist that I have them initial for each product. Again, this checklist isn't used as a legally enforceable contract. It's used to ensure my Supplier and I are on the same page. Here are some basic things I include:
- “Made in China” label required?
- Suffocation label required?
- Instructions required?
- Packaging requirements? Plain brown box? White Box? Sticker?
- Shipping marks?
- How many items per carton?
Could I have a lawyer craft all of these specifications into a contract? Sure. But in my experience, the vast majority of the time when expectations are clearly and unambiguously outlined between me and my Suppliers, they perform exactly what is requested. And again, if they don't perform as expected, if you can't work out the disagreements personally with your Supplier, the chances are that no one else can help you.
There's also many things which are exclusive to our products, for example, specifying that 600 Denier Polyester must be used. Chinese Suppliers have a nasty habit of sometimes substituting and omitting materials that are not clearly specified. Having a checklist removes the threat of this. I simply send my Suppliers a very basic PDF. I know some Buyers who make their checklists much more complicated than this and have them translated into Chinese (see the inspection checklist, um, checklist, here). It doesn't need to be complicated.
Remember, that when making specifications to your Suppliers, a picture often means a thousand characters. If you have something that is even slightly complex to explain, use a picture! Find a picture of the product (or one similar to it) and illustrate any of your product specifications in Photoshop or MS Paint. For example, we needed a product tag attached to a very specific area of our product. Rather than trying to explain where to place it, I simply drew a picture. Knock on wood, any time I have given a Supplier an illustration, things have arrived exactly how I expected.
When Do You Need a “Contract”?
If you're spending a lot of money into developing a proprietary product, a contract is a good idea. Again, if not for enforcement reasons, then the fact that sitting down with a Lawyer specializing in doing business in China can help you think of questions you never even thought of asking.
And of course, if you're working for another company where your boss will almost certainly expect you to have some formal written contract with any Suppliers, you should have a contract (not to mention if you're working for a company large enough to hire a professional Purchaser like yourself, then they probably also have the means to enforce contracts).
Maybe I'm lucky and have never been in a situation where I either needed a contract or where a contract would have saved me. But I do believe for most small importers and solopreneuers, the time spent crafting and devising contracts could be better spent opening up MS Paint and making some crude drawings demonstrating their product needs.
What has your experience been with contracts and doing business in China? Do you use contracts when you make orders? Do you have a product specification checklist you provide? Please comment below!