By: Sindy Pei
As a European company in the automotive or machinery industry, there are many elements to keep in mind when you are sourcing in China: price, quality, the delivery time of the products etc. After the project is launched, there is also a series of contract documents that need to be signed with the supplier. The contract documents are the most critical part of the entire project. Once the contract is in effect, it is legally valid and binding, so the purchasing contract should be carefully reviewed before it is signed. In this article, we will share with you some considerations when signing contracts with a supplier in China.
First of all, the preparation before signing the contracts: we should conduct a detailed background investigation on the supplier and review the business license to understand its business scope, capital, credit, operation, and the employed staff – basic information. This information can be obtained through internet research, but of course, the best way is an on-site audit, which is the most direct and effective way to assess the supplier’s ability to perform the contract. These assessments evaluate the stability of the company’s employees to avoid staff leaving the company or replacement during the project, which might have an impact on the progress of the project and the quality of the products; at the same time, you can see whether the supplier has a stable capital chain, which is important to avoid interruption or stagnation of the project due to a shortage of funds in the middle of the project.
Secondly, the contracts we signed with the supplier should be on top of the ones we signed with the customer. We should sort out what agreements we have signed with our customers, such as Non-disclosure agreements, mold purchase contracts, long-term supply contracts, quality agreements, logistics agreements, etc. We should ensure that we sign the same documents with our suppliers and keep the main terms and conditions of our customers and suppliers in line to avoid unnecessary losses to our own company due to information asymmetry between customers and suppliers. Take the price adjustment method and payment method as an example. If we agree with the customer to adjust the product price quarterly according to the increase or decrease of raw materials and the payment method is 50 days after receiving the goods, then we should use the same way or a better way to agree with the supplier in the contract.
In addition, the quality standards of the products should be clearly stipulated in the contract to avoid disputes caused by the quality of the delivered goods not meeting the desired procurement standards. The risk control of quality clauses in the contract mainly includes the following points:
Usually, the supplier’s delivery destination is a domestic port, while the delivery destination we provide to our customers is Europe. The sea freight from China to Europe is relatively long. To avoid special circumstances, suppliers should prepare some stock in case the goods cannot be delivered to the customer in a timely manner due to factory reasons; the supplier should bear the additional air freight or penalty incurred. These terms should be agreed upon in advance with the supplier in the contract.
The contract should also clearly indicate the packaging standards, such as easily damaged and rusty goods, preferably accompanied by graphic and textual explanations; General goods can refer to industry standards; In addition, packaging requirements should also consider environmental protection. EU countries with limited requirements for environmental protection need to consider the supply, recycling, and related costs brought by packaging.
The contract must clearly define the obligations and responsibilities of both parties for breach of contract. Both parties to the contract should agree on a solution and legal liability for the breach of contract in order to ensure their legitimate rights and interests. For example, it is agreed that in case of breach of contract, a penalty should be paid, and the supplier should compensate the customer for their losses in case of breach of contract and provide corresponding solutions; agree on applicable laws, jurisdiction, intellectual property rights, confidentiality clauses, termination conditions, etc. When there is an inability to fulfill obligations as stipulated in the contract, timely communication and negotiation should be conducted with the supplier. If the supplier agrees to modify the agreement, a written supplementary agreement shall be signed with the other party in a timely manner.
The automotive and mechanical components industry may involve many details due to the characteristics of products, and what we have mentioned above are only some of the risk points. bdp has many years of experience working with suppliers, and our procurement and legal teams can provide you with comprehensive contract review and evaluation services.
bdp Mechanical Components further offers our full range of services, including purchasing, supplier audit, process audit, product inspection, and logistics.
Feel free to contact us at email@example.com with any further questions you may have regarding appropriate supplier selection.
Our bdp Mechanical Components team will be happy to advise and support you.