The Importance of Contracts When Importing From China

I often hear the saying, “the greater the risk; the greater the reward.” Although the risk/reward concept makes sense in most cases, let us not exaggerate.   Importing from China is a risky and complex process in and of itself, if you want to reap rewards from it, you must do everything possible to control and reduce the risks.

One way to do this is to pay attention to contracts.

Many importers I have interfaced with are faced with so many concerns and details when placing – and renewing orders that they forget to be ironclad in the process of having a signed and stamped contract.  Paying attention to this simple exercise can make a huge difference when importing from China.  Sending an order via email is simply not good enough.

The main reason you should have a signed and stamped contract is to eliminate/reduce misunderstandings. Importing from China is a challenge, so you should include in the contract as much detail as possible about materials, specification, design, colors, and components or as well as concerns about quality issues and specific processes to control quality.  At CPG, all our contracts include a PSS (Product Specification Sheet) and an ISS (Inspection Specification Procedure) for each product ordered.  This may appear bureaucratic to some, but the factory that signs the contract pays attention and it can save a lot of aggravation in the end.

Email and Skype are great for communications, but terms enshrined in a contract carry a lot more weight.

In some cases, you may even consider having the contract in both English and Chinese, just to be sure. They didn’t say importing from China would be easy, but it would be worth it. The more bases you’re able to cover in the beginning, the less you’ll have to worry about at the end.

Other reasons to have a contract are to:

• Hold the supplier to specific quality requirements he agrees on.
• Affirm that specifications as well as tolerances for defects (if any).
• Be specific about recourse: What happens in case of failure?
• Establish payment terms

Note on payment terms:  Importing from China has changed a lot through the years. Many Chinese factories are starting to give longer payment terms instead of the old-fashioned “pay a down payment and pay balance upon shipment” approach.  In other words, some suppliers give their good customers 60, 90 or even 120 days terms.  This means that the goods are received (and checked) before payment needs to be made.  Such terms make it tempting to think contracts are not necessary.  But they are.

A contract is an excellent and necessary discipline if you’re considering importing from China, or improving your sourcing program.  It helps you be more systematic about details and causes suppliers to take you more seriously. Without a contract, you might look disorganized and you risk being treated accordingly.

So lets boil the contract process down to a few basic principles:

1. The objective is to avoid misunderstanding and clear about ALL the major terms and conditions and avoid different interpretations
2. You want clarity about the responsibilities and obligations of each party
3. Nail down ALL payment and delivery terms
4. Include all product and inspection specifications
5. Include resolution mechanisms and prevailing laws in case of problems to avoid costly litigation
6. Remember that once you have a good contract, well drafted by a lawyer, you can use it as a template for future orders.

I hope this helped a little and I look forward to hear some of your stories about contracts and importing from China; how they helped, how they prevented problems – or not.

Do you wish you had your own sourcing team to guide you through sourcing contracts?  It is easier than you think. Find out more about this on our Services page.

by Guerschom Francois