China has become the world’s leading manufacturing base, it is quite obvious that businesses from all over the world want to make the most of it. NNN and OEM agreements could prove to be the most effective tool in order to carry on seamless business operations in China.
The highly advanced product manufacturing sector and quality control make China the go-to place for industrial and consumer components and products. Often businesses come up with the idea or design of the product but they do not have the capital to manufacture the product on a wide scale. Most of the time they lack the resources required to produce the items. This is where the value of NNN and OEM agreements comes into the picture.
NNN Agreement in China–
Instead of drafting a pure NDA agreement, foreign companies should be opting for a Non-Disclosure, Non-Use, and Non-Circumvention agreement (NNN) that includes the normal protections of an NDA including non-disclosure and non-use provisions but in addition to those, also non-circumvention protection. China NNN agreement prevents your Chinese manufacturer the distributing of your IP to 3rd parties. It stops Chinese suppliers from using your IP for any purpose other than manufacturing the product in question for you and prohibits a supplier from selling direct to your clients.
Must have Provisions in a China NNN Agreement–
- NNN agreement should be written to be enforceable in a Chinese court with jurisdiction over the Chinese defendant.
- It will need to be written in English and Chinese and we will need to be able to make slight edits (such as changing the supplier’s name in English and Chinese) so you can re-use the document (for the same product) but for different suppliers.
- An NNN agreement must include a sum of certain contract damage provisions that a Chinese court can and will enforce by ordering the seizure of the defendant’s assets.
The abbreviation “OEM” stands for an original equipment manufacturer. The OEM definition can be misleading, as an OEM manufacturing does produce the product or components but they are created based on the design specifications produced by the original company. So if you have given your product’s technology and signed an OEM contract with the Chinese manufacturer, you can be sure that you will get the product according to your product specification.
The Following is a Checklist of OEM Agreement:
- Materials– The kind of material the CM is going to use must be clearly mentioned in the contract. Be sure the contract manufacturer you’re considering has adopted quality standards – such as the ISO 9001:2008 – which provide guidelines to ensure the contract manufacturer’s products and services are consistently meeting customer requirements.
- Manufacturing– Review consignment terms, contract, and Standard Operating Procedures (SOP)
- Price– Request to know the provider’s pricing formula and activity or service rates with current your product.
- Order placement– How are orders to be placed? Purchase order or by forecast? Also, be sure and state the liability where necessary. The agreement must also define the list of products, performance criteria, tooling list and purchase order.
- Quality control and quality assurance- Foreign companies need to have the right, after a 24-hour notice, to inspect, audit or examine the manufacturer’s operation, record, system, and facilities to ensure compliance with the OEM agreement.
- Term– The parties will determine an appropriate term for their contract, and may make the agreement renewable on request by the buyer.
NNN and OEM agreements could prove to be the most effective tools in order to carry on seamless business operations in China. It is important that the right China supplier is selected at the very beginning to make sure you are getting the best product without the fear of losing your IP.