Distribution Contract a Viable Option for the Foreign Companies in China

Despite the recent political crisis between the US and China, this manufacturing heaven is still considered to be the best place for getting involved in a business venture. Beijing has enormous leverage and importance on the international level. According to the Larry Brainard, chief emerging markets economist at investment research firm TS Lombard, China is “facing tariffs on the bulk of their exports to the US for the indefinite future, binding constraints on acquiring US cutting-edge technology and domestic economic dislocation as [Chinese] firms adjust to the tariffs.”

Various distribution structures are available in China, including:

>> Structures Of Distributorship

>> Commission Agency

>> Franchise

>> Trademark Licence

>> Joint Ventures

Why Distribution Contract is an Important Element for the Foreign Companies in China

Most companies and entrepreneurs are sourcing from China for two main reasons. The first reason is the long term objective of creating a market presence in China for the purpose of serving the economy. The other reason is a short term objective of taking advantage of low labor cost in this part of the world. Forming a distribution contract in China is the best possible options for the foreign businesses to distribute their manufacturing goods in the Mainland China. As an overseas company, if you are not willing to appoint agents in China to act on behalf of you, then going for a distribution contract is the ideal way to operate over here. The risk is less and the gains are enormous.

The distribution agreement is distinct from an agency agreement and an introduction agreement to which different Chinese laws apply. China has no requirement mandating payment of any compensation or indemnity to a commercial agent or distributor upon termination or expiry of the agreement. If the agreement provides for compensation upon termination or expiry, the Contract Law will apply.

Any Seller entering the Chinese market would no doubt be concerned about protecting its business secrets and intellectual property rights. In order to deal with this issue, China lawyers put “no registration” provision to the distribution agreement in order to secure the China trademarks of their clients. The provision functions in this way, the Chinese distributors agree that the foreign company owns all the trademarks and other intellectual property rights and the distributor has no rights to those trademarks and the distributor will not register any IP in any way related to their foreign partner’s IP.

In order to make the distribution agreement enforceable in the PRC following things need to be done:

First- The distribution agreement has to be drafted with Chinese law as the governing law.

Second- The Chinese language should be the agreement’s controlling language.

Third- The enforcement of the agreement should be in the Chinese court.

Final Thoughts

Enforcing a contract in China is quite a challenge. Foreign companies need to have a proper legal representation to cope with these challenges and make the most out of the China distribution agreement.

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