China Manufacturing Contracts: The Questions We Ask

When we first began drafting manufacturing agreements for clients outsourcing their manufacturing to China, one of our China lawyers would send the client a six page questionaire to tease out the client’s China manufacturing plans. But no matter how hard we tried, there were almost always important questions our client either did not understand or unable to answer. We quickly realized that dumping six pages of questions on our clients was too much, especially since a particular answer to one question might mean a few other questions had become irrelevant.

We met with legal tech people to see about using technology to simplifying the process but we soon determined that would hardly help at all. These are not the sort of contracts that can be automated. Rather these contracts require the China attorney working on the manufacturing agreement to be in constant “live contact” with the client to help the client determine what makes sense for its industry, its company, and its product. So we instead switched to a system where we ask questions in “waves.” When we get answers to the first wave, we review those answers and ask a second wave and we keep going until we have all the information we need to start drafting the contract. We then draft the contract in English for our client to review and then we draft it in Chinese as the official version, with an English language version as a translation for our client. See Get Your China Contracts Written In Chinese, Not Translated and How To Draft A Contract For China. This has also become our standard operating procedure for our China NNN Agreements and our China Product Development Agreements as well.

I thought of all this today while reviewing a client’s email response to the first wave of questions for its China manufacturing agreement. The answers made so much sense that drafting wave two of questions will be a breeze. I am going to share this first wave of questions because they should make for a good starting point for Western companies seeking to determine how to have their products manufactured in China. Note that even our first wave of questions is tailored to the specific client so a few of the below questions are not relevant to every industry, company or product.

This is ____________ from Harris Bricken. I will be drafting your manufacturing agreement for China. To kick off this project, I have some preliminary questions. I will have other more specific questions based on your answers.

1. I note from your website that you have an extensive product line. Which specific products from that line do you want this manufacturing agreement to cover?

2. Do you have a specific set of factories in China with which you are already working? Or do you want this manufacturing agreement to be used for new factories? Or both?

3. In what PRC region(s) are your factories located?

4. When you work with factories, do you set a specific product amount on an annual or other fixed basis? Or do you work on a per purchase order basis, with no fixed annual order amounts?

5. What is your pricing arrangement with the factories? Is there a set price fixed for a specific period? If there is a set price, how is that price level enforced?

6. What are your payment terms? Do you pay an initial deposit? When is the final payment made?

7. How do you provide for submission and maintenance of samples? I know that in your industry, products are normally made in reference to a physical sample, rather than to a drawing or CAD diagram or similar. What system do you use?

8. What is your system for inspection and quality control? Do you inspect during production? Prior to shipment? After you receive the products in the United States and in Europe? After delivery to your customer? What is the specific system for dealing with defective/non-conforming product discovered at any of these four points in the system?

9. Do you have a system for dealing with inspection and related specific safety standards in place in the U.S. and in Europe? For example, flammable fabrics, non-lead paints, small pieces on toys and related. If so, what is the division of responsibility between your company and the Chinese factory?

10. Do you have a system for dealing with the quantity of orders made over time? Since many of your products are seasonal in demand, do you have some form of scheduling system to ensure that the factory will have capacity to deliver your orders during peak seasons?

11. What is your procedure for packaging and shipping? What are the shipping terms? How is pricing linked to shipping terms? To where is the product shipped? To your warehouses in the U.S. and in Europe, or directly to your customers?

12. I understand that you distribute some of your products for sale in China. Have you considered how the China side of your operations might impact this agreement, if at all? If we can ignore the China entity/sales issue at this time, that is fine, but we should discuss this.

13. I understand that you have been having products manufactured in China for more than a decade. What specific problems have you encountered that you want your new manufacturing agreements to resolve?

If you would like to discuss any of these matters over the phone or by Skype, and I would be pleased to speak with you.

For more on what goes into China manufacturing agreements I urge you to check out Having Your Product Made In China: The Basics on Protecting It and You and the links within that post.

China Manufacturing Contracts: The Questions We Ask

Does Cyber Insurance Cover My Interconnected Home? And Other Questions

In mid-2016, a division of the insurance giant, Munich Re, began to offer cyber protection insurance to consumers. As more cyber insurance carriers extend their coverage from companies to consumers, those consumers are putting those policies under a microscope to understand their benefits and how they might protect consumers from typical cyber security risks. Some of the more frequently asked questions and responses are as follows:

1. Does cyber insurance cover risks associated with interconnected homes?

As more homes install Internet of Things (“IoT”) devices, they create more opportunities for hackers to access home-based networks and to launch attacks from those networks. Munich Re’s policy will restore devices damaged by hacks. Whether a personal cyber policy covers corollary or third-party damage related to a hack of an interconnected home will depend on the specific policy.

2. Will personal cyber insurance cover bank account or credit card losses?

Banks and credit card issuers typically carry coverage that protects clients from fraud-related losses, and individuals generally do not need extra insurance for those risks. Brokerage and investment accounts, however, might not be covered. Individuals need to discuss this matter directly with their investment advisors and insurance carriers.

3. Does my cyber security policy cover identity theft?

Identity theft may be covered, either with a specific cyber insurance policy or with a separate endorsement on an individual’s homeowner’s policy. Almost half of all identity theft cases start with the theft of an individual’s laptop, memory stick, or portable electronic device that includes personal information. Cyber insurance may cover losses associated with the theft of an individual’s liability up to the coverage limits of a specific policy.

4. Will personal cyber insurance cover my business’s intellectual property losses?

Executives and entrepreneurs who work from home or other offices that are remote from a central business location might retain sensitive business information on a personal or home-based network. If that information is lost or stolen, the value of that business loss can easily exceed losses connected to theft of sensitive personal information. To the extent that business information is owned by a company, a business cybersecurity insurance is a better source of protection against corporate intellectual property losses. Home-based employees should check with their employer’s cyber insurance carriers to confirm that the insurance does extend to cyberattacks on a remote or personal network.

5. Does cyber insurance protect me against ransomware threats?

In a typical ransomware attack, a hacker will disable a corporate information system until the victim remits a ransom demand, usually in the form of a cryptocurrency like Bitcoin. Individuals are perceived to be less susceptible to ransomware, as it is less likely that they have the depth of information to make ransomware attacks viable or the financial resources to pay the ransom demand. Nonetheless, the individual cyber insurance policy offered by Munich Re’s subsidiary, The Hartford Steam Boiler Inspection and Insurance Company (HSB), does cover cyber extortion that provides victim assistance and payment of the ransom demand upon HSB’s approval. HSB’s policy also covers routine individual cyber threats, such as malware, attacks on and damage to internet-connected devices, and damage from phishing schemes and other online fraud.

6. What other information do individuals need to know regarding personal cyber security insurance?

Individual cyber insurance coverage is currently in its developmental stage. Insurance companies do not have good data to understand how individuals can or should protect their own information systems, and that lack of data impairs an insurer’s ability to assess risks. Rather than providing global cyber security insurance to individuals, insurers are offering alternatives, such as Pure Insurance’s auditing and monitoring services that audit home networks for intrusions and assess how cybercriminals might use an individual’s personal information. At present, the cost of these services is likely beyond the budgets of all but those few individuals who maintain very robust and information-rich home computer networks.

In the short run, insurers are more likely to focus on the corporate market for cyber insurance protection. As they gain a better understanding of individual cyber risks, insurers can be expected to pay more attention to the individual cyber insurance marketplace.

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Does Cyber Insurance Cover My Interconnected Home? And Other Questions