Outsourcing Essentials 3 - NDAs & Terms

Outsourcing

You have found a supplier you feel is suitable for manufacturing your products and have undertaken the required due diligence to ensure they are a true manufacturer and have the capability and bandwidth to effectively manufacture your product. So now you are looking to move forward with the manufacturer relationship.

The first thing you need to consider is how are you going to protect your product and legal rights. Your supplier will typically provide you with an English name that they "operate" under for international clients. In many cases this name has no legal connection to the actual business registration and as such when inserted into a contract or an NDA is NOT LEGALLY BINDING.

To look at this issue from a different perspective: Suppose you have identified that your company "Bob's Design and Fabrication" has a strong potential market in Russia and you decide to start pursuing clients from this country. One of the largest roadblocks you encounter in the first case is that your business is not accepted as legitimate or as a preferred supplier due to the fact that when you submit quotations the first thing that your potential clients see is the foreign business name. To get around this you decide to translate your business name into the local language. To save on costs you simply input your business name into Google Translate and get "Боб проектирование и изготовление".

Your company now gains acceptance into the Russian market and you start receiving clients. A problem arises where you are legally required to compensate a client for faulty product. You don't agree with the assessment or you don't wish to honor the contract (not passing judgement here) and so the matter is set to go to court for arbitration. Your client is unable to litigate against an Australian company in Russia so they decide to take the matter into our domestic court system. They submit a claim against your company with the company name as "Боб проектирование и изготовление". This is not a registered company in Australia so the case is not heard. So they then try to reverse the translation back to English for litigation. The business name now becomes "Bob's Design and Manufacture" which is different to you business name "Bob's Design and Fabrication" and so without any further means to legally identify your company as the supplier, the case cannot be processed and the client loses his attempt to litigate.

Seeing the potential loophole in NDAs and contracts as highlighted in the preceding paragraph, the issue arises as to How can you protect yourself when you are dealing with a supplier from a non-english speaking country? The answer is actually reasonably simple: Legal documentation (Contracts, NDAs etc) need to be bilingual in both English and the suppliers native language and need to identify the supplier's company exactly as it has been registered in their country.

So you now have a legally binding contract and NDA with your supplier and wish to move forward to manufacture. You receive your quotation and the next issue you encounter is the payment terms. Your supplier wants 100% payment on order prior to commencement of work. Having not worked with this supplier previously nor within the country you are unsure whether to accept these terms. The answer is NO, 100% upfront payment leave you with all the risk. You have no opportunity to withhold any portion of payment due to non-compliance or failure to deliver. The country in which your supplier is located may also not enforce any refund policy for faulty or non-compliant product so you are in the situation where you potentially could pay for manufacturing and receive your product as 100% non-compliant scrap.

Typically you should be aiming for a 30% / 40% / 30% payment split. This means you pay 30% of the order upfront, 40% of the order is paid on completion of the order ready for shipment and the final 30% of the order is settled after your company has had the opportunity to perform QC checks on the products. As a new customer you may not be in an immediate position to request these terms. Your supplier is typically as wary of your company as you are of them. So you should insert 30% / 70% terms for initial manufacturing with the addendum that the terms of the contract will be reviewed within 6-12 months and the suggested final terms should be 30% / 40% / 30% as above.

The second alternative is to have a bank provide a irrevocable Letter of Credit with the supplier as the recipient for the value of any particular order. This reassures the supplier that your company has sufficient finances to honor the order and they will be paid for work once the output of manufacturing has been received and QC approved.


Brian Le Mon

Principal at

Isn't it time you re-evaluated your International Supply Chain setup? If there is one thing 2020 taught the world, it is how fragile supply can become when the majority of the world's manufacturing is conducted in the same country. If we are being honest with ourselves, China has not offered a significant financial or capability benefit for several years now. Ever increasing wages and operating costs compounded with the desire for those traditionally employed as factory staff to better their life and livelihood has pushed manufacturing costs up and the inherent IP risk has never really been resolved. Now with trade wars and retaliatory "anti-dumping" fees / embargos for Australian products imported to China coupled with growing consumer resentment around the "Made in China" tag, it is becoming more and more the time to re-evaluate. There are a multitude of options outside of China as well as the possibility of return to local manufacture for some products but it is best to have a definite plan on your future strategy and actions required to get there. EQP can help you to plan and execute your future sourcing and manufacture strategy by working with you and potential manufacturing partners either locally or offshore to ensure that any move away from China does not result in a drop in capacity or quality whilst potentially saving you money. There is no better time to plan for the future than today. Get in touch to explore your options and resolve some of your Supply Chain headaches.


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