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Nine clauses to check before terminating a supply contract in China

Tags: Early Termination of Contract, IP protection, OEM, SMBs and SMEs, Supply Contract

       
termination of contract

When businesses adjust their supply chain, they often need to terminate the existing supply contract or OEM contract.  How to get out of a supply contract cleanly and avoid negative consequences? How to make sure the supplier will not compete with you or steal your IP after the contract termination?

There are 9 clauses you should check before terminating your supply contract or OEM agreement.

Termination Clause

The first clause to check is how you can early-terminate the contract and how you should notify the other party. You want to avoid penalties arising out of “wrongful termination”.  

Non-use of Intellectual Property

IP protection is always important no matter whether you are entering or leaving a foreign market. You would not want the supplier to use your trademark or patent, or allow another party to use your IP. There should be a contractual obligation prohibiting the supplier from using your IP after they cease to be your supplier.

Confidentiality

Similar to the “non-use” restriction, non-public information should be kept confidential after the termination of the supply contract. It includes your client list and other business secrets which you may have shared with the supplier.

Non-compete

You don’t want to see your supplier or OEM become a competitor after the termination of your contract with them. You need to make sure your non-compete clause continues after the contract ends.

Non-solicitation

It is prudent to have a valid contractual obligation to restrict the supplier from hiring your core team members. Such obligation should last for a period of time after the contract termination.

Calculation of Damages 

Chinese courts usually do not support claims for lost profit unless it is specified in the contract.  Therefore, the lost profit arising out of the other party’s breach of contract should be included when calculating damages.

Continuity of After-sales Support 

Sometimes you need the supplier to provide continuous support after the termination of the OEM agreement. If that is the case, you would want to have this obligation in your contract.

Dispute Resolution 

SMEs executives often overlook the dispute resolution clause when signing contracts with suppliers or OEMs in China.  However, you need to understand how and where a potential dispute should be resolved before you terminate the contract.

Prevailing Language of Supply Contract

Inconsistency in the English and the Chinese language versions often causes disputes. It is especially true when one party suffers economic loss or terminates the contract unexpectedly.  It is always critical for you to know whether the version you refer to is the governing one.

Please note:

  • The order of items in the above list does not indicate the level of importance.
  • The above is based on the lawyer’s experience and there are always different considerations in every case. 

Recommended Lawyer: Jenny Sun

Jenny Sun is a partner lawyer at a leading Chinese law firm.  She has over 10 years of experience in advising international businesses in commercial contracts, international trade, and dispute resolution.

Ms. Jenny (Hongli) Sun, Shanghai, China

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