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The signing of Processing trade contract and notes in China

[The signing of Processing trade contract and notes]


Processing trade contracts include the import and export of processing trade contract signed by processing trade enterprises and foreign enterprises, as well as processing trade contract signed with commissioned processing enterprises within Chinese territory.


Processing trade contracts are different in the nature from the purchase and sale contract based on property rights transfer, the basic content and notes are described below:



The purpose of contract


The purpose of processing and assembly contract is different from the purchase and sale contract, and its main purpose is to reflect labor required and a certain technology or technological content during the assembly process of materials and parts into the specified products. Therefore, in processing and assembly contract, processing and assembly operations and requirements must be clearly documented.



Agreement on materials and parts and semi-finished products


Whether the commissioning party can provide materials and parts according to quality, quantity and time directly related to the commissioned party can provide finished products by regulated quality, quantity and time.


Therefore, the contract must be clear to show time and place for the commissioning party providing materials and parts, and also define specific requirements of quality, quantity and specifications of raw materials, materials and parts.


In order to clarify responsibilities, handling methods about the quality and quantity of materials and parts which do not meet the requirements or the commissioning party which fails to provide materials and parts in time will be clearly defined.


If the commissioning party uses part of the materials or purchases materials in domestic arbitrarily, the quality and price are required for agreement.



Agreement on finished products


It is the commissioned party’s obligations to provide finished products in regulated time, quantity and quality to commissioning party. Processing and assembly products’ quality are directly related to the sales and profits of commissioning party in the foreign market. Thus, quality specifications, quantity and delivery of finished products must be clearly defined in the contract. Products with special requirements need to provide detailed technical provisions and handling methods for breach of contract.


Commissioned party should take full consideration to the accident happening before agreed the contract. It is better to leave some room at delivery and quantity.


In addition, when commissioned party accept the processing task, accurate analysis based on equipments status, technical standards and production capacity is required to ensure the normal performance of the contract.



Agreement on loss of materials and parts and the ratio of defects


During the process of signing the processing trade contract, in order to determine the reasonable use of materials and parts, the two parties will reach agreement on loss of materials and parts and the ratios of defects.


Because raw materials are provided by the commissioning party, it naturally hopes that the material loss is as less as possible. While in the position of the commissioned party, it needs to consider its own functions of equipments and skills of staff.


If the loss rate is set too low, it will lead actual loss rate more than the agreed rate in the contract during processing and unable to complete the required quantity of processing task.

If the loss rate is set too high, it will lead increased cost of the commissioning party and affect the enthusiasm of the commissioning party. It is necessary to provide a reasonable loss rate and defect rate at the provision of raw materials. The corresponding quantity of materials and parts should be provided by the rate.



Agreement on processing fees


Processing fees is an important processing trade contract term, including processing costs and processing profits. The commissioning party naturally wants to use lower processing fees for higher profits, while the commissioned party is hoping to charge higher processing fees for increasing profits.


Processing fees must be considered properly and also judged according to the standard labor costs, changes in the internationalmarket situation, currency exchange rate and other factors. If necessary, exchange warranty can be attached.



Agreement on transport and insurance


Processing trade contract also should be clearly defined related transportation responsibility and costs of exported finished products and imported raw materials bore by which party.


From legal point of view, in addition to materials and parts and processing fees, the ownership of finished products is the commissioning party. Therefore, insurance costs should also be borne by commissioning party. However, if the commissioned party purchased insurance, processing fees and additional insurance premiums should be clearly defined in the processing trade contract.



Agreement on exchange settlement


In the processing trade, time, place, mode and method of payment are very important to both trade parties.


Generally, exchange settlement contains cash settlement, collection, credit settlement and other methods. In the actual business, the following two methods are commonly used:


Price non-prescribed way


Prices of all semi-finished and finished products aren’t set but processing prices only are paid. In this case, after the delivery, the commissioning party will pay for the processing fees to the commissioned party by cash settlement or credit settlement.


Price prescribed way


In the contract, price of materials and parts and finished products are specified, and the balance is the processing fees.



Agreement on the provision of equipment and technology


In processing tradeaccording to processing requirements, the commissioning party can provide part of the equipment and technology. At the same time, it needs to be cleared whether such equipments are paid or free.


Paid providing requires to clearly regulate equipment amount, ways and time that commissioned party should repay. The commissioning party not only provides technology, but also the technical training of personnel of commissioned party.



Agreement on intellectual property right


The commissioned party should also pay attention to the possession of trademarks, patents and other intellectual property rights of the commissioning party. Ensure that there shall not be infringement of intellectual property right.


In the contract, the commissioned party can request the commissioning party to provide related certificates of trademarks, patents or the legal ownership proof of trademarks, patents and other materials. Also, the commissioned party must follow samples, designs and trademarks requirements of the commissioning party for processing, and the commissioned party will take full responsibility for the situation of infringement by a third party.

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