[Success Case] OEM Contract System Establishment and Legal Consultation for China Shanghai Subsidiary Domestic Transactions

1. Case Overview

The client, a domestic enterprise specializing in sundries (dolls, fancy goods, and household items) expanding its business in China, requested legal advice to ensure legal stability and establish an efficient ordering system for domestic transactions between its Shanghai subsidiary and Chinese manufacturers. Key challenges included establishing practical ordering procedures considering the lack of local internal electronic systems and managing risks related to price fluctuations and damages based on the Civil Code of the People's Republic of China.

2. Key Issues and Response

"Your Law Team" deeply analyzed local Chinese laws and judicial precedents to provide the following three core solutions:

• Efficient Contract Structure Design (Master Agreement & PO): We established a common legal relationship through a one-year "OEM Master Agreement" and structured detailed transactions to be handled via "Purchase Orders (PO)." Specifically, we ensured practical convenience by specifying the legal validity of email orders, maximizing operational efficiency without a dedicated electronic system.
• Price Escalation Clause based on the Chinese Civil Code: To prevent indiscriminate contract termination due to economic changes such as raw material price surges, a "Price Escalation Clause" was inserted. This preemptively blocked potential disputes by allowing unit price adjustments upon mutual agreement if price fluctuations exceeded a certain percentage.
• Protecting Rights through Expanded Scope of Damages: We explicitly included indirect damages, such as "loss of goodwill (商誉损失)," which are traditionally difficult to prove in Chinese practice. By revising Article 9.1 to mandate compensation for "all indirect losses including direct losses and loss of goodwill" in addition to a 10% penalty for quality failure, we significantly strengthened the legal defense capabilities.

3. Result and Significance

Through this consultation, the client secured a standardized bilingual (Chinese and Korean) contract system that fully reflects local Chinese laws and practical precedents. This is significant as it provides a lasting corporate legal asset (Standard Guideline) that can be immediately utilized for future transactions with new suppliers. Furthermore, by establishing a legal basis for compensation regarding brand value decline in case of quality issues, we built a strong defense for the company's intangible assets.