Our international manufacturing lawyers work with many experienced and very good international product sourcing consultants. These consultants are usually very good for the following reasons:
- They know the ins and outs of what it takes to successfully purchase products from foreign countries.
- They know the ins and outs of how to find good companies for any transaction their customers are looking to make, because they know how to distinguish between a good manufacturer and a bad one.
- They know the ins and outs of negotiating with manufacturers.
- They know when to call a lawyer to help them.
Of course, I had to add the latter and — unsurprisingly — it’s the latter that I write about.
International product sourcing consultants too often miss the legal aspects of their own business. They’ve been “stocking up” for so long that they sometimes lose sight of the fact that when the going gets tough (or, as we lawyers like to say, when it comes to finding a deep and easy pocket), they are American/British. /Canadian/Australian/European company that may have to answer for what happened.
If you are a product sourcing consultant, you need to understand that if something goes wrong with your client, you will likely be your client’s first choice for legal recourse. Not only are you likely to have the deepest pocket (or at least the easiest pocket to reach), but you’ll almost certainly be easier to chase because you’ll likely be nearby, not each other. side of the earth.
What can go wrong for international product sourcing consultants that causes them to incur liability? And what can you do, as a product sourcing consultant, to prevent or mitigate these issues? Our first piece of advice whenever a business comes to us with concerns about protecting against future liabilities is to engage in business structuring to protect business and personal assets. This is an absolutely necessary first step. Considering securing insurance coverage is often a good second step.
A typical international product sourcing project can be summarized as follows:
- The western company hires a product sourcing consultant to find the best widget maker based on cost, quality and reliability.
- The product sourcing consultant requests and secures a sample widget from a number of manufacturers, many of whom may have done business before.
- The consultant meets countless manufacturers looking for the best.
- The consultant recommends company Z to manufacture 200 million widgets.
- The consultant must be paid a percentage of the manufacturing costs, often with this percentage decreasing over time.
- Company Z starts making the widgets.
Now, let’s deconstruct this hypothetical project above and note where the consultant potentially harmed the client and unnecessarily took on huge responsibilities.
The consultant agreed to find “the best widget maker”. Is it the best widget maker in a particular country or the best in the world? What if a widget maker charges one hundred dollars per widget for 200 million widgets, but your client’s competitor finds another widget maker who will do it for ninety dollars? Is the consultant responsible for the difference of ten dollars? Even worse, what if a competitor of the consultant’s client gets the same widget maker to make its widgets for ten dollars less? Will an American jury believe that the consultant did his best on price when his fees ended up being higher because the manufacturer was able to charge more? Is the consultant responsible for delays in delivery from the manufacturer? Is the consultant responsible for the wrong product from the manufacturer? Whose fault is it that 100 people are seriously injured because of faulty widgets? Is it clear exactly what the consultant’s percentage is based on? Is there anything preventing the consultant’s client from entering into a new agreement with the manufacturer that the consultant has found?
If, as a consultant, you show your client’s products or designs to potential manufacturers without FIRST having various intellectual property safeguards in place, you are courting disaster. This product or design could be used for counterfeiting and the trademark on the sample (or even just your customer’s name) could also be stolen. Pretty much every time we write about how to protect intellectual property when manufacturing overseas, we get a call or two from a product sourcing consultant wanting to know if they can be held liable if his client loses his intellectual property. Our answer is that it usually depends on the contract they have with their clients and the role they play for their clients. Most of the time, these consultants have nothing in writing with their clients and they have presented their companies as a complete product sourcing solution for their clients.
And this is the big trap into which product sourcing consultants too often fall. By trying to secure customers, they encourage their customers to believe that they are experts in all things sourcing/buying/manufacturing products and that is what can come back to them.
I recently received an email from a product sourcing company regarding extremely complex and potentially major intellectual property issues experienced by one of their customers. I explained the issues his client would likely face and the consultant wrote back to tell me how he would handle the situation. The advice provided by the consultant was not appropriate, so I responded something like the following:
It’s incredibly complicated and the advice you plan to give your client is simply not good advice for them or even for you. My advice would be to COMPLETELY stay out of ANY legal issues and let your client sort out those issues on their own. Your client shouldn’t expect you to give them complicated cross-border legal advice and that only increases the chances of you being blamed and sued when things go wrong.
And that’s the point. As a product sourcing consultant, it rarely makes sense for you to be in the middle of your client’s complex international legal issues and your clients shouldn’t expect that of you. Even if you, as a product consultant, are the source of your client’s complex international legal problems, your attempt to solve them will probably only make them worse.
So what is the solution for international product sourcing consultants? A written contract between your consulting firm and your client before you start working. This contract should specify what your consulting company will do and not do for your client.
The problem we constantly see is that product sourcing consultants typically oversee their clients’ international manufacturing agreements, which exposes them to major liability issues if those contracts fall short – and they don’t. Hardly ever.
Too often these product sourcing consultants use their own lawyers for these contracts and too often these lawyers are domestic lawyers in countries like China, India, Thailand, Mexico, Indonesia, etc. All of these countries have a lot of great lawyers, but the product not only does the sourcing consultant not choose a great lawyer (because they’re usually very cost-focused), but that lawyer is their lawyer, and not the client’s lawyer who actually signs the manufacturing contracts.
If your sourcing company markets itself as “the product sourcing expert” for a particular country and your customers rely on your company to guide them through the commercial minefields they will face, you need to recognize that your company Sourcing staff will need to know everything about what it takes to protect your customer. And if something goes wrong, a Western court will probably expect you, as the “expert”, to be the one who should have known better. For example, if your client loses his intellectual property in Mexico because he thinks his US, Canadian, Australian or European patents and trademarks are extended to Mexico (this is usually not the case), then you, in as a procurement consultant, you may find yourself facing legal action for not warning them otherwise.
At a minimum, product research consultants should advise their clients in writing that they do not provide legal advice and that their clients should retain their own lawyers for that. And then stick to it and refuse to provide such advice.