Why You Need a Product Development Agreement

Why You Need a Product Development Agreement

In nearly 20 years of advising international clients on China manufacturing, I've observed a persistent pattern: while foreign firms properly execute NNN and Manufacturing Agreements, they routinely fail to secure Product Development Agreements (PDA) - an omission that has cost clients millions in lost IP and failed projects.

Key Reasons for a PDA: 

1. IP Ownership

Clarifies that you own all patents, designs, and copyrights. Under China's Anti-Unfair Competition Law, misappropriation can be penalized, but only if your contract explicitly defines ownership. 

2. Milestone Payments

Links payments to deliverables (e.g., prototypes, testing) to avoid overpaying for subpar work. 

3. Dispute solutions

The dispute resolution clause requires meticulous attention. Based on my experience handling cross-border manufacturing disputes, I must emphasize two non-negotiable principles: 

1) If you choose arbitration, then arbitration must be explicitly defined 

A generic "arbitration" clause will likely be unenforceable in China. You must specify: 

* The arbitration institution (e.g., CIETAC, SHIAC) 

* The seat/venue (e.g., Shanghai) 

* Governing rules (e.g., CIETAC 2024 Rules) 

An Example of an enforceable clause: 

"Disputes shall be resolved by arbitration at CIETAC Shanghai, applying CIETAC's rules. The award is final and binding."

2) If you choose litigation, then Chinese courts have exclusive jurisdiction

Never assume foreign judgments will be enforced in China. China rarely enforces court judgments from foreign countries (only 3% enforcement rate under reciprocity, usually), at the same time as the lawsuit was filed,you may apply for property preservation against the defendant to make sure the judgment will be enforced. 

3 Common Pitfalls & How to Avoid Them 

1. Assuming NNN Agreements Are Enough 

NNNs protect confidentiality but don't address development risks. A PDA adds IP ownership, quality standards, and penalties for delays. 

2. Ignoring Manufacturer Due Diligence 

Verify the factory's financial health, technical skills, and past projects.

3. Weak Quality Control Clauses 

Define testing protocols, compliance standards (e.g., CE/FCC), and penalties for defects. Example: "Repeated failures to meet specs allow termination with cost recovery."

One of our clients, a U.S. startup learned this the hard way. After skipping a PDA and relying only on an NNN Agreement, their Chinese manufacturer claimed IP ownership and demanded higher fees. With no clear contract terms, the company had to abandon the project. 

Remember, a China-specific PDA is non-negotiable. It shields your IP, ensures accountability, and saves you from costly disputes. Always work with a lawyer to draft enforceable terms under Chinese law. 

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