What Should the Mold Clause Say in a Chinese Factory Contract?

I check each contract against Chinese law, Chinese court rulings and my own cases. Each clause note does that for one clause. This one covers molds.

Molds give a factory leverage. They cost a lot, are slow to replace and stay at the factory. When money is in dispute, the factory may simply hold on to them. A good clause settles that argument before it starts. The manufacturing agreements I draft and review for overseas buyers cover tooling ownership too.

What the law says

No article of the Civil Code says who owns molds that a factory makes for you. That comes from your contract and from who paid. The law says more about a second question. Can the factory keep them?

• The basic rule. If a debt is unpaid, the creditor can keep the debtor's movable property that it lawfully holds (Civil Code art. 447). This is called a right of retention.
• Between companies. Usually the property and the debt must come from the same legal relationship. Between two companies, that link isn't needed (art. 448). If the link is missing, the debt must still have arisen in the course of business (SPC Interpretation on the Guarantee System under the Civil Code, art. 62).
• Work made to order. If the customer hasn't paid the fee or the material costs, the maker can keep the finished work or refuse to hand it over. This applies unless the parties agreed otherwise (art. 783). In my view, a mold made to your order usually falls under this rule.
• Agreed exclusions. Nothing can be kept if the law or the contract says it can't be (art. 449).
• Buying through a middleman. Your molds may then be a third party's property, as far as the factory is concerned. The factory can keep a third party's property only for a debt from the same legal relationship. If the debt comes from something else, you can ask for the molds back (Interpretation art. 62).

So a factory has a real legal footing to hold molds while money is owed. The simplest answer is a clause that says it may not. Articles 449 and 783 both leave room for that.

What courts have done

The nearest published cases I have written up are three OEM overproduction cases. They concern goods and packaging, not molds. The brand owner won all three. Two points carry over to a mold clause.

• Name the conduct, fix the price. In the Luohe case, the contract named the breach and set a fixed sum for it. The court's reasoning ran to two sentences. A clause that clear is easy for a court to apply.
• What stays at the factory can be used. In the Xiaoshan case, the factory used leftover packaging after the relationship ended. The court said that was no excuse. Molds left at a factory carry the same risk.

What happened in my case

An overseas brand bought from a Chinese factory through a middleman. The proforma invoice listed the mold cost as its own line. The brand paid that line in full. None of the documents had a mold clause.

When the relationship broke down, the factory gave two reasons for keeping the molds.

• Extra costs. It claimed for material wastage and storage. It had no invoice and no purchase order for either. It had never told the brand about them. In my view, a court would not have allowed these costs. The brand paid a token amount to settle the point.
• An unpaid balance. The brand still owed a small balance. The factory said that gave it the right to keep the molds.

The dispute went to court. It settled through mediation during the lawsuit. The settlement confirmed that the molds belonged to the brand. The brand had paid for them.

The full story, including how the design was separated from the molds, is in who owns the mold when the factory designed the product.

How I write it now

I don't give full sample wording in these notes. These are the points I now cover in every mold clause.

1. Ownership. The molds belong to the buyer from the day they are paid for. The buyer named is the company that runs the business, so no transfer is needed later.
2. No right to keep them. The factory may not keep the molds over any amount, whether owed by the buyer or anyone else. This sentence answers articles 448 and 783.
3. Extra costs. The clause lists what the mold price covers. Any other cost needs the buyer's written approval and an invoice first. Without both, it isn't payable.
4. Money disputes run separately. A dispute over the balance goes through the payment and dispute terms. It doesn't hold up the molds.
5. Return on request. The factory hands the molds over within a set number of days, in working order. On request, it confirms in writing where each mold is and its condition.

Points 2 and 3 answer the two reasons the factory gave in my case. With them in the contract, neither reason would have had much to stand on.

Sample wording for points 1, 2 and 5 is in that article.

Are you about to pay for tooling, or is a factory holding your molds? Send a short summary and the supplier's Chinese company name. Once I've checked that I don't act for the other side, I'll ask for the contract or proforma invoice, the payment record for the molds and its last message. I'll tell you where you stand and what your options are. Describe your situation →

Part of my guide to manufacturing contracts in China. If a factory is already holding your molds, see when a supplier won't return your molds.

The case described above is a matter I handled. Names, products, places, dates, amounts and quantities are left out. It describes one matter and isn't a prediction for any other. This article is general information on PRC law. It isn't advice on any particular matter.