Your Chinese Factory Made More Than You Ordered. Here Is What Three Courts Did About It.

Short answer: yes, a Chinese court will treat a factory that keeps making your branded goods without an order as liable, and it will order it to stop. In the three cases below, the brand owner won every time. The amounts were RMB 10,000, RMB 15,000 and RMB 30,000.

In each case the amount tracks two things: what the brand owner could prove, and what it had allowed to happen during the relationship. None of the three involved a foreign buyer, and none was a case I acted in. They're useful because the facts are the ones overseas brands run into with OEM suppliers, especially at the end of a relationship.

The fixed-sum clause: Luohe

A Shanghai food company used a factory in Luohe to make its products. Their contract said that if the factory produced goods or packaging outside the brand's orders, or used the brand's company name, it would pay RMB 10,000 in liquidated damages "regardless of quantity."

The brand found out about the breach in an unusual way. It received a summons from a court in Shaoyang, Hunan, in a dispute it knew nothing about, and learned the factory had been using its company name. The Luohe court's reasoning is two sentences long: the factory broke the contract, so it pays the agreed sum and stops.

The lesson is about how that clause was built. It didn't depend on proving how many units were made, what they sold for or what the brand lost. It named the conduct and fixed the price. A modest, per-breach figure is the kind of clause a court applies without much argument. The weakness is that RMB 10,000 is also the most the brand could get under it.

The leftover packaging: Xiaoshan

A Shaoxing company owned the "Xianchun" drinks brand and had a Taizhou factory make the products under an OEM agreement running from March 2016 to 30 March 2017. The agreement said the factory couldn't sell the branded goods to anyone else, and that after the relationship ended it couldn't make or sell anything bearing the brand in any form. If it did, the brand could claim double the factory's sales.

Two weeks after the term ended, the factory made 210 cases of branded coconut drink, sold 200 to a trading company at RMB 28 a case and gave the rest away. The brand owner reported it to the local market regulator, which inspected the factory, found the packaging in its warehouse and fined it RMB 23,000.

In the civil case, the factory ran three defences, and all three failed:

• The packaging was left over. It had been printed during the OEM term. The court said using up old packaging after the licence ended was still infringement, and not a lawful way to clear stock.
• This was only a breach of contract. The factory said the dispute had to be heard where the contract pointed, which was the breaching party's location. The court held that the same conduct was both a breach of contract and trademark infringement, and the brand owner could choose to sue for infringement. That choice also took the case out of the contract's forum clause.
• The contract hadn't ended because the parties were in dispute. The court called this self-contradictory. The term had expired.

The award was RMB 15,000. The court weighed the factory's sales (RMB 5,880), the administrative fine already paid, the leftover-packaging background and the contract's double-the-sales clause. It also rejected part of the claim: some branded drinks the brand had bought from a retailer carried production dates inside the OEM term, so they were genuine stock, and the brand couldn't show they came from the factory's unauthorised run.

Two things in this case matter more to an overseas brand than the amount. The trademark route was available only because the brand held a registered Chinese trademark. And the regulator's inspection did the evidence work that a private buyer usually can't do.

The loose ordering: Foshan

A Foshan food company had another local factory make its egg rolls until January 2017. A year later, egg rolls in the brand's packaging turned up with a production date of 8 January 2018. The factory said they were stock the brand had ordered and never collected. The first-instance court accepted that. The Foshan Intermediate People's Court reversed it in November 2019.

The appeal court's reasoning started with the burden of proof. The production date fell after the relationship ended, and the parties had settled their accounts, with the brand paying the last balance in August 2017. If the factory said the brand had ordered those goods, it had to prove it, and its stock list didn't match the products the regulator had found. So the goods were treated as made without authority, and the factory was liable.

Then the court explained why the damages were only RMB 30,000, and this is the part to read closely. The two companies had never fixed production quantities. The factory produced, the brand collected when it needed stock, and orders were often given by phone. The brand admitted it sometimes accepted goods made beyond what it had asked for. It also didn't collect its printed packaging from the factory until mid-January 2018. The court held the brand partly at fault and found the factory's fault relatively light, given the long OEM relationship. It also noted the factory had made no real profit from the sale.

The brand won because the dates and the settled accounts put the burden on the factory. It got RMB 30,000 because its own way of ordering had made overproduction normal.

What the three cases add up to

Read together, they point to four things that decide both liability and the amount:

1. Written orders with fixed quantities. Where every order is on paper, anything outside it is unauthorised. Where quantities float, the factory can say you took extra before, and the court may listen.
2. Packaging, labels and printing plates. Two of the three cases turned on branded packaging left at the factory. It is the raw material for overproduction, and leaving it there after the relationship ends weakens your position.
3. A registered Chinese trademark. It gives you an infringement claim alongside the contract claim, lets you choose that route, and opens the door to the market regulator. Without one, you have the contract and nothing else.
4. A clause that prices the conduct. A formula like "double the factory's sales" sounds strong, but you can't prove the factory's sales. A fixed sum per breach, or a sum per unit found with a minimum, is easier to apply.

What I'd put in a manufacturing agreement

• Every order in writing, with quantities, and a term that production outside a written order is a breach, whoever takes the goods.
• A duty to account for surplus: over-runs, rejects and samples are reported, and either delivered to you or destroyed on your instruction, with photographs.
• At the end of the relationship, a deadline to return or destroy all branded packaging, labels, printing plates and moulds, with a written certificate and photos, and a right for you to inspect.
• A fixed sum for each unauthorised run, plus an amount per unit found, with a floor. Keep it at a level a court will treat as a genuine estimate, which means you should keep the price and margin records that support it.
• The Chinese trademark registered before production starts, in the name of your own company.

Part of my guide to China manufacturing agreements.

For the trademark side, see China trademarks for overseas brands.