“legalize it, don’t criticize it”
Rastafarian Peter Tosh was speaking about something else when he sang those words, but I’d like to talk about how to “legalize” your relationships with suppliers that you are protected in a local court of law. You won’t have to “criticize it” if the system in China actually works to your advantage.
Regardless of which country you do business in, if you work there long enough, and even if you are the straightest arrow in the bunch, sooner or later there will be a day when you get to see the legal system up close and personal.
Leveling the playing field
I’ve been involved in a hand full of legal battles in China during my 12 years here. Most involved good suppliers gone bad. I am happy to say that the foreign party has emerged victorious in all the cases (knock on wood).
When my friends and business associates here this, they always ask two questions
1. Aren’t the courts in China biased against foreigners?
2. What is your secret?
Let’s answer the latter question first. I have no secret, just a well developed SOP for setting up contracts with suppliers. Here is the view from 30,000 feet looking at my 5 Essential Check Points.
If the buyer has the following items in place, even a foreign buyer will have a decent chance of negotiating a resolution that is acceptable:
1. a signed / chopped contract that clearly defines what is the acceptable level of quality
2. a clear paper trailing showing proof of payment
3. the seller named on the contract matches the receiver of the payments. (With so many trading companies out there it is a common mistake to have a contract with a supplier but pay a trading company!)
4. your supplier has physical and financial assets (small “one-man-bands” disappear as soon as they feel a lawsuit is on the way)
5. the jurisdiction on the contract matches the location of the supplier’s assets at a city, province or country level.
Optional #6. It is always nice to have future orders you can leverage as well.
Help the court help you
I’m not sure if I have been lucky, simply well prepared, or perhaps I started with very low expectations, but my experience with the Chinese court system overall has been pleasantly surprising (knock on wood).
Let me give you a summary of my most recent experience with the Chinese legal system to give you a feel for how fast things are changing in China.
A supplier was holding some funds that belong to me and diplomacy had failed, so my assistant and I got up early and made it to the court to be the first in line to submit our notarized documents and present our papers to the clerk in order to book a date for the hearing. The clerk went over our papers and everything was in order, except a very technical suggestion in their SOP that we needed a formal letter from my company’s board of directors stating that I have the right to represent the company in submitting the paperwork.
That request was quite silly because I am the sole owner of the company and carried the company chop and passport and even business license stating I was sole owner with me that day. But a government officer has a lot of room to interpret the rules as they see fit. So we explained the situation. Plus it helped that I went in person as having a westerner kow-tow to the clerk to ask to speak to her supervisor to explain our case actually worked, and after a bit of a wait we got an audience with one of the judges that very afternoon.
We once again explained the situation and politely mentioned how the costs of lawyer fees, court fees and notarization, combined with my time away from the office, travel back from out of town to come to court and so on… are significant when you consider the whole case is for less than 20K USD.
Believe it or not, the judge was receptive and wanted to help. But he couldn’t easily overturn his subordinate’s stance that we should submit more documents as that would cause his subordinate to lose face. But he did want to help, so he actually picked up the phone and called the defendant in our case to explain that he was “sitting here with the foreign boss, who is very serious about this case and after reviewing the case, if he was the judge, he would probably rule in his favor,” so the defendant would be better off paying the amount now rather than risking a loss and even larger payment once court cases and perhaps damages were applied.”
The situation made me really pause to reflect on how much China has changed over my 10 years living here. Even as recent as a few years ago:
1. the courts would certainly not go out of their way to help a foreign entity
2. The clerk would no way allow her superior to be bothered.
But today was remarkable, the system was working fairly and both the clerk and even the judge went way out of their way to help. Wow, China court system is more effective than my experiences in the USA.
Wishing you successful China Sourcing!
Author, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book/)