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Resolving a dispute: Demand letters and legal options

QUESTION:
Do you have a copy of a Chinese legal letter? We just got some USBs that were printed backward and want to sue this supplier.

ANSWER:
Before I get into the legal letter option, let me ask a question. At what stage did you realize the USB were printed wrong? Ideally you or an appointed inspection agent checked out the goods in China before final payment was made and before the goods shipped. A lot of buyers don’t know that inspection by a reputable 3rd party professional only costs a few 100 USD. Plus due diligence is readily availble to buyers who want to check out their Chinese suppliers.

Now back to your question…

Assuming that the legal letter you are looking for is a demand letter to be issued to the Chinese supplier to let them know you are unhappy and that there will be consequences for their poor performance, then the following notes apply. And assuming the worst, let’s say you found the defect after the goods have shipped out. Here are some options.

  1. A demand letter template adjusted by you the buyer is not going to do much good. If you want to go down that route, you need to get an English speaking Chinese based lawyer involved so that they at least understand the basics and can prepare a logics argument in the form of the letter addressing what the supplier has done and what remedies are requested. If you cobble together some thoughts of your own using another company’s template, and even if translated into Chinese, the supplier will most likely sense that you are bluffing and have not actually engaged a law firm to support you. In my experience, the drafting of the letter is not very expensive, and if your situation is cut and dry, then it won’t take much time for the lawyer to get up to speed and that keeps costs down.
  2. Some buyers think they can use a US based lawyer to scare the Chinese suppliers into corrective action. The only person that benefits is the US lawyer. They get paid to draft a letter that has next to no impact. Chinese suppliers know that a US lawyer and even a US court has no authority in China. So don’t waste your money with that route, in my opinion.
  3. Keep in mind that once you release this letter, especially if it indicates that a lawsuit is pending, the supplier may simply ignore you. This is an indication that they see you as a threat and rather than work with you to correct a problem, they would prefer to stonewall you as they prepare for a legal fight by hiding assets and getting rid of incriminating evidence and even preparing a counter argument or lawsuit against you.
  4. So before you get the lawyers involved or issue a demand letter, I would like to share with you and article I wrote explaining how I resolve problems with my suppliers. This check list developed organically during my 12 years sourcing in China. Hope it allows you to jump ahead in the learning curve.

Resolving Disputes in China

Unfortunately there is no effective Better Business Bureau in China where you can take your grievances. Also, you will find limited support from government agencies, unless your case has pressure from your government’s agency on the Chinese agency. That pressure can actually work, but is very hard to arrange unless you have high level government contacts back home already.
So let me offer some practical steps.
If you have the following items in place, then there is 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.

It is always nice to have future orders you can leverage as well.

Also, before placing the PO did you or a 3rd party do an audit / due diligence at the factory to confirm they were legit. If yes, please keep that report on file as you may need to refer to it later.
If you answered “no” to the questions about audit and inspection, please slap yourself hard on the wrist and pray you have not just learned an expensive lesson. And shame on you as 3rd party Audits (and even Due Diligence) are readily available and affordable.

According to what I found on the internet…

Perhaps you may  feel surprised to learn that the supplier you found online (that looked soooo good at first) is not a reliable company afterall. A gold ranking on Alibaba (or a multi star ranking on Global Sources.com for that matter) does not guarantee 100% the supplier is legitimate. It is a good start, but the buyer still must audit and do due diligence. BTW, read here for an overview about the scam Alibaba’s staff used to fraud foreign buyers.

Here are my suggested next steps if you aren’t getting anywhere resolving a dispute with your supplier.

The first step is to define the damage and put a value on the costs to repair or replace.

Second step is to negotiate with your supplier on your own.

If that fails, many buyers think going to court or issuing a demand letter is the next best step. But actually, bringing in a 3rd party that can help facilitate dispute resolution.

Keep in mind that a demand letter or threat of court action can lead to a complete communication breakdown. Once this letter is sent, walls are put up by the supplier and getting to the facts of the situation becomes very difficult. In many cases they simply stop responding to the buyer and “call the bluff” if they suspect you are not willing to go to court, which is often the case when the orders are small or the 5 items mentioned above are not in place.

To bring in a 3rd party to help mediate after the legal letters have been sent out makes it very hard for this 3rd party to be effective as any goodwill on the sell side has been lost.

If the 3rd party assisted negotiations are not successful, then consider getting an English Speaking Chinese lawyer to write a demand letter.

KEY POINT: Unlike most other nations, in China you can sue for lost revenue. Since the price you sell to your buyers is certainly much higher than the price you pay to your suppliers, your demand letter can “swing big” and put the fear of God into a supplier!

Last resort. Go to court.

There is hope!

I have been involved directly or indirectly with 8 court cases during my 12 years in China. In all 8, the foreign party was victorious, BUT in all cases the buyer had the 5 critical items mentioned above in place.
Wishing you successful China Sourcing!

Best Regards,
Mike Bellamy

Director, www.PSSchina.com
Board Member, www.ChinaSourcingInfo.org
Author, “The Essential Reference Guide to China Sourcing”

references/notes

  1. For more on Global Sources verified supplier program, visit www,GlobalSources.com.
  2. Visit www.SourcingServiceCenter.com for reputable inspection/audit firms and providers of due diligence.
  3. Contact CSIC if you would like to be introduced to lawyers and negotiators who can provide dispute resolution services.

 




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