Doing Due Dilligence

Jamon Yerger | Southern Perspectives Shenzhen

When we plan to plan on buying a house or a new car, most of us will “kick” the proverbial tire and take a deeper look into our possible purchase.  When making a significant investment we want to be comfortable in our decision. You would think that this logic carries over to checking your suppliers here in China. I am alluding here to the due diligence of investigating a company’s legality, doing a delinquency background check, and being smart about contract formation.

A company’s legality involves a variety of concerns:

Is the company legally registered?

If it is a fly-by-night company, you will be putting your money and your product into some risky hands. You don’t want to just hand your money over to anyone, right?

Are payments to a company bank account or a personal account?

After receiving a potential supplier’s quotation, confirming the above details should be your next move.  Do not fall for the “you will have to pay taxes then” trick. It can mean two things:  1) They do not have a real registered company or 2) they do not want to pay taxes for your order.  Do not be tempted by lower prices for paying to a personal account. If something goes wrong, you will have very little to no recourse.

Does the company have a previous history of (recorded) charges against them?

As of 8 months ago, a new governmental website, http://zhixing.court.gov.cn/search/, has been put online to allow people to check this kind of information. What this record details is the company’s delinquency on a judgment from a court. For example, company A was ordered by the court to pay company B, but has not paid company B. While in Chinese only, it’s still a valuable tool for checking on companies that you will be doing a significant amount of business with.

Let’s not forget about signing on the dotted line.  Once you have gotten this far and are ready to place your order, do not rely on a simple purchase order to be your binding contract. While some purchase orders can be detailed, they often lack important information, and are constantly updated, and are not effective in clarifying each party’s responsibilities for the transaction at hand. Purchase orders should be an appendix; something that supports your contract.

Chinese please

Contracts should be in Chinese and written by a professional. In Chinese, there is no room for interpretation on what “it” could mean.  An experienced lawyer will carefully choose specific terms and nuanced terms, which are important and much more effective than a contract written by a fresh graduate or by someone who happens to speak Chinese.

Correct law

When constructing contracts, you can choose which jurisdiction will govern the contract. Choosing your home country’s to govern a contract sounds great on paper, but can have enormous drawbacks.  Your transaction or possible dispute is in China.  Chinese law should govern the contract.

Appendixes

As I have mentioned, your purchase order can be one part of your contract. There are many other details you might like to include as well: color pictures, technical drawings and specifications of your goods. This is just a simple list and can be much more elaborate depending on your product.

This seems like a lot of work, especially if you are sourcing many different items from a large amount of vendors, but a small investment of due diligence might save you tens of thousands of dollars. Prevention and preparation are what will make your sourcing venture a successful one. So get out there and kick those tires.


 

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