China Business & Law Update for Busy Executives
2017 Q4: Mike’s China Sourcing Update
Topic 1: China Sourcing Contracts: Key Consideration
Do Contracts Mean Anything in China?
First off, a well-prepared contract gives out the right signals from day 1. It says to the suppliers “here are the specific issues that are important to me and I am a professional buyer not to be messed with”. Secondly, a good contract provides remedy if anything should go wrong. For example, having a penalty clause approved in advance by the supplier, can prove it’s worth in gold later if the supplier breaks the contract.
Do I need a Bilingual Contract?
An English-only document signed by both parties is legally binding. But it is bad idea! To have any legal validity in China, you have to list the Chinese name. I’m talking about the Chinese name you see on the supplier’s Chinese business license. Local authorities and courts only recognize registered Chinese names. So the English name, or whatever they call themselves for marketing, is not an official name. You can’t sue some company named “Best Good Star Mfg.” But you can sue “最好星有限公司”!
If your key documents are only in English, it complicates things a lot should the case go to court. For example, before the courts can make a decision, the English documents/ supporting evidence will need to be translated into Chinese by a court approved translator for the court’s review. This can be expensive and very time consuming. Plus the defense can employ a stall tactic of fighting over the wording of the translation itself. It’s much better to have your attorney structure the wording in advance in Chinese rather than hope the court’s translation will be accurate. Be safe. Use bilingual contracts.
Can I take my Chinese Supplier to Court in My Home Country?
Keep in mind that to litigate outside of China is for the most part meaningless. The vast majority of Chinese companies do not have any assets outside of China and a court in China does not enforce foreign judgments, so it means that you actually get nothing (except a bill for wasted legal fees) even if you prevail in a court back home. So if litigation is the only option to solve the dispute, a lawsuit should be filed in a Chinese court.
Contracts & Payments: 10 Lessons learned the hard way during my 15 years in China (Short Video)
Topic 2: What happens when a Chinese company breaks a contract and how to get compensation for the loss they caused?
If you are doing business with China for the long term, at some point you will have a dispute. In today’s update, we’ll list the pros and cons of the available options.
Reporting Chinese Companies to the Better Business Bureau
Unfortunately there is no Better Business Bureau in China or in most parts of Asia where you can take your grievances. So you can cross that one off your list of options.
Chinese Embassy in your country
You can try to contact the Chinese embassy in your country, but in every case I have witnessed in the past 20 years, they will be too busy or explain why they aren’t the right people to help you. Basically, they are so overwhelmed with requests like yours that they can’t possibly get involved unless the loss is massive, like in the millions of USD.
Your Embassy in China
Depending on what country you are from, your Embassy in China may be a bit more helpful than the Chinese Embassy back home. I’m sure they also get lots of mail from companies in situations like yours. Most of the time they will suggest you contact the police and they may give you a list of lawyers and some English speaking Chinese government offices that are, in theory, supposed to help you. So it can’t hurt to contact your Embassy. But unless your loss has political implications or is very large, I would not expect the Embassy staff to lead the charge to get your money back. Most likely the embassy will suggest you contact the police in China.
Unless you have a very clear case and concrete proof of illegal (not merely unethical) activities, the police in China will most likely say they can’t help you. If you are lucky, they will ask you to file a report, which must be done in person. That means you fly to China or appoint somebody you know to represent you. If the target company has not disappeared and is a real company with real assets, you may have a chance to work with the police and/or have a local lawyer issue a demand letter. But if you aren’t based in China, realize you may need to appoint power of attorney to a local representative.
If you do end up working with the police, it may help to engage a private investigator. I’ve had success using a 3rd party to collect all the facts and present the file to the local police. Basically, I paid for my representative to do the “police’s work for them”. The investigation can cost 1000’s of USD per day, but if you have a large case, it may be worth it.
Demand Letters and Court Cases
Demand letters actually work well in China and litigation is affordable compared to back home in N. America for example. Plus the case will proceed a lot quicker than you may expect. In China, you can sue for lost revenue caused by supplier’s poor performance. In most countries, you can only sue for direct damages.
Let’s look at a typical case where there is a contract with a supplier, but they missed targets for delivery date or quality. I have witnessed buyers in similar cases issue a demand letter (in Chinese, from a real China lawyer) for the full amount of lost revenue (direct and indirect) to shock the seller into negotiating a settlement such as replacement products or a refund. So you go in asking for a big number, and then negotiate down to something that is still acceptable. But there is one potential road block. If the seller is a scam, meaning not a real business with no license…just some guys pretending to be a company, then a demand letter doesn’t have much impact. The supplier needs to be legit with assets to lose for a demand letter and fear of the law to have effect.
Here is a flowchart to help you better understand the options for your particular situation:
Download Link Here
Related Content: Loss Recovery
- Dispute Resolution & Recovery of Funds Lost to Bad Suppliers
- 7 items you probably forgot to put in your contract with the factory.
- Why your Chinese supplier(s) break the terms of your Purchase Order (PO)
- Learn from this foreigner buyer’s experience with Chinese courts
Topic 3: Scams & Blacklisted Suppliers
Sadly, during the past few months of listings at www.SupplierBlacklist.com, there was no shortage of business people ending up with bad suppliers or falling into scams.
- Be very careful if you are buying new and used equipment from China. Here is an example of a seller that appears to be a real company but in reality is just a ghost that disappears when they collect the first payment.
- Typical case where the factory ignores their “exclusive distributor” and sells to anybody in the market.
- This buyer got 100K USD worth of the totally wrong product.
Have you been let down by your supplier? Go here to expose the scam or under-performing suppliers!
I start drafting the 2018 updates over the holiday season. Let me know which other topics you’d like to have covered and I’ll do my best to include them in 2018.
BTW, do you prefer written articles or video tutorials?
Mike Bellamy (LinkedIn Profile)
Celebrating 20 years in Asia!
P.S. – BTW, if you didn’t get last quarter’s update, you can find the library online at here.