China Manufacturing Contracts: Yet Another Reason to Have One

Drop the stick and back slowly away from the horse carcass.

What with China’s economy slowing, our international manufacturing lawyers have been getting a steady stream of emails and phone calls from companies (mostly American and European) whose Chinese manufacturers have shut down and/or disappeared. The below is email correspondence I recently had with one of these companies, changed to camouflage anything that might enable anyone to identify this company. I chose this American company simply because its situation nicely highlights what so may companies that have their products manufactured in China have been going through the last few months. I start with this company’s initial email to me:

Hi Dan,

I’m running into an issue with one of my factories getting ready to close their doors and they have about $210K of our deposits. The factory is broke but they have a lot of assets in the factory.

Is this something you can help with? Is there something we can do?

After I determined the potential client did not have a written contract with its China manufacturer nor did it have anything in writing that would have allowed us to trace its payments to ownership of any specific product made by the Chinese manufacturer I sent them the following email:

Your chances of ever seeing your money again are not good, especially if your factory does shut down and the creditors come calling. Those creditors will say that, yes, maybe the factory owes you $210,000, but you have no claim to anything specifically owned by the factory (including the products it has sitting there that we would argue were made just for you). With this being the case, these other creditors probably will take priority over you or you will be thrown in with them. Many of these other creditors probably have contracts with the Chinese manufacturer making clear that the money they paid to the factory belongs to them unless and until the factory provides them with the product for which they have paid. Others probably have security interests in factory property.

Your only shot is to move as quickly as possible to try to get what you can though various tactics (letter writing, suing, etc.) before this company actually shuts down completely and starts the creditor feeding frenzy, but even for this your lack of a written contract will make things tough.

We’d be happy to try to help you but the chances of success are probably less than 50% and so you should ask yourself whether paying attorneys’ fees would be just throwing good money after bad. I do suggest you check in with your insurance broker/agent to see whether you might have any coverage for this sort of thing.  Not likely but one never knows.

I am going to be in Mexico for the next week or so please text me if you want to get started on this. Like I said, it is urgent and the last thing I want is for any slowdowns to come from our end.

What are you seeing out there?

2 responses to “China Manufacturing Contracts: Yet Another Reason to Have One”

  1. I have three orders pending from Chinese suppliers and two are over thirty days late. I went to Shenzen last week to investigate and the two factories overdue are closed and the management disappeared in one, the other said they are in the middle of moving to Vietnam. Something is very wrong in China… it is like 2008 but worse.

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