When our China lawyers represent a client that will be providing products or services to a company in China, we always start by asking about payment terms. If the Chinese company will be paying our client the full amount upfront, the contract provisions do not need to be too specific. But full upfront payment from Chinese companies is quite rare.
In the typical provision of services scenario, the Chinese company pays the foreign company a small amount upfront (usually 20-25%), another portion (maybe another 25%) after the foreign company has met some vaguely defined milestone, and then pays the remaining 50% or so after the project is “completed.”
This sort of payment structure puts a large amount of risk on our clients because they must perform first and then collect. The vagueness of the various milestones (including what constitutes “completed”) only increases their payment risks. Often, after the contract is signed the Chinese company will make so many changes to the previously agreed upon deliverables or to the schedule that the foreign company ends up losing money, even if it eventually gets paid in full.
Because of the above, our China lawyers typically advise our clients to consider the following three things when it comes to payment terms with China companies:
1. Make the payment terms as simple and as clear as possible. This actually benefits both parties. The terms should be clear on when a payment is due, whether it is because the calendar shows a given date or because a project phase has been completed or a product prototype has been delivered. Clarity is one of the key reasons why it almost always makes sense to have your contract in Chinese. See Will My Contract Be Enforceable in China, and Will It Help Ensure the Chinese Side Performs Properly?
2. Require a large upfront payment and make clear in your contract that you will not begin work until you receive it. Having a large upfront payment helps to prove the good faith of the Chinese side, and it proves that it is capable of sending large payments outside China. China’s currency, the renminbi, is still a nonconvertible currency, and a Chinese entity that wants to send more than $50,000 in hard currency overseas must first secure approval from the transmitting Chinese bank. This generally requires it to have an executed contract (in Chinese) for goods or services that are acceptable for foreign entities to provide and that the foreign company has submitted a formal invoice in a form acceptable to the bank. This is all because the bank in turn usually needs to get approval from Chinese government authorities to send the money. For the specifics on what is required to get paid by a China company. See How to Get Paid by Chinese Companies for your Services: It’s as Easy as 1, 2, 3. For reasons usually peculiar to the Chinese company with which you are doing business, this China bank approval often never comes. It is better that you learn early on whether the Chinese company with which you are doing business will be able to pay you rather than later, after you have already provided the service or shipped your product.
3. Consider adding a 10% payment as a final “almost bonus payment” due after delivery. Chinese companies are rightly notorious for insisting on receiving delivery in full before they make their final payment and then (because they already have what they need) never making the final payment. If you do get this final payment, consider it a bonus; and if you never get this “bonus” you can at least take comfort from having been sufficiently paid.
What are you seeing lately in terms of getting paid by Chinese companies?