If one of our clients owes money to a Chinese company and it cannot pay all its creditors, our international dispute resolution lawyers recommend they pay the Chinese company last because the Chinese company will likely never sue to recover. See Ranking Creditors: China is Dead Last. I am NOT advocating not paying your debt to your Chinese creditors, but I am saying that if you have to choose among your creditors on who to pay, the Chinese company should be your choice.
I say this based on the following:
1. About a year ago, a European client came to my law firm for a consultation regarding a dispute it was having with its Chinese OEM supplier. The Chinese company was threatening to sue my client for about $350,000, per its invoices. My client was refusing to pay the Chinese company due to a spate of bad product. My client was seeking $150,000 credit for the bad product and the Chinese company was refusing and threatening to sue. I advised my client not to pay anything, based on two legal maxims. One, possession is nine-tenths of the law, and two, never fund someone who is threatening to sue you. I spoke with this company last week on something completely unrelated and I asked them “whatever happened with that Chinese supplier that had been threatening to sue you?” Their response was that absolutely nothing has changed. Every few weeks, the Chinese company emails seeking its $350,000 and threatening to sue. My client responds by offering $200,000 in full settlement and the Chinese company refuses. We laughed and moved on.
2. Many years ago, our international dispute resolution lawyers were retained by a Chinese company to collect on approximately $500,000 owed the Chinese company by a US company. We mapped out the litigation strategy, which involved suing an Alabama based company in Washington Federal Court (long story). We spent an inordinately long time discussing with the client the costs and strategies. The Chinese company hired us and sent us a good-sized retainer.
We emailed the Chinese company client to let them know we had received the retainer and they emailed us back with a laundry list of things we should do on the case. Nothing on that list corresponded to what we had told them we would be doing for them and one of the things on the list was flat out ridiculous. We had a few weeks earlier told the Alabama company that if they did not pay by such and such a date, we would sue them. Amazingly enough, item #1 on the list from the Chinese client was that one of our dispute resolution attorneys fly to Alabama to try to talk settlement. We wrote the Chinese company and reminded them that they had hired us because we were US attorneys and we know what we are doing in dealing with US companies on what had now essentially become a US case. We told our Chinese company client that the absolute worst thing we could do would be to fly to Alabama to talk settlement and that doing so would be tantamount to our saying we were not really serious about suing. The Chinese company then confessed that they were not really serious about suing and that they just wanted us to settle the case immediately all along. I then gave them the maxim about how you have to be prepared to try a case to settle a case and they told me they had decided not to go forward with the matter and asked us to return the retainer, which we did.
I emailed them the other day just out of curiosity to ask how their case had gone and they asked me if my law firm would be willing to take their case again. We politely but vehemently declined and noted how they needed to retain an attorney fast because they were now facing serious potential statute of limitation problems.
3. We were once contacted by a large Chinese SOE owed more than $10 million by an American company. We asked all sorts of questions about the debt and we got good answers so we asked him to send us the documents. Turns out the debt was eleven years old and way past the time we could sue. We asked them why they had waited so long and the explanation was that they had been trying to work it out. I am not kidding.
My law firm has been handling cases like these for companies from many other countries for years. China is different.
Foreign companies that fail to pay their Chinese creditors may though face repercussions other than a law suit. For example, if you are a foreign company with a real presence in China, you not paying a Chinese company might end up causing you real problems in China and you must consider this before choosing not to pay. Just by way of example, we represent a large Chinese manufacturer in an industry where there are only around five companies capable of manufacturing this particular product. Our Chinese client is owed millions by a US company and that US company figured it would not need to pay and it didn’t.
What this US company did not figure was that our client would alert the other manufacturers of the non-payment and now none of those manufacturers will make product for this US company either. Once the US company started running out of product, it started paying our client again. On the other hand, if you have but a small presence in China and you can switch your manufacturing over to some other country. . . .
What are you seeing out there?