Owed a LITTLE Money by Your Chinese Manufacturer? Good Luck with That

China manufacturing contracts

For at least a decade, our law firm has probably never gone a week without getting an email from a company that has paid anywhere between $500 and $50,000 for product from a Chinese manufacturer and received either nothing in return or product that clearly is not up to snuff. These days, we are getting one or two of these emails a day.

The writers of these emails all want to know what they/we can do.

In virtually all cases, the purchasing company has never visited the Chinese manufacturer to which they wired the funds and, in most instances, the Chinese manufacturer has stopped responding in any way to the bilked company’s entreaties.

The writers of these emails all want to know what they/we can do (I am repeating this for effect!).

Some of these bilked purchases have already reported the foreign manufacturer to the Chinese Embassy in their home country and/or to their own embassy in China, but with either no response or a form letter back, saying that the Embassy does not get involved in these sorts of civil law matters.

They want to know what they/we can do.

They often have a vague notion that our international litigation lawyers can get some embassy or government official somewhere to come down hard on the foreign manufacturer or that we would be happy to sue the Chinese manufacturer on a contingency fee basis somewhere and bring them to heel.

The following is my typical response to these emails.

We would be happy to review all the relevant documents in your case and write a demand letter in the native language of your manufacturer, but this seldom works. And before we do that, we will need to do at least some basic research to determine whether the manufacturer to which you sent your money even exists and, if it does exist, whether it has sufficient assets to be worth pursuing. For what this entails, I suggest you read this.

Your other alternative is to have us find the right lawyer in the city in which your manufacturer is located and who speaks English and will sue on your behalf. Or you can spend way more than the amount at stake warrants and sue in your home country and then try to attach any assets this manufacturer might have in your home country, but they almost certainly have none. You might also try to find an international debt collection agency to take this on, but my understanding is that few if any that will be interested.

We will charge you hourly to review your documents and draft a short memo setting out your best options. If you hire a Chinese law firm to sue in China, you will almost certainly need to pay them and pay relatively high filing fees. The fact that you do not have a China-centric manufacturing contract means there is a good chance you will not even prevail if you do sue.

I would be remiss if I did not also mention that before we do anything that will anger anyone in China, we should make sure there is nothing the angry Chinese company can do to mess with (or even destroy) the business or manufacturing you are doing in China. This usually involves our making sure everything you are doing in China is being done legally (you would be surprised at how often this is not the case) and making sure your intellectual property assets are not at risk in China due to failures on your part to register them in China.

Going through the above will not come cheaply. So in other words, it is not looking good for you right now and maybe the best thing you can do is mark this all down to experience and be a lot more wary about doing business with China in the future. If the US/Chinese embassies/consulates did anything on these sorts of cases, that is all that they would be doing because my firm alone gets at least two of these a week.

BOTTOM LINE: Don’t let this happen to you. If the amount at stake is higher than that mentioned above, the situation is very different.

7 responses to “Owed a LITTLE Money by Your Chinese Manufacturer? Good Luck with That”

  1. As far as how to avoid having this happen to you…..
    Instead of talking to a lawyer after something goes wrong, it’s a lot easier and faster to talk to a local banker *before* you send money over. There is a standard procedure involving letters of credit and payment by documents that are used in international trade, and your friendly neighborhood banker can set all of this up.
    What the basic procedure is that you have a local bank issue an irrevocable letter of credit to the sender of the goods, and that letter of credit gets paid only when you send over documents that the goods have been received. One of those documents is a certificate by a third party that both of you have selected beforehand have indicated that the goods are according to specification. There is an equivalent set of machinery at the other end to make sure that the person at the other end doesn’t get stiffed.
    One really good introduction to all of this is….
    http://www.amazon.com/International-Business-Transactions-Nutshell/dp/0314195211/ref=pd_sim_b_1
    One other thing is that all of this is pretty standard so that you can go into any bank with international presence and they’ll point you to the right person to arrange this. One big warning sign is if the person at the other hand refuses to handle things according to normal business procedure, in which case you need to take your business elsewhere.

  2. I agree with twofish–a letter of credit is usually effective, when one of the terms asks for a certification of passed quality control (issued by an inspection firm that you nominate in advance).
    But there are many other tools (due diligence, OEM contract, in-process inspections…). Most importers pay by bank wire and many of them do just fine.

  3. I suppose you cannot refer them to for example the good Dr Ibrahim Abubakar or any of his friends [Editor’s Note: A name sometimes used on 419 scam emails] , who as we all know (or don’t know, as it is a secret just for you to know) can help you recoup a great sum of money, if only you send him your address details, DOB, mother’s maiden name, bank account number and PIN code….
    A summary less eloquent than Twofish’ and Dan’s:
    Plan A: do your homework and don’t get scammed.
    Plan B: get scammed, get over it, and try to not get scammed again (see plan A).

  4. Is there anything beyond Due Diligence and a good contract that we can do to avoid these sorts of problems?

  5. Great post Dan.
    If only we could get those people calling you to talk to me before they have to talk to you.
    In ten years of sourcing and manufacturing goods in China we have had exactly one instance where what was shipped didn’t meet final specs and in that case we aborbed the hit on behalf of the client.
    For start-ups, entrepreneurs or SME’s one of the smartest things you can do is to engage a qualified China sourcing and manufacturing services company to manage China for you. You get the experience, wisdom, expertise and strong local management you need and in most cases we can get a better factory price than the average company waltzing into China for the first time.
    To ensure successful production some simple do’s and don’ts:
    -Do Not place an order through Alibaba or any other online portal
    -Do Not place an order without having someone from your organization or working on behalf of your organization meet management, inspect the factory, go over QC protocols and 25 other details that need to be checked.
    I see things in factories (having been in thousands) that the average buyer does not see. For instance, ask the manager what his top three export markets are. He may tell you US, Western Europe and Japan.
    He will tell you this so that you believe they are used to the quality standards, procedures and needs of developed markets.
    After the factory tour then ask him if you can inspect the warehouse and trucking platforms. Often you get back there and the shipping marks on the carton will read Cost Rica, Poland, or Zimbabwe. Big red flag.
    Another example is that we actually do due dilligence on the factory’s domestic supply chain. Most problems start at the component part level. Make sure the factory is working with reliable subcontractors and not just buying cheap components because his cousin owns the factory.
    DO – Invest in strong local management
    DO – Have inspections during and post production
    DO NOT – Wire balance before final inspection of goods
    DO NOT – Rely on a single “fixer” “agent” or “foreign trade assistant” in China. If they disapear, so may your money and your project.
    DO – Only work with sourcing companies who give you full transparancy on suppliers, prices etc. YOU should own those relationships while the sourcing firm can create and manage them for you.
    I could go on but I’ll stop here.

  6. Lets suppose all contract documents are in order. Email thread clearly shows trend of deception and false promises. I have a contract with a supplier in Shenzen.  This supplier has been paid tooling charges for which I own the tools and also a 50% deposit for a production order following samples received that I evaluated and approved.  The gentlemen is non native chinese and speaks english fluently – his brother is an airline pilot here in the US which is how we were introduced. He has since made several false promises over many months to deliver product each communication is without action on supplier part.  I have well documented email threads as well as a contract which I am happy to share.  I seek guidance on the best way to pursue my material and/or money.

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