Whenever my law firm is retained to represent a company that is looking to provide goods or services to a new overseas buyer, one of the first things we want to know are the payment terms. If our client is going to get 100% payment before it provides the goods or services, a written contract may not even be necessary. The old expression about possession being nine-tenths of the law holds true, though I’d probably update it to say that it’s 99 percent of the law when it comes to selling to many emerging market countries.
Unfortunately, 100% upfront deals are nearly as rare as manure from a rocking horse.
What we usually see are situations in which the buyer wants to pay 30% to 40% upfront, with the remainder due upon completion of the services or delivery of the goods. Under this sort of payment situation, the contract becomes critical. But even with a good contract, our client is at risk and we usually suggest they hold out for better payment terms – something like at least half up front and the remaining half upon completion. Or better yet, a 70-30 arrangement. More than anything, we like to see our client getting enough upfront to cover their costs, whether or not their counter-parties make the second payment.
The following are some examples of what we have seen:
1. One of our clients that makes custom factory equipment charges its overseas buyers 40% before it starts production because that 40% roughly equals its production costs. After our client completes production, its buyers must pay another 40% of the total price or the equipment will not ship. The final 20% gets paid once the overseas buyer signs off on the product on delivery, at which point our client sends someone to help with installation.
2. One of our clients is an ultra-specialized, ultra high-end theme park designer with more business than it can handle. It will not put in one minute for an overseas client unless and until that client has paid 100% upfront for the project. It also – quite wisely – has us make very clear in its contracts exactly what its client gets for its upfront flat fee and that any work beyond what is covered by the flat fee must also be paid in advance. These provisions are important to prevent the overseas buyers from claiming their project encountered problems due to our client’s breach.
By way of an aside, this is a classic example of why there is no one answer regarding the best location and law for a dispute. We have countless times written how most of the contracts we write for our American and European clients provide for disputes to be resolved in China. See e.g. Drafting China Contracts That Work. This client frequently provides its services to companies in China and yet contractually providing for its disputes to resolved in China does not make sense for them. Providing for disputes to be resolved in China almost always makes sense in a situation in which it is more likely that the Chinese side will breach the contract by failing to pay, or by stealing IP. But if (as is the case for this client) there is no chance of the Chinese company not paying (because they’ve already paid in full) and no chance of the Chinese company stealing our client’s IP (because it does not really have any IP), it makes sense to force the Chinese company to come to our client’s home turf if it wants to sue. We thus put in a U.S. dispute resolution clause to minimize the likelihood of our client facing a lawsuit.
3. One of our food company clients charges its China clients 70% upfront and 30% upon delivery. The 70% covers all production and shipping costs, ensuring our client will not go in the hole even if the remaining 30% is never paid.
4. One of our larger clients requires its buyers pay at least 30% upfront and cover the remainder of the payment with a letter of credit from one of various large U.S. banks.
What terms do you require when selling your products or services to a foreign company?