Whenever one of our China lawyers is retained to represent an American or European company that provides goods or services to China, one of the first things they want to know are the payment terms. If our client is going to get 100% payment upfront, before providing any goods or services, a written contract may not even be necessary.
Unfortunately, all upfront deals are rare.
What we usually see is a situation where the Chinese 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 China counter-parties make the second payment.
The following are some examples of what we have seen:
- One of our clients that makes custom factory equipment charges its China buyers 40% before it starts production because that is roughly its cost of production. After it completes production, the China company must pay another 40% of the total price or the equipment will not ship. The final 20% gets paid once the China company signs off on the product upon delivery, at which point our client sends someone to help with installation. This client’s production costs roughly equal the 40% paid upfront. It can sell this custom equipment to others, but for way less than full price.
- One of our clients is an ultra-specialized, ultra high end designer. He operates solo and has more business than he can handle. He will not put in one minute for a China client unless and until that client has paid 100% upfront for the project. He also — quite wisely — has us make very clear in his contracts exactly what the China client gets for its upfront flat fee and that any work beyond that must also be paid in advance. These sort of provisions are important to prevent the Chinese side from claiming its project encountered problems due to our client’s breach. By way of a sidelight, this is a classic example of why there is no one answer regarding the best location and law for a dispute. We have written many times how most of the contracts we write for our American and European clients provide for disputes to be resolved in China. For this client, we call for disputes to be resolved in the United States because the odds of our fully paid up client suing the Chinese company are so low that being able to collect on a judgment is essentially irrelevant. We thus put in a US dispute resolution clause to minimize the likelihood of our client facing a lawsuit.
- 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.
What terms do you require when selling your products or services to China?