What to Do When You Get Bad Product from China

International Manufacturing Lawyers to protect your manufacturing molds

Our international dispute resolution lawyers must get some form of the following at least twice a week:

I just received a shipment of bad product from China and my manufacturer is ignoring my requests for a refund. What do I do? Do I have a case?

Our attorneys usually answer with a “that depends”.  That depends on the following:

1. How much is at stake.

2. The history of the relationship with the Chinese company.

3. The city in which the Chinese company is located.

4. The legitimacy of the Chinese manufacturer.

5. The nature of the defects in the product.

6. Whether there is a written contract and, if so, whether that contract clearly addresses the defect.

7. What the contract says about dispute resolution.

Much of the time there is either not enough at stake or not a good enough China Manufacturing Contract to warrant my law firm’s involvement. In those cases we tell them that it would not be worth retaining our firm and they usually then ask what else they should do.

Much of the time I suggest that they do nothing and just make sure to do the right things the next time so as to prevent this sort of thing from recurring.  Occasionally, I suggest they try to find a China licensed lawyer who will take the case on a contingency fee basis. If they ask about involving “the Chinese government” or the Embassy or Consulate from their home country — this is actually quite common —  I tell them that if they want to try either or both of those things, they should, but that I am not aware of this ever having helped anyone.

I have learned that my advice is not terribly different from this article entitled, Is It Too Late to Do anything if I receive bad quality products? [link no longer exists]

This article sets out five “essential check points,” which if you cannot “check off,” you probably should just “learn from your mistakes and do things right on your next order.

On the other hand, foreign buyers of Chinese product who have the following five items in place, “have a decent chance of negotiating an acceptable resolution”:

1. A signed/chopped contract that clearly defines the acceptable level of quality.

2. A paper trail showing proof of payment. This is sometimes much tougher than you would think because if you paid some Hong Kong holding company your Chinese product supplier will likely claim that you actually never paid for your product at all. Be very wary of this, both with respect to who you pay and in analyzing the value of your bad product claim.

3. The seller named on the contract matches the receiver of the payments. With so many trading companies out there it is a common mistake to have a contract with a supplier but pay a trading company! See number 2 re Hong Kong.

4. Your supplier has physical and financial assets (small “one-man-bands” disappear as soon as they feel a lawsuit is on the way).

5. The jurisdiction on the contract matches the location of the supplier’s assets at a city, province or country level.

It then adds that “it is always nice to have future orders you can leverage as well.”

Good advice.

What do you think?

6 responses to “What to Do When You Get Bad Product from China”

  1. Dan, I have been reading your sourcing primers and your “what do do if it goes wrong” posts for a long time now. I almost always agree with your preventive and prescriptive advice and that of your always excellent contributors.
    But there has always been a glaring omission from your advice. The contracts, IP registrations, the chops, etc. all matter a great deal and you should never go without them.
    But, in the end, China is a relationship-based society and business culture. Therefore the BEST thing you can do to protect yourself is to have people on the ground micromanaging every part of the process.
    That person(s) should be:
    1. Negotiating the terms of contract, quality of product, INCO terms etc. in person.
    2. Inspecting the facilities, vetting management, checking export records, checking QC regimen and documentation, checking the manufacturer’s supply chain, looking at the loading dock to make sure that where they say they export to and where they really export to match and 100 other things you should look at in the factory itself.
    3. Should either be on-site or close by during the production run to monitor quality and progress
    4. Conduct final inspections and approve all paperwork in regard to export
    5. Be there to negotiate solutions in person if something goes wrong. A factory owner won’t lose face through email, but will if your man or woman on the ground is staring him down and calling him out in the right way
    I got my start in China many moons ago working in an actual Chinese factory. I have seen every miserable plot and scam from both the seller and buyers side.
    For an average of 5% of cost of P.O. there are some really great companies out there (including ours) who can provide these services to importers.
    For clients who have used me and my companies over the years in this way the record is clear.
    250 successful production runs (most of which had problems somewhere that were solved by micromanagement)
    2 failures (one of which resulted in a refund from the factory to the buyer because of our intervention.
    A good sourcing and manufacturing expert goes a long way. This applies to the Fortune 500 companies we source for as well as start-ups and everything in between.
    Best,
    Michael Zakkour

  2. I had a new customer who asked me what to do about a batch of bad quality products he received from a Chinese merchant, here is what I told him:
    “The first “problem” (or characteristic so to say) is that many Chinese firms don’t really understand the concept of a sample.
    Many times I have received some rubbish with the disclaimer, “Well, once you make an order we’ll make it correctly to your specs.”
    Oftentimes a “sample” is not really representative of the exact product that will be sold to you, it may even just be a product procured from the local market.
    It is entirely possible that their products have been fine for many years. Sometimes they will change producers without making sure quality is the same, some producers go bankrupt (deservedly so I might add), and oftentimes the production oversight is just bad or entirely lacking. For many products, there is a surprising lack of basic understanding by the factory personnel as to just what the heck it is they are making and the use thereof. Ergo they can’t rationally quality check because they don’t know what “correct quality” actually looks like!
    As to how to approach resolution of these specific issues with this supplier:
    Paramount for most producers/suppliers is not “how to please the customer” but “do not lose money on any transaction”. Their supplier will certainly stiff-arm them on any refund, and I and quite certain they will not issue any refund to you. The usual resolution method for these problems is that they will replace the defective wares. However, they will usually demand the defective wares be returned. Not for quality checking; they will then return them to stock and sell them to someone else, so as not to lose money. Alternatively, they may suggest to you, “If they don’t meet your specs, why don’t you sell them to some third-world client?”
    I suggest finding a specific product from them with which you have had no problems, offer to send the defective products back in exchange for a credit applicable to buying the problem-free product.
    They will probably not pay the freight either way, but you can always ask.”

  3. @Chinamike,
    With clients I always talk about how getting good product from China is a three legged stool: good partner, good contract, good monitoring. The stool can’t stand up without all three. I may emphasize “good contract” the most on this blog because that is the area I know best, but I would absolutely never claim the other two are not at least as important.

  4. For American companies the US Embassy / Consulate’s Commercial Section can sometimes be of help. You probably haven’t heard about the successes because the Embassy can’t talk about what they do for individuals or companies unless the individuals or companies want to talk about the matter – and most do not. I’ve referred many US companies to the embassy and depending on how well documented the case is – I’d say the embassy has about a 50/50 success rate. Sometimes just a call from the embassy to “ascertain the facts” is enough to get movement in the case. Perhaps because the Chinese company suspects (with good reason) that executives of companies with a history of ripping off US parties often don’t get visas to visit the US.

  5. I hear you, but it seems these poor souls writing in to you always seem to be missing the “good partner” portion. Interesting.

  6. This is good advice, but even more important is preventing this because as you say, once something bad happens with your Chinese supplier, there is almost no way to get back even to square one with them.

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