Things to lookout for while doing business with China Suppliers

The caveats of international trade with China. Prepare yourself for when things may go wrong.

In my seven years as a Chinese lawyer, 90 percent of my cases involved international trade disputes. For the majority of those cases I represented the foreign buyer as the plaintiff, going after Chinese companies and Chinese scammers. Unfortunately, a significant number of my clients were standing on sketchy ground as they lacked sufficiently prepared evidence which made my job a lot harder. When buying products from Chinese suppliers, these are the caveats I believe are easily overlooked by even a veteran buyer.

1) China courts are heavily evidence based.

There is a serious flaw in the perception by many foreigners when it comes to China’s judicial system, in terms of how the courts in China operate. They believe China courts are bias against foreigners. This idea is reinforced when a foreign plaintiff files a legitimate complaint against a Chinese company, but the courts still decide in favor of the Chinese company. China courts rely heavily on solid evidence to make a judgment. Judges can be overly precautious as they want to ensure their judgement is ground in unambiguous evidence. Affidavits or testimonials generally do not carry much weight and are often dismissed as bias opinions. Offering “solid” evidence would come in the form of written consents such as contracts, agreements, documented correspondences, technical/specification documents, wire transfer receipts, etc.

2) Company websites are not a justification for legitimacy.

Clients come to me all the time and ask me “how can I get my money back from a Chinese supplier?”. Usually, I would have no answer for them until I can identify who “really” is the supplier. They become perturbed and doubt whether I’m a real lawyer since the supplier information is clearly provided in their website. They have pictures of their products, office, staff and certificates of their company that convinces customers they are real and trustworthy. However, it doesn’t mean they are the company you are actually doing business with. Website domain names registered in China are easy to identify who is behind them since the regulatory agency in China require the owner information to be authenticated. Nonetheless, many Chinese companies choose to register their website overseas, including and especially in places like Hong Kong, to avoid the strict regulations. I’m not suggesting anyone using overseas registered domain names for their company website is intent on committing a fraud or a scam. In most cases, it is purely for legitimate business reasons. However, it would be naive and potentially dangerous to believe everything on the website is true since there is no one to verify the content and the owner of the domain name is not liable in China for its content. Clients should always take further actions to verify a Chinese company before doing business with them.

3) Only Chinese names work in China.

Since Chinese is not considered the international language of business, English is, many Chinese companies come up with English names to make it easier for customers to remember and understand. However, in China, only Chinese company names are officially recognized by the authorities. WFOE (Wholly Foreign Owned Enterprise) or JV (Joint Venture) companies may register an English name but is still required to have a Chinese name to be officially recognized. Wholly Chinese owned companies will not have any officially recognized name other than their Chinese name. This is also true for any contact person. Names, like Lucy, Jack, Yo-Yo, Rainy, etc., are generally made-up names and do not comply with the PINYIN rules (romanization of Chinese characters) recognized by China. Therefore, it is of the utmost importance Chinese names are used when signing contracts, issuing a purchase order and receiving an invoice along with any person’s name attached to that document who is a Chinese National.

Below is an example of English translated into Chinese and its Pinyin equivalent.

4) Money sent doesn’t mean money received. Know who is actually getting your payment.

There are many ways a Chinese supplier can receive money. Typically, it would be through a company bank account in China or an overseas account. When you send money to an account in China, there is a good chance I can trace the account owner and investigate the money trail. However, if money was sent to an overseas account, including Hong Kong, the Chinese courts are unable to subpoena bank records. There was I case I handled in 2017, where my client had sent an initial deposit to the supplier and the supplier confirmed receiving the payment. On the final payment, the contact person of my client asked them to send payment to another account which my client obliged. In the end, the supplier never received the payment and was unwilling to ship out the goods my client ordered. The contact person disappeared and couldn’t be found because they were using an English name which no one could identify.

5) Shell companies can leave you high and dry.

Shell companies are real companies and identifiable. They can be legitimate businesses facilitating trade, like an agent or trading company. The caveat here, is anyone engaged with these types of companies are more vulnerable to risks. Many trading companies do not own significant assets. When something goes wrong, you’ll have better chances recovering money from factories than you would from a trader or an agent.

6) Misuse of terms and legal jargon.

Before moving forward, let me explain the legal concept of an “order”. Order, from a business transactional standpoint, is an expression of the buying party’s intent to do business with the selling party. It is binding only when the buying party receives consent or acceptance from the selling party. A valid order is comprised of at least three phases; placement of order, acceptance of order, and delivery acceptance. Failure to definitively define any one of these phases can invalidate the order and invariably lead to a dispute. The simplest way to avoid such a scenario is to have the supplier sign and stamp a purchase order. Any changes to the terms where both parties agree to must be followed up with an amendment document signed and stamped by the supplier. It is important to note, judges in China give more credence to printed and stamped documents as opposed to electronic stamps which can lead to authenticity issues in trials. To properly protect your interest in cross-border trade, unambiguous and material terms must be clearly defined. I have come across numerous orders that were flawed and incomplete which made my job a lot more difficult. The most frequent issues I faced in my cases are the following:

a) Lack of product description or reference to technical specifications.

Typically, this can lead to disputes in quality standards. Many buyers reference advertised products on the supplier’s website, like Alibaba, to confirm a product description. By doing this you leave yourself wide open in terms of interpretation of the product description. Always get a physical sample you can approve as well as details in writing for any material variables in the product.

Furthermore, different countries have different standards or directives regarding the materials used or mandatory requirements in certain products. If it is the case, put that in the contract with the supplier and request them to provide relevant certificates issued by accredited institutions which are recognized by final importing countries.

b) Lack of or misuse of Incoterms.

Incoterms are important for 2 purposes; one, it defines the price parameters of the product and the conditions of responsibility on shipping arrangements, and two, it defines where the liability of the shipper or supplier ends. The latter is usually where buyers misunderstand their rights. The three most common examples are:

EXW (Ex-works); the seller delivers goods to the buyer at the seller’s premises.

FOB (Freight on Board); under lead time encompasses the time for the goods to arrive on board in a shipping vessel.

CFR or CIF (Cargo and Freight or Cargo, Insurance and Freight); under lead time encompasses the time when the goods arrive to the destination port with freight cost covered by the supplier.

Misuse of period term for delivery. Hands down, the most disputed terms are delivery time, lead time, production time, etc. Buyers often use these terms without actually knowing the implication or legal definition of the term.

Here follows the accurate definition:

Lead Time encompasses the entire process from acceptance of an order to the delivery of the product to a defined destination, subject to Incoterms

Delivery Time only specifies the time it takes when the product is ready to ship to the time of receiving the product at a predefined location.

Production time defines the time for the production of the product and technically does not include required time for packaging and inspection.

c) Lack of delay penalty and cancel order terms.

Without a delay penalty clause or cancel order terms in purchase or supply contract would essentially renders any term given for lead time, delivery time, and/or production time as ineffective. When stipulating time frames it must be accompanied by a penalty or an optional term. Chinese courts are not favorable in awarding non-direct or loss-of-profit cost as a result of a failure to meet time frames, because they are conditional. These terms must be stated in the purchase agreement for greater likelihood of a favorable award. It is recommended to set a fixed penalty or a fixed percentage to an order amount as penalties.

d) Lack of well-defined warranty terms.

Not having or lack of a well-defined warranty terms in your contract will lessen your ability to claim damages, replacements, or refunds. A Warranty is a critical part in upholding quality and IPR compliance. It lays out the response of the seller when these issues arise, such as what the supplier must do or what they need to compensate for these violations.

For example, the supplier may agree and offer a one-year or two-year warranty replacement for a defective product. However, that is all what the provision states and does not provide a definition of defective product. A defective product can mean something which doesn’t work properly right of the box and/or does it mean a certain performance standard the product must adhere to over a period of time.

As Murphy’s Law says, “If something can go wrong, it will go wrong”. Hopefully, this article will better prepare yourself and understand the nuances in language and well-defined provisions in a contract to mitigate the risks when something does go wrong.