by Mike Bellamy in 'China Sourcing Information Center'
First, let us address how to set up your payments so that you are not exposed to problems.
In the opinion of Sophie Mao of www.chibridge.net, my lawyer in China, "The best way to protect yourself is to structure your payment terms so that payment and quality of the goods are linked. Make sure to keep the deposit as small as possible and do not make the remaining payments until you or a third party inspection agent has checked the goods."
This is why she always recommends to her clients, if they cannot get something like 30/70, then there is no deal. Of course, the better option is about 30/30/40. Meaning, the initial deposit is 30 percent, another 30 percent after the preshipment inspection and 40 percent after delivery in the destination country.
For those readers who did not know about the strategies above, and who have paid the suppliers in advance yet have not received the goods, unfortunately there is no effective "Better Business Bureau" in China where you can take your grievances. Also, you will find limited support from government agencies, unless your case has pressure from your government's agency on its China counterpart. That pressure can actually work, but is very hard to arrange unless you have high level government contacts back home already.
Hope is not lost, though. Here are some tips to get your product shipped or your money back. If you have the following items in place, then there is a decent chance of negotiating a resolution that is acceptable:
1. A signed or chopped contract that defines clearly the acceptable level of quality.
2. A clear paper trailing showing proof of payment.
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).
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 is always nice to have future orders you can leverage as well.
Also, before placing the PO did you or a third party do an audit or due diligence at the factory to confirm they were legitimate? If yes, keep that report on file as you may need to refer to it later.
Here are my suggested next steps if you are not getting anywhere resolving a dispute with your supplier. - The first step is to define the damage and put a value on the costs to repair or replace. - The second step is to negotiate with your supplier on your own.
If that fails, many buyers think going to court or issuing a demand letter is the next best step. But actually, bringing in a third party can help facilitate dispute resolution.
Keep in mind that a demand letter or threat of court action can lead to a complete communication breakdown. Once this letter is sent, walls are put up by the supplier and getting to the facts of the situation becomes very difficult. In many cases they simply stop responding to the buyer and "call the bluff" if they suspect you are not willing to go to court, which is often the case when the orders are small or the five items mentioned above are not in place.
Bringing in a third party to help mediate after the legal letters have been sent out makes it very hard for this agency to be effective as any goodwill on the sell side has been lost.
If the third-party negotiations are not successful, then consider getting an English-speaking China lawyer to write a demand letter.
Unlike most other nations, in China you can sue for lost revenue. Since the price you sell to your buyers is certainly much higher than the price you pay to your suppliers, your demand letter can be effective.
Last resort: Go to court.
Answer written by Mike Bellamy, an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center. Mike is also the author of "The Essential Reference Guide to China Sourcing" and founder of PassageMaker Sourcing Solutions.