by Dan Harris in 'China Law Blog'
I am often asked by my clients what they can do to minimize the risks of getting stuck holding the bag when the product they import from China either injures consumers and/or needs to be recalled. My first answer is usually “not a whole lot” and then I talk about how they need to inspect the product as best they can and “get a really good insurance policy.” I then talk about how difficult it can be to sue and collect a full award from a Chinese product manufacturer.
It is possible to require your Chinese manufacturer to secure product liability insurance, but this comes with its own problems. First, many Chinese manufacturers will simply refuse to get this sort of insurance. Second, many will say they will get it and then never will. Others will say they will get it and then show you a fake policy and unless you are well versed in such things (and few are), you will never know the difference until you seek to collect on it.
As for suing your Chinese manufacturer, that is possible, but it is usually fraught with difficulty. If you have a properly drafted written contract between you and your manufacturer, it will contain an appropriate choice of venue provision that will allow you to sue the manufacturer in a jurisdiction (probably China) where it has assets against which you can collect any judgment you receive. The problem is that it is unlikely both that the Chinese court will reward you the full extent of your damages and it is even more unlikely that your Chinese manufacturer will have the cash on hand to pay it in any event.
Provided you have properly drafted your manufacturing contract, arbitration is another option. There are essentially two main ways you can go in terms of drafting your arbitration provision. The first is to call for arbitration outside Mainland China, either in your own country using your own country's laws or in a neutral country using that country's laws. If you wish, you can arbitrate in one country under some other country's laws, but that usually does not make sense. Both China and the United States are parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards, which means that China has signed on to enforcing United States arbitration awards.
We see two problems with this sort of arbitration provision. First, Chinese manufacturers almost never agree to them. Second, though China is required by the New York Convention to enforce U.S. arbitration awards, it may refuse to do so on “public policy" grounds and this exception can be a big enough loophole to drive a truck through.
We have become fans of Hong Kong and Singapore and Canadian (particularly Vancouver) arbitration both because Chinese companies are much more willing to agree to arbitration in these jurisdictions and because we have the strong sense that China's courts are more willing to enforce arbitration awards from these countries. Not surprisingly, Hong Kong is typically the best for this, with Singapore second, and Canada third. Hong Kong is a great place for arbitration, but it is very expensive.
Your second option is to arbitrate in China. The China International Economic and Trade Arbitration Committee ("CIETAC") is the best known arbitration center for foreign related arbitrations, but there are some others that are pretty good as well. Around 25% of CIETAC arbitrators come from outside China.
CIETAC arbitration is well priced and fairly reliable and its awards have a very good chance of being enforced in China's courts. You should be extremely careful when drafting a CIETAC arbitration clause as they can easily contain pitfalls for the unwary foreigner. Just by way of example, I have had to tell many an American company that their failure to specify English as the language of the arbitration means that it will be in Chinese.
There are all sorts of issues that can arise in trying to protect your company from bad or harmful product coming from your Chinese manufacturer. Unfortunately, there is no one best solution and certainly no fool-proof one. In the end, the best solution will likely be some combination of a good and well-heeled manufacturer, a good contract, and a good insurance policy (certainly for you and for your Chinese manufacturer as well, if possible).
What do you think?
Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.