By Dan Harris
With Phase One of the US-China Trade deal requiring China to purchase large quantities of goods and services from the United States, it makes sense to write how to ensure payment when selling to China.
When our China lawyers represent a client that will be providing products or services to a company in China, we usually start by asking about payment terms. If the Chinese company will be paying our client the full amount upfront, the contract provisions do not need to be too specific. But full upfront payment is rare.
In the typical provision of services scenario, the Chinese company pays the foreign company a small amount upfront (usually 20-25%), another portion (maybe another 25%) after the foreign company has met some vaguely defined milestone, and then paying the remaining 50% or so after the project is “completed.”
This sort of payment structure puts a large amount of risk on our foreign company client because it must perform first and then collect. The vagueness of the various milestones (including what constitutes “completed”) only increases the risk to the foreign company. Many times, the Chinese company will make so many changes to the deliverables or to the schedule that the foreign company ends up losing money even if it eventually gets paid in full.
Because of the above, our China lawyers typically advise our clients to consider the following three things when it comes to payment terms with China companies:
1. Make the payment terms as simple and clear as possible. This actually benefits both parties. The terms should be written so it is crystal clear when a payment is due, whether it is because the calendar shows a given date or because a project phase has been completed or a prototype has been delivered. Clarity is one of the key reasons why it almost always makes sense to have your contract in Chinese. See Good Contracts are Key, Corruption be Damned.
2. Require a large upfront payment and make clear in your contract that you will not begin work until you receive this initial upfront payment. Having a large upfront payment works both to prove good faith by the Chinese side and to prove that it is able to make large payments outside of China. China’s currency, the renminbi, is still a nonconvertible currency, and a Chinese entity that wants to send more than $50,000 in hard currency overseas must first secure approval from the transmitting Chinese bank. This generally requires it have an executed contract (in Chinese) for goods or services that are acceptable for foreign entities to provide and that the foreign company has submitted a formal invoice in a form acceptable to the bank. This is all because the bank in turn usually needs to get approval from government authorities. For the specifics on what is required to get paid by a China company. See How to Get Paid by Chinese Companies for your Services: It’s as Easy as 1, 2, 3. For reasons usually peculiar to the Chinese company with which you are doing business, this approval never comes. It is better that you learn early on whether the Chinese company with which you are doing business will be able to pay you.
3. Consider adding 10% as a final almost bonus payment due after delivery. A nontrivial number of Chinese entities insist on receiving delivery in full before making the final payment and then (because they already have what they need) never make that final payment. If you do get this final payment, consider it a bonus for the extra work Chinese companies are famous for seeking to extract from their vendors. And if you never get this “bonus” you can at least take comfort from having received a sufficient payment in any event.