By Sun Jin(Marlow), Chinese attorney at Law
| Some
data indicates that after China joined the WTO, China's import and
export volume grew by 30%~40% each year, and it is now ranked as the
third-largest in the world. As a lawyer practices law matters of
international trade and international investment in China, the writer is
seeing growth. At same time, many foreign merchants are falling into
embarrassing situations while carrying on their import and export
businesses in China, this essay is written for them.
Let's follow Mr. A's steps. Mr. A
is a businessman from USA, or somewhere else, and he is an importer and
distributor of an electric scooter, or something else. He is new to
China and China is new to him, too. He met Mr. B on a B2B website who
said he is the boss of an electric scooter factory in Zhejiang. And Mr. A
is really happy with B's quotations. However, as he knows little about
Chinese suppliers, he has a little doubt about B's company's situation,
and would like to verify the company. A Chinese lawyer offered to assist
him.
***Verification of a company registered in China.***
In today's mainland China most
official business organizations are in form of Limited Liability
Company. For a Chinese trading or manufacturing company registered at
the local municipal industry and commerce bureau, the company must have a
business license. And it's a simple job for a lawyer to investigate the
company's original registration application files in the local
municipal industry and commerce bureau. From the files, we can get some
basic information like the company's legal name and address, legal
representative, registered capital, and so on. So, if B's company is a
registered company, buyers can gain a basic level of trust so as to
start business with them. If need more information, Due Diligence will
be needed.
After getting the lawyer's
positive investigation report, Mr. A felt better. He placed a small
order of US$3, 000 to the supplier; the payment term is T/T in advance.
However, after A received the
cargo in the destination seaport, he found that nearly half of the
scooters were defective. So, he requested to return the defective cargo
to B and a partial refund of the payment. The supplier did not agree.
Again, he turns to a local lawyer's help.
***Lawyer's letter: notice of claims and final notice before legal actions***
At this stage of a lawyer's job,
the lawyer can send a notice letter of claim to the supplier under
authorization of Mr. A, and before deciding to take further legal
actions like a lawsuit, the lawyer can send another final notice before
legal actions to the supplier as well, while in lots of situations above
two letters are in one. In traditional Chinese culture of Konfucian's
theory, a lawsuit was not a right choice and not a recommended solution
to disputes, so most Chinese peopledetested lawsuits. At that time we
had two other types of society controlling strength in coexistence with
judicial strength, morality and clan/family strength. Nowadays, the
situation might have changed a lot, however the remaining effects of
traditional culture still exist. After B gets the lawyer's final notice
letter, under the pressure of facing a lawsuit and after considering the
whole situation, Mr. B agrees to A's return of cargo, but said that he
will send replacements instead of a refund. A agrees.
One month later A got the
replacements, and to A's great surprise, the replacements were perfect.
So game is not over here yet. After some consideration, Mr. A wanted to
place a larger order of US$30, 000. Same as the first order, B wanted A
to make the payment via T/T. Mr. A now has a standing legal advisor in
China, and his lawyer offered the following solutions regarding payment
to B.
***Payment terms and related solutions***
For a payment sum larger than $10,
000 USD, it is strongly recommended to make payment by Letter of
Credit. At the same time, do not make the L/C terms very complicated. If
the supplier is new but really wants some deposit from the buyer in
cash, at same time the buyer can not give the supplier a basic trust,
then the buyer can choose to make payment in trust of his lawyer. It's
something similar to escrow. A precondition is the sum is not big, like
several hundreds or thousands of US$. When the payment is large, the
buyer might have to pay it to the supplier's account directly, as the
supplier needs to receive the foreign currency directly in order to
apply for a refund of the value-added tax from the Chinese government
(about 5%~17% of cargo's CNY value). So it's not a small amount when the
total sum is big.
Finally the both parties agreed to
close the deal with payment term of L/C. However, Mr. A is still a
little worried about the cargo's quality. As the L/C itself can not
offer the buyer any guarantee regarding cargo's quality. At the time,
Mr. A hears from one of his friends, who tell him that pre-shipment
inspection is very important and really works. However, his lawyer says
something more.
***What will really work in the game, pre-shipment inspections or contracts?***
Generally buyers will not place an
order until he is satisfied with the price quotation he received. So in
next step, he will face problem of quality controlling. Somebody said
pre-shipment inspection can control the situation. It's true that
pre-shipment inspection is fairly important, and via your eyes and
tests, you can find some obvious defects. However, we can not expect
that cargos' defects are always so obvious that can be easily found
merely by eyes and simple tests. Inspection is a very technical job, and
a well-furnished laboratory is needed to make a full and professional
test over the subject goods, from raw materials to technically
performances. And if the buyer comes to China to inspect it in person,
the costs will be high. So we have to consider other important measures
to control the situation, like choosing a right factory, and contract
management. You can inspect your shipment and devise payment terms in
your favor; but the real game is drafting sound contracts in compliance
with Chinese Law. Inspection problems and all other problems are solved
through dispute resolution. Clear and concise contracts with suppliers
usually allow you to resolve these issues without having to go to
arbitration or court, or making endless threats but receiving nothing.
Another example is when the buyer's order requires some new molds be
tooled; generally the suppliers will request the buyer to shoulder part
or all of the tooling costs. But the mold's ownership is not clear yet,
which will need an agreement to specify it. If there is no such
agreement, and when cooperation breaks up, both parties will have
disputes over it, which may lead to a lawsuit. In brief,
contracts/agreements are your own rules of the game, laws are also
rules, but it's more like a final relieve because of its universality.
So Mr. A comes to China, and
visits Mr. B and his factory inZhejiang. Both parties have a very
pleased meeting and sign one sales/purchase contract. Mr. B is a really
friendly and hospitable guy, and offers all of his possible assistance
to Mr. A while A is on his business trip in China. And surely there are
nice Chinese dishes, bars, and so on. It seems that they have become
good friends. At least Mr. A's business trip to China is great. And two
month later, Mr. A gets his container.
Well, we must say sorry to Mr. A,
to go ahead with our story, this order of $30, 000 must have quality
problems again which will lead to a lawsuit or arbitration case. Lots of
capable local suppliers here, but Mr. A is unlucky. After he received
his second order's cargo and sold it to his clients, he received
complaints from his clients. It seems that about half of the electric
scooters have some inner defects.
And this time, the situation is a
little bit complicated. Mr. B insists his products have no problems, but
Mr. A insists that the cargo is definitely unacceptable. The situation
does not come to an extreme example, and both parties need not make
threats to each other. Our honorable judges or arbitrators will decide
the duties of both parties according to their contracts, and the cargo
itself as well.
A's lawyer received complains from
both parties about the other party in the negotiations before official
legal actions. Mr. B said Mr. A is really impenetrable, they were so
friendly before to each other, and he had done so much and spent lots of
money for Mr. A especially when he was in China, but now he raises a
lawsuit against him while he believes that cargos has no problems. Mr. A
has the same complaint that Mr. B is impenetrable, too. It will be a
hard job for a lawyer to explain the cultural differences here. Even in
domestic Chinacultural differences exist, merchants in Zhejiang are
doing business in a fairly different manner from merchants from North
China and also different from merchants from Guangdong. Not saying the
merchants from different nations. However, we are lucky that we still
have something in common: laws, international trade traditions, and
profits.
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