The End Of Cheap China, Part V. Even More On How YOU Must Prepare For It.

In part IV of our continuing series on the end of cheap China and the impacts arising from that, co-blogger Steve Dickinson wrote about the increased risks product buyers are facing from their China-based manufacturers. That post concluded with Steve talking about why paying your Chinese manufacturer in advance for product can be so risky. In this post, Steve addresses other, better, payment options. 

To summarize my last post (The End Of Cheap China, Part IV. More On How YOU Must Prepare For It), the following are the basic rules you should employ to pay for product produced by Chinese manufacturers:

  • Avoid paying an advance deposit. If you must pay an advance deposit, understand the risk. Do not throw good money after bad in sticking with a manufacturer that shows it cannot do the job.
  • Inspect the product before you pay. Ideally, do the inspection after delivery. If you inspect the product in China, take into account the risk of deception.
  • Take your inspection seriously. If the inspection shows a problem, either cancel the contract or insist on a remedy. It is surprising how many buyers ignore the results of their own inspection. I have seen several cases recently where buyers contracted for OEM manufacturing of their product using the terrible 30/70 system discussed above. Having read about the problems of defects from China, they paid for a pre-shipment inspection. The inspection showed numerous surface defects, suggesting deeper problems with the product. However, as a result of feeling stuck by their deposit and being under time pressures, they paid the full amount and had the product shipped anyway. In each case, numerous defects appeared, rendering the entire shipment essentially worthless. They could have filed suit in China, but either the amount did not justify the cost of suit or they did not have the resources to sue. If your product inspection reveals a problem, take this seriously. Do not payuntil the problem is solved. Do not think that a theoretical right to sue will save you from disaster. International litigation is expensive and uncertain. Do not allow yourself to be put in a position where such litigation is even a possibility.

The above discussion shows how truly unusual the situation is in China concerning product sale. For most countries in the world, the standard product purchase and sale contract is something like this:

  • Payment is made after inspection. In most cases, the inspection is made in the country of delivery to prevent fraudulent substitution.
  • Inspection is made by a truly independent and expert inspector. The inspector usually works for an internationally recognized inspection agency with a long track record of expertise and independence.
  • Payment is made pursuant to an irrevocable letter of credit issued or confirmed by a major international bank.

The key to this system is the participation of truly independent, trusted intermediaries: the inspector and/or the bank. In drafting purchase agreements where such trusted intermediaries will be used, I focus far less on the litigation/ dispute resolution process because my client's protection comes from the payment system itself. I Instead focus on creating a set of clear rules so that the intermediaries will be able to do their job with no chance of mistake or misunderstanding. If my drafting is unclear, the inspector or bank will simply reject and I have to try again.

The situation in China is oftentimes completely different. In the China trade process, the usual trusted intermediaries are not permitted to operate. Inspections are done by state owned inspection companies. Letters of credit are issued by state owned banks. Since the 80s, these state owned entities have shown that they are not independent. They will virtually always side with the Chinese side in the case of a dispute.

The result is that they are seldom used. Without the services of trusted intermediaries, the Chinese trade system is set up so that one side of the transaction bears excessive risk. In smaller transactions, the foreign buyer usually bears the risk. In large transactions, the Chinese seller usually bears the risk. This would not be necessary if the Chinese companies and government simply made greater use of the existing system of well established inspection and trade finance.

However, I see no movement at all in this direction. The risk is considerable and must be taken into account in all purchases from China.

Buyer beware.

DAN'S ADDITION: Many years ago, I represented a US Company that was sued for having provided allegedly rotten food to a foreign fish buyer. The foreign company sued my client in a US Federal Court for the bad food. The foreign company's case hinged entirely on a Chinese government inspection of the fish, which said that the food was bad. Very soon after the case was filed, we told the foreign company plaintiff that there would be no way it could prevail because the Chinese government inspectors would never testify and without them, they had no evidence of bad product. Two years later, and right before trial, we settled the case for a pittance because the Chinese government inspectors had avoided being deposed and would not be showing up for trial. I mention this to point out that even in those cases where the Chinese government inspection reveals bad product, you may not be able to use that inspection in such a way to ensure a real recovery. This case was maybe five years ago and things may have changed since then, but I doubt it. 

Another China WTO Loss. Another Nail In The Coffin Of World Trade.

By: Steve Dickinson

Preserving its track record of major defeats before the WTO, China recently lost its appeal of the WTO panel decision in the minerals export case. The appeal decision was issued on January 30 and can be found here. Briefly stated, the original panel report held that Chinese export duties and export quotas for certain industrial minerals violate WTO requirements. China was ordered to reduce its duties and dismantle its export quota system. China appealed and lost on all important issues.

This decision has important implications. As most observers have noted, the real issue is export quotas and the real target is China’s export quota system for rare earths. Under the terms of this decision, China’s rare earths quota system is in clear violation of the WTO. The U.S. and others expect China to now act on its own and terminate the rare earths quota system. If this is not done voluntarily, the U.S. and the European Union have threatened to bring a follow-up action in the WTO, targeting rare earths. After this victory in the metals case, such an action against China would almost certainly succeed.

More important, China has an extensive export quota system covering over 600 products. These are all basic materials considered by China to be vital to its internal security: energy, raw materials and food. Under the terms of the panel decision and appeal, it is now clear that China's entire export quota system is in violation of the WTO. This recent decision on minerals therefore goes far beyond rare earths. It is a challenge to a vast and complicated system that the Chinese see as essential to national survival.

Ron Kirk, the U.S. Trade Representative, described the success of the appeal as as a “tremendous victory” for the United States.  In reality, the decision is bad for both the United States and China and for the members of the WTO as a whole.

This case is a very hot issue in China. After the decision, assessments have appeared from the Chinese government, the Xinhua News Service (the Chinese government's propaganda arm) and from general business commentators. The universal conclusion of the Chinese is that China has no intent whatsoever to comply with the terms of this decision or any other decision relating to its export quota program or to any other regulatory regime China deems in its national interest (such as China's restrictions on importing print and audio-visual materials).

The basic position set forth in the Chinese press has been as follows:

  • Control of domestically produced raw materials, energy and food are vital to China’s national interest. China will not allow a trade law like the WTO to impact its pursuit of policies such as export quotas that are vital to its national interests. The attempt by the developed countries to use the WTO as a way to attack China’s national interest is unfair and shows bad intent. Such attempts will be rejected.
  • China still intends to remain within the WTO so as to be able to obtain certain trade benefits. Rather than openly disregard the minerals decision, China will resort to “procedural games” (游戏规则) to render any response against China ineffective as a practical matter. China is proud of how it has  used “procedural games” to avoid its responsibilities to respond to adverse WTO decisions and it openly states that it will continue to use this approach in these "national interest" cases. In fact, the term “procedural game” has become a standard feature of the China's trade policy vocabulary.

This result is bad for supporters of the WTO trade system and it is bad for China. It is bad for the supporters because it exposes the weakness of the WTO dispute resolution process for resolving serious trade conflicts. China’s recent series of losses in the WTO justifies the US and other countries imposing major tariff and related trade sanctions against China, but no such sanctions have been imposed and China has concluded that no such sanctions will ever be imposed. China correctly believes that it can afford to ignore adverse WTO decisions because the complaining countries have no interest in actually imposing sanctions. We can thus expect China to continue ignoring most (all?) adverse WTO decisions against it. This will serve to progressively weaken the WTO trade system.

The odd thing about the export quota case, however, is that China itself is likely to be the biggest loser. China is the major importer in the world of raw materials, energy and food products. China therefore absolutely requires an open and fair export system for such products. By acting to support mercantilist export quotas and other restrictions on the export of critical raw materials, China is acting directly against its own economic and national security interest. China's control of the rare earths export market has convinced it that it can become a rare earths version of OPEC, giving them power to finally dictate terms to the developed world. This dream has blinded China to the real risks of its plan.

Both China and the U.S. are acting recklessly in a way that serves to undermine the WTO trade system. The damage has been done. The WTO minerals ruling is just another nail in the coffin. The WTO has been murdered. China pulled the trigger and the U.S. and Europe supplied the gun.

What do you think?

For more on China and the WTO, check out the following:

For more on China's rare earths, check out the following:

Dr. Clarisse von Wunschheim On Arbitrating Your China Disputes, Part III. Is Enforcement Overemphasized?

This is part III (the last) of Dr. Clarisse von Wunschheim's three part series of guest posts on China arbitration. I asked Dr. von Wunschheim to write this series because arbitration is so important to so many China transactions and she literally wrote the book on China arbitration: Enforcement of Commercial Arbitral Awards in China

More from Dr. Von Wunschheim:

PART 3:         Relevant Criteria for Selection between Arbitration in or outside China – Are enforcement issues really so important?  

In my previous posts, I set out the context of the battle between arbitration in or outside China and the arguments that the supporters of each option commonly rely upon. I further explained the reasons why I am not convinced by most these arguments, the main reason being that I believe the pros and cons invoked by the supporters of either option to be largely directed by their fear and ignorance of the other option, and are not made in due regard of the specific needs and possibilities of the case at hand.

The aim of this final post is therefore to determine what should be the relevant criteria when having to decide between arbitration inside or outside China.

First of all, let me go on the record to state that I do not believe in a Manichean view, considering one option as good and the other as evil. Which option is better and why can only be determined based on the specific needs and expectations of the parties to the contract.  On this basis, either option may be the better one.

Therefore, the key questions are: ‘What do the Parties want?’, and then ‘Which option is more likely to give them that ?’

When answering these questions, I believe that we – lawyers – focus too much on enforcement issues. How many times have I heard that ‘arbitration is not efficient if enforcement does not work’? Too many times.

I believe this statement is fundamentally flawed for the following reasons:

  • There are a lot of other positive ‘endings’ to arbitration than enforcement, including:
    • Amicable settlement before rendering of an award, and the related withdrawal of the claim (believed to be around 25% of the cases according to Queen Mary/PWC Survey 2008 and, with regard to China, between 20-30% according to CIETAC and BAC reports);
    • Voluntary compliance with the award (believed to be around 50%, according to Queen Mary/PWC Survey 2008 , and ‘high’ with regard to China according to CIETAC’s Secretary General);
    • Self-executory awards, i.e. awards in which the winning party’s needs are satisfied with the mere issuing of an award (e.g. full rejection of all claims [representing up to 31% of the cases according to Naimark/Keer Study 2000], award used for insurance purposes, etc.);
    • Post-award settlement (believed to be around 17% according to a survey by Naimark/Keer in 2003); etc.

In most cases, there is thus no need to resort to enforcement. The same seems to apply in China, where less than 10% of the total volume of arbitration cases are believed to result in enforcement proceedings. While, it is undeniable that the possibility of successful enforcement plays a certain role when deciding whether or not to comply with an award or settle, the actual influence of this factor is unknown. I believe that it affects more lawyers than business people, and that’s just as well.

  • There are a lot of other motivations for arbitration proceedings other than recovering money from the opposing party.  Various studies conducted in recent years (e.g. studies made by Richard W. Naimark and Stephanie Keer in 2001 and 2002, Queen Mary/PWC 2008, Queen Mary/White&Case 2010, etc.), reveal that (among other factors such as flexibility, speed, privacy, receipt of a monetary award, arbitrator’s expertise and superiority of the international legal framework, continuing the relationship with the opposing party, etc.) the parties firstly seek a fair and neutral process entitling them to resolve their dispute in a way that is acceptable to both of them. In such cases, it may not be justified to focus mainly on enforcement issues, and it is more important to choose a form of arbitration that will be able to accommodate the parties’ needs and the specificities of the case. Sometimes, the parties just want a decision on a dispute in order to move forward, and the expression of this dispute in monetary terms is more a ‘tool’ rather than an aim in itself. Sometimes, the parties will want a determination of the facts and liability for insurance or other similar purposes. Sometimes, the decision of the arbitrators will allow the parties to create a basis for renegotiation of their business arrangements with regard to future developments not anticipated at the time of conclusion of the contract, etc.  

In summary, I believe that the health and efficiency of arbitration, in general, lies firstly in its capacity to lead to a voluntary compliance with arbitral awards or to amicable settlements. If compliance with the award depends on the efficiency of the national enforcement system, then arbitration has in my view already partly failed.  While it is thus certainly important to provide for a well functioning enforcement system, I believe it is even more important to increase the parties’ trust in the system of arbitration.

There is no doubt that there is a lot of work to be done in this respect in China. To trust the international arbitration system, Chinese parties need to be educated about it, and such education can happen through involvement of Chinese parties and companies in international arbitrations, but it can also happen through involvement of foreign arbitration practitioners who bring in their expertise and know how into Chinese arbitrations.  To trust the Chinese arbitration system, foreign parties also need to learn and understand more about it.

At the end of the day, the real challenge is not to decide between arbitration in or outside China. It is to get to a point where international arbitration makes room for the Chinese participants and their cultural specificities, and vice-versa, with Chinese arbitration coming closer to the expectations of international arbitration users.

Dr. Clarisse von Wunschheim On Arbitrating Your China Disputes, Part II. Inside Or Outside China?

This is part II of Dr. Clarisse von Wunschheim's series of guest posts on China arbitration. I asked Dr. von Wunschheim to write this series because arbitration is of such crucial importance to so many China transactions and she literally wrote the book on China arbitration: Enforcement of Commercial Arbitral Awards in China.

More from Dr. Von Wunschheim:

PART 2:         Pros & Cons of Arbitration Inside and Outside China

In my previous post, I tried to establish that though the question of whether to arbitrate in or outside China may seem to be primarily relevant for so-called ‘foreign-related’ contracts, it actually concerns all kinds of China-related contracts.  Today’s post aims to determine the main pros and cons of each option, as well as the current trends which they give rise to.

Referring to the arguments most often invoked by the supporters of each option, the main pros and cons can be summarized as follows:

ARBITRATION OUTSIDE CHINA

PROs

CONs

-         Neutrality of the forum, and thereby better assurance of independence of the arbitrators and the arbitration institutions

-         Higher level of professionalism, ethical standards and competence of international arbitrators

-         Increased flexibility and party autonomy, especially with regard to (i) choice of the arbitrators and (ii) conduct of the proceedings

-         Expensive

-         Slow

-         Complicated

-         Lack of availability of interim measures for protection

-         Difficult enforcement of foreign awards in China

-         Western Bias against Chinese companies

 

ARBITRATION IN CHINA

PROs

CONs

-         Faster

-         Cheaper

-         Some availability of interim measures for protection

-         Easier enforcement

 

-         Lack of independence of the arbitrators and/or the arbitration institution

-         Limited party autonomy regarding selection of arbitrators and design of the arbitration proceedings

-         Lack of professionalism among arbitrators

-         Restrictions regarding representation by foreign lawyers

-         Lower ethical standards of lawyers and arbitrators

-         Complicated

 

Though the above lists give a good overview of the most common ‘selling points’ of each option, they do not distinguish:

(i)            the weight of each individual pro or con compared to the others;

(ii)          what makes the difference at the end of the day, the pros of the chosen option or the cons of the opposite option.

With regard to the individual weight of each pro or con, this can be quite different if looking at the problem from the perspective of a Chinese company/lawyer or from the perspective of the foreign company/lawyer.

  • With regard to the position of Chinese lawyers/companies, most of them seem to favor arbitration in China for the following main reasons:
    • They believe arbitration outside China is too expensive, takes too much time and is too complicated;
    • They believe Western arbitrators and arbitration institutions are biased against Chinese companies;
    • The Chinese arbitration system works just fine.

While there is merit in some of these arguments, I also think that they are partly misplaced:

-            Regarding the costs: There is no doubt that arbitration according to international standards and with the involvement of international specialists is generally more expensive than arbitration in China under a local arbitration commission and with local experts. However, there is a reason why, and the list of pros and cons listed above already gives a hint of these reasons. In addition, many companies and especially Chinese companies, misperceive the real cost items and ignore that there are ways to control and limit these costs. They often believe that the main cost item are the fees of the arbitrators and arbitration institution, while it is actually the lawyers’ fees (which are estimated to represent over 80% of the total costs related to an arbitration). They will also often tell you that prices in Geneva, London or Stockholm are far too expensive and they can’t afford to travel there. This argument ignores that the place of hearings does not need to be at the place of arbitration (actually a lot of lawyers ignore that too…). The place of arbitration is a virtual place determining the applicable legal framework to the arbitration, and while they may need to hire lawyers from that region, parties do not need to go there. Hearings can be held in Hong Kong, or even somewhere in China, while the place of arbitration can be anywhere outside China. 

-            Regarding the time: It is also true that the deadlines provided in Chinese arbitration rules are usually shorter than in international arbitration rules, and that arbitration proceedings in China usually take less time than in international arbitration proceedings. However, firstly, while speed is good, it is rarely a virtue per se. If it is at the expense of quality it is useless, and even detrimental given the final and binding character of the award. Secondly, let’s not forget that in international arbitrations the parties are the masters of the proceedings, and therefore also of the timeline. In many cases, the problem does not lie with the arbitrators or the rules, but with the parties and their counsel. As busy as famous arbitrators may be, the same is true for high profile arbitration counsel… Here again, there are ways to control this issue, by choosing appropriate arbitrators and counsel. Many arbitration institutions now also provide for fast-track arbitration proceedings.

-            Regarding the argument of ‘complicated’ proceedings, I believe this argument confuses ‘complication’ and flexibility. Chinese arbitration does not provide lawyers and parties with a lot of autonomy, and most things are decided by the arbitrators in a fairly expedited manner. Thus, when Chinese companies and lawyers are involved in international arbitrations, they do not know how to deal with the autonomy given to them and they see that as being ‘complicated’. Due to their lack of exposure to arbitration abroad, many Chinese companies and lawyers do not feel confident in their ability to efficiently conduct such proceedings. And, let’s be honest, no one likes to have to get external help…

-            Regarding the argument of bias against Chinese companies, I believe it is closely linked to the previous argument. It is normal that Chinese parties feel safer at home, the same is true for any party from anywhere. However, this concern has recently been alimented by a survey from CIETAC according to which Chinese companies involved in arbitrations abroad lost in 9 out of 10 cases. Unfortunately, only the result of this survey was published without any information on the reasons for the loss or the methodology or scope of the survey. Thus, while some believe that this survey confirms Western arbitration is tainted by a general bias against China, others (myself included) prefer to explain the figure of 9/10 losses (if at all representative - I am still skeptical about this figure) with the lack of experience and familiarity of Chinese lawyers and companies with international arbitration, which leads them to make the wrong choices. Also, let’s remember that splitting the world into the West vs. China does not really reflect the current world map, be it in terms of geography, economic interests, culture or political power…

In summary, I believe most concerns of Chinese companies and lawyers arise from misperceptions concerning the real functioning of international arbitration. This is understandable to the extent that, except for a handful of mostly big Chinese law firms and their clients, most Chinese lawyers and companies have not yet been exposed to international arbitration.

However, I should also stress that I have noticed in recent years an increased willingness of Chinese companies and lawyers to arbitrate their dispute outside of China, though they often insist on places such as Singapore or Hong Kong. Chinese parties choose these venues because they feel culturally close to them and believe that the risk of a bias against them is limited. From an outsider’s perspective, since these regions having both adopted the UNCITRAL Model Law on International Commercial Arbitration, they are attractive options compared to arbitration in China. However, what the parties often do not realize is that these jurisdictions have common law legal systems, which means that the way that lawyers work and the manner in which the case will be pleaded may be very unfamiliar to them and different from the spirit in which their contracts were drafted. I am thus not sure that this is necessarily the best way to go for Chinese parties, and in particular I am not sure it will help them feel more confident with international arbitration.

  • With regard to the position of foreign lawyers/companies, there is no unanimity and the two schools of thought find supporters. With regard to each of these options, the most common arguments I hear are the following:
    • From supporters of ‘Arbitration outside China’: Arbitration in China is unpredictable. Arbitrators have too much power and the risk of lack of independence and impartiality reduces the chances of fair proceedings;
    • From supporters of ‘Arbitration in China’: Arbitration outside China is not always efficient. After all, winning the arbitration is only half the battle, and enforcing foreign awards in China is more difficult than enforcing Chinese awards.

Again, I remain partly unconvinced by most of these arguments for the following reasons:

-       Regarding the argument of unpredictability of arbitration in China: I agree that arbitration in China is often unpredictable. However I am not sure whether this is really due to the alleged lack of independence and impartiality of the arbitrators or the arbitration institution, as opposed to the general unpredictability of the Chinese legal system. In addition, one cannot deny that international arbitration always shows a certain degree of unpredictability, in particular when the case involves arbitrators from different backgrounds, lawyers and parties from different backgrounds and legal cultures, various laws applicable to various aspects of the dispute, etc.  Who can honestly pretend to be able to predict the outcome?  What must be predictable is the process; arbitration must provide the guarantee of a fair process according to pre-determined rules, and this brings me to the argument of lack of independence or impartiality of the stakeholders.

-       Regarding the argument of lack of independence and impartiality of arbitrators: I have no doubt that this argument is justified in some cases. But this is also true on the international arbitration scene. Let’s not forget that the maxim: ‘the arbitration is only as good as the arbitrator’. In other words, your arbitrator can kill your arbitration, and this is true everywhere, not just in China. While it is true that the choice of arbitrators is more limited in China due to the system of panels of arbitrators, this limitation has been widely relaxed in recent years: Firstly, the current panels of some arbitration commissions, such as BAC or CIETAC, now list many foreign candidates, and secondly, these arbitration commissions now allow the parties to choose arbitrators outside the official panels (with regard to party-appointed arbitrators). In other words, when drafting their arbitration clause, parties have sufficient room to limit risks relating to the background and personality of potential arbitrators.

-        Regarding the argument of enforcement: This is the argument that convinces me the least.

Firstly, why should enforcement of a Chinese arbitration award be easier than enforcement of a foreign award?  While it is true that a Chinese award does not need to be first recognized before being enforced, this recognition phase consists in the review of the existence of grounds for non-recognition/enforcement. Such a review is also applicable to Chinese awards and they are subject to a similar system, though it is not called ‘recognition’.  In addition, I am not sure that the end result of enforcement is more optimistic for Chinese awards than it is for foreign awards.  Most of the difficulties encountered in enforcement proceedings are of a practical nature (finding the defendant, locating the assets, etc.) and apply generally to both types of awards. As to local protectionism or lack of independence of the courts, it can just as easily affect a Chinese award (rendered in favor of a foreign company) as a foreign award. In addition, numbers do not seem to support the theory that Chinese awards are easier to enforce (see a survey conducted by WunschARB).

Secondly, even if one was to assume that it is easier to enforce Chinese awards (which I do not believe), this can only be deemed an advantage if the award is the result of a fair process, which meets and corresponds to the parties’ expectations. And in this regard, in view of the cons listed above, many would say that the chances of getting a fair process is more difficult in a Chinese arbitration...

I draw two main conclusions from the above:

  • It seems to me that what makes the difference at the end of the day is often not the pros of the option eventually selected, but rather the cons of the other option.
  • This, together with the lack of persuasiveness of many of the cons, in turn indicates that the way parties choose between arbitration inside or outside China is still largely directed by their fear and ignorance of the other system and is not made in due regard of the specific needs and possibilities of the case at hand. And this will be the topic of my next post.

 

Dr. Clarisse von Wunschheim On Arbitrating Your China Disputes, Part I. The Legal Context.

We are always writing on the importance of China contracts having a well-crafted dispute resolution provision. My favorite line about this is the following, from the post, "Arbitration In Your China Contract. Adult Supervision Required":

With sushi restaurants, it's the yellow-fin.
With new houses, it's the windows.
With international contracts, it's the dispute resolution provision.

The "it" I am talking about is the one easiest, fastest, most accurate, way to judge whether something is good or not. And the way I judge international contracts is by heading straight to the dispute resolution provision. The well crafted provision is, above all else, unambiguous. If it calls for litigation, it says where it will be and what law will apply. And it says who will pay for it and under what circumstances. If it calls for arbitration, it says where it will be, how many arbitrators will be required, how the arbitrators will be chosen, the language of the proceedings, the rules that will be used for the proceeding, and the law that will apply. And it says who will pay for what.

The above are minimums.

Because arbitration is of such mainline importance to contracts with China, I asked China arbitration expert, Dr. Clarisse von Wunschheim to write a series of guest posts on China arbitration and she has agreed to do so. I asked Dr. von Wunschheim because she literally wrote the book on China arbitration: Enforcement of Commercial Arbitral Awards in China. Dr. von Wunschheim presently heads up WunschARB, "a boutique advisory firm created in Zurich in 2010, with the Beijing branch opening in April 2011. It provides advice and practical assistance preventing, managing and resolving cross-cultural commercial disputes, with a particular focus on international arbitration and China related disputes."

So without any further ado, Part I of Dr. von Wunschheim on China arbitration.

Introduction

One of the biggest bones of contention among lawyers and business people when it comes to negotiating and drafting arbitration clauses in China-related cross-border commercial contracts is whether it is better to arbitrate inside or outside China, and there are two main schools of thought:

  1. Avoid China as place of arbitration and try to agree on a place of arbitration outside China. Focus first on winning the arbitration, and worry then about enforcement.
  2. Avoid complications due to arbitrating abroad and keep your place of arbitration in China. Overall, you will be better off, especially when it comes to enforcement.

I believe that both of these approaches miss the point, and that the question of where to arbitrate is intimately linked to the parties’ expectations and needs and should therefore depend on a series of case-specific factors.

Before dealing with the pros and cons of each option (post no. 2), and determining which should – in view of the pros and cons and of the parties’ expectations - be the relevant criteria for selection (post no. 3), let me briefly set out the (legal) context of the issue. 

Premise – Legal Restrictions on Choice of Forum

Under Chinese law (see in particular Art. 242 PRC Civil Procedure Law and Art. 128 Contract Law), only parties to a ‘foreign-related contract’ may choose a foreign dispute resolution forum.  The corollary of this is that parties to a purely domestic contract must keep their dispute and its resolution in China.

Based on this, the debate about a foreign or a Chinese place of arbitration would seem to be limited to ‘foreign-related’ contracts.

However, this statement does not fully reflect reality and raises two main questions:

1.         When is a contract deemed foreign-related?

The term ‘foreign-related’ can be misleading and the perception of foreign companies as to what counts as ‘foreign-related’ is therefore often wrong.

In 1992, the Supreme People’s Court defined a ‘foreign-related’ case as a case showing one of the following features:

(i)            one or both parties are of foreign nationality or stateless, or a company or organization is located in a foreign country;

(ii)          the legal facts that establish, alter or terminate the civil legal relationship between the parties occur in a foreign country; or

(iii)         where the subject matter of the dispute is situated in a foreign country.

Unless one of these three circumstances is present, the case will be qualified as domestic.

While the official definition of what counts as ‘foreign-related’ seems to be quite broad, the practice of the Chinese courts is very restrictive: When determining whether a case is ‘foreign-related’ they rely exclusively on the first criteria, i.e. the nationality of the parties involved.

In summary, for a case to be considered foreign-related, at least one of the parties involved must be of foreign nationality. In this regard, foreign companies too often overlook the fact that their Chinese subsidiaries, including joint ventures or wholly owned entities, are considered to be Chinese entities established under Chinese law. Therefore, disputes involving such subsidiaries will mostly be considered domestic, which means that the contracts entered into by such subsidiaries may not provide for a foreign place of arbitration.

2.         What happens if notwithstanding the domestic nature of your contract, you select a foreign place of arbitration?

If, notwithstanding the domestic nature of the contract, the parties opt for a foreign place of arbitration, they breach Chinese law and in particular Art. 242 PRC Civil Procedure Law and Art. 128 PRC Contract Law.

It is however not totally clear what the consequences of such breach are.

One argument could be to say that the arbitration clause is invalid because it breaches Chinese law.

However, this argument is not necessarily convincing, mainly for the following reason:

The law applicable to the validity of the arbitration agreement may not necessarily be Chinese law. Under most modern arbitration laws, the law applicable to the arbitration clause is the law chosen by the parties, and in the absence of an explicit choice, it is the law of the place of arbitration.

In other words, where the parties choose a place of arbitration abroad, let’s say in Switzerland, Swiss arbitration law will apply to the question of the validity of the arbitration agreement. Since there are no restrictions under Swiss arbitration law with regard to the place of arbitration, an arbitral tribunal constituted under Swiss arbitration law will have no reason to consider the arbitration agreement invalid.

The restriction imposed by Chinese law on the place of arbitration may therefore in principle not prevent the arbitration from taking place in another country.

However, the party seeking to enforce the arbitral award in China may encounter serious problems.

From the outset, I should say that I am not aware of any decision of Chinese courts refusing enforcement of a foreign award in relation to the breach of the legal restriction concerning foreign forum selection. In addition, the breach of legal provisions is – as such – not a ground for non-enforcement of foreign awards under the New York Convention.

However, I believe that Chinese courts would very likely consider such a breach to trigger the ground for breach of public policy under Article V(2)(b) New York Convention: Though it is true that the Supreme People’s Court has made it clear that a breach of – even mandatory – legal provisions does not necessarily amount to a breach of public policy (see e.g. ED&F Case 2003; Mitsui Case 2005; GRD Minproc Case 2009), it has also made it clear that a breach of China’s jurisdictional sovereignty will in principle amount to such breach thereby justifying to refuse enforcement (see the Yongning case 2008).

Since Art. 242 PRC Civil Procedure Law and Art. 128 PRC Contract Law are meant to allow China to keep control over certain contracts and disputes, I anticipate that a breach of these provisions would be regarded as a breach of China’s jurisdictional sovereignty.

Consequently, I believe that enforcement of a foreign award rendered based on an arbitration agreement which disregards the forum selection restrictions set by Art. 242 PRC Civil Procedure Law and Art. 128 PRC Contract Law run a serious risk of being refused enforcement based on Article V(2)(b) New York Convention.

Does this mean that parties should refrain from entering into such arbitration agreements? Not necessarily. This ultimately depends on the importance given to the issue of enforcement, within the entire context of reasons why parties would want to choose arbitration abroad.

In this respect, it is my contention that the role of enforcement is often overemphasized and this will be the topic of the next two posts.

The End Of Cheap China, Part IV. More On How YOU Must Prepare For It.

By: Steve Dickinson

In my previous post in this series on the end of cheap China, I noted that the risks relating to purchases from Chinese manufacturers are rising in the export sector in China's Eastern provinces. Given the risks, it surprises me that I still see many buyers who continue to use the worst payment system possible in their dealings with Chinese manufacturers. The standard (terrible) system for payment in most of the export sector is: 30% down payment on signing of contract with the remaining 70% payable prior to shipment.

Why is this a terrible system for the Buyer? Let's consider the deposit system first. It is common for a Buyer to learn that the manufacturer is not able to make the product, makes the product with excessive defects or substantially delays in delivering the product. If the Buyer has paid a 30% deposit, the Buyer is basically "stuck" with the manufacturer and is not able to go elsewhere even after these problems are discovered. I have seen many Buyers who find themselves trapped in this way.

More important, the need for deposits reveals weakness of the manufacturing sector. Many foreign buyers naively believe the deposit is retained in a special account or is at least reserved for their own project. This is not the case. The 30% deposit is not used as any sort of security. Rather, the deposit is used as a financing tool for the manufacturer. Most raw materials for production are purchased with these deposits without regard to the specific project or buyer. Other costs are paid from the same general deposit fund.

As a result, when there is a problem, the deposit is almost never returned. There are two reasons for this. First, the manufacturer has already spent the money on costs and simply does not have the funds available to pay a refund. Second, the manufacturer knows that the amount of the deposit is so small that there is little risk of the foreign buyer filing suit for a refund. Indeed, normally there is not contract so the basis for requiring a refund is not clear. Thus the Buyer is forced to negotiate a price reduction or an extension or some other make-do remedy with a manufacturer that has already revealed ts clear weaknesses.

Now consider payment of the 70% upon shipment and prior to delivery. Under this approach, if the Buyer does not inspect in China, the Buyer only discovers what has actually been shipped after the payment and after the product has been delivered to the buyer. To consider the risks, consider these stories that have come into my law firm over the years:

  • Buyer purchases carrying cases for its notebook computer. Computer is 8 inches wide. The cases arrive. They are beautiful, except for one "minor" problem: they are all seven inches wide.
  • Buyer purchases jewelry bracelets with clasps that are to be mounted on the left side. The bracelets arrive. They are beautiful, except for one minor problem: the clasps are all mounted on the right side.
  • Buyer purchases hand blown glass Christmas tree ornaments. The ornaments arrive just in time for holiday sales. The are beautiful except for one minor problem: the ornaments do not include a ring on top for mounting on the tree.
  • Buyer purchases candle lamps. Lamp must be made from inflammable safety materials. Buyer pays extra for use of this material. The lamps arrive. They are beautiful except for one minor problem: they are made from normal, flammable paper and plastic and explode into flames at the touch of a match.

In each case, the Buyer received a full container of 100% defective product. The defect was so obvious that it would have been discovered by even the most rudimentary inspection prior to shipment. By failing to inspect, the buyer suffered a total loss. So much for the China price.

Of course, the more common thing is finding a smaller number of defects that result in damages ranging from 10% to 30% of the delivered product. Since the money has been paid, if these defects are discovered only after delivery to the buyer, then the buyer is entirely at the mercy of the manufacturer and is virtually without an effective remedy. The manufacturer knows that the amount at issue is too low to justify a lawsuit on the part of the buyer. If the manufacturer is looking for repeat business, the most common result is that the manufacturer will admit there are defects, refuse to pay a refund or damages and will instead offer a "credit" (typically 5% to 10%) against future purchases.

As with advance deposits, the "credit for defects" system is also a terrible system for the buyer that virtually always ends in failure. Let's take a look at how this works. In order to obtain the credit, the buyer must purchase from a manufacturer who has already shown that it will make a defective product and not give a refund for having done so. Buyers then get locked in a downward spiral. Each shipment has defects, and the amount of the credit grows. The manufacturer knows that the price for the subsequent shipments will be discounted, so the manufacturer gets even sloppier. So defects increase and delays become common. Finally, the buyer just gives up and writes the whole thing off or simply goes out of business due to the lack of adequate product.

Some buyers have finally understood that making payment prior to inspection is an invitation to disaster. Many buyers now perform inspections in China prior to shipment. This is an excellent trend and is basically required for protection of the buyer. However, this approach is still not as safe as inspection after delivery in the home country of the buyer. The basic reason is that we are aware of many times where Chinese manufacturers deceived inspectors and shipped non-conforming product.

As I mentioned in my previous post, some really bold manufacturers will substitute an entire container of non-conforming product by replacing a sealed container with an alternative. More often, manufacturers will rig the container so that conforming product is easy to find, with non-conforming product hidden deep in the container or in alternative locations on the loading dock. The only way to avoid these deceptive practices is to inspect at the place of delivery in the home country of the buyer and to make payment after that inspection is complete. Most Chinese manufacturers will strenuously resist payment only after inspection upon delivery. Buyers should therefore at a minimum inspect in China prior to shipment and then take into account the inherent risk in this practice. The price the buyer pays is actually substantially higher than its face value since this inherent risk is built into the price.

In part V of this series, I will discuss payment options that can reduce your risks.

The End Of Cheap China, Part III. How YOU Must Prepare For It.

We have been writing frequently regarding the end of cheap China because we are just about every day seeing how this impacts our (mostly American) clients. This post by Steve Dickinson is on how buyers of manufactured product from China's Pearl River Delta are going to be impacted by the end of cheap China. Here is Steve's post:

The excellent Chinese financial journal Cai Jing recently published an article, entitled, Dire Straits in the Pearl River Delta, detailing the financial problems facing export-oriented manufacturers in the Pearl River Delta region of Guangzhou Province. The article includes the standard lament that these businesses are not being adequately supported by the central government. However, the truth is that these manufacturing businesses are under financial pressure simply because they are no longer competitive. These manufacturers of toys, clothing, shoes, furniture and housewares are standard high volume, high employment, low technology and low margin operators.

The Chinese government has decided to let them go for three very good reasons. First, they do not represent the high technology manufacturing that China wants for the Pearl River Delta. Second, they are largely controlled by foreigners, mostly from Hong Kong, Taiwan Korea and Singapore. Third, and most important, these manufacturers are simply no longer competitive. It is well known that wages in China have increased greatly. However, other costs have also increased substantially in this region: raw materials, utilities, rent and taxes have all dramatically increased over the past five years. When all of these costs are combined, the Pearl River Delta manufacturers simply can no longer compete with their competitors in Asia and elsewhere in the world.

What these manufacturers want are subsidies from the Chinese government that will allow them continue to operate when normal economics would force them to shut their doors. The answer from the Chinese government has been clear. Financing will be made available to domestically owned manufacturers that can show that they have a viable business. All others will need to shut down. There will be no “hand outs.”  

Many buyers are convinced that the central government will eventually step in and save these failing businesses. They believe that the need to create jobs will trump any other concerns. This belief is misguided. It is a central theme of the 12th Five Year Plan that the Pearl River Delta manufacturing region will be transformed from low value added to high value added manufacturing. The government does not want to provide jobs for migrant laborers in this region. It wants the migrant laborers to return home and take jobs in Sichuan and Henan and other central provinces. The government encourages low value added manufacturing to move to those regions and it is providing numerous incentives for such moves. In parallel, the Chinese government has no intention of preserving these Pearl River Delta businesses with subsidies when such a practice is directly contrary to government policy.

It is therefore certain that over the next two years we will see a major change in the whole export manufacturing sector that extends from Wenzhou down to Zhuhai. During this period, many companies will fail. Many of these companies will have a long and excellent track record of performance. But they will still fail because their business model no longer works. 

In this environment, there are substantial risks that foreign buyers must prepare for with great care:

  • Many buyers pay an advance deposit for products. Many failing manufacturers will collect these deposits with no intention of ever manufacturing the product.
  • If a manufacturer is struggling, the level of defects will rise to a shockingly high level. Manufacturers that owe a credit or refund from prior defects will not pay. There is also tremendous pressure for the manufacturer to substitute low quality or non-conforming components to save money. Lead content paint on toys or low quality fasteners on clothing are examples.
  • Many buyers pay for their product at the time of shipment without doing an inspection of the product. This leads to a great risk of fraud in dealings with a manufacturer who is going to go out of business in a short time. Some standard frauds are as follows:
  •  
    • The manufacturer simply does not ship the product. Sometimes the manufacturer will convince the buyer to make a payment to a new bank account. Often this bank account is in the wrong name or even in a different country. When the buyer complains that there has been no shipment, the manufacturer claims the buyer is the victim of fraud by someone other than the manufacturer. We are seeing this one a lot, with the "new" bank account being a personal (rather than a business) one.
  •  
    • The manufacturer takes payment, and then ships an entirely different product or a non-conforming product. For example, a container of frozen fish will turn out to have one layer of fish and the remainder of the container is bricks. Or a container of a frozen food product when unfrozen will turn out to be entirely rotten product. We had a client receive a shipment of frozen salmon that was so rotten that the container was declared a hazardous waste site right on the dock.
  •  
    • Even where the buyer inspects, we have recently seen a number of cases of outright fraud. In these cases, the buyer watched the product be loaded and the container sealed. The manufacturer then switched the container on the dock and sent an entirely different product to the buyer.

In all these cases, the manufacturer is relying on two things:

First, due to the low value of any single container, no foreign customer will bother to sue in China.

Second, since the manufacturer plans to go out of business and “disappear,” the manufacturer simply is not worried about legal liability.

Note that past history with a manufacturer is no guarantee that these problems will not occur. As I noted above, even “good” companies will fail when the business model no longer works. Often, these “good” companies are the cleverest at extracting the most funds from their long term foreign customers. These owners are smart, and they apply their considerable intelligence in making the best of their difficult situation.

Given the current economic hardship in the southern coastal region, all buyers must take particular care to guard against these risks. Those of us who have been in China for a while have seen all this before. It always happens during an economic shift or slowdown in China. Previous examples are the late 1980's when SOEs were forced to stand on their own and then again in the late 1990s when the effects of the Asian financial crisis were felt in China. We also saw some of this in 2008. This period will be no different.

Buyer beware.

Learn Chinese For Business? The Pros And Cons

The following is a guest post by Jonathan Poston. Jonathan is the Editor-in-Chief of the Learn Chinese Business Blog and Chinese Carolinas. Though learning Chinese well is obviously helpful for doing business in or with China, actually accomplishing can be so difficult that many a learner has given up or just pondered whether it is worth it. I asked Jonathan to write a post on the pros and cons of learning Chinese for business because his Learn Chinese Business blog so often delves into issues relating to China's business culture. Here's Jonathan's post:

If you Google “When will Chinese economy overtake US,” you will notice how many of the top results spit back a year that is closer than five years away: 2016. Though no one can predict the future, consider that China is already the second greatest economic power in the world, which begs the question as to when learning Mandarin-Chinese will be mandatory for aspiring international business people worth their mettle. Let’s take a look at the pros (beyond China’s massive economy) and cons to determine whether it pays to learn Mandarin-Chinese for business.

Pros

Government Subsidies for Mandarin Language Training.  The Chinese government is making it easier for foreigners to learn Mandarin, as part of a highly organized campaign to strengthen their “soft power” abroad. U.S. high schools and universities are already recipients of Chinese government subsidized Mandarin learning initiatives, which usually operate under the sometimes controversial Confucius Institute marquee. 

Mandarin is the Most Popular Language on Earth. Mandarin is the official language of the most populous country on Earth: China. That means Mandarin easily ranks as the most widely used language among native speakers. There are also millions of other native Chinese speakers living in Taiwan and around the world, who use the language to conduct their regular business affairs.  

Stronger Relations. Developing a strong relationship with Chinese business partners usually precedes meeting at the official negotiating table, and is in many ways paramount to the deal itself. Learning to speak with Chinese business partners in their native tongue always imparts a special advantage to anyone willing to learn a language for the sake of business. It shows respect, and who wouldn’t appreciate that? Furthermore, foreigners who end up doing business with the Chinese may have a partner or translator who speaks the language, but relying on them too much can undermine crucial “bonding” experiences with important Chinese decision makers.

Catching Bad Translations. Knowing a bit of Mandarin in most cases won’t mean there isn’t going to be need for a translator, but it can help non-native speakers catch some mistakes during negotiations.

Getting Around Easier.  American businessmen often make the mistake of believing that everyone in China learns English and that everything comes with an English translation. This might be somewhat true in tier 1 cities like Beijing and Shanghai, but more business opportunities are becoming available in tier 3 and 4 cities, where English is more of a rarity. Even with a translator, what business thought-leaders want someone to order everything for them, or even escort them to the public bathrooms at a tradeshow?

Cons


Takes Forever to Learn. The argument has been made over and over again that Mandarin-Chinese is too difficult for foreigners to learn, when weighed against the “business” benefits the learner stands to gain. Many who seriously tackle Mandarin with the gusto that it takes to become truly fluent do so for personal reasons, rather than strictly for business. Though it’s relatively easy to take high school Spanish coursework abroad and actually make some use of it for business purposes, it’s almost impossible to expect a similar use-outcome from the same amount of time spent learning Mandarin.  It takes many years of study and practice to begin to peel back and process through the layers of complexity of a four tone, fifty-plus thousand character language.

You’ll Never Be “Chinese.” When you do business in China, you are, for all intents and purposes, an outsider (There’s even a term you’ll probably hear yourself referred to as: Wai Guo Ren -外国人). No matter how much Mandarin you know, you’ll still never be seen as Chinese. That means you may be missing out on inside talks and preferential treatment the Chinese government has been known to reserve for Chinese-owned companies. So, while knowing Mandarin can give international business people some advantages, it can only take you so far.

Regional Dialect Differences. “Standard Mandarin” is what most Chinese language learners study. It’s what’s officially spoken in Beijing, and supposedly in the rest of China as well. But the further you travel from the capital city, the less likely your standard Mandarin will “work.” So what might pass for good Mandarin in Beijing might not be intelligible in Shanghai, much less in some of the more rural areas where Mandarin is amalgamated with the local dialect (which might not even be Mandarin-based at all). This author saw where tour bus drivers from one region had trouble asking for directions in another.

Unlikely to be the Next English. Though many extol the virtues of learning Chinese to prepare for the new global economic reality of China's dominance, because Mandarin is currently primarily used only by native Chinese speakers (because it is so difficult to effectively learn and standardize), it is unlikely to supersede “English” as the preferred language for global business communications.

With the above “pros and cons” in mind, readers might still be left wondering what to do. Do you learn Chinese for business or not? For businesspeople currently living in China or those planning to spend a considerable amount of time working with the Chinese, it’s definitely worth it. For those planning to do a deal or three over a lifetime, it’s just not feasible. For personal purposes of tourism, ex-pat retirement escape plans, making international friends, or just expanding your world view (imagine how much Chinese you would know if you spent the same time learning the language as you do reading the Economist), learning Mandarin is just as rewarding as mastering any other skill, and well worth the time spent.  It all just depends on your goals.

China Rep Offices, Bankruptcies And The Perils Of Being Chief Representative

I know I keep reading how China's economy is just fine, but my firm just keeps getting more inquiries and more work relating to shutting down offices and companies in China. 

Of those, the most heartbreaking are coming from Chief Representatives of China Representative Offices who are concerned about their own liabilities when their China Rep Office closes.

Typically, the Chief Representative tells the Rep Office employees that the Rep Office is going to be shutting down. Naturally enough, the employees ask about their getting paid. The Chief Representative usually tells them not to worry, which causes them to worry more and go to their local government. A local government official then comes by and informs the Chief Representative that he or she is PERSONALLY responsible for paying the Rep Office's employee salaries AND all outstanding taxes. 

The Chief Representative then contacts my firm and we tell him or her that he or she does indeed run a very real risk of being on the hook for any and all Representative Office debts and so they had better make sure their home office pays. What can happen to a Chief Representative if the home office refuses to pay? We've heard of all sorts of things, ranging from the Chief Representative being held at a hotel for weeks until all debts are paid, to Chief Representatives sneaking out of town and then out of China, under fear of being put on a list that will prevent them from ever returning.

But what happens when the head office/owner of the China Representative Office files for bankruptcy in the United States?

In those situations, we recommend that the Chief Representative hire a US-based bankruptcy lawyer to file a claim against the bankruptcy estate on his or her own behalf.  The Chief Representative could claim that the US company owes him or her the amount owed to the Chinese employees and the Chinese tax authorities because the Chief Representative assumed that debt on the home office's behalf.  Will this work?  We don't know. Yet. 

Will the bankruptcy court hold that the Chief Representative is owed anything by the home office in bankruptcy? And even if the bankruptcy court does hold that the bankruptcy estate owes the Chief Representatve the amount the Chief Representative (and the estate) owes in China, is there any basis for the Chief Representative to claim entitlement to any higher percentage on his debt than any of the other unsecured creditors? In other words, will the Chief Representative get anything more than the usual pennies on the dollar creditors usually get? I rather doubt either the employees or the tax authorities in China will cut the Chief Representative much slack simply because his or her home office has filed for bankruptcy in the United States.

Quite the ugly situation. Bankruptcy lawyers (and others), what do you know?

China Product Quality Problem? Here's My Template Answer.

Because I receive countless emails every day and because so many of them involve the same questions, I have developed various templates to respond. 

Here's the template I use when a US company writes me with a China product quality problem and the contract they have provided me is not good at all. Much of the time the US has no contract at all, but usually when they do have one, it is usualy so bad as to work against them. Here's my "stock" answer in that situation.

This is our template response when the contract calls for arbitration in a US city but is pretty much silent on everything else (a far too common scenario when non-lawyers draft a contract).

It's a tough case and your contract does not help matters at all.

What you probably will need to do is begin arbitration in [US City] and serve [the Chinese company] via the Hague Convention. This will require translating the complaint into Chinese and serving it through the Chinese court system, which takes months. We write our arbitration contracts to say that service can be done by email/fax/personal delivery so as to avoid this sort of situation. 

Your contract is silent regarding the arbitration panel to be used and the choice of law.  I hate to tell you this, but we had a case with a similar arbitration provision and it cost our client $50,000 to get the case into arbitration in the first place because the other side used the vagueness of the provision to stall.  And that was just the arbitration panel alone.  It could cost $10,000 easy to figure out what law should apply here and in the end, I am very worried it will be Chinese law.  I'm worried about that because under Chinese law, terms like "highest quality" and "best workmanship" can be very different from the US.  Very different.

In the end, the arbitrator will probably use US standards (without saying so explicitly) but you've opened yourself up for a whole lot of argument in the meantime.  If your complaints are based on the Chinese company's failure to build your product according to ____ standard or to meet _________ certification, your case becomes a bit simpler because there is at least something clear cut against we can measure the product you received.  You may need an expert to testify regarding the quality problems and that is more cost.

So now that I've told you the many issues that you may need to confront just to get the case into arbitration and then to win in arbitration, I'm going to tell you that even if you win in arbitration, you are only about 60% of the way there. Because after you win in the US, you will need to take your US arbitration award over to China and then convert it into a Chinese court judgment and that is going to take a while and will likely involve its own set of fights. Once you have a Chinese court judgment, trying to collect on it will be the next difficult and expensive task.

Here is how I suggest you proceed:

1.  If you are ever going to buy product from China again, you should hire us or some other law firm experienced in writing Chinese OEM Agreements. We typically write the official contract in Chinese (with a Chinese court dispute clause) and the translation in English.  A good contract scares Chinese companies and your threat of a lawsuit thus has a lot more force. Most importantly, a good contract is much more likely to make it worth your Chinese manufacturer's while to do things right from the get go.

2.  I am very skeptical that it will be worth your while to pursue arbitration in the United States, but that seems to be the only litigation/arbitration route you have.

3.  One other option you have is to have us write a demand letter to [Chinese company] in Chinese to stating that if it does not resolve and pay for the product quality issues, we will pursue arbitration in [US City] pursuant to the contract and then take that arbitration award to China and turn it into a court judgment.  We would act like all of that will be easy. We have a decent (but not great) success rate with these letters in that we do sometimes get real money back for our clients by writing them, even when the litigation/arbitration option is gloomy.

If you have any questions, please feel free to write or call.

What do you think? Part II of this will be the letter we write when the contract calls for litigation in a US city (which is even worse than arbitration, BTW).

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