China Law Blog

Hardly a week goes by at my law firm where we do not get a call or an e-mail from a company exploring its options for pursuing its Chinese manufacturers for a bad product shipment or no shipment at all. Each time, we patiently explain the costs and the hassles of litigating in Chinese courts (or any court, for that matter), and each time, the company that has contacted us concludes it does not make sense for them to sue.  It usually does not make sense to undertake a long, arduous, and highly risky effort to try to collect such debt in China.

I find it frustrating these situations are always occurring when they usually are so easily prevented by the following:

1. Know your manufacturer.  There are plenty of good Chinese companies out there that will conduct basic due diligence on your proposed manufacturer.  We have seen good reports (in Chinese only) on manufacturers that have cost less than $1,000.  This basic due diligence ought to be able to tell you whether the manufacturer exists, whether it is probably registered, and a bit about its reputation.  I have seen far too many times where companies have ordered and paid for product only to later learn that the "company" from whom they were buying the product does not really exist.  As I mentioned in a previous post, we have even heard of fake "law firms" doing this with intellectual property (IP -- trademark, copyright and patent) registrations in China.  My firm is right now seeking to recoup more than USD $2 million for product that was never delivered by a company that never really existed.  Do not let this happen to you.   
2. Use a good contract.  In particular, use a contract that details your product's quality requirements and clearly sets out how disputes will be resolved. 
3. Have the product inspected before you pay for it.  I realize it is the rare Chinese manufacturer that will ship your product before you pay, but if the manufacturer will not let you inspect before the product ships, that is not a manufacturer with whom you want to be doing business. Again, there are services in China that can do this for you on a contract basis. 

The Chief Asia Inspector Blog just started a series, entitled, "Direct from The Factory, where it will be showing videos of factory product inspections.  The first one is an eye opener only because it shows how basic such inspections can be (though this will obviously vary with the product involved).  The key is simply to have someone whom you can trust verifying that the product about to be shipped is the product you ordered and for which you are about to pay.  I am aware of many companies who pay around $10,000 a year for quality control inspections in China yet save hundreds of thousands of dollars every year by doing them. 

There are many other things smart companies do to protect themselves when using manufacturers in China (protecting one's intellectual property (IP) through trade secret contracts and registrations comes immediately to mind) beyond the those I have set forth above.  But companies that conduct due diligence on their manufacturers, use good contracts, and conduct inspections of their product, stand a great chance of never being subjected to a lawyer lecturing them on the difficulties and costs of pursuing Chinese litigation.