Selling Product And Services INTO China. It's The Payment Stupid.

With President Obama talking about doubling U.S. exports and with China's economy booming, it seems appropriate to talk about what should go into a sales contract with China, when you, the foreign company, are the one doing the sale.

The big thing -- almost, but not quite the only thing -- in such a transaction is the payment terms. In turn, the payment terms greatly influences the complexity and the terms of the contract. The old saying that "possession is nine tenths of the law," is actually great advice when it comes to international sales contracts. If you are selling product to China and you get paid in full in advance, you are at least 90% of the way towards full protection.

Unfortunately, it is the rare sale into China that involves full payment up front. So if you cannot get full payment upfront, you should consider, at minimum, getting a sufficient upfront payment to cover your costs, thereby ensuring that even if you receive nothing more, you will have covered your costs.

If you are not going to get full payment upfront, then you need to figure out what you can do to maximize your chances of getting the rest of your payments. There are many things you can do to improve your chances, including the following, many of which can and should be combined:

1. Conduct due diligence on your Chinese buyer. There are services that can do this at relatively low cost (typically USD $500 to $1500, depending on the depth of research performed).

2. Hold back title. Write your contract so that title to your widgets does not pass to your Chinese buyer unless and until you receive full payment.

3. Choose your venue for contract disputes wisely.

4. Secure payment by using a Letter of Credit. The International Business Law Advisor did a post, entitled, "How to Secure Payment from Your Overseas Customers with Letters of Credit" nicely explaining how these work:

There are four participants in a letter of credit transaction — two businesspeople and two banks:

The buyer. That’s your customer.

The opening bank. This bank normally issues the letter of credit, so it is sometimes referred to as the “issuing bank.” They assume responsibility for the payment on behalf of the buyer.

The paying bank. This is the bank under which the drafts or bills of exchange are drawn under the credit. A paying bank in an L/C transaction might also act as the negotiating bank, advising bank or confirming bank, depending upon what responsibilities it accepts.

The seller. That’s you.

To summarize the process: Once you and your customer agree on payment by letter of credit, it is the customer’s responsibility to take your proforma (an invoice that reflects all estimated costs involved to move product door to door) to her bank and open the L/C (letter of credit) in your favor. Once the opening bank has all the appropriate information from the customer, it advises you, the seller, that the L/C has been opened. Oftentimes this will be done by cable or e-mail to the paying bank. Your bank then forwards that information to you. The letter of credit is final and subject to correction only for errors in transmission.

The post correctly notes how "accuracy in all details of your letter of credit is critical." The problem with letters of credit is that, contrary to what some believe, they do not guarantee you will be paid, even if you fully comply. My firm handle a case involving a fake letter of credit and another case involving a dishonest bank that failed to honor its letter of credit without any basis for doing so, beyond its own desire to stay in good stead with its client.

What do you do to make sure you will get paid?