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Collecting Debt From Chinese Companies. Clear Threats Trump Logic.

By Dan Harris on Posted in China Business, Legal News

We are frequently requested to write demand letters to Chinese companies that owe money to our American clients. These letters are very different from what we would write were we seeking to collect from an American company.

Demand letters to American companies are typically fairly long. They usually spend considerably space setting out the facts and the relevant law. They then usually conclude by stating what we would expect to get from a jury and then it concludes by talking of how it is in everyone’s interest to seek resolution and towards that end, we will accept something less than what the jury would give us.

The other side usually responds by pointing out the holes in our case and emphasizing how difficult and expensive it will be for us to collect anything. Something over 95% of U.S. business law cases settle.

China is different.

David Dayton of the Silk Road International Blog has a post that explains some of this difference. The post is entitled, “When Your Supplier is not Arguing to Win,” and it posits that Chinese companies simply do not care about arguing towards a logical conclusion:

Americans tend to argue to resolve specific points (words, dates, statistics, etc.).  Ideally those individual points will be acknowledged and eventually the argument will reach a “logical” conclusion—each side’s specific points have been resolved to some mutual agreeable level.  I guess you can say that you “win” an argument by getting as many of your specific concerns resolved to your satisfaction as possible (without giving up too many to the other side).  This interpretation doesn’t preclude win/win either—you still want to get as many of your personal issues resolved as you possibly can, you’re just going about it by allowing the other side the same goal in the hope that it’ll actually get both of you a better resolution in the end.

But in 12 years in China, I can honestly say that I’ve only had this progressing-to-a-logical-conclusion type of argument a couple of times (and no, I’ve NEVER had a win/win type factory relationship—even when we’ve consciously tried to structure it—there just isn’t enough mutual trust on either side).  It seems to me that both the point of and the process of arguing is completely different in China.

David has worked with hundreds (thousands?) of Chinese factories and so i tend to believe him on this. Believe him or not, we have found that the most effective demand letters to Chinese companies usually consist of one to two pages and they dispense pretty much entirely with the law and they are light on the facts as well. Our demand letters (always in Chinese) typically set out as fact (without any explanation) that the Chinese company owes our client X dollars from its failure to do Y. We then let the Chinese company know in no uncertain terms how miserable and expensive we will make their lives if it does not pay our client and pay it fast.

The Chinese company typically then contacts us and tells us it will not pay anything. The Chinese company usually gives some sort of vague reason for not paying, like “your client is a liar” or “your client promised it would make another order from us” or “your client does not understand China.” We then reiterate the horrible things that we previously described would happen to the Chinese company if it does not pay and fast and then things move on (or not) from there.

What have you seen out there?

  • Peter

    You and Dayton are speaking the truth but nobody is going to listen unless they have themselves been through it. Westerners are just not used to the idea that people are not always going to act logically and this is just one of those things they have to see for themselves (probably more than once) to really understand. Then they will come back here and comment on how right you are.

  • PPT

    This is exactly how it is. 100%.

  • http://laowaitimes.blogspot.com Mike Cormack

    “Your client does not understand China”
    How I love this excuse, and how malleable it is! Every time you have to criticise something a Chinese person does, out it comes. That, and “China is complicated”.

  • MHB

    Contrary to Peter, I think the Chinese logic is sound. They won’t consider whether or not you deserve the payment – there are dozens of people everyday claiming they deserve the boss’s money, but why should he give any to them?
    Either you will get the money, or you won’t. The merits of any case don’t affect the result directly – a wholly deserving case will fail if no-one can enforce it, and a wholly undeserving case will succeed if the right person gets involved and puts pressure on the boss. He wants to keep the money, so keep it until he sees a greater power can take it from him.
    It is clear to us Westerners that, in such a situation, we should pay, or at least engage with the other side. We are used to following the law. Legal arguments, it seems, have little moral force in China. Much better ‘to put him in his place’. Once he recognises the forces are aligned against him, he will fall in line and co-operate.
    This seems extremely logical to me!

  • http://rightsite.asia Michael Cole

    In a way collecting in China works very much according to the same logic as it does in other parts of the world, except that in my nine years in the market I find that the factors influencing this logic are quite different in China’s legal environment.
    People anywhere do what they think they have to and obey rules that they think will be enforced. Many businesspeople in China have learned that companies often struggle to collect debts through the legal system, so they avoid paying. If they believe that you can force them to pay, then they cough up.
    In western markets this may be done through the courts, but in China, particularly for smaller business debts, it is often done through quasi-legal “collection agents,” or just plain harassment.
    Maybe this can be called collection with Chinese characteristics?

  • Chris

    China is indeed complicated and few companies or individuals concerned about threats via civil litigation. There is a logic there and its local but perfectly reasonable.
    My favorite tactic with landlords who always refused to refund deposits was either to withhold the last month’s rent on the grounds that they would not refund my deposit and under the ‘local’ logic that there was no chance they could enact civil litigation in that time, or if I had paid and on the 2 occasions landlords refused deposit refund (for no particular reason other than they could) was to threaten to report them to the tax department for rent tax and income tax evasion. I SMS’d them the amount of tax avoided and address of the tax department where I was going to report them the next morning. On both occasions they called me immediately and agreed to refund and did pay.
    This was logical. They were far more afraid of tax penalties than they would have been of slow, civil litigation.

  • Another Dan

    This is how it is. Say what you will about Chinese courts. In my experience, Chinese companies are afraid of them and if they think you will sue, they will usually go from “we didn’t do anything wrong” mode to discussing money.

  • LT

    This sort of thing is why you and Silk Road are my two favorite blogs. I think you both are right on this and because I am in a dispute right now with a supplier, I also think this stuff is actionable. Thanks for your blog.