One of our China lawyers got the following email this week (modified a bit to avoid any identifiers):
I am certain you hear this everyday…”my supplier has disappeared with my deposit.” For the first time in 20 years it has just happened to me. We are a small family business in Illinois importing promotional products from China for many years. I have been dealing with one trader since 2007. She sources almost 50% of my products and always delivers quality, on-time shipments.
She has since disappeared with my deposit from an order placed in February. Can you please advise me what steps I can take to recapture the funds? As far as legalities are concerned who can I contact and where do I start? Any insight you can provide would be greatly appreciated.
We promised we would respond to the above email here on the blog, so here goes.
First off, we do not hear this every day. In fact, during good times, we might go months without hearing something like this. And during good times, when we do hear something like this, it pretty much never involves a long-time relationship. But during downturns in China’s economy we get an email like this just about every week and too many of them do involve long-time relationships.
And we are in a downturn in China’s economy right now. Sort of.
Back in 2012, I wrote an article for the Wall Street Journal, China’s Slowdown and American Business Hardly a week goes by without complaints about payment problems or bankrupt debtors, with the purpose of warning American companies to increase their guard and to react accordingly. What I said in that article applies 100% to what is going on in China right now.
I started out warning about how China tends to increase regulation of foreign companies during downturns and we are certainly seeing that again:
Take regulation. The best assumption to make is that the Chinese government will respond to the slowdown by attempting to minimize citizen discontent so as to keep its hold on power. The government is much more concerned with social harmony than with economic numbers.
The government is encouraging wage growth—including a greater-than-normal tolerance for union-style labor activism at foreign-owned factories—even though higher wages make China’s factories less competitive. The calculation is that citizens happy with their higher wages will far outnumber those unhappy and unemployed because rising wages forced uncompetitive factories to close. American companies should no longer assume that the government will welcome low-wage manufacturing with open arms.
We are seeing this.
I wrote of how “China’s prioritization of its citizens’ contentment … [means] that China is going to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny”:
The authorities also are throwing new roadblocks in the way of foreigners seeking to form businesses in China. Such higher standards are not uniformly applied. Beijing and local governments are ever more eager to distinguish between “contributing” and “noncontributing” foreigners. Thus, it has never been easier for well-funded, nonpolluting foreign companies to secure approval to operate in China. Conversely, it has never been tougher for foreign companies that pollute, pay low wages, or have no plans to hire Chinese employees to get their foot in the door.
I then pretty much spoke to the email above:
The slowdown also is changing Chinese company interactions with foreign companies. Chinese exporters, particularly those that compete with companies from lower-wage countries like Vietnam and Bangladesh, are suffering—in particular in very low-tech, very low-wage industries such as textiles, clothing, shoes and low-end electronics and toys.
Foreign companies that do business with Chinese companies in these industries must be on their guard. Hardly a week goes by without my law firm getting a call from a Western company experiencing problems. Sometimes the Western company has paid for a product and the company it paid no longer exists. Sometimes the company still exists but it needs “more money” from the Western company to buy raw materials for the product it already promised to produce.
Now back to the real issue. What can foreign companies do to avoid problems in China stemming from the downturn? Wish I had something new to add from my article, but I don’t, so I will just quote it:
Foreign managers need to understand what is happening in their own industries within China. This might mean visiting your Chinese co-party’s factory, warehouse or office to look for warning signs of a company in distress. Or it might mean taking out insurance to cover your China business or transaction. A number of Chinese manufacturers are owned by Taiwanese, Singaporean or Hong Kong companies, and sometimes it is possible to secure guarantees from the foreign parent.
The key is to be proactive: If you find yourself in a bad situation with a Chinese company going under, there usually is no remedy after the fact. Bankruptcy in China more often than not consists of a company shutting down in the middle of the night and its owner fleeing to another town.
The key to weathering China’s slowdown will be for foreign companies to go back to basics: think afresh about what a company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level. Above all, no Western company doing business in China should blithely assume that a slowdown won’t affect it.
Yeah great, but what is this Illinois company to do in terms of getting its money back. Well one thing it should not bother doing is contacting the U.S. Embassy or Consulate, as we explained in Have A China Business Problem. Consulate Says “Don’t Call Us.”
The way my firm’s China attorneys analyze a matter like that of this Illinois company is by looking at the dollars and cents. If this company is out $5,000, probably the best thing it can do is not to spend any more money. It can keep trying to reach its sourcing agent and if it eventually succeeds, it can try to pressure her to return some or all of the funds. But for an amount that small, it probably does not make sense to spend any money on an attorney in China and it certainly does not make sense to spend money on a U.S. attorney. I cannot imagine a U.S. attorney taking such a small matter on a contingency fee and our experience (with considerably higher dollar figures) is that Chinese attorneys will be equally reluctant. On top of that, the filing fees in Chinese lawsuits are relatively high and what good is suing someone if you cannot even find them?
But if this were a million dollar matter (and we have been contacted on those), our advice would be entirely different. In those cases, we encourage the American company to retain my law firm and then we in turn will figure out the company’s best options for recovery. This typically involves our reviewing all relevant documents and then sketching out a collection plan that typically involves our bringing on a Chinese law firm (only a Chinese licensed lawyer can appear in a Chinese court) to pursue litigation or alternative means of collection.
The most difficult cases for us are those between $50,000 and $200,000. In those situations, we do not generally think it makes economic sense for the American company to hire our law firm, yet at the same time, there has been too much money lost to suggest that the American company just walk away. We usually give companies in these situations the following three options:
- Walk away.
- Find and hire a Chinese lawyer on their own.
- Hire us to work up the case and then hire a Chinese lawyer and either walk away at that point or stay on to assist.
These are not easy cases….