Whenever one of our China attorneys is retained to represent a client providing goods or services to China, we start by asking about the terms of payment. If the Chinese side is going to pay our client the full amount upfront, the contract provisions do not need to be too specific. But this almost never happens.
A more typical scenario is one where the Chinese side agrees to pay a modest amount upfront (say 20%), another portion (say, another 20%) after a vaguely defined milestone, and the rest after the project is completed. This is far from ideal. Halfway through performance of a contract is not the time to be arguing about whether a milestone has been met. But such arguments crop up nearly every time. Even worse, this structure transfers the bulk of the risk to our client, who has to perform first and then collect. We have seen far too many situations where the Chinese side makes so many 11th-hour changes to the deliverables and the schedule that our client ends up losing money on the deal even if they do get paid. Most Chinese companies do not behave this way out of ill will, but when they hold all the financial leverage they have little motivation to adhere strictly to the contract terms.
Accordingly, we advise our clients that at a minimum, they must consider the following three things when it comes to payments:
1. Make the terms of payment as concise and clear as possible. This is really for the benefit of both parties. It should be self-evident when a payment is due, whether it’s because the calendar shows a given date, a project phase has been completed, or a prototype has been delivered.
2. Demand a nontrivial amount upfront, and confirm payment before they even lift a finger. It’s not just a show of good faith by the Chinese side (although that doesn’t hurt); it’s to prove that the Chinese side can in fact make a payment on the contract. The renminbi is still a nonconvertible currency, and aside from a $50,000 annual exception, any time a Chinese entity wants to send US currency to a foreign entity, it needs to get approval from the transmitting Chinese bank. This generally means that the parties have executed a contract for goods or services that are acceptable for foreign entities to provide, and that our client has submitted a formal invoice in a form acceptable to the bank – because the bank in turn usually needs to get approval from government authorities. Sometimes this approval never comes, and the Chinese counterparty is unable to make any payments at all. It’s a lot better for our client to find this out at the beginning.
3. Add 10% to their charge and include it as a final payment due after delivery. A nontrivial number of Chinese entities insist on receiving delivery in full before making the final payment – and then never make that final payment. If our clients do get paid, it’s a bonus, albeit one they will almost certainly have earned for all of the extra work they have done. If they don’t get paid, then at least they received what they expected at the beginning.