April 26, 2012

Be Careful Who You Purchase From

Out of all legal representation inquiries emailed to me from expat businessmen in the past three months, over a third were China-related international transaction disputes.

Those disputes share a few common characteristics: 1) the disputed amount was less than 200,000 CNY; 2) the opposing party was a small trading company which often has a less-than-great financial and credit standing, or the opposing party was legally classified as an individual; and 3) the opposing party likely didn’t care about establishing a long-term business relationship but just wanted to take the payment without providing what was purchased – a typical act of good faith violation.

Economically speaking, those cases tend to be not worth pursuing in the People’s Court. Besides attorney fees, there are court fees, translation fees (the trial lawyer who represent you cannot work as your translator in court), notarization fees (documents regarding your identity would need to be notarized if you are a company located overseas), and so on.

Alternate solutions are limited. Certain clients have asked me to issue formal lawyer’s letters to the opposing parties. But, under most circumstances, I would advise the client to let the issue go, as engaging a licensed attorney to pursue this type of case generally costs more than the amount lost. I would also recommend them to think about planning better risk control management for future business transactions with Chinese vendors.

In those inquiries, the senders also showed interest in seeking legal representation in China, which is not a bad idea as qualified Chinese counsels would at least be of help in the following.

Due Diligence

Due Diligence should be conducted in all types of transactions with Chinese registered business entities, not just in big deals like buying a business or going public. In small and medium size transactions, Due Diligence would include a general background check of the company, their financial and credit standings, etc.

You can conduct your own Due Diligence work before contacting an attorney for further verification. Here are some tips: 1) make sure you are dealing with a real company by asking them to at least provide you with a copy of their business licenses; 2) when making a payment, ask them to provide you with the company’s bank account info, not an individual’s. This helps minimize your risk of losing your money. Plus, establishing a lawsuit is more difficult if you transfer money to an individual’s account.

When you do engage a licensed Chinese attorney, he or she can verify the information you acquired on your own and also provide important information that you may have missed.

Contracts Review

Oftentimes a Chinese vendor would provide you with a contract in which the conditions and clauses are not in your favor. You may not understand their significance in accordance with Chinese laws, but at the same time you may be concerned that there would be no deal if you don’t accept the terms.

Tip: You don’t have to accept an unfair but “well-written” agreement, especially if you can convince the vendor that the transaction is a win-win deal. Moreover, try to provide them with a contract prepared by your own attorney. Ask your attorney to explain to you the most important clauses and what is at stake when signing the final version of any agreement.

Debt Collection

In an earlier article, I mentioned that “the average life expectancy of small and medium size Chinese enterprises is 2.9 years.” You need to have a solid risk control plan when paying a large advance payment to any unfamiliar party.

If your risk control procedures fail, there are not too many options if your company needs to have the payment refunded. You may try on your own by calling, emailing, or even coming over to China to talk face-to-face with the vendor. If nothing works and you still want to try, you can either engage a debt collection agency in China or an attorney to do the job.

Engaging a debt collection agency in China itself is risky though, as the legality of some of their methods can be questionable. Besides that, they tend to charge outrageously. I would advise my clients to consider using debt collectors only as last resort and under supervision of an attorney.

Other Legal Assistance

A Chinese attorney may be of help in other ways including but not limited to 1) providing opinions on Chinese business laws, regulations, policies and administrative orders from local authorities; 2) selecting and working with attorneys from special legal jurisdictions such as Hong Kong and Taiwan; and 3) assisting with opening a representative office or even forming a WFOE or joint venture for your expansion to China.

Any questions? Send your email to I or my colleague will try to get back to you as soon as possible.

April 26, 2012