How To Trade Safelty With Chinese Factories
This is the 2nd video of the Investing In China Chapter.
We will talk about doing background checks, what clauses you must put in your purchase contract, and how to avoid common traps.
A lot of clients which are mainly overseas buyers have contacted me to complain about Chinese factories sending the wrong type of goods, shorting the weight or amount of goods, or just refusing to send the goods even when they have received the deposit in full, claiming that they do not trust the buyer and want the full amount.
Doing due diligence is a must before trading with your Chinese party. Before you send money over to your supplier, you should always ask for their business license and get a lawyer or even just a Chinese friend to check their company online. If there are existing lawsuits, or if the company is brand new, you should think twice before doing business with them. A lot of overseas companies find their supplier on Alibaba, and decide not to use the platform to buy products when offered a discount. The seller or factory will tell you that both of you can avoid hefty taxes and platform fees, and it is a win-win for both parties, but this is usually a trap. If you stick to the platform, they escrow the money and it will not be actually sent over to the seller when you press the dispute button. This at least gives some form of protection to buyers when there is something fishy going on.
Another thing that I notice about overseas buyers is that they do not have a proper contract with the Chinese seller. They either have only a 1-page contract, or just a proforma invoice. Now this is very dangerous practice as you do not have any sort of protection when a legal dispute arises. Unlike the UK, China does not have a law that states that the losing party pays for legal fees. So even when you win the lawsuit, you lose out on legal fees. Therefore, you should add a clause in your contract that says the legal fees are paid by the losing party, and add a contract breach penalty clause as well to cover time and energy lost. You can also consider putting in an arbitration clause, as English can be used in arbitration. Arbitration is also much faster than going to court, as there are no appeals.
The best way to avoid trouble down the road would definitely be to come over to China to meet with your supplier before dealing with them, and hiring a lawyer to draft up a contract that protects your legal interests fully. Such a cost is really nothing when compared with the time, energy and money wasted on battling it out in court. If you are a middleman procuring goods for companies in your country, you lose your client if you are unable to send them what they want on time, not to mention possible penalties for breach of contract. If you are buying raw material like steel and aluminium, your whole project just gets delayed for at least a month because you have to look for another seller to ship over what you want.
Please subscribe for more interesting legal facts!
China Law 101 Video Series
1) Is It Illegal To Work Under Business Visa?
2) 5 Must-Knows About Company Incorporation in China
3) Who Pays For Broken Appliance In Rented House
4) Can You Get Blacklisted In China?