Resolving a dispute: Demand letters and legal options with Chinese suppliers

Hello, I’m Mike Bellamy, founder of PassageMaker Sourcing Solutions and blogger at www.AnotherChinaBlog.com.

I’ve been living in China full time now for over 12 years, and it is my pleasure to let you behind the bamboo curtain and offer some practical tips for sorting out problems with suppliers, for example if the products delivered are not what you wanted and now who is going to pay for the costs to fix or replace?

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Hello, I’m Mike Bellamy, founder of PassageMaker Sourcing Solutions and blogger at www.AnotherChinaBlog.com.

I’ve been living in China full time now for over 12 years, and it is my pleasure to let you behind the bamboo curtain and offer some practical tips for sorting out problems with suppliers, for example if the products delivered are not what you wanted and now who is going to pay for the costs to fix or replace?

If diplomatic means prove unsuccessful, before you go to court, you may want to consider issuing a demand letter in hopes of resolving the situation.

A demand letter template adjusted by you the buyer is not going to do much good. If you want to go down that route, you need to get an English-speaking China-based lawyer involved so that they at least understand the basics and can prepare a logical argument in the form of the letter addressing what the supplier has done and what remedies are requested. If you cobble together some thoughts of your own using another company’s template, and even if translated into Chinese, the supplier will most likely sense that you are bluffing and have not actually engaged a law firm to support you. In my experience, the drafting of the letter is not very expensive, and if your situation is cut and dry, then it won’t take much time for the lawyer to get up to speed and that keeps costs down.

Some buyers think they can use a US-based lawyer to scare the Chinese suppliers into corrective action. The only person that benefits is the US lawyer. They get paid to draft a letter that has next to no impact. Chinese suppliers know that a US lawyer and even a US court has no authority in China. So don’t waste your money with that route, in my opinion.

Keep in mind that once you release this letter, especially if it indicates that a lawsuit is pending, the supplier may simply ignore you. This is an indication that they see you as a threat and rather than work with you to correct a problem, they would prefer to stonewall you as they prepare for a legal fight by hiding assets and getting rid of incriminating evidence and even preparing a counter argument or lawsuit against you.

So before you get the lawyers involved or issue a demand letter, I would like to share with you how I resolve problems with my suppliers.

Unfortunately there is no effective Better Business Bureau in China where you can take your grievances. Also, you will find limited support from government agencies, unless your case has pressure from your government’s agency on the Chinese agency. That pressure can actually work, but is very hard to arrange unless you have high-level government contacts back home already.

So let me offer some practical steps.

If you have the following items in place, then there is a decent chance of negotiating a resolution that is acceptable:

1. A signed / chopped contract that clearly defines what is the acceptable level of quality.

2. A clear paper trail showing proof of payment.

3. The seller named on the contract matches the receiver of the payments. (With so many trading companies out there it is a common mistake to have a contract with a supplier but pay a trading company!).

4. Your supplier has physical and financial assets (small “one-man-bands” disappear as soon as they feel a lawsuit is on the way).

5. The jurisdiction on the contract matches the location of the supplier’s assets at a city, province or country level.

It is always nice to have future orders you can leverage as well.

Also, before placing the PO did you or a third party do an audit / due diligence at the factory to confirm they were legit? If yes, please keep that report on file, as you may need to refer to it later.

If you answered “no” to the questions about audit and inspection, please slap yourself hard on the wrist and pray you have not just learned an expensive lesson. And shame on you as third party Audits (and even Due Diligence) are readily available and affordable.

Here are my suggested next steps if you aren’t getting anywhere resolving a dispute with your supplier.

The first step is to define the damage and put a value on the costs to repair or replace.

Second step is to negotiate with your supplier on your own.

If that fails, many buyers think going to court or issuing a demand letter is the next best step. But actually, bringing in a third party that can help facilitate dispute resolution.

Keep in mind that a demand letter or threat of court action can lead to a complete communication breakdown. Once this letter is sent, the supplier puts up walls and getting to the facts of the situation becomes very difficult. In many cases they simply stop responding to the buyer and “call you a bluff” if they suspect you are not willing to go to court, which is often the case when the orders are small or the items mentioned above are not in place.

To bring in a third party to help mediate after the legal letters have been sent out makes it very hard for this third party to be effective, as any goodwill on the sell side has been lost.

If the third-party assisted negotiations are not successful, then consider getting an English-speaking Chinese lawyer to write a demand letter.

KEY POINT: Unlike most other nations, in China you can sue for lost revenue. Since the price you sell to your buyers is certainly much higher than the price you pay to your suppliers, your demand letter can “swing big” and put the fear of God into a supplier!

Last resort. Go to court.

There is hope!

I have been involved directly or indirectly with eight court cases during my 12 years in China. In all eight, the foreign party was victorious, BUT in all cases the buyer had the critical items mentioned above in place.

See you next time. Wishing you successful China sourcing!

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