China Manufacturing Contracts: Yet Another Reason Why You Should Have One

What with China’s economy slowing, our China lawyers are getting a fairly steady stream of emails and phone calls from companies (mostly America) whose Chinese manufacturers have shut down and/or disappeared. The below is email correspondence I recently had with one of these companies, changed to camouflage anything that might enable anyone to identify this company. I chose this American company simply because its sitaution nicely highlights what so may companies that engage in China OEM manufacturing have been going through the last few months. I start with this company’s initial email to me:

Hi Dan,

I’m running into an issue with one of my factories getting ready to close their doors and they have about $210K of our deposits. The factory is broke but they have a lot of assets in the factory.

Is this something that you can help with? Is there something that we can do?

After I determined that the potential client did not have a written contract with its China manufacturer nor did it have anything in writing that would have allowed us to trace its payments to ownership of any specific product made by the Chinese manufacturer:

To put it bluntly, your chances of ever seeing your money again are not terribly good, especially if they do shut down and the creditors come calling. Those creditors will say that, yes, maybe the factory owes you $210,000, but you have no claim to anything specifically owned by the factory (including the products it has sitting there that we would argue were made just for you). Wit this being the case, these other creditors probably will take priority over you or you will be thrown in with them. Many of these other creditors probably have contracts with the Chinese manufacturer making clear that money paid to the factory belongs to them unless and until the factory provides them with the product for which they have paid. Others probably have security interests in factory property.

Your only shot is to move as quickly as possible to try to get what you can though various tactics (letter writing, suing, etc.) before this company actually shuts down completely and starts the creditor feeding frenzy, but even there, your lack of a written contract will make things tough.

We’d be happy to try to help you but I have to tell you that your chances of success are probably less than 50% and so you have to ask whether your paying our hourly attorneys’ fees would be just throwing good money after bad. I do suggest though that you check in with your insurance broker/agent to see whether you might have any coverage for this sort of thing.

I am going to be traveling over the next few days with marginal internet so please text me if you want to get started on this. Like I said, it is urgent and the last thing I want is for any slowdowns to come on our end.

Just as is usually the case in these sort of situations (where we tell them that their chances are not good), the American company chose not to pursue things further in China, but instead to just walk away.

What are you seeing out there?

The post China Manufacturing Contracts: Yet Another Reason Why You Should Have One appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.