Owed Money By a Chinese Company? Maybe You Need to Sue

Nearly every week, an American or a European company (or sometimes an Australian company) will write to one of our China lawyers asking what it can do to get paid on its contract. The amounts typically owed are between $50,000 and $250,000, but sometimes they run deep into the millions.

These companies writing us are not our law firm’s existing clients because we so strongly advocate not doing deals with Chinese companies without getting a substantial payment upfront. See Want to Get Paid by a Chinese Company? Do These Three Things:

Demand a large amount upfront and make clear both orally and in your contract that you will not begin work or ship your product until you receive the full amount of this initial upfront payment. Having a large upfront payment works both to prove good faith by the Chinese side and to prove that the Chinese side is able to make large payments outside of China. China’s currency, the renminbi, is still a nonconvertible currency and any time a Chinese entity wants to send US currency to a foreign entity (greater than $50,000 a year), it needs approval from the transmitting Chinese bank. This generally requires the parties to have executed a contract (in Chinese) for goods or services that are acceptable for foreign entities to provide, and that the foreign company 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. For the specifics on what is required to get paid by a China company, check out Service Companies In China. How To Get Paid.

These companies writing us for help in getting paid are obviously past the point where a well-crafted contract can help them and they want to know exactly what they should do to get paid. One of our China attorneys recently responded as follows to such a company with very large amounts owed to it by two Chinese companies, one a State Owned Entity (SOE) and the other a privately-held Chinese entity (I have modified the email a bit to hide any possible identifiers):

Usually the best way to collect money owed to you by a Chinese company is to file a lawsuit. Otherwise, the Chinese company will probably just ignore you. The problem, of course, is that lawsuits by WFOEs against SOEs are not favored in China. If your claim has any defect, that defect will normally defeat the claim. However, filing a suit can provide you with leverage in any settlement negotiation. Your case against the privately-held company will probably be easier. But for both cases, much will depend on the quality of your contract and until we review those contracts we would only be guessing at your chances.

Sending demand letters to Chinese companies tends to be a waste of time, though they often make sense to confirm the default, if such confirmation is required under the relevant contract. Most Chinese companies ignore demand letters and this is especially true of SOEs. These two companies have been the clear decision not to pay you and unless and until you sue them, they probably will stick by that decision. In fact, sending a demand letter from your lawyer is seen by many Chinese companies as a sign of weakness. They are of the view that if you are really going to sue them, you would do so and not just send out letters. Those who send demand letters are too cheap to hire a lawyer to do anything more.

So that leaves filing a lawsuit against these two Chinese companies. But lawsuits are rarely inexpensive and filing one will permanently affect your relationship with these buyer and it could hurt your standing in the _______ industry in general. Litigation should therefore be initiated only after careful consideration. I cannot assess your chances of prevailing in litigation until after a review your contracts and other documents and get a much better sense of the entire factual situation. But I can tell you that just like in the United States, litigation in China is expensive (though usually considerably less expensive than in the United States, slow (though usually considerably faster than in the United States) and uncertain. So pursuing litigation is not a course to be taken lightly. However, when you are being ignored, it is the only affirmative action you can take.For what it is worth though, the World Bank recently ranked China as the fifth (5th) best country in the world in terms of contract enforcement!

Using an “intermediary” is a standard “old school” Chinese practice. Provided no bribe is given to this intermediary and provided this intermediary acts pursuant to China law, using such an intermediary is not illegal. [This was mentioned because the company owed the money said that someone had told it to collect the debt in this way]. These intermediaries typically charge a percentage of what they collect and you should measure that percentage against the cost of litigation. The problem with using an intermediary though is that you become dependent on the intermediary and your contract with that intermediary may make it difficult or impossible for you to sue your creditor if and when you wish to do so  and you become liable if your intermediary for whatever it does that is irregular or illegal. Most importantly, its chances of success are uncertain and we have seen instances where intermediaries have not only failed to collect, but the things they have said and done have essentially ruined the chances of succeeding in any lawsuit.

Using an intermediary in your case seems particularly problematic for two reasons. How is an “intermediary” going to convince an abusive SOE to pay its bill to you a WFOE? It sounds far fetched to me, but I don’t have all of the facts. Two, you are coming up against a statutes of limitations that may prevent you from ever being able to sue these two companies. The last thing you want to do is miss out on your opportunity to sue because you are bogged down using an intermediary. I do not know enough about your case to tell you how to proceed, but I can tell you that we generally advice against companies using intermediaries to collect on their China debts.

If want me to review the contracts and other documents that would support your claims, I am available to do that.

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.