It seems my Chinese supplier has stolen $50,000...do I have any recourse?
I've been having some goods manufactured in China for several years now. We have always worked through the same contact, let's call her "Zoe". Zoe was recommended to us by a Chinese friend (let's call him Lee) of my business partner. Whether it has been the same company performing the actual manufacturing this whole time I do not know.
We typically place orders consisting of 3 forty foot shipping containers at a time. The typical terms of the agreement are that we pay for containers #1 & #2 up front, #1 is manufactured and sent to us, we pay for #3, and then #2 and #3 are sent to us. The justification for this is that they had to purchase raw materials for the entire order in advance. This seems reasonable to me. Whether or not that is actually done I do not know. It typically takes us about 18 months to work through 3 containers of inventory. The cost to us for each container is approximately $50,000.
Each time we place the large order, there is a date set on when we will send the final payment. Due to some complications in our business, we missed our agreed upon date for final payment by about 8 weeks. A series of emails were exchanged between us and Zoe, us explaining the issues on our end, and her explaining a variety of reasons why we must send our final payment immediately (inflation in China, factory moving on to something else, etc etc). Eventually, she gave us an ultimatum, a final date by which she must receive the final payment. If we were to miss that date, our penalty would be forfeiture of our 2nd $50,000 payment.
By this time, we were getting a bit nervous. The various stories given requiring our immediate payment were inconsistent. In some emails she indicated the 2nd order was finished and ready for shipping, in others it was half complete (in emails after ones in which she indicated it was fully complete). We have always been very easy going, and if our delay caused an even greater delay due to timing on their end, or additional costs due to inflation, we would have had no problem with that.
Basically, we were scared to put $100,000 at risk when she was acting so unusual, so we missed our final deadline, and now it looks like she is sticking to her guns, is going to keep our 2nd installment and that shipment, and has stopped responding to emails. fwiw....the goods we have manufactured are extremely proprietary, and any she has in inventory are useless to her as she would be unable to find a buyer.
Throughout this whole time we haven't heard a peep from "Lee", the person who initially put using touch with "Zoe". (He used to live here, but is now back living in China). At the outset of this arrangement, he was actually quite a trusted contact of ours, but that seems to have changed.
So, in a nutshell: 1. We've paid for 2/3 of an order, and received only 1/3. 2. We missed a payment deadline by about 2 months, and as a result, she is keeping payment #2 as penalty. (There was nothing in our "contract" stating what would happen if either party reneged in part or in full on their end of the deal.) 3. We haven't heard from her for almost two weeks now.
So its starting to look pretty bad. I'm wondering if anyone here has experience dealing with Chinese suppliers and could recommend a course of action for the situation I find myself in? Do I have any legal recourse? We do have several years of documented business transactions with Zoe, including payments from our side and shipped product from her side.
Any help or advice is appreciated.
PS: FWIW, she operates out of Futian District, Shenzhen City, Guandon Province. I have her email address, business address, bank account information (for wiring funds) and that is about it.
22 comments
[ 3.5 ms ] story [ 64.6 ms ] threadSeriously though. Why not just fly there? It's a couple grand to likely get back $50k (cash or merchandise). People are far less mean in person.
By the OP's admission, they were late with some of their payments, and the Chinese counterparty could conceivably have some kind of a legal case against them. In which case, being in China could open them to getting sued in Chinese courts, which can be a tricky situation for Westerners. Not least because (as in this case), it can get difficult to leave the country once the case is in the courts.
(The linked article describes a case where a businessman was stopped at the airport because of a $250,000 lawsuit that he says he was unaware of. He was only able to leave after his family found the money.)
In the future it's best to have an expediter in China that can check the facts on the ground. Also you should not have to pay for manufacturing before the product is shipped or at least checked by an independent contact in China. Usually terms are around 30-90 days depending on the industry and product (sometimes up to 6 months).
I put up a manufacturing guide a few months ago where I talked a bit about this: http://news.ycombinator.com/item?id=1840896
@OP, I would concur with the "lawyer first" strategy. While it may be worthwhile to go to meet with your supplier(s) / contact to try to resolve the issue, the first step you need to take is to better understand your current legal posture and options, lest you find yourself in unpleasant territory once you hit Chinese soil.
In my experience legal advice from people that do not practice law is rarely helpful and potentially harmful.
In my experience, Chinese manufacturers have very little incentive or desire to provide credit or terms of any kind. They also have little desire to problem-solve issues or defects. So, it's no surprise that your problem is (according to them), your problem. I don't know if there is even a Chinese equivalent to the saying "the customer is always right".
Sorry to say so, but this sounds like a classic case of 'a stitch in time saves nine.' I appreciate that you were nervous, but you should have brought in outside help/advice when you first realized you had a cash flow problem. They may have been scamming you, but then again you may have caused them a major cash flow problem; manufacturing margins are relatively slim, and $50,000 is a lot of money by Chinese standards. Suppose the factory has had difficulty paying its workers or your broker has been prosecuted over unpaid bills? At the very least, your broker has suffered a major loss of face, and serious damage to her commercial reputation. Meanwhile, you have not just lost $50,000, you appear to have lost your entire supply chain - and it's possible that you now have a reputation as a buyer who doesn't pay on time, and will have difficulty negotiating terms with alternative suppliers in addition to the more generic problem. Although you might have had to spend a few thousand for legal assistance a few months ago, look how much more it has wound up costing you.
So, get help immediately. A lawyer is like a doctor for your business in this situation, and your business has developed a serious problem. As well as the legal costs, you may have to pay compensation to your Chinese broker or supplier, and possibly go there in person to demonstrate your sincerity and restore their reputation as well as yours. You should also be exploring alternative avenues of supply, commercial credit, and how less flexible payment terms might impact your cash flow. It's going to be a lot of work. Good luck, and I hope it all works out for you and your firm.
We have FULLY paid for 2 shipments, and received only one. We were late paying for #3 (in advance of receiving #2, for which we have already fully paid.) There is never any credit extended to us (despite doing several hundred thousands of dollars of business with them).
Labor is the vast majority of the manufacturing process, so making the argument that they could have taken a loss on raw materials is impossible. As I said, I appreciate our timing could have caused some financial harm and we are happy to negotiate, but I don't think she is interested. I think she is thinking, hmmmm....it would take me 2 years to make $50k on this deal...or, I could make it instantly, without the hassle. That is honestly what I think.
You're 100% right on the lawyer though, that's for sure. Sigh
Most of the larger companies have offices in places like Singapore and China so can offer help there, and for reasonable premiums you can be completely covered for things like this (legal fees, collections, remediation, etc.).
I've never had a need, but some friends who run physical goods companies swear by it for reducing risk and, arguably more importantly, stress (big losses from complicated situations like this are almost entirely mitigated).
Thanks
I can tell you legal recourse is a bit of a tricky thing. You really don't want to rely on contracts in a foreigner vs chinese situation. The supplier's guanxi (business relationships) will almost always trump your connections. The only way to resolve things are:
A) Place a larger order under safer terms for you - I know that sounds crazy but you can sometimes get suppliers to "do the right thing" by rewarding them for their bad behavior. Offer to purchase an extra large order where the money they already have is the down payment. Requires a certain morale flexibility to hand more money over to a thief (but it can get the job done)!
B) Buy some guanxi. Get yourself a high end law firm (or consultant) based in Shenzhen and pay for their persuasive abilities with the local government and supplier in question.
Hope this helps. Good luck!