When doing business with a Chinese counterparty, many foreign clients may encounter the following situations:
- A foreign supplier has shipped goods to the Chinese purchaser, however, the Chinese purchaser refused to pay the final payment.
- A foreign buyer has placed an order with the Chinese supplier, however, the Chinese supplier refused to deliver the goods after the receipt of the first payment. Under such situation, the foreign buyer just wants to get the first payment back from the Chinese supplier.
As one can see, debt collection is common in the international trade. Debt collection generally refers to collecting the payment from the other side according to the laws and/or agreements. Many foreign clients might be worried about being outside of China, how they can collect the money owed to them in China. Well, this article would like to briefly address these concerns.
I. Prevention
Before introducing ways to collect debt from China, some prevention measures would like to be first introduced in order to protect foreign clients’ business in China. Moreover, these measures will help foreign clients collect debts (if any) from China later.
1. Due diligence on the Chinese partner before the deal
Before doing business in China, it is important to check the registered information and qualification of the counterparty. Do not judge potential partners only by their introductions, website, business card, even this potential partner might also be introduced by the broker.
In order to confirm whether the Chinese partner is reliable, it is advisable to require the Chinese partner to provide the scanned copy of its business license or its company name in Chinese. Such information of the company can be checked through the government database “National Enterprise Credit Information Publicity System”. There are also a lot of APPs, such as Qichacha, Qixinbao, through which can be investigated the corporate credit information.
If foreign clients have Chinese friends, they can ask their friend to help them check the information of the Chinese partner. Or engaging a lawyer in China
to conduct the due diligence, especially for deals with a large amount of money. This will guarantee that foreign clients are dealing with a legitimate company instead of a scammer. In addition, without the correct registered information of the Chinese company name, it will increase the difficulty to file lawsuit against the Chinese partner to recover the money (if necessary).
2. Signing a written contract with the Chinese counterparty
Compared with sending a few emails or several WhatsApp messages, signing a written contract includes the following advantages:
- a written contract can specify the details of the content mutually agreed by both parties. It clearly sets forth the rights and obligations of both sides;
- once a dispute occurs and needs to be resolved in the later litigation or arbitration proceeding, it is more convenient for the judge or the arbitrator to check which party should be liable through a written contract. Such a written document will serve the role as legal proof.
According to Article 470 of Civil Code of the People's Republic of China, the content of a contract shall be agreed upon by the parties and generally contains the following clauses:
Based on the Article 470 of Civil Code of the People's Republic of China, the following details will further address how to prepare an enforceable written contract.
Firstly, if both parties are about to enter into any type of contract, it is important to include point 1) to 6) listed above to specify the main agreement by both parties.
Secondly, both parties can imagine any possible problem when carrying out the written contract. Before the execution of the contract, both parties may set out clauses regarding the solution to these possible problems in advance.
Thirdly, it should be clearly stated the detailed amount of liquidated damages or the calculation standard of the liquidated damages, rather than generally stated that the default party should bear the liability for breach of contract.
Fourthly, it is advisable to choose mainland China as the jurisdiction for written contracts, with Chinese law as the applicable law. This is because the enforcement of foreign judgement in China can be time-consuming and difficult. Moreover, if the jurisdiction of mainland China is applicable, it is easier to take the measure, such as applying for property preservation, to ensure the enforcement of the award in your favor (if any).
If you need an English-speaking lawyer in China to prepare a bilingual agreement, please feel free to contact us. A post regarding Procurement Contract as an example for reference, please check: How to Conclude a Successful Procurement Contract with a Chinese Supplier?
II. When a dispute arises, the first thing to do
When disputes arise, many people often go to argue with the other side at the beginning. However, this might make the other party aware of the dispute and refuse to provide the information in your favor. Therefore, before contacting with the other party, it is advisable to check if current evidences are sufficient to prove that the other side is at fault.
If evidences are not sufficient for claims, it is necessary and easier to collect more evidences, such as confirming the vague information by WeChat or email, before tension may arise between both parties. It is never too late to require the other party to solve the problem after you have sufficient evidences. Please kindly note that there is usually a big gap between the client and the court regarding the understanding of sufficient evidences. If you are facing with a potential dispute with a large amount, it is advisable to consult a lawyer in China for legal advices before approaching to the other party on the solution of potential dispute.
III. Lawyer’s letter: a way to collect the debt at a reasonable cost
A lawyer's letter, also known as a letter of demand (“LOD”), is a professional legal document prepared and sent by a lawyer on behalf of a client. Generally, a lawyer’s letter in debt collection is made by the lawyer on behalf of the client, which informs the recipient that its payment is overdue and should be made to the client.
Since the litigation procedure can be costly and time consuming, it might be a good option to send a lawyer’s letter to the other party, especially for the deal with a small amount of money. Please however noted that the drawback of lawyer’s letter is the recipient might be aware of the upcoming claim. Therefore, whether to send the lawyer’s letter depends on the circumstances of the case.
We have prepared a post regarding the details of lawyer’s letter, please check: Lawyer's Letter: Resolving Your Dispute in China.
IV. Litigation
If the other party does not respond to lawyer's letter, or if no agreement can be reached through communication, litigation is likely to be the next step. For reference, the following content will briefly introduce the civil litigation system in China.
One general feature of the Chinese system is the “four levels” court system. Almost every city has primary people’s courts and intermediate people’s courts. Please note that there are some special courts regarding special disputes, such as maritime, IP. Some of the special courts are equal to intermediate people’s courts, while some are equal to primary people’s courts. Generally, supervising primary courts, intermediate courts and some special courts are the provincial high people’s courts. The Supreme People's Court is the highest supervising organ over all courts in China. Most of the first instance of civil cases are filed in primary courts or intermediate courts.
The graphic above illustrates the general structure of the Chinese court system. Please kindly note that the jurisdiction can be complex in the specific case and be changed from time to time due to the notice issue by the related High People’s Court or Supreme People’s Court.
Another general feature of the Chinese system is the “two instances” trial system. This means that a civil case should be finally decided after two trails. Please note that the second instance (i.e. the appeal) is not required if both parties are satisfied with the judgement of first instance. However, there is also available the “System for Trial Supervision” which represents a remedy to the system of two instance being final. This provides a further level of “appeal” of an effective judgment. Such trial supervision does not stop the enforcement of the original effective judgment.
If foreign clients have the information of the other party’s property (e.g. bank account, the address of the real estate), they can apply to the court for property preservation before or after the case is filed. The latter one is easier to be accepted by the court. In order to apply for property preservation, the applicant will be required to provide certain guarantee of such measure (e.g. security deposit, guarantee letter issued by guarantee companies).
From our experience, the entire case generally takes around 6 to 12 months from serving of documents to obtaining judgment in the first instance. An appeal usually takes around 4 to 8 months to judgment. These depend on the complexity of the case and the workload of the competent court.
After the foreign client obtains the effective judgement in its favor and the other party fails to perform the obligation required by the judgement, the foreign client can apply for the enforcement of the judgment. We will prepare a detailed article regarding the enforcement of the judgment in the future.
Please kindly note that if the foreign client has reached an agreement on the arbitration with the other party, then the foreign client will need to file an application for arbitration (instead of the litigation) with the agreed arbitration commission. We are not going to further discuss this in the details.
This article provides general information for reference only and does not claim to be provide legal advice. If you need any assistance with the debt collection, please feel free to contact us via administrator@legalandwise.com
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