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July 17, 2007
What Happens When Your Chinese Supplier Says: Sure, Go Ahead, Sue Me!
Because American states must, in most cases, enforce a judgment issued by the court of any other American state, Yanks in business tend to take for granted that fabulous feature of our legal system, known as "full faith and credit." [A dear relative was wont to say "for granite," but the malapropism is nevertheless just as valid, i.e., written in stone.]
But nations do not fall within the American constitutional system: American court judgments aren't not often enforced outside of the U.S. Unless, of course, there is a treaty between the U.S. and a foreign nation, there is little chance a court of that nation will recognize and enforce an American judgment. And, lest we forget, vice-versa.
For this brief post to be of any value to you, I must mention Don Clarke, who teaches at Harvard. He's written a brief article, entitled "The Enforcement of United States Court Judgments in China: A Research Note," and even if you are not an attorney, it is worth your time. Don says, in essence, that Chinese courts do not recognize and haven't enforced an American judgment.
My point in recommending you read Professor Clarke's article is this: here lies an important lesson for American companies who do business with China. Don't expect you can take an American judgment against a Chinese company to China and sue upon it. Your American judgment will not be recognized. Your more likely remedy would exist when the Chinese company has established sufficient presence in the U.S., such that you can sue the company in an American court. But unless that Chinese company has assets in the U.S. upon which you can levy, you are unlikely to recover very much at all.
What implications does this have, exactly? For importers, for example, the Golden Rule is to guard your money carefully -- before you even enter into a transaction with a Chinese exporter. Do not pay up front and then expect to receive product. You may not receive it once the money has left your hands. You will simply have no recourse.
The wise prefer to spend the extra fee to open a letter of credit, payable upon your acceptance of the product, rather than resort to prayer. Now prayer is a good thing, but its efficiency in trade is yet to be proven. Who wouldn't spend the extra? Many inexperienced traders. Perhaps you. Especially if you are new to importing -- and some I've spoken with are sourcing via the internet without even visiting the physical location of your provider -- you should never blindly pay cash up front. [If you haven't visited your supplier, you are neglecting essential due diligence.] But even if you have longstanding relationships with your suppliers, I would not recommend anything but L/C based transactions, except in the rarest circumstances (emergency circumstances where a mold needs to be opened immediately, etc.). Continue to pray, by all means, but, with some recourse in your own country, you won't need to pray so very urgently.
More on the practical aspects of Don's article in upcoming posts.
Comments
I disagree with this post.
A letter of credit is little guarantee against quality problems for many types of product. You are making an assumption here - that alll quality problems can be solve simply looking at the product.
Posted by: ToH ![[TypeKey Profile Page]](http://www.asiabizblog.com/nav-commenters.gif)
at July 17, 2007 10:24 AM
I think I see what you are getting at, but that's not my assumption. In fact, I didn't have post-transaction quality issues in mind. A letter of credit makes it more likely that you will get something for your money, instead of seeing it disappear down the rabbit hole. Incredibly, sourcing via the internet, people send cash to China for product without having even visited the factory. Does the factory even exist?
Yes, an L/C must be paid for non-conforming goods, where no specifications have been specified. Even with specifications, in-country certifications as to specifications can be readily falsified, defeating the purpose of the specifications. So the buyer must find a trustworthy independent third party who will issue a quality certificate that you can rely on. A number of international companies provide such services in China. And yes, that is about all you can do, as far as an L/C is concerned. That said, importers, together with their banks, look assiduously for flaws in the documentation in order to void payment. Opening and negotiating an L/C is an art, requiring specialized knowledge of terms and experience with trade practices. It is not a fail-safe, but it is better than cash.
But, well before the L/C even comes into the picture, the importer must have done his homework -- on-site, without blind faith that newbies espouse. Whether or not you receive a product that fulfills specified quality standards depends greatly on the lengths you go to understand the supplier, his capabilities and reputation; whether or not you perform an inspection of your goods prior to packing at the factory, etc.
Posted by: Editor, Asia Business Intelligence at July 18, 2007 2:47 AM
With respect to your first paragraph, please note that even in the USA, "full faith and credit" is not granted for default judgments by many, if not all, states, where the default was caused by failure to answer the Complaint, because there was no joinder of issue and therefore the possibility of lack of personal jurisdiction exists. Hence, even in the USA, plaintiffs are always advised to consider, first, suing a defendant in the defendant's state, unless the defendant's nexis with the plaintiff's state is strong enough to support personal jurisdiction.
Posted by: Law Office of Todd L. Platek at July 19, 2007 3:09 PM
I'd written "in most cases" with that just that in mind, but thought it best to avoid delving into the complexity, given the focus of the post. But thank you, Todd, for the providing the explanation.
Posted by: Editor, Asia Business Intelligence at July 19, 2007 6:47 PM
It should be possible to enforce a US judgment in a Chinese court (with the limitation mentioned by Mr. Platek), so the situation mentioned by Professor Clarke (of GWU not Harvard) could change at any time.
My wife and I have often seen the issues mentioned here. Also common, which should be avoided, are L/C on site. Any bank willing to do a L/C with China would be able to advise on how to use a L/C properly.
The most commonly used laboratory that can confirm quality control, even in China, is SGS.
Also increasingly popular is import credit, which is essentially a credit card, with most of the same protections. They claim to be cheaper and easier than L/C. Exim Bank people say they are useful, but I don't have experience with them.
Posted by: zoticogrillo at July 22, 2007 8:29 AM
I found an important point in your post about not visiting the factory before blindly making payment. From my experience an intermediary can be very important to assisting new importers confirm QA checks, delivery and negotiate when communications break down. There is an article on this that illustrates some of the pitfalls and ways of preventing such instances.
http://www.sourcejuice.com/2007/12/16/beware-the-middleman-and-seek-the-intermediary/
Hope this information finds you well.
Dylan Blankenship
Posted by: SourceJuice at December 18, 2007 7:34 PM
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