The benefit of the global economy is instant access to the right product at the lowest prices. The internet enables small and medium size businesses (SME) in the USA, Europe, or anywhere else to identify low cost suppliers for important commodities and specialized goods. Unfortunately, there are major downsides.
One of these downsides for a SME is that your supplier is often literally 1,000’s of miles away. In the age of the internet, businesses are forced to rely on a website, rather than sizing up their potential supplier face to face. Because of the distances involved some Chinese companies have chosen to exploit this system by manipulating foreign SME’s into payments for goods that either never come, or do not match the quality expectations of the purchaser.
So it is that these SMEs come to our firm with a simple question, “Can I get my money back?” Unfortunately, the answer we have to give is often, “No, you probably can’t.”
This happens nearly every week, so let’s take a moment to examine the most common reasons why this situation occurs. In many of these cases, the situation could potentially have been avoided by simply asking the Chinese party for a few items of information.
1.
The name and address of the company
. This is one of the most important pieces of information you can have on your supplier but it is
the
most commonly missing detail. It is important to remember that an English name is NOT a Chinese company’s valid legal name. Official Chinese company names are required to be in Chinese. The English name as given on a website is NOT your potential supplier’s real company name. Ask your supplier for their official Chinese name, in Chinese characters. Make sure this name is written in Chinese characters on any contract you sign with a Chinese company. Pinyin is not enough as any given combination of 3-4 pinyin letters could be 4-6 actual Chinese characters. Address information should be in Chinese Characters as well. Street names in China are not typically written in English.
2.
Business License
. Every company in China is required to have a Business License stating the company name, address, company management personnel, and the company’s permitted Scope of Business. Even better than asking your potential supplier for their real name, is asking for this official documentation that this company actually exists. Most companies will have a scan of the official document which they can provide by email. Ask for it before sending any money. Keep in mind, you are the customer, you are risking your money, it’s perfectly reasonable to make an inquiry to ensure that the people you are dealing with are who they have held themselves out to be. If your potential supplier hesitates to supply this documentation, it’s time to find a better partner. Keep in mind, occasionally times the document delivered when such an inquiry is made is not an authentic Business License. It is advisable before a large transaction to have a China lawyer review the document for authenticity.
3.
The company seal (chop)
. Every China company has a Company Seal. If you sign a contract with a Chinese company, make sure the document is stamped with this official seal. Often we see electronic scans of agreements executed via the internet, with either no seal, or a fake seal. Official seals are circle, rather than oval or another shape, and they indicate the Chinese name of the company in Chinese characters. They do not have English letters. It is important that an agreement is stamped with the company seal, as under Chinese law, the company is responsible for the contents of any document to which its seal is affixed. So, a willingness to stamp the document indicates that the Chinese company is dealing with good intentions. However, keep in mind that the simple presence of a stamp does not mean the document has been executed with the official seal. It is advised to have a China lawyer conduct due diligence on the Chinese partner to confirm the valid company seal.
If every company verified these three details before sending money to their new China supplier, a large number of trade disputes would be eliminated. Remember, when conducting business with a company across the globe your local ideas of business trust and contract enforceability don’t necessarily apply. Your partners on the Chinese side are very aware of the limits of contract enforceability within their own legal system, and some parties are prepared to bank on these limitations, guessing that you will not be able to navigate the system effectively to hold them to their business commitments.