You should terminate the contract before considering whether to claim compensation from him.

This post was first published in CJO GLOBAL, which is committed to providing consulting services in China-related cross-border trade risk management and debt collection.

The transaction is not closed until you terminate the contract.

He/She may deliver the goods to you suddenly after a long lapse of time and you may no longer need the goods.

But since he has already delivered the goods, he/she may be held responsible for the late delivery, and you may also have to pay for the goods.

1. How to terminate the contract with the Chinese supplier

You are entitled to unilaterally terminate a contract with a Chinese company only if the conditions for rescission as agreed in the contract or under Chinese law mature. Otherwise, you can only terminate the contract with the consent of the other party.

In addition, you must follow specific steps. Otherwise, your notice to terminate the contract will likely be considered a breach of contract by the judge in the later lawsuit in China.

Therefore, you need to treat rescission with caution.

If the contract agrees on steps of rescission, you need to follow the agreed steps to terminate it. If not, you need to complete the rescission in accordance with Chinese law, which stipulates the following steps.

First, you must collect evidence of the other party’s breach of the contract.

You need to lead the other party to make an express repudiation, including statements saying “I will not deliver” or “You must pay more or I will not deliver”.

Where the other party simply delays the performance of his obligation, you need to first notify the other party to deliver the goods as soon as possible and give the other party a reasonable grace period. And you are entitled to terminate the contract upon the expiry of the grace period if no reshipment is made during the period.

Where the quality of the product delivered by the other party is substandard, you need to adopt the following steps.

The first step is to inform the other party of substandard product quality and explain to him that the goods are completely unsaleable or unusable.

The second step is to give the other party a grace period to make another shipment and take back the original goods.

And the last step is to terminate the contract upon the expiry of the grace period if no reshipment is made during the period.

Then, you can notify the other party of your rescission of the contract.

The contract shall be terminated as of the date of the other party’s receipt of your rescission notice. Therefore, you need to prove that the other party has received the notice.

In addition, you can also file a lawsuit with a court or apply to an arbitral institution for arbitration and ask them to confirm the rescission of the contract.

It should be noted that you must exercise your right to terminate a contract within a certain period of time by giving notice, filing a lawsuit with a court, or other reasonable means. If you fail to exercise such right in due time, you are no longer entitled to terminate the contract.

Well, what is the period length?

You can agree on that period in the contract. If there is no such agreement in the contract, the Chinese law will fill the gap by prescribing a period of one year from the date you know or should have known the occurrence of the rescission cause.

For a detailed discussion, please read an earlier post ‘How Do I Terminate a Contract with a Company in China? ’.

2. How to claim compensation from the Chinese supplier

If a Chinese supplier commits any default or fraud, there are four measures you can take to get your money back: (A) negotiation, (B) complaint, (C) debt collection, and (D) litigation or arbitration.

A. Negotiation

Negotiation is the most cost-effective measure to get your money back, but the key is how to persuade the Chinese supplier to refund.

In order to succeed in a negotiation, you should gain some “bargaining chips” by legitimately inflicting losses on the supplier.

For example, if you know other customers of the supplier, you can reveal to them that the supplier is owing money to you, and then copy the relevant correspondence to the supplier. In this way, your supplier may negotiate with you to maintain his credit with other customers.

Nevertheless, you should ensure that no obligation of confidentiality to your Chinese suppliers is violated in this correspondence.

Apart from that, you can also add pressure on the supplier by making complaints.

Please keep in mind that you cannot use these tactics to claim additional benefits, otherwise, it constitutes a crime, at least under Chinese law.

B. Complaints

(1) to Chinese Embassies and Consulates

You can make complaints to the Chinese Embassy or Consulates in your country. In some cases, the embassy or consulates will refer your complaints to the law enforcement agencies and trade promotion agencies in China, who have the authority to mediate your dispute with the Chinese supplier.

(2) to Local Law Enforcement Agencies in China

You can also make complaints to the Chinese government. Under normal conditions, it makes no sense to complain to the central government and its departments, since usually these departments are only responsible for policy formulation, not law enforcement. Instead, you should turn to government departments at local levels where the Chinese supplier resides, such as the local authorities for administration for market regulation or the local commission of commerce.

With the aim of maintaining the local business environment, these local law enforcement agencies will be more than willing to help you settle the dispute. After all, export trade is a significant source of revenue for many local governments.

But, there are times when some local law enforcement agencies may ignore your complaints, especially if the dispute involves very little money. This is because many local law enforcement agencies in China only act on orders from above, rather than on their own initiative.

In any case, complaints are a relatively low-cost measure. Thus, you can give it a try, or ask your Chinese agents to do so.

(3) to Business Associations or Chambers of Commerce

If you find that the Chinese supplier has joined a business association or chamber of commerce, you can make complaints to these organizations.

The organizations they join can be local or international.

Some suppliers need to maintain their good reputation with these organizations, so they fear being tainted with scandal.

Some suppliers have spent a great deal of money to join these organizations, so they fear being removed on account of an adverse record.

C. Debt Collection

You can also entrust a debt collection agent in China to communicate with the Chinese supplier on your behalf.

These agents will adopt legitimate measures to urge the debtor to pay up.

In many cases, Chinese suppliers dare to commit any fraud or default simply because you don’t have agents in China. The long-distance and national borders make them believe that they bear no liability for fraud or default.

Once you have agents in China, these Chinese suppliers will show more restraint.

D. Litigation or Arbitration

Litigation or arbitration against the supplier in China can be used as a last resort.

You can refer to our previous post titled “Suing in China vs Suing in Other Countries: Pros and Cons” to learn more about the differences between litigation in China and litigation in your home country. It can help you decide whether to litigate in China or not.

If you need to estimate the cost of litigation in China, the post titled “Sue a Company in China: How Much Does It Cost?” can be helpful to you.

The Cross-border Trade Dispute 101 Series (‘CTD 101 Series’) provides an introduction to China-related cross-border trade dispute, and covers the knowledge essential to cross-border trade dispute resolution and debt collection.

Photo by Daric Xu on Unsplash

Contributors: Meng Yu 余萌

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