China

Want To Get Paid By A China Company? Do These Three Things.

Companies in China typically place a large amount of risk on your client. Here's how to best deal with that.

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Whenever one of our China lawyers represents a client that will be providing products or services to a company in China, we begin by asking about payment terms. If the Chinese company will be paying our client the full amount upfront, the contract provisions do not need to be too specific. But full upfront payment virtually never happens.

The more typical scenario is one where the Chinese company has agreed to pay a modest amount upfront (maybe 25%), another portion (maybe another 25%) after our client has met some vaguely defined milestone, with the remaining 50% to come after the project is “completed.”

This sort of payment structure puts a large amount of risk on our client, who has to perform first and then collect. The vagueness of the various milestones (including what constitutes “completed”) only increases the risk. We also have seen many situations where the Chinese company makes so many changes to the deliverables and/or to the schedule that the U.S. company ends up losing money even though they eventually get paid in full.

We advise our clients to consider the following three things when it comes to payment terms with China companies:

1. Make the payment terms as concise and clear as possible. This is really for the benefit of both parties. It should be self-evident when a payment is due, whether it is because the calendar shows a given date or because a project phase has been completed, or a prototype has been delivered. This is yet another reason why it makes sense to have your contract in Chinese.

2. Demand a large amount upfront and make clear both orally and in your contract that you will not begin work until you receive the full amount of this initial upfront payment. Having a large upfront payment works both to prove good faith by the Chinese side and to prove that the Chinese side is able to make large payments outside of China. China’s currency, the renminbi, is still a nonconvertible currency and any time a Chinese entity wants to send US currency to a foreign entity (greater than $50,000 a year), it needs approval from the transmitting Chinese bank. This generally requires the parties to have executed a contract (in Chinese) for goods or services that are acceptable for foreign entities to provide, and that the foreign company has submitted a formal invoice in a form acceptable to the bank — because the bank in turn usually needs to get approval from government authorities. For the specifics on what is required to get paid by a China company, check out Service Companies In China. How To Get Paid.

Sometimes for reasons usually peculiar to the Chinese company with which you are doing business, this approval never comes, and that first payment counter-party never comes at all. It is obviously better that you learn early rather than late that your China counter-party will not be able to pay you.

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3. Consider adding 10% to your normal charge and include it as a final payment due after delivery. A nontrivial number of Chinese entities insist on receiving delivery in full before making the final payment — and then never make that final payment. If you do get this final payment, consider it a bonus for all of the extra work that Chinese companies are famous for seeking to extract from their vendors. And if you never get this “bonus” you can at least take comfort from having received your normal payment in any event.

Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.

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