Some inexperienced buyers learn about letters of guarantee, and they think it is the best thing since sliced bread. It costs nothing and it puts pressure on the supplier to deliver acceptable quality!

What does a letter of guarantee look like?

It is a certification, with the supplier’s letter head and company chop, that reads something like this:

We (supplier company) guarantee that the shipment of (order reference) is conform to (importer company)’s requirements regarding product technical specifications, labeling and packaging requirements, and quantities as stated in (relevant documents: P/O, checklist…).

We guarantee that we will undertake full responsibility for the compensation of prejudices related to the non-conformity of this particular shipment to the above listed requirements even if those non-conformities are recorded after reception of the products.

What are the problems with letters of guarantee?

There is no legal recourse if a claim is issued by the buyer and not paid by the supplier (except in rare cases, e.g. if the supplier has assets in the export country). Actually this type of document is only useful if the supplier expects new orders in the near future. If you want a possibility of legal action, ask a specialized lawyer to draft a contract, in Chinese if possible.

Contrary to what many suppliers and buyers think, a inspection does not relieve the exporter from his liability. For example, when an importer complains that he found quality problems in his country, the supplier’s canned response is often “even your inspection company did not find it, so how can you expect us to find it?”. This is not a valid point, and QC firms generally make it clear to every party that the buyer can file claims even after inspections (we write such a note on all my company’s reports). 

This one is technical point, but the letter only covers “non-conformities” (for example, the wrong color of paint is a non-conformity). If the paint job is poorly done on 10% of the goods and they cannot be sold, the supplier can argue that the letter of guarantee does not apply. Expecting zero defect is not realistic. These defective goods should be below a limit, but the letter does not mention it: what is the limit, and how to determine that it is not respected?

The most dangerous is the feeling of safety it can give to inexperienced buyers. “I have placed responsibility on the shoulders of my supplier, so I am clean whatever happens”, they think. Wrong! The responsibility for getting acceptable quality is borne by the buyer–and only the buyer. Blaming other parties stems from a lack of understanding of the sourcing game.

When should letters of guarantee be used?

I see two situations where a letter of guarantee can be used:

1. When an importer feels confident about a factory’s quality standard (after inspections have been consistently passed), she can check only some shipments and ask letters of guarantee for the others. It only serves as a signal to the supplier that they should maintain their quality level.
2. After an inspection is failed for an issue that is of minor importance to the buyer, asking the supplier to rework the goods and ship them without re-inspection can be a good tactic. It saves “face” and shows some goodwill. Again, asking for a letter of guarantee is a signal to the supplier.