What Legal Protection Does China Provide Buyers Who Receive Fake Or Bad Products?

Jessica Xu, a senior trial litigator and legal counsel for various government bodies and private enterprises, and Clive Greenwood, a senior compliance counsel and award-winning technical legal consultant, both based in the Liangma Shenzhen law firm, discuss essential advice for Western companies facing quality disputes with Chinese suppliers, emphasizing the importance of due diligence, clear communication, and establishing rigorous quality agreements.

They also shed light on the legal recourse available in China, including the process of taking legal action, the significance of evidence, and the potential to sue for consequential damages. Real-life case examples illustrate the challenges and strategies involved in navigating these disputes.

If you prefer listening to reading…

Listen to the audio here.

Here’s a summary of the episode, but listen for full details:

What advice is there for Western companies in a dispute over product quality?

Do good due diligence on the company before working with them to avoid such problems, especially checking that they understand your market’s applicable certifications and regulations.
Clarify your quality standard so the supplier knows precisely what you need and expect.
Communicate the issues with the company and ensure that they understand the problem/s.
Assist them in improving their processes and compliance with required standards.
In the event of a dispute, remain patient and keep calm as being confrontational may result in a breakdown of communication. (02:35)

Pursuing Legal Action in China.

There are usually 2 options, negotiate with or sue the supplier using the local legal system. If you decide to sue a supplier, providing the Chinese court with detailed evidence is key to enabling them to understand the facts and situation. For smaller financial amounts (say thousands of dollars instead of millions), the cost and time of recovering the money through legal action may outweigh the amount recovered. (07:29)

Suing for consequential damages.

If poor quality products result in serious damage or injury, such as starting a fire that burns down a building, then it is common to take legal action for consequential damages in China. In some smaller cases, perhaps just the threat of legal action from a local lawyer is enough to bring a supplier’s manager to the table to negotiate. If you do sue for consequential damages and win, the legal fees will usually be taken from the damages awarded. There is legal insurance that you can take out which may pay out and cover some or all of the legal fees based on the case’s strength and the lawyer may seek to freeze the defendant’s assets against the legal claim. (12:03)

How legal cases where a foreign buyer takes Chinese suppliers to court work.

A case starts with a preliminary hearing, then you’re called back in and evidence will be examined. The Chinese court considers the value and completeness of your evidence. This may be product test reports, statements from compliance experts, documentation, contracts, and more. If you have done thorough due diligence in advance it will make your lawyer’s job a lot easier when suing the supplier. (16:44)

Actions against fake certifications.

Due diligence on suppliers will regularly take into account certifications held such as ISO 9001. But what happens if the certificates turn out to be fake? Supplier disputes tend to use civil courts, but if a supplier has used fake certificates to win sales and mislead customers then the lawyer may go down the criminal law route. It may be reported to the administration bureau who will take up the case, or it can be reported to the police as criminal fraud. This could also be used as leverage when negotiating with a supplier. The good news is that many certificates can be checked easily on international databases to prove authenticity. (23:08)

Escalating to litigation.

Escalating to litigation will almost certainly be the end of a business relationship with Chinese suppliers. If the relationship is worth salvaging, discussing the issues with them and working with them to improve their processes and compliance may be preferable. If preventive and remedial actions fail, then attempting to recover costs is the next resort. Your preparation, due diligence, and the ‘evidence’ you hold, then take center stage. (29:04)

Conclusion.

Before litigation, a lot of work needs to be done on the prevention of issues in the first place – selecting the right suppliers, using enforceable contracts, getting feedback from them, clarifying your Quality System, specifying you requirements clearly, and discussing issues and trying to fix them together.

If needed, then you assess if you have the leverage to push the supplier into litigation and in the end collect consequential damages.

In China, they operate a buyer-beware system, so the legal system will protect you IF you have shown you did due diligence and covered all of the bases. However, some foreign buyers think that they cannot sue Chinese suppliers, but that’s not correct. Local suppliers should also understand that foreign buyers will be protected by the law in China and should not be dismissive of their responsibilities thinking that ‘it will never happen.’ (31:25)

Don't miss a post