China Payment Terms
Negotiating payment terms is one of the trickiest aspects of doing business with Chinese companies. Vague milestones, unpaid invoices, and last-minute changes are common complaints. This post provides key strategies to ensure you get paid in full and on time when working with Chinese companies.
Whenever one of our China attorneys is retained to represent a client providing goods or services to China, we start by asking about the terms of payment. If the Chinese side is going to pay our client the full amount upfront, the contract provisions do not need to be too specific. But full payment upfront almost never happens because Chinese companies almost never will agree to this.
Payment Pitfalls to Avoid
A more typical scenario is one where the Chinese side agrees to pay a modest amount upfront (say 20%), another portion (say, another 20%) after a vaguely defined milestone, and the rest after the project is completed. This is far from ideal. Halfway through performance of a contract is not the time to be arguing about whether a milestone has been met. But such arguments crop up nearly every time. Even worse, this structure transfers the bulk of the risk to our client, who has to perform first and then collect, often from a Chinese company with no assets outside of China. We have seen far too many situations where the Chinese side makes so many 11th-hour changes to the deliverables and the schedule that our client ends up losing money on the deal even if they do get paid.
Payment Protections to Include
We advise our clients consider the following three things when it comes to payments from Chinese companies:
1. Make the terms of payment as concise and clear as possible. This benefits both parties. It should be self-evident when a payment is due, whether it is because the calendar shows a given date, a project phase has been completed, or a prototype has been delivered. These milestones should be as clear and comprehensive as possible because you will probably be fighting about them later.
2. Demand a nontrivial amount upfront and confirm payment before you do even a minute’s worth of work. We recommend this both because payment shows the Chinese side is serious about paying and because it proves the Chinese side can in fact make a payment on the contract. The renminbi is still a nonconvertible currency, and aside from a $50,000 annual exception, any time a Chinese entity wants to send money overseas, it must first secure approval to do so from the transmitting Chinese bank. This generally requires the parties have a written contract the foreign company has submitted a formal invoice in a form acceptable to the bank. Sometimes this approval never comes, and the Chinese counterparty is unable to make any payments at all. It’s better for you to find this out at the beginning before you have started performing your end of the contract
3. Add 10% to your charges 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 our clients do get this last payment, it’s a bonus, albeit one they will almost certainly have earned for all of the extra work they have done. If they do not get paid, then at least they received what they expected at the beginning.
Alternative Payment Plans
Over the years, we’ve seen some clients try different tactics. Some have sought local intermediaries or guarantors to ensure payment. Others have turned to trade insurance to mitigate risks Trade insurance is a type of insurance that protects businesses from losses due to non-payment by customers. When a business has trade insurance, the insurance company will pay the business for the value of the goods or services that were delivered to the customer, even if the customer does not pay.
These alternative payment strategies sometimes make sense, but they usually introduce additional complexities and costs. Sticking to clear payment terms is almost always the most straightforward and effective approach.
Using a Dispute Resolution Clause to Protect Your Company
If you have a dispute with a Chinese supplier, it is important to have a written contract in place that clearly outlines the payment terms. You should also have a dispute resolution clause in your contract that specifies how any disputes will be resolved. For what goes into choosing the appropriate dispute resolution clause for a China contract, check out China Contract Dispute Resolution Clauses: Choose Certainty
Payment Protection Tactics
Navigating payment terms with Chinese companies requires understanding China’s business and legal landscape and a strong and healthy dose of assertiveness, and above all else, a significant upfront fee and additional safeguards like a 10% post-delivery charge. Assertiveness here would be some combination of the following:
- Being clear about your payment expectations and requirements and requiring terms that protect your company.
- Not being afraid to ask for a down payment or progress payments.
- Having a written contract that works for China and clearly outlines the payment terms.
- Being prepared to walk away from a deal if you are not happy with the payment terms.
By being assertive, you can help to ensure that you are paid on time and in full for the goods or services that you provide to Chinese companies.
When negotiating payment arrangements with Chinese companies, a pragmatic approach is essential. By avoiding vague milestones, requiring substantial upfront deposits, and building in protective contract terms, you can increase your chances of receiving full and timely payment. Though some deals may necessitate creative solutions like trade insurance or guarantors, keeping payment provisions clear and simple is usually the most effective tactic. With the right contractual safeguards and vigilant follow-through, getting paid by your Chinese partners is achievable.