3 proven advice in resolving a breach of contract dispute in China

breach of contract resolution in China

If you are an international buyer, resolving contract disputes could be complicated and time-consuming, but don’t be intimidated. In this post, I am going to describe what we have experienced resolving a breach of contract dispute in the law court and provide the insights I got for the legal system.

A brief description of this breach of contract case

We all want to work with responsible and reliable suppliers, but good luck does not always come with every new choice, and it turned out to be the case when we placed an order to a new factory of machining job of 6 meters long aluminum profiles.

long cnc machined aluminum profiles

Long story short, everything seemed good at the beginning, a few samples were made and approved, the test order had been half finished, this factory had showed their responsiveness and commitments. It all looked like we will begin a good business relationship until we placed the big order to them.

Machining these 6-meter long profiles is a quite demanding job, because we require there should be no scratches and other blemishes on the surface (we lowered this standard a little later to make it workable). This requirement will make them check the surface little by little, and there were times that the raw material came with imperfections and they need to pick those imperfections prior to machining.

surface flaws on anodized aluminum
surface flaws on anodized aluminum

They soon lost patience to work on this job, plus they had received a lot of orders from other customers, they started to put our job aside, and ignore our repeated request to finish order production on time.

unmachined stock aluminum profiles
Unpacked and unmachined raw alunimum profiles left in the workshop

Earlier, we agreed to send them the deposit payment to cover the material cost, and due to the miswording in the contract (this shows the importance of the appropriate wording in the contract), although we had verbal agreement (with telephone conversation records) that they were responsible for the purchasing of the raw material, they insisted it was our fault that the raw material had the imperfections.

What stood in favor of us is: they did not have any written record of mentioning this matter before the dead line of the order delivery date.

It all seemed there would be other solutions. 2 months later we chose another supplier for this order. 3 months later, we started to file the law case against them.

The result of the court hearing

The court hearing started at 9:00 AM and ended at about 1:30 PM, so it is a long process. At first, we all made our utmost efforts to fight for our points of view, and provide to the judge our evidence. It seemed no resolution would be made, we would have to let the judge make the decision.

Things started to make a dramatic change when the judge started to conduct the court mediation, that she talked to the two sides separately. When I came back to the courtroom, the other side agreed to pay back about $21,500. Our earlier deposit to them was about $27,500. Including the attorney’s fee, our total loss is about $7,500.

Since continuing with the law case is quite time-consuming, we agreed to this mediation.

Although we did not get back all of our losses, this is just within our expectations from what our lawyer analyzed prior to the court hearing. 
Generally, I feel relieved after the hearing. 

I also want to provide some thoughts or insights on resolving a breach of contract dispute in China:

You can win the case, but still lose money

It is not like that if you win the case, you are justified to get the amount of compensation that you expect.

In our understanding, the breaching party should pay excessive amount as a punishment since they are faulty, and some of the potential losses are hard to be decided. It all seems reasonable to ask them to pay a bit more.

Unfortunately, the laws do not take it this way. The court judgment usually does not take into consideration of how wrong they are, it is only based on actual losses, excessive compensation is rarely supported by the laws.

Now here comes the problem, due to inadequate evidences (I mean the evidences in the legal sense, those are more rigorous and cogent than in common sense), or you may be proved partly responsible for breaching the contract (like the late payment, even it is really minor), practically you can hardly get full compensation of the actual losses, not to mention the potential losses.

Your liquidated damages may not be supported by the judge

In many cases, the actual or potential losses of breaching a contract are hard to be determined, then you want to have a fixed number pre-agreed with the supplier in the contract, which is called the liquidated damages.

However this is a tricky clause, the amount of the liquidated damages may not be agreed by the court.

The original purpose of liquidated damage is not to be punitive, but rather to be fair. This means the amount of the damage should be as close to the real losses as possible. Otherwise, both parties can request the judge to raise or lower the amount.

In China, the laws take a more conservative attitude in judging the liquidated damage, it is the 30% of actual losses to be the up limit. In other words, you can request 130% of the losses you claim to the breaching party.

In practical, you can put 4 times of the current bank loan interest, for example, 0.05% per day as the delivery delay penalty payment as the liquidated damages. This will usually be supported.

However, large sum of liquidated can still be supported with solid evidences

It does not mean that a large sum of claims will never be supported by the judge, here is an example:

I met a mold maker the other day. He told me that he was a supplier for a large auto manufacturer in China. According to their contract, if they miss the deadline, they will be fined hundreds of dollars for each minute of the delay. The total sum can be huge if the delay is a few days, not to mention weeks.

This will be supported by the law court. Because the customer can show to the judge the monthly or yearly output of their production line. If their production line is shut down due to the failure of supply of quality parts, the supplier needs to pay for this loss.

If a large sum of liquidated damage can be proved to be the actual loss, it will still be supported, but this will only happen if you are a famous company and located in China.

Difficulty in handling the quality dispute

It is quite usual that the buying party wants to refuse to pay or ask for a payment refund due to the poor quality of received products. If you are the buyer, you are at risk of losing this dispute.

Regarding the claims of the non-conformity of products to the pre-agreed quality criteria, the verifying process will be quite disputable and time-consuming. The judges are not engineers or technicians, they will usually entrust a third party to verify the quality issues.

It is easier when it is simple fact, like the failure to fulfill the dimensional tolerances (diameters, length, and width, locational and geometrical tolerances). When it comes to more sophisticated issues, like visual appearance, coating quality, material properties, etc, the verifying process will be more complicated and disputable.

Besides, there are a lot of other issues of the verifying process itself:

    At which location should the quality inspection be conducted?
    How can you prove the products with quality issues are not produced by other manufacturers?
    What percentage of the products should be inspected? With which production lot number?

The whole process will be long and disputable. It does not mean that you can not win the dispute, but if possible try to avoid the quality issues in the law suites. It is a lot easier to sue on other contract violations, like delayed delivery, payment issues.

Court judge or mediation?

In many cases, court mediation is an easier and time saving solution for both parties, and the judge also intends to use mediation than court judge.
Unlike private mediation or negotiation, the court mediation has just the same legal force as the court decision, so just get confused by the word “mediation”.
The differences between the court judge and mediation are:
The court mediation is final, you cannot appeal on it later. This means once you agree on it, you are not supposed to change your mind.
The court mediation does not require solid proofs, it is based on the acceptance by both the plaintiff and defendant.
The court judge does not need to take responsibility of the content of the mediation, because again, it is agreed and accepted by both parties. That is why the judges like the mediation.
The court fees are charges 50% of that for the court decisions.
The content of the mediation will not be posted on the official website, this helps to help the reputation of the losing party.

Now here comes my 3 advice for international buyers of how to deal with a breach of contract dispute, or better, of how to avoid this dispute in advance.

Keep the proofs, the contract is the most important one

You may be angry condemning how despicable or untruthful the other party is at the court, but the court judges are not driven by your emotion, they will only make the judgment based on the evidence.

The legal evidence includes the contract, purchase orders, emails, chat records, or even telephone recordings.

Among them, the contract or purchase order comes at the top priority. Make sure you define things clearly: quality inspection criteria, delivery date, payment terms, shipment, packaging, when the ownership of goods will transfer, and etc.

Keep everything documented, this will show your supplier that you are a professional buyer, and they will be at risk if they violate the contract.

Hire an attorney, if possible

If you do not know how to draft a well written contract, hire a lawyer to do so or review your contract is a good way, this will not cost much but it is definitely helpful.

Take actions decisively, don't wait until things get worse

After reading this post, I hope you already have an idea of what you will get by taking legal action. One lesson I have learned from this is: take the action earlier is always better than doing it later. 

There is a legal term called anticipatory repudiation, meaning even before the contract deadline, if you foresee that the supplier will not be possible to finish the order on time, you are entitled to sue them.

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