Whenever my law firm is engaged to represent a business seeking to provide goods or services to a new foreign buyer, one of the first things we want to know is the terms of payment. If our client is going to get 100% payment before it provides the goods or services, a written contract may not even be necessary. The old saying that owning is nine tenths of the law is true, although I’d probably update it to say it’s 99% of the law when it comes to selling to many emerging countries.
Unfortunately, 100% initial offers are almost as rare as rocking horse manure.
What we typically see are situations where the buyer wants to pay 30% to 40% upfront, with the rest due upon completion of services or delivery of goods. In this type of payment situation, the contract becomes critical. But even with a good contract, our client is at risk and we usually suggest that they wait for better payment terms – something like at least half upfront and the other half at the end. Or better yet, a 70-30 arrangement. More than anything, we like to see our client get enough upfront to cover their costs, whether or not their counterparties make the second payment.
Here are some examples of what we saw:
1. One of our customers who manufactures custom-made factory equipment charges his foreign buyers 40% before starting production, because this 40% is roughly his production cost. After our client finish production, their buyers need to pay extra 40% of the total price, otherwise the equipment will not be shipped. The last 20% is paid once the foreign buyer has signed for the product on delivery, in which case our customer sends someone to help with the installation.
2. One of our clients is an ultra-specialty, ultra-high-end theme park designer with more business than he can handle. It won’t take a minute for a foreign client unless and until that client has paid 100% upfront for the project. He also asks us, very wisely, to state very clearly in his contracts exactly what his client is getting for his initial package and that any work beyond what is covered by the package must also be prepaid. These provisions are important to prevent foreign buyers from claiming that their project ran into problems due to our client’s violation.
By the way, this is a classic example of why there is no single answer regarding the best location and the best law for a dispute. We have written countless times how most of the contracts we write for our US and European clients provide for dispute resolution in China. See for example Writing Chinese Contracts That Work. This client frequently provides its services to companies in China and yet contractually providing for the resolution of its disputes in China does not make sense for them. Providing for disputes to be resolved in China almost always makes sense in a situation where the Chinese party is more likely to breach the contract by not paying or stealing the intellectual property. But if (as is the case with this client) there is no chance that the Chinese company will not pay (because they have already paid in full) and no chance that the Chinese company will steal the IP from our client (because they don’t really have an IP), it makes sense to force the Chinese company to come to our client’s property if they want to take legal action. We have therefore implemented a dispute resolution clause in the United States to minimize the likelihood that our client will face a lawsuit.
3. One of our customers, a food company, charges its Chinese customers 70% upfront and 30% upon delivery. The 70% covers all production and shipping costs, ensuring our customer won’t go down the drain even if the remaining 30% is never paid.
4. One of our largest customers requires his buyers to pay at least 30% upfront and cover the rest of the payment with a letter of credit from one of the various major US banks.
What conditions do you need when selling your products or services to a foreign company?