Uncovering Hidden Dangers in International Trade: Are You Prepared to Mitigate the Risks?

In this article, we will learn about several common risk points in international trade by examining a case of international procurement.

Our client, Canada Eagle Company (pseudonym), plans to purchase gloves from China. They found a suitable company named Dongguan on Alibaba with reasonable prices and a good credit score. When our client was ready to place an order on Alibaba, Dongguan informed them that their trading volume on Alibaba had been restricted. As a result, Dongguan suggested that our client, Canada Eagle Company, conduct negotiations on WeChat before the transaction and make payment through bank transfer according to the confirmed payee written on the Proforma invoice.

Pitfall 1 !

Lawyer warn of the risks!

Transferring purchases from a legitimate procurement platform to WeChat lacks the protection provided by the original shopping platform to customers, as the shopping platform cannot monitor the funds and logistics of transactions made outside of the platform through other communication tools.”

According to the agreement stated on the Proforma invoice, our client is purchasing gloves and has agreed to pay a 50% deposit in advance, with the remaining balance to be paid before the shipment.

Pitfall 2 !
The invoice terms are not specific, and it is necessary to specify clearly that an inspection must be carried out on the goods before paying the balance, and it is best to have an agent watch the goods board the ship to prevent the seller from sending fake goods.

In this case, when Canada Eagle Company was paying for the purchase, the Dongguan company said they could only receive payment in USD, but our client did not have a USD account, so they entrusted a friend to make the payment in USD.

Pitfall 3 !
When entrusting someone else to make a payment, it is important to prepare a “payment instruction letter” and have all three parties, including the payer, the principal and the payee, sign it. This is to ensure that the payment made on behalf of the principal is recognized by the payee and is related to the transaction.

After our client paid the full amount, the Dongguan company delayed shipment. After urging the Dongguan company several times to ship the goods, our client learned that the Dongguan company was not the actual manufacturer of the gloves. The factory that produced the gloves had encountered a disaster and was flooded, so it had not yet completed production of all the goods. The Dongguan company could not obtain the goods and therefore could not deliver them to our client.

Pitfall 4 !
The real manufacturer was not confirmed before signing the contract. If the manufacturer can be confirmed, it is recommended to include the manufacturer, supplier, and agent in the contract as the main parties to the contract, making it easier to demand a refund and compensation for losses in case of disputes. If the factory is also one of the main parties to the contract, we can list the factory and Dongguan Company as defendants, requiring them to bear responsibility for the case together, reducing the time cost of communicating with Dongguan Company, avoiding Dongguan Company from using the factory’s responsibility as an excuse to delay time, and increasing the probability of obtaining compensation.

Our client urged Dongguan Company to deliver the goods several times, but Dongguan Company responded that it was not their fault because the factory did not produce the goods. They had already transferred all the money received from us to the factory, and they had no money to compensate us. They told our client that they had sued the factory and hoped that we would wait and give them some time. After the lawsuit was over, they would pay us as soon as they received the payment.

Pitfall 5 !
Do not trust a trading partner who has already breached the contract. The other party’s excuse may just be a delay tactic. The other party’s claim that they have no money may not be true, and their lawsuit against the factory may not necessarily win and obtain compensation. Even if they receive compensation, they may not necessarily pay us. Other people may also be asking Dongguan Company for money, so if we do not resolve the issue through legal means as soon as possible, we will not have an advantage in terms of time.

After consulting with us, our client decided to resolve this case through legal means, and below are some tips on how we achieved victory in this case.

1.Freeze the defendant’s assets while filing a lawsuit

At the same time as filing the lawsuit, we applied to the court to freeze the defendant’s bank account and properties. This put a lot of pressure on the defendant and prevented them from transferring assets during the litigation process, avoiding the risk of not being able to recover assets if we won the lawsuit.

2.Sue both Dongguan Company and its shareholders at the same time
According to Chinese law, a company with only one shareholder should bear joint liability for the company’s debts if the shareholder cannot prove their personal assets are independent from the company’s assets.

Based on the information we gathered, we found that the two shareholders of Dongguan Company are a couple. We searched for past cases and found one that is very similar to this case. In that case, the court held that if a company is established during the marriage of a couple, the company’s assets belong to the couple jointly, which is similar to a company with a sole shareholder in essence and can be considered as a one-person limited liability company.

Therefore, we argue that if the two shareholders of Dongguan Company cannot prove that their personal assets are independent from the company’s assets, they should bear joint and several liability for the company’s debts.

3.Ask compensation for litigation costs and losses
In this case, in order to help the client to maximize their rights, we also requested that the other party compensate us for our notarization and certification expenses. In Chinese litigation, if evidence from abroad needs to be submitted to the court, notarization and certification are required. We argue that these expenses are necessary costs incurred in the litigation process and belong to our client’s losses, and this has been supported by the court.

The loss and compensation have been successfully reached the customer’s account