Trading in the Netherlands from a Chinese point of view: best practices.
The ongoing growth of China as an exporting giant goes hand in hand with a head-on culture clash while conducting trade with Europe’s mainland. In this article we focus on the headaches Chinese companies experience because of trade and contracting in the Netherlands. From our experience in guiding Chinese companies, we distilled some best practices and guidelines.
To start off, we list a few common ‘mistakes’ that are regularly encountered:
- The perception that a long-term professional relationship between buyer and seller eliminates the risk of default.
- The illusion that a buyer will always pay when contracting under Documents against Acceptance (“D/A”), Letter of Credit (“L/C”) or other deferred payment instrument through a bank.
- The self-assurance that when cargo is insured, all potentials gaps are covered.
- That a transaction is ‘secure’ after the accompanying documentation has been ‘checked’ and handled by a bank (of high standing).
- That meeting your Dutch counterparty in person grants you professional courtesies and guarantees payment of your invoices.
When engaging in commercial transactions, Chinese companies rarely conduct investigation of the credentials of their foreign customers. There is a general lack of awareness of the legal risks involved when trading ‘Chinese’ in the Netherlands. Especially when it comes to longtime customers, Chinese companies barely perform the necessary follow-up investigation, given the ‘relationship’. We have encountered cases where the Dutch buyer is already filing for bankruptcy (or even liquidated) while the Chinese seller, unaware of the situation, keeps shipping goods while awaiting payment. When payment is overdue, Chinese companies often handle recovery themselves, either with aggression or apathy, which greatly reduces the chances of any recovery. Dutch debtors dealing with Chinese counterparts are prone to easily file for bankruptcy, to transfer and move assets and monies or to simply liquidate the company, leaving their Chinese counterparts empty-handed.
Below is a list of trade practices which we encountered and which potentially pose legal risks for transactions.
Chinese sellers tend to send pro forma invoices and purchase orders to their Dutch buyers.
The unsigned documents then are the ‘contracts’ on which the thereafter transactions are concluded. No further contracts of sale are send nor signed. This main reason for such behavior is that Chinese sellers typically tend to simplify transactions and promote easy contracting in order to attract buyers who are up for a ‘quick sale’ without too much hassle. But pro forma invoices or purchase orders do not contain a signature, dispute resolution clause nor any other clauses for that matter. The transaction therefor is completely ‘unregulated’. When dispute or default of the buyers parts occurs, the Chinese seller has no legal protection at all.
Little attention is paid to major contractual provisions, particularly payment terms and dispute resolution.
When there are contracts of sale, these are often poorly drafted with no legal attention to major provisions and random use of boilerplate clauses. Payment clauses or dispute resolution clauses are often missing or copied from other contracts at random. The most commonly used international trade instruments are simple remittance (or open account), documentary collection and letters of credit. When conducting import and export, one should distinguish potential (credit) risks that come with the different trade instruments. Entrusting simple remittance is not recommended when contracting intercontinental. When sellers do trust that payment will follow by mere remittance, additional security should be obtained and contracted.
Under documentary collection there is more basic feel of security because the transaction is supervised by banks. But in principle this does not mean that that payment is guaranteed. Chinese sellers should avoid the use of documents against acceptance (“D/A”). With this payment term the documents to take delivery of the goods shipped from China are released by the clearing bank after the buyer accepts a time draft (or Bill of Exchange) drawn upon him. But, after this time period has passed and the Chinese seller wants to clear the draft, buyers often default and do not pay. We have experienced that the time draft (often 60 or 90 days) is used by the buyer to take the goods, sell them and then liquidate the company. Collection procedures and/or legal action are often futile after that. Documents against payment (“D/P”) is a more secure instrument, although not failsafe. With D/P, the buyer must pay at the clearing bank before he obtains the documents. This provides more security with regard to payment. The buyer may, however, reject the goods, which already arrived in the port of destination or are in transit, resulting in costs for the Chinese seller. But at least the goods remain in the seller’s ‘possession’.
A Letter of Credit (“L/C”) is considered to have the least risk of all trade instruments. But sellers should conduct strict scrutiny when receiving a L/C and insist on modification of unacceptable terms. They should also investigate the issuing bank (which are very different in approach) in order to ensure safe and timely receipt of a L/C and correct handling of its requirements. Chinese buyers should demand high standards of the bank issuing a L/C. We have encountered identity fraud on false passports and personal documents which were ‘checked’ by issuing banks.
When Chinese companies conduct business with foreign counterparts there are generally different currencies involved. Changing exchanging rates and payment in foreign currency could be a costly affair. Big losses are made when payment is due and the relevant exchange rate has risen or dropped. Provisions on currencies and exchange rated should be included in a contract and legally assessed if already present.
We generally recommend clients to choose arbitration when it comes to dispute resolution. However, many companies have no (legal) knowledge of the impact of choosing a specific arbitration institution and the language in which proceedings are concluded for that matter. We handled a case where Chinese company signed a contract of sale with its counterparty in Eastern Europe, thereby using its Dutch branch. The Chinese company itself was not actually involved in concluding the contract. International Court of Arbitration (ICC) was chosen (venue Paris) with English as language. When a dispute arose and arbitration was initiated, the Chinese company was faced with large costs of translation and travel which caused additional loss. Such factors should be taken into consideration when drafting arbitration clauses.
Losses due to insufficient knowledge of practices of international trade
The different legal systems and cultural backgrounds of each country also mean different (international) trade practice. The Incoterms are a set of terms under which goods may be transferred. The user may chose an Incoterm that fits the needs of both seller and buyer. Every term defines who is responsible until when, which leg of transport is to be paid by who and who arranges the insurance. Even if they are familiar with the Incoterms, Chinese sellers and buyers generally lack knowledge of potential risk of each specific term. Choosing a wrong Incoterms could be at great loss.
Evidence is key: negotiations and contracts should be done in writing and preserved.
While on the European mainland everything is negotiated or concluded by means of e-mail or paperwork, Chinese companies tend to do business by phone or WeChat (voice message). Many foreign companies take advantage of such means of communication: there is no evidence of what was and what was not agreed. When disputes arise, it is difficult for Chinese companies to present evidence in support of their arguments. Some Chinese companies will then make secret (video)recordings when disputing whit their counterpart to serve as evidence later on. However, this sort of evidence has little meaning in international trade. Chinese companies must appreciate that written documents are key in proving made arrangements. In addition, courts and arbitration tribunals will (generally) only accept evidence which was acquired legally.
Instantly initiate litigation without legal analysis leads to additional loss;
When disputes arise, Chinese companies tend to initiate litigation on impulse without conclusive evidence, without legal analysis of potential risks and often against the wrong counterparty. A thing to take into consideration is that according to the Dutch Civil Code, foreign companies (e.g. Chinese companies) will need to set a guarantee for the legal costs of the counterparty which lasts the procedure. Such guarantee may be provided by depositing an amount set by the court or by means of a bank guarantee for this amount issued by the bank where the Chinese party holds account. This may cause result in that a certain amount on this account will then be frozen which often causes cash flow problems. Further, if the procedure is lost the Chinese company is liable for the legal fee incurred (if awarded) of the counterparty.
Summarizing the above we hereby suggest to take the following into consideration when contracting in the Netherlands.
- Do conduct follow-up investigation on your longtime customers. Chinese companies should acquire more information on their foreign customers, their funds and commercial background. Check whether they have sufficient credit before each transaction or on a quarterly basis.
- When it comes to new customers, Chinese companies should (in addition to the above) gather enough background information before signing any contract. Ask for financial statements. Ask for credit limits and credit terms that potential customers have with their banks. Acquire information on the operational flow of payments within the company. This is commonly referred to as the "4C" investigation, in short meaning the company's Character, Capacity, Capital and Condition. We advise Chinese companies to have local lawyers conduct simple due diligence to minimize the risk of default.
- A written contract is vital when engaging in international trade. The clauses and provisions of the contract must be legally sound and state the necessary. It is recommended to hire an experienced lawyer to have the contract reviewed and to choose a suitable and secure payment instrument based on customers' background.
- When disputes do occur, please contact a (local) lawyer first to legally represent your company. A local lawyer takes away the language barrier and has much more tools and experience in communicating with foreign companies and banks, in conducting investigations and in resolving disputes immediately without going to court straight away.
As a final remark, international trade risk management consists mainly of prevention and avoidance. Chinese companies generally should increase their risk awareness. Every international transaction should be considered and reviewed as a potential risk. Thoroughly carry out preliminary investigation on your customer to minimize risk and avoid potential default. Research upfront will prevent losses.
If you have any questions about this text, please do not hesitate to contact us.