In this next post from our Q&A series on disputes with Chinese suppliers, we explore another tricky situation. This time, the issue revolves around a supplier manufacturing a specialty product with design improvements, but failing to deliver a key promised feature which damaged the customer’s business.* Let’s examine it and see what lessons can be learned…
*We omit any specific information that might be used to identify the customer or the product.
New supplier…the start of the project seems promising
A few years ago, this customer switched to a new supplier to make the products. The supplier implemented some design improvements, such as adding a special mirror, a nice packaging box, and offering different color options.
The customer also paid an affordable price of just a few thousand dollars for a plastic injection mold, which was necessary for production. (It may be that the supplier undercharged for the mold, but compensated by charging a slightly higher unit price per product.)
The first order shipped in early 2021 and went straight to stores, followed by another order shortly after. The total value of these orders was not very high. Unfortunately, due to slow sales during the COVID-19 period, there were no subsequent orders for this product, and the products were not inspected at the time.
But now sometime later complaints have started coming in
Fast forward to today, and many complaints have started coming in from the customer’s sales channels. It turns out that the products are missing a key feature—the special mirror—despite it being prominently mentioned in the sales copy, on product tags, and elsewhere. Understandably, this caused significant dissatisfaction among the end customers.
The supplier won’t take responsibility
When approached, the supplier dismissed the issue, claiming the orders were too old to revisit as it was from some years ago.
There may be a three-year statute of limitations in Chinese law which, if true, is a worry. If that’s the case then there could be little comeback on the supplier. Additionally, the costs of legal action could far exceed the value of the initial orders.
The customer needs to think carefully about whether the damages inflicted on their business: lost reputation, lost future sales, and the cost of handling the defective products, make it worth pursuing.
What could they do to resolve the situation?
Unfortunately, due to the relatively small costs involved and the cost of litigation, this may be one to let go. But there are a few steps to consider:
1.. Discuss with a China business lawyer
A competent lawyer can advise on the viability of pursuing the case under Chinese law. Keep in mind that the three-year statute of limitations may be a hurdle, but it should be confirmed that this affects your case.
2. Send a Demand Letter
Send a formal demand letter to the supplier, detailing the issue and your expectations for resolution. This might include a request to release the mold or provide compensation. While not legally binding, a well-crafted demand letter can often prompt action (having the lawyer send this may add additional weight to your demands).
3. Weigh up the costs of taking legal action
Weigh the costs of potential legal action, including fees and time, against the potential benefits. Don’t forget to account for the intangible losses like brand reputation and customer trust.
4. Find a new supplier
No matter what happens with this old supplier, it’s clear that you need to identify a new, more reliable, supplier. Look for one with a proven track record of quality and delivery for similar products.
What can you learn from this case?
There are a few helpful takeaways from this unfortunate situation.
- Inspections are crucial: Not doing product quality inspections cost this customer. Early detection of issues can save a lot of hassle and cost later on and would have helped them avoid this situation altogether.
- Document everything: An enforceable manufacturing agreement where all product specifications and agreements are clearly documented, including penalties for non-compliance, will make disputes far easier to resolve later on (a lawyer could create this).
- Source and vet reliable suppliers: Invest time in finding suitable suppliers who will be trustworthy, transparent, and focus on quality. Vet potential partners thoroughly before starting production.
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