Chapter 6 – Who is Informing Your Company of a Claim and What Actions Must You Take?

If you are faced with a claim, you have to consider your available options. Claims usually involve large amounts of money that have to be set aside for penalty payments, compensation payments, and/or logistical costs.

I will discuss this in context of the same sources of claims as used in the  previous chapter:

  1. Late or incomplete deliveries
  2. Major quality issues
  3. Copyright violations
  4. Patent infringements
  5. Non-compliance with laws of the destination countries
Who is informing your company about the problem?
  1. Late or Incomplete Delivery problems will likely be detected by your own staff, the information will come from your warehouse manager when a shipping container arrives with incomplete or missing quantities. Your freight forwarder should report late deliveries to you when your goods are loaded into the container and shipped. You should have confirmed the vessel and departure date with your freight forwarder and therefore the late delivery should not come as a surprise to you. If your goods have been inspected (I hope you had followed my advice to arrange that), you would have known weeks ahead of time that the production was finished later than requested because your trusted inspection company had to book the inspection date when production was at least 80% complete.
  2. Major Quality Issues can be identified by several different parties. The information can have come from your own QC department (you can congratulate your people if they detected a quality problem that slipped by your inspection company or occurred during the long ocean and land voyage) or the information could have come from one of your customers. Your customers may have their own QC department that found a problem that your own people did not (if that is the case, you have to be concerned with your QC department’s qualifications and take immediate action to avoid a recurrence). This scenario is more serious because it jeopardizes your reputation as a high quality importer. Another possibility is that government authorities detected quality issues during tests that are randomly performed in all EC countries on a regular basis. Samples are purchased from various retail outlets and tested for quality, performance, and compliance with local regulations.
  3. Copyright Violations will likely be brought to your attention by the registered copyright owner or more likely, by their legal representative or even worse by a court issuing a restraining order against your company. Usually a copyright violation will be detected as soon as your customers begin selling the products. The information could also come from your customers lawyers after the copyright owner approaches them.
  4. Patent Infringements are reported to you in a similar way as copyright violations. Since these cases are much more complicated, the reporting party will usually employ a specialized patent attorney to represent them. A copyright violation is often easier to decide than a patent infringement because only real experts can decide whether a patent was infringed or not.
  5. Non-compliance with Laws of the Destination Countries usually results in you being contacted by one of the government authorities after they have detected the non-compliance during their random tests (see paragraph 2) or by one of your customers after they have been approached by the authority.

All 5 scenarios result with you being issued a written notification and there will probably be a deadline for you to reply or take action.

Which actions must you take?
  1. Late or Incomplete Delivery – missing quantities must be immediately reported to your supplier in China and your forwarder as well. It is unlikely that a large number of products are missing but sometimes it happens that between the factory and your warehouse, goods come up missing (are stolen). The supplier will always refer to his packing list but my experience is that if you are only missing a minor quantity, most suppliers will honor your relationship with them and compensate you for the missing goods because it is difficult to trace where the incident happened. The remedy could be shipping the missing quantities with the next container FOC (free of charge) or allowing you to deduct the value from your L/C payment. On the other hand, containers are normally sealed before shipment and it would be difficult to steal something without breaking the container seal. Missing quantities should not happen too often, otherwise it indicates something is seriously wrong within your supplier’s organization. Late deliveries or partial deliveries should only be accepted by your company on a one-time exception basis, otherwise you set the standard for all future shipments because you have shown too much leniency towards your supplier. I believe that punctual delivery of each order is essential because you have commitments to your customers. Large retailers require suppliers accept penalty clauses for late deliveries and that could become an issue here. I mentioned in chapter 2 that your P/O must contain various clauses including a Late Delivery Clause. This clause will now apply and there could be substantial money at stake if you missed your customer’s promotion. In any case, you must file your claim with the factory and ask them how they will compensate you.
  2. Major Quality Issues – you must immediately stop all deliveries of faulty products to any of your customers. If additional containers are on the way to you from China, the likelihood that these products will be also faulty is quite high. Inform your supplier immediately (see filing a claim in chapter 7) and negotiate with him about what to do with the remaining quantities. Your supplier usually has an interest in solving the situation quickly otherwise, he will not be paid. Be prepared for your customers to return the faulty products to you and charge you for the transportation costs. Large retailers will also deduct the value of the returned goods from their next payment to your company. So it is again about a lot of money. File your claim with your supplier as soon as possible. It is also in his interest because he may face the same problem from other customers if the problem is not solved right away.
  3. Copyright Violations require that you comply with the deadline and inform the copyright owner of actions you have taken. Of course, you can object to his request if you are 100% sure that your products do not violate his copyright. That might be a very bold step because, in my experience, in most cases the copyright owner will have a solid case against you and you will not win. Copyright violations do not leave much room for leniency. If your company has violated somebody’s copyright and he can prove it, you will not be allowed to continue selling the products and will be issued a court restraining order to make sure that you obey. If you are lucky and this was your first delivery of the copyright goods, the requested compensation payment will be lower than if you have been importing the goods for months or years. Your company has to provide evidence of the total imported and distributed quantities to the copyright owner or his legal representatives. Bargaining over the compensation payment can take quite some time and you will have to pay lawyer’s fees as well. File your claim with your factory immediately but leave the total compensation amount open, because it is not known at this stage.
  4. Patent Infringements require that you meet the deadline to inform the patent holder about any actions you have taken. Objecting to his claim might be more difficult than objecting to a copyright violation due to the more complicated nature of these cases. It will be a lengthy process and the outcome is uncertain. In any case, you will need the help of an experienced patent lawyer. A normal lawyer will not be of much use to you because they lack the required knowledge to assist in these cases. It will again be about a large amount of money (you will find examples in chapter 14). Filing a claim with your supplier as soon as possible is essential. You will not know the total compensation amount because it will be decided later but file the claim right away.
  5. Non-compliance with Laws of the Destination Countries again requires you to comply with any deadlines and informing the authorities of actions you have taken to solve the problem. You will likely have fines and fees to pay based on how long it takes you to resolve the problem. Failing to take prompt action will only make a bad situation worse. Remember it is the government you are involved with and their offices are quite powerful. Once a violation is proven, they won’t take “No” for an answer. Since your product has breached the law, at least that is what they will try to prove to you, anything is possible. The authorities have the right to ask for a nationwide recall of your products that could require newspaper, radio, and/or TV ads. I do not need to tell you how damaging this will be to your reputation. To be blunt, it could easily kill your company. Since all of your customers will learn about your problem, they may discontinue purchasing any of your products to avoid tainting their own image. You may ask: “How it is possible that the violation was not detected earlier”? Unfortunately, this can easily happen if you are importing technical products like electrical home appliances or consumer electronics products. Again, you will find real life examples in chapter 14. In the EC, electronic products must comply with the EMC (Electromagnetic Compatibility) law that has limits for electromagnetic emissions. Samples that are prepared for EMC approval are usually within the allowed tolerances but they may not be maintained during mass production. If your Government authorities draw a lot of five samples and the majority fail to meet the regulatory limits, your products are unfit for sale. If it is only one out of five products, your product may remain viable for sale if you can prove to the authorities that it is a one time exception and provide the authorities with a corrective action plan from your factory. In any case, you need to file a claim with your supplier immediately as part of your action plan and deadline. If you have shipped a large quantity to your customers and have to recall these quantities from them, you will need a large compensation amount to cover all your expenses.
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