Chapter 7 – The Claim Filing Procedure

All claims involving a substantial amount of money require sufficient evidence to back them up. In the previous chapter, I pointed out that all claims opened against your company have to be made in writing. This becomes the first piece of evidence for you to in turn present to your supplier. 

What else is needed to open a proper claim against your factory in China?

This is easiest to understand is by again referring to the same five claim scenarios used in the previous chapters:

  1. Late or incomplete deliveries
  2. Major quality issues
  3. Copyright violations
  4. Patent infringements
  5. Non-compliance with laws of the destination countries

Make sure that your information is as precise as possible and easy enough to understand that your Chinese supplier can take necessary actions. It is therefore clear that all information must be provided in English or even better, when a Chinese translation can be provided. Any other language is unacceptable because your Chinese supplier may already have enough difficulties following your English explanations and bringing in a third language just confuses things. I have often seen documents in German, French, or Spanish that were simply attached to the communication in the hope that the other party will somehow manage to understand it.

Considering the amount of money involved in these cases, the cost for a translation is peanuts and should not be objected to by management.

  1. Late or Incomplete Deliveries claims that involve missing quantities in a sealed container should include photos of the partially empty container. Your warehouse manager needs to prepare a declaration stating the quantities missing from the container and/or any export cartons that are also missing. That is usually enough because as I mentioned before, it is very likely that the missing quantity is a relatively small amount. That does not mean that you should close your eyes and forget about it because otherwise the missing quantities might increase during future shipments. If you want to file claim that your factory made a late delivery it will mostly be about penalty payments for late or non-delivery to your customers. Since larger retailers have standing procedures for these situations, you can compose your compensation request simply by specifying the amount that you had to pay to your customer. It could be everything from lost profit, to a fixed amount per customer outlet, to the difference between your selling price and the selling price of one of your competitors that your customer had to purchase a substitute product from and even the cost of printing promotional leaflets or newspaper ads. The list can go on but the result will always be a substantial amount of your hard earned money. Earlier, I mentioned that late deliveries can be avoided by closely monitoring the production progress. It would have saved you a lot of money and trouble if you or another company representative would have visited your factory and verified the progress on the spot. Alternatively, you could have appointed a consultant you have confidence in, like our company, to perform the oversight on your behalf. Your expenses for these services would be a fraction of the compensation requests from your customers. If your supplier signed your P/O and confirmed the delivery date, thereby accepting your late delivery clause, you will have enough evidence to substantiate your case.
  2. Major Quality Issues require that you find a solution for any outstanding shipments that you cannot and should not accept because they will only multiply your problems. Most importantly, you have to provide adequate evidence to the factory that supports your claim. Suppliers usually do not like self-declarations regarding quality issues because they could be manipulated or be an underhanded way of returning goods the importer found difficult to sell. You will probably need outside help from one of the internationally accredited labs in your field. Suppliers will always argue that the products passed the inspection and they are therefore not liable because the inspection report is evidence that their quality was acceptable. Do not fall into that trap. Anything is possible from a bribed or deceived inspector to poor workmanship or packaging that affected the product quality during the long sea voyage. If government authorities confirmed major quality issues, you will have their evidence to present to your supplier. Your claim must include the transportation charges that your customers will back charge to you. Major quality issues mean that part of your turnover and invested money is tied up in defective products that are also occupying valuable storage space in your warehouse. Therefore, a prompt solution is needed. A possible solution that your supplier may agree to is paying to have the defective goods reworked in your country. A problem probably lies in the much higher labor costs of your country, which your supplier will object to. I suggest that you seek a compromise that will allow you to resume distributing the goods in a relatively short amount of time compared to sending the goods back to the factory for rework. The Chinese Government sometimes restricts the return of a larger number of goods to China so you may be stuck with them anyway.
  3. Copyright Violation claims require that you first provide all evidence to your supplier. That should be relatively easy since you have received sufficient information from the copyright owner or their legal representatives. In most cases, you will not be allowed to continue selling products that violate copyrights in your home country. However, the copyright may not cover every country in Europe or the Americas and there is a chance that you can get rid of the goods by selling them to a customer in countries where the copyright is not registered. Of course, this will only be possible if you substantially reduce your selling price. It is however, an option that you should not overlook because you will receive the majority of your money back and can prove to the copyright owner that the claim has been resolved. Naturally, you will file a claim against your supplier for all unrecovered expenses. He will most likely accept them because returning the goods to his factory would be even more costly. If this solution does not work, there are not many options left. One is to destroy all of the goods and file a claim for compensation from your supplier. Another is returning all of the goods to your Chinese supplier. I believe it is next to impossible to obtain compensation from your supplier after all the goods have been destroyed in your home country. It is better to return the goods to China because your supplier may find a way to sell these goods to other countries at a discount price helping to reduce his loss. If you do not mind if your branded products are later sold in some African or Middle East countries, you may want to accept this solution. Remember, your company has to provide evidence of the total imported and distributed quantities to the copyright owner or his legal representatives. They may want to claim a per piece compensation either from all the imported goods or all the sold and distributed goods. You may try negotiating a lower value but you cannot totally escape making a compensation payment. Evidence of your compensation payment to the copyright owner must be presented to your supplier in expectation that he will refund the amount to you.
  4. Patent Infringement cases are often solved by negotiating a royalty payment per item. The patent holder and his legal representatives will provide you with all necessary evidence to make your claim against the supplier. These are often lengthy and costly cases. Once you come to agreement with the patent holder and pay the required compensation, you will be allowed to continue your sales activities. All other details are similar to cases described in the copyright violation section and require you to take the same actions.
  5. Non-compliance with Laws of the Destination Country cases also require that you immediately forward to your supplier sufficient evidence provided by your government authorities along with your claim notice. Since it comes from an official government organization, it is hard evidence supporting your claim against the factory. Factories fear being blacklisted from selling to important economic regions, as is the case with the United States and the EC. A blacklisting would deprive them of a very large portion of their market and you can bet that they will do everything to avoid it. You should also know that the Chinese Government has a strong interest in not sustaining a reputation tainted by poor quality and dangerous product exports. I know of one case in which a factory producing electric irons was completely shut down for several weeks after a consumer in Greece was killed by one of their defective steam irons. Fortunately, things have changed for the better in China and factories know that they endanger their very existence if they do not promptly respond to justified customer claims in an appropriate manner.