What is a Demand Letter and how is it used in China to solve disputes?
Negotiations with your supplier going nowhere? Have you been wronged by a party in Asia? Need help getting your money back?
Demand Letter Service
Unfortunately, there is no Better Business Bureau in most parts of Asia where you can take your grievances. You will find very little support from government agencies and local police unless your loss is large or you have political connections.
Unless you are sure you have an "open & shut case" and all negotiations with the target company have been exhausted, in the interest of time and budget, it is probably not in your best interest to take the target company to court as your next move. Consider a demand letter first.
In the vast majority of cases, the Demand Letter Service (as offered by AsiaBridge Law) would be the logical next step in hopes of recovering funds without having the time and/or expense of going to court.
What’s the difference between a demand letter and a court order?
A Demand Letter is a demand issued by a lawyer requesting the target entity to do or not do something. It is not legally binding. A Demand Letter is issued before formal court proceedings take place.
- The Demand Letter is essential the “threat” of legal action.
- Having a Chinese registered lawyer issue the Demand Letter shows the target entity that you are very serious and it is one last chance for the target entity to resolve the issue before you take action that will hurt them, such as going to court in China.
- Since overseas courts have no jurisdiction in China, Chinese companies tend to ignore demand letters written in English or sent from a non-Chinese lawyer. For these reasons, a Registered Chinese Lawyer will issue the demand letter.
The goal of the demand letter is to reopen negotiations, help the client settle out of court and ideally gain a resolution that is acceptable to the client.
- There is no guarantee that the demand letter will succeed in recovering some or all of the client’s loss.
- On average, 30% of cases are closed to client’s satisfaction during the demand letter phase. The remaining 70% of the cases are either moved to litigation, dropped by the client or the client elects to continue negotiations.
- Most demand letters can be drafted and issued within 10 work days from the date of project launch.
How does a demand letter get prepared and delivered?
A demand letter is a formal letter that lets the recipient know that you are aware of their wrongdoing and are prepared to take legal action against them.
The Demand Letter Service involves a 3 Step Process
Formal Case Review (Step 1)
- A paralegal will collect the case file from the client on behalf of the lawyer.
- A local lawyer will review the case file and suggest the right message for the Demand Letter and provide an overall strategy for recovering funds.
- Important: If the initial "Case Review" (step 1) concludes that a demand letter is unlikely to be respected, the remaining Demand Letter Service fees for "Due Diligence" (Step 2) and the "Issuance of the Demand Letter" (Step 3) will be returned to the client.
- Tip: Avoid overwhelming the lawyer with non-essential information.
If the lawyer is requested to review a large case file, full of irrelevant emails for example, it will significantly increase the workload for the paralegal and lawyer, possibly resulting in a higher than necessary expenses for the client.
The better option is to provide a clear summary of the situation, state what you feel are the key arguments and offer the lawyer the core pieces of evidence supporting your position. The lawyer will review and request additional information if needed.
Due Diligence (Step 2)
Demand letters have little impact if the target is a fake company or bankrupt. Luckily, Due Diligence is affordable and effective.
Because the central government collects detailed data on Chinese businesses, it is fairly easy for a Chinese speaking investigator to collect key Due Diligence if they know where to look. The subject company will not know the research is taking place.
As the local language is the official language of the legal system, it is essential to know the exact legal name (in local language) of the subject company and full names of the key representatives of the target company in order to conduct Due Diligence and issue an effective demand letter.
For example, a demand letter addressing the English name of a Chinese entity is likely to be ignored.
Pro tip: When dealing with a representative for a Chinese factory, always get their full contact information, including their name and the full name and address of the Chinese factory in Chinese. This will be needed for your purchase order contract and will be good information to have in the event there are any issues later.
Due Diligence gives the client and lawyer the transparency they need to make a decision about moving forward with the demand letter.
Important: If the "Due Diligence" (Step 2) shows the company is broke or closed, the remaining service fees for the "Issuance of the Demand Letter" (Step 3) are returned to the client and other options will be explored.
Issuance of Demand Letter (Step 3)
Assuming the Due Diligence report indicates the target company is real and has assets, the next logical step is to issue a Demand Letter. Here are the action items:
- Demand Letter issued by lawyer
- A follow up call is made to the target company by the lawyer, whenever possible
- Client is updated on results
Demand Letter Service considered complete
What happens if the demand letter is not successful in resolving the dispute?
Demand letters fail for a number of reasons, but the most common three are:
- target company has gone out of business, is broke or doesn't care about its brand/reputation.
- target company gambles the client is not willing to go to court
- client's demands are excessive
If the demand letter is not successful in meeting the client goals, lawyers in the AsiaBridge Law network will advise on the remaining options available to the client which may include Litigation and/or Police Action
About the author:
Brian Garvin, American, Asia-based since 2003.
Managing Partner & Senior Business Advisor: www.AsiaBridgeLaw.com
ABL Blog: Sr. Editor and Primary Content Creator: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
A featured presenter on China issues at seminars, trade shows and corporate events across the globe.
Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/
Mike is the author of “The Essential Reference Guide to China Sourcing”
(available on Amazon).