How to avoid personal liability as the middleman

A friend visited me yesterday to talk about a deal gone wrong. He was the middleman between a Chinese factory and an overseas buyer. Obviously, there is a shortage of masks all over the world, and everybody is scrambling to get masks. 

The buyer wanted 5 million pieces of masks and gave 5 million to my friend to acquire the masks. My friend found a factory in Dongguan to produce these masks, bought them for 4.5 million, and shipped these masks to Italy a week later. Easy money, wasn’t it? Half a million Yuan just for being the middleman. 

However, that was just the start of his problems. The masks could not clear customs as there were issues with quality. The CE certificate was fake. As the buyer didn’t receive his 5 million masks, he was really angry and wanted his 5 million back. Obviously, my friend did not have the money anymore as he had already paid the factory. The factory was also unwilling to return the money as they claimed that they had already produced the masks, and whether or not the masks could clear customs was not their problem. 

My friend is now in deep water as he is being sued by the buyer for not being able to deliver certified masks. To get the 4.5 million Yuan from the factory, he would also have to sue the factory. 

Law In A Minute

This is a real case, and he could have avoided this from the start. As the middleman, it is obviously not worth getting into all this trouble just over half a million.

In the worse scenario, he would have to pay the buyer 5 million out of his own pocket. Even if he succeeds in suing the factory, it may take quite a few months, and the factory might be bankrupt by then. Even if the factory pays up, unnecessary time and money is wasted.

Think about how much you need to spend hiring a lawyer to sue the factory, and defending yourself as well. Therefore, my advice is to write up a commission contract between you and the factory to ensure that you get your share of the pie. 

Find a reputable third party, like a law firm to escrow the money instead of taking it into your own hands. The buyer trusts the law firm, and the factory also trusts that the law firm will release the funds when the deal is complete. This way, you are removing yourself from all risks and will not end up in the same scenario as my friend did.

Edgar Choi is author of “Commercial Law in a Minute” and host of a legal-advice account “Law in a minute” on WeChat

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