Burn The Contract
The Expensive Fiction of International Law
It was 2008. I was sitting in a law firm in Shanghai. The carpet was thick, the view was panoramic, and the coffee cost more than the hourly wage of the workers I was trying to manage.
My lawyer, a sharp man in an Italian suit, was explaining my options. A supplier had taken our 30% deposit and delivered a machine that didn’t work.
“Mr. Victor,” he said. “We have a strong case. We can file in the local court. We will likely win.”
“How long?” I asked.
“Perhaps eighteen months for the first judgment. Then appeals. Then enforcement. Maybe three years.”
“And the cost?”
He named a number. It was higher than the value of the deposit I was trying to recover.
That was the day I stopped believing in contracts.
A contract is a parachute. It is good to have if the plane crashes, but it does nothing to keep the plane in the air. By the time you are reading the “Termination Clause,” you have already lost. You have lost time. You have lost market share. You have lost your reputation with your customer.
In the German machinery industry, we learned a brutal lesson: You cannot litigate quality.
You need a system that makes compliance the easiest path for the supplier. You need leverage that hurts them today, not three years from now in a courtroom.
I call this the “Invisible Contract.” It is not written on paper. It is built into the physics of the transaction.
Chain 1: The Financial IV Drip (Kill the 30/70 Rule)
The standard payment term in manufacturing is 30% Deposit, 70% Balance before shipment.
This is a suicide pact.
Once you pay the 30%, the factory has covered their material costs. They have zero risk. Once they finish production, they demand the 70%. You haven’t seen the goods yet. You pay. The container ships.
If you open the box in Hamburg and find scrap metal, your money is gone.
The Invisible Contract demands a “Milestone Drip.”
I do not pay for promises. I pay for proof. My standard term for new suppliers is 20-30-30-20.
- 20% Deposit: Just enough to buy materials. I keep them hungry.
- 30% “First Off” Approval: I pay this only after they send me a video of the first 50 units coming off the line, plus a physical sample sent by air.
- 30% Pre-Shipment Inspection (PSI): I pay this only after my auditor visits the factory and issues a “Pass” report.
- 20% Post-Delivery: This is the profit margin. They don’t get their profit until I verify the goods in my warehouse.
Suppliers hate this. They scream. They say, “It is not industry standard!”
I tell them, “I am not the industry. I am Victor. If you want the easy money, go work for the Americans. If you want the steady money, work with me.”
By breaking the payments into small chunks, I keep the leverage in my hand. If they miss a deadline, I stop the drip. The pain is immediate. They fix the problem to unlock the next 20%.
Chain 2: The Hostage Strategy (Own the Mold)
In manufacturing, the Mold (the tooling) is the soul of the product. If you control the mold, you control the production.
But most buyers are lazy. They pay for the mold, but they leave it at the factory. The factory stores it in a damp corner. Worse, when you try to leave, the factory holds the mold hostage. “You want your tooling back? Pay us $10,000 for ‘storage fees’.”
I treat molds like nuclear launch codes.
The Ownership Protocol:
- The Nameplate: Before I pay the final installment for the tooling, I demand a photo. The photo must show a metal plate riveted to the mold. The plate must say: PROPERTY OF [MY COMPANY]. ASSET #1024.
- The “Visit” Clause: My contract states that I can pull the mold at any time, with 24 hours’ notice, using a third-party truck.
- The GPS Trick: For expensive tooling ($50,000+), I embed a battery-powered GPS tracker inside the crate.
I once had a supplier try to run “Ghost Shifts”—using my mold to make products for my competitor at night. I saw the mold moving on the GPS. It traveled 50km to a different factory at 8:00 PM and came back at 6:00 AM.
I called the owner. “Why is my mold traveling?”
He went silent. He knew I was watching. He stopped immediately.
If you do not physically control the tools of production, you are not a buyer. You are a guest. And guests can be kicked out.
Chain 3: The “Shadow Supplier” (The Open Envelope)
Monogamy is beautiful in a marriage. It is fatal in a supply chain.
If a factory knows they are your only source, they own you. They can raise prices. They can delay shipments. They know you have nowhere to go.
You must build an “Invisible Contract” of Fear.
The factory must believe, at all times, that they are one mistake away from losing the business.
I use the “Warm Backup” strategy.
For every critical part, I have a Primary Supplier (who gets 70% of the volume) and a Shadow Supplier (who gets 30%).
The Shadow Supplier is hungry. They want the 70%. The Primary Supplier is terrified. They see the Shadow Supplier waiting.
The “Open Envelope” Tactic: When I visit the Primary Supplier, I leave a sample from the Shadow Supplier on the conference table. I don’t say anything. I just leave it there, with the Shadow Supplier’s logo visible.
The General Manager will look at it. He will sweat. He realizes: “Victor is already talking to them. The tooling is already made.”
Suddenly, the “impossible” deadline becomes possible. The price increase disappears.
You do not need to threaten them verbally. The presence of the Shadow Supplier does the work for you. It creates a competitive market of one.
The “Golden Sample” as a Legal Weapon
I wrote about “Golden Samples” before, but here is how they fit into the Invisible Contract.
A contract says: “The product must be high quality.” This is garbage. “High quality” is subjective. The judge doesn’t know what high quality is.
The Invisible Contract relies on the “Signed Defect Board.”
I force the factory owner to sign a physical board with sample units glued to it.
- Sample A: Acceptable.
- Sample B: Reject (Scratch > 1mm).
- Sample C: Reject (Color variation > Delta E 2.0).
We take a photo of him holding the board. We print it. We stick it on the wall of the QC room.
When a dispute happens, I don’t send a lawyer. I send a photo of the board. “Look at Sample B. Look at the shipment. They are the same. You rejected this 6 months ago. Remake it.”
It cuts through the noise. It is binary. Yes or No. No interpretation needed.
Final Thoughts: Leverage is a Verb
People think a contract is a noun. It is a thing you file in a drawer.
The Invisible Contract is a verb. It is an active, living pressure system.
- It is the pressure of the withheld payment.
- It is the pressure of the GPS tracker on the mold.
- It is the pressure of the competitor waiting in the wings.
I am a minimalist. I hate friction. Litigation is maximum friction. Leverage is minimum friction.
When you have leverage, you don’t need to raise your voice. You don’t need to bang the table. You just whisper. And the factory moves.
Stop paying lawyers. Start building chains.