China Law Blog

Last week I spent a lot of time talking with new and potential clients about China. Probably the two things I found myself saying most often were the following:

1. If the deal your Chinese counterpart is proposing to you does not seem to make economic sense to you, it almost certainly doesn't.

2. The longer I have been practicing law, the more certain I am that the simplest solution is the best solution nearly every time. I have been practicing law long enough so that if I cannot understand the deal it is not because I am an idiot, but because it either cannot be understood or is simply too complicated for anyone's good.

These two ideas are really at the core of an excellent post just up on the Chinese Negotiation Blog, entitled, "10 Signs that your China Deal is Getting Too Complicated."

The post starts out by rightly noting that Westerners doing business with China too often make the mistake of being so "sensitive to cultural and interpersonal issues that they lose sight of business issues:"

The key to success in China is to walk away from bad deals and find good ones. I know – that sounds simple. The fact is that many newcomers to China business have trouble spotting the red flags and danger zones that indicate a deal is about to fall apart. The result is that they hang in there and keep negotiating with inappropriate counter-parties until they end up with a bad compromise and a disastrous deal.

The post then points out the common strategy (the post makes it seem this is a Chinese strategy, but I have seen it employed just about everywhere) of using "complicated structures and drawn out timetables to insert advantageous terms or conditions that get lost in the shuffle." It then lists ten "warning signs that a deal is about to get too complicated too fast." My own comments are in bold.

1. "Terms that will change at unspecified times or circumstances in the future. This is particularly true of price, cost, product line or technology. As in 'we’ll sell you the existing technology at price X, and when the new product line is ready we’ll lower the price to Y.' May also include: 'when we move to the new facility…,' 'when we get the approval from the government…,' 'when we develop the new product…,' 'when we hire the new engineer…,' 'when we tie up with our sister company....' It’s not that they’re necessarily lying – but you can grow old waiting for the conditions to become reality." I concur.

2. "New technology or connections to be introduced later – but priced now." You should be concerned both that the new technology will not work and that it will never happen. There is no more reason to do such a deal with a Chinese company than anywhere else.

3. "Asymmetrical payouts. You pay now – they deliver at some unspecified time in the future." This is a good way to lose a lot of money fast.

4. "Open ended liabilities or unsettled valuations." Your deal should have specific valuations and timetables; do not sign a contract unless and until all important terms have been agreed upon. This is true everywhere, but truer in China than almost anywhere else. Chinese courts seldom imply terms into a contract so good luck trying to claim to a Chinese court that "everyone in the industry knows shipments are to be made within 30 days."

5. Best effort sales/marketing deals are a "big red flag in China." "Chinese distributors are notoriously sketchy when it comes to fulfilling best-effort sales agreements." Very true.

6. "Anything involving connections, relationships or trust. If they say 'I have guanxi' you say 'I have to go.' Seriously." EXACTLY. Either it is a good deal on its own terms or it is not. "Guanxi" does not make a deal.

7. "Mysterious new players enter – particularly decision makers – and change the terms.' This can happen in any country but it is a common tactic in China." Yes.

8. Be careful of a deal that escalates too quickly into a "long-term, multi-transaction Joint Venture (JV)." I concur. Far too often our clients come to us for assistance in forming a joint venture with a Chinese company with whom they have never done even one Yuan of business. Just as you would not form a long term partnership outside China with someone you do not know well, you should not do so in China either.

9. Do not do anything without a signed written contract. "Usually this takes the form of “the owner/accountant/treasurer is away on vacation and we can’t stamp the contract until he’s back but if we don’t get the deposit now we won’t be able to make the deadline…” No. Just plain NO." I completely concur.

10. "They tell you that something is too complicated to explain. They’re right. Walk away now." I agree.

Simple, isn't it?