By Steve Dickinson
Dan did a recent interview on joint ventures in China with Amcham and a couple of follow up posts, entitled, “Love The One You’re With. When China Joint Ventures Make Sense,” and “The China Joint Venture. It’s BACK!!!”
We are writing about joint ventures so often these days because we are seeing a pronounced resurgence both in companies wanting to go into Chinese joint ventures and in companies coming to us needing legal assistance with their failed and failing joint ventures here in China. We have often expressed cautions about joint ventures in the past, and nothing we have seen recently causes us to change our mind.
In many cases we are not able to effectively assist the foreign party in a troubled JV because their original joint venture agreement has been so poorly drafted as to preclude any real assistance. We usually attribute this to the foreign company’s originally misinformed view that “China has no law” or that the “JV contract is not worth the paper it is written on.” Based on this view misguided view of Chinese law, the foreign joint venture participant failed to secure good legal representation when it went into the joint venture deal, leaving us with little or nothing to work with in terms of fixing the joint venture problems. The foreign joint venture participant has made basic mistakes that make it impossible to use the very effective Chinese laws and legal system to resolve the problems that have arisen in the JV. Though China’s courts do generally enforce foreign arbitral awards, the issues between joint venture partners more often hinge on issues relating to control and operations, which typically require a Chinese court ruling.
Some examples of the basic mistakes are:
– In order to resolve a joint venture dispute, the issue oftentimes must be resolved in China, either through litigation in the Chinese courts or through arbitration with CIETAC, BAC (Beijing Arbitration Commission), or some other legitimate Chinese arbitration body. Foreign partners often provide in the JV agreement, however, that litigation or arbitration must take place outside of China, either in the home country of the foreign partner or in some expensive and well known arbitration forum like Stockholm or London. This type of provision does little to nothing to protect the foreign partner and makes it impossible to resolve any disputes in China, where the problem exists.
To take an example, many clients come to us complaining that the JV’s representative director has highjacked the operations of the China joint venture company and is operating without supervision and against the wishes of the board of directors. To effectively address this issue, it is imperative that we proceed in court in China directly against the rogue director. However, if the JV Agreement provides for jurisdiction outside of China, we are effectively precluded from taking such direct action.
This is only one way that foreign participants in JVs sabotage their own chances at resolving disputes. Other examples are:
– Failing to hire their own independent legal and accounting advisor during the formation process, thereby relying on the Chinese JV partner for all of the formation legal work. This is a guaranteed disaster, and it still happens every day. We have seen US companies that have put tens of millions of dollars into a Chinese joint venture, using no legal counsel at all, using the legal counsel of their joint venture partner, or using a local Chinese lawyer who has no experience with foreign joint ventures and no real incentive to protect their foreign client. We had one client who when he first came to us boasted of the great job his Chinese lawyer had done for only $600. When we pointed out how his joint venture so heavily favored the other side that his multi-million investment would likely never yield him a penny, we began to suspect he no longer thought of his counsel as such a bargain.
– Relying on a majority share interest to control the venture, rather than exercising effective control through the right to appoint the representative director and the general manager.
– Relying on a personal guarantee from the Chinese JV partner as a substitute for failing to properly document the project.
– Failing to provide clearly for protections for the foreign partner, assuming share ownership is sufficient to provide adequate protection.
– Failing to carefully monitor capital contributions and the use of contributions to capital, assuming that accounting reports will be adequate to reveal the fate of money contributed.
Though the above looks like a long list, I often see joint ventures where the foreign participant has made every single one of these mistakes and more that I have not mentioned. When this happens, we as lawyers are severely constrained in terms of what we can do to help. But this is not because China has no law or because Chinese contracts are worth nothing. It is because the failure to properly form and manage the JV has made it impossible to proceed. This blame for this generally falls on the shoulders of the foreign JV partner, not on the Chinese side or the Chinese system.
Joint venture agreements are really no different from any other contract. The better the agreement, the less likely there will be problems and the more likely there will be a quick and inexpensive resolution to whatever problems arise.
By Steve Dickinson