I was interviewed the other day by CBC Radio out of Canada for a story on the “Perils of Signing an MOU.” The topic was the meaning of a Memorandum of Understanding (MOU) between American and Chinese companies. Andrew Kurjata conducted the interview and he reaffirmed for me what I have already observed first-hand: Canadian radio and television newscasters generally go into their interviews better prepared than their US counterparts. Here is that interview:
AK: From ghost towns to universities, everyone wants to cash in on the booming Chinese economy. Yesterday, both the deserted Gold Rush town, now a tourist attraction, Barkerville, and the University of Northern British Columbia signed separate Memorandums of Understanding with delegates from Wuyi University in China. MOUs, as Memorandum of Understandings are called, are frequently used as photo opportunities for officials, but what do they actually mean? To find out we have reached Dan Harris. He’s a lawyer specializing in doing business with China and the author of China LawBlog.com. We have reached him in Seattle.
AK: Good morning.
DH: Good morning.
AK: First of all, what is a Memorandum of Understanding?
DH: Well, it really varies. It can be anything from a one-page document saying, “hey, let’s get together and maybe agree on something in the future” or it could be a 150-page document between two massive companies detailing what they want to do once all the regulatory hurdles and various other issues are resolved. Those usually involve at least one publicly traded company.
AK: And do companies and organizations in North America generally view them in the same way as their counterparts in China
DH: Probably yes, and the way they’re generally viewed is that they can range from being fairly important to being completely meaningless. So you don’t see them all that often between two North American companies, but they’re fairly common with Chinese companies and Chinese governmental bodies, because those companies and governmental entities like to show them off in China to show that they’re doing something outside of China. But whether they’re really doing something or not is always open to question. And quite frankly it’s really the same on this side, in that, when I see someone saying that they have a Memorandum of Understanding with a company in China, my first thought is “Yeah, so what. Why don’t you just wait to announce that you actually have a real deal?”
AK: So how do you tell the difference between an MOU that doesn’t hold much weight and an actual announcement of weight or actual deal that indicates a real relationship?
DH: When I see an announcement of an MOU, I really have no choice but to assume that it has no weight, unless and until something comes down the road later that shows that it did have some weight. And that something down the road later would be an enforceable contract. In my experience, MOUs lead to enforceable contracts probably less than 10% of the time. So when I read about MOUs, I just completely ignore them.
AK: So you don’t feel like there’s much weight to a press release or an announcement or a photo opportunity around an MOU?
DH: I feel like there’s no weight. In fact, my first reaction is, why are you announcing something that may or may not happen down the road? If something’s really going to happen down the road — if something’s really imminent down the road — then why not just wait until you’ve gotten down the road? Why are you taking the risk of acting as though some big thing has happened, and then two or three months later what are you going to do when it really doesn’t come to fruition? Are you going to issue another press release saying, “oh we were just kidding three months ago,” or are you going to do what most companies do, which is just say nothing?
AK: Frequently officials in North America, here in British Columbia, across Canada, stress that, in doing business in China, it’s a very long term process and you have go back and forth and take lots of little steps in order to get towards that big deal. Is that a correct assessment?
DH: Often times yes it is, but so what? That doesn’t mean you need to run off and announce that you’ve got an MOU. Now you can go off and announce that you’ve got an MOU, but what you’re really saying in most cases is that we are somewhere along the line of a long process of negotiating with a Chinese company, and that negotiation process may or may not ever result in anything real. And companies don’t usually announce that. I think the reason we see this sort of announcement happen with Chinese companies more often than we do with, let’s say, other North American companies, is that it makes North American companies feel better to be able to tell the world that, “hey, we’re trying to do something in China.” China is definitely the flavor of the week. Everyone is wants to get a ride on the train, even those who don’t really have a seat on the train want to advertise that they’re trying to get into the train car.
AK: In your blog you do warn that MOUs with Chinese organizations can sometimes actually be more than they appear.
DH: That’s exactly right. That’s sort of the flip side of all of this, and that is that MOUs, in North America but even more so in China, sometimes are not really MOUs—they’re contracts. And the American company doesn’t realize that. We’ve had companies come to us and say “hey, could you help us with this MOU and then we’re going to have to figure out what to do to by way of a contract.” And then we look at the MOU and we tell them that under Chinese law this [what they thought was an MOU] is a contract. And a lot of times in those instances, that’s how the Chinese company views the MOU, and the American company didn’t even realize it. So they’ve gone over [to China] and signed something without the authority of the higher-ups in their own company, and that something they signed is a two-or three-year contract that they nobody ever really approved. So that’s the flip side of all of this. Just calling something an MOU doesn’t mean it’s an MOU as is commonly defined by North American business people.
AK: Dan Harris, thank you for your time this morning.
DH: Thank you very much.
For more on MOUs with Chinese companies, and on the mistaken belief that such documents are never binding, check out The China MOU (Memorandum of Understanding). Use Them At YOUR Peril.