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China MOUs. I Really Do Care. Deeply.

Posted in China Business, Legal News

My last blog post was a CBC (Canadian Broadcasting Interview) regarding my reaction to press releases/media stories regarding North American companies entering into an MOU (Memoranda of Understanding) with a Chinese company. The point I made in the interview is that stories about such MOUs are just not worth much because the MOU itself could very well be non-binding. My whole point was that I just don’t view these announcements as a big deal because so often no binding agreement ever follows:

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?

In the same interview, however, I also made clear (or so I thought) that MOUs can and sometimes are binding on the parties that sign them:

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.

Then at the end of the post, I referred back to one of our previous posts, The China MOU (Memorandum of Understanding). Use Them At YOUR Peril, on how MOUs can and sometimes are binding and that American companies far too often believe that simply calling something an “MOU” is enough to prevent them from being bound by the MOU they sign.

But for some reason, a number of readers missed this aspect of the post and I ended up getting hit with a flurry of emails pointing out how I was wrong to be so flippant about MOUs with China.  To the extent my interview was not clear, I accept the criticism and I want to clarify.  The point of my interview was to note how outsiders to an MOU have no idea regarding the meaning of the MOU as such documents can range from “hey let’s cooperate” all the way to a binding deal.  Generally though, if a company is going to announce an MOU, it means that they likely do not have a binding deal (or at least do not realize that they have a binding deal).  Put simply, if the company has a binding deal or thinks it has a binding deal, why bother announcing an MOU?

The post was not intended to minimize the importance of the MOU that you may go off and sign.  Far from it as these documents can be critical to anyone doing business in China.

One commenter talked of how they are important to Chinese companies and they are.  And as I keep saying, they also can be binding.  Where we often have a problem with them as lawyers is when a client comes to us with an MOU that says A and then wants us to draft a contract “based on it” that says B.  We then tell the client that going from A to B might offend the Chinese side and the client usually says something like, “but it is just an MOU.”  Yes, it is just an MOU, but binding or not, Chinese companies generally take these pretty seriously.  In fact, I cannot tell you how many times we stress to our clients the need to give us (as lawyers) a chance to review their MOUs before they circulate them because binding or not, MOUs do have meaning.  And just to be as clear as I can be: what you call an MOU may very well be what a Chinese Court or your Chinese counterpart calls a binding contract:

The impact of this difference is that we frequently see the following: American company comes back from China and shows me their five page MOU and says that they now want to work on a contract .  I tell them that what they have given me is probably a contract.  They tell me that I’m wrong.  I tell them to tell their Chinese counterpart that they now want a contract and see what happens.  Virtually every time, the Chinese company tells the American company that there is no need for a contract and then the American insists that there is and then the Chinese party thinks the American is being a jerk.  The parties have already gotten off on the wrong foot.

China MOUs can matter. China MOUs can be important.  China MOUs can be binding.  Believe it.

What more can I say?

What do you think?