This is the fourth in a series of posts in response to emails and comments asking us to expound upon how Western companies can better negotiate with Chinese companies on technology deals.
In part one, Negotiating With Chinese Companies: Be The Rabbit, we talked about using the Zen technique of “being the rabbit,” which in Western terms translates mostly into just being patient, hanging back and letting the Chinese side start negotiating with itself. In part two, Negotiating With Chinese Companies: Walk, Don’t Look Back, we talked about how Western companies must 1) convey a willingness to walk away from the deal and 2) actually be willing to walk away from the deal. In part three, Negotiating With Chinese Companies: Death By a Thousand Cuts, we again emphasized the need to be patient, this time when facing the common Chinese company negotiating “death by a thousand cuts” tactic, which is where the Chinese company endlessly negotiates by raising new and minor points with each go-round. In this part four, we talk about the “China is different” negotiating tactic, which is quite common on all China deals and even more common with tech deals.
Chinese companies will often seek to justify a contract demand by stating that “China is different.” It is shocking how often Western companies fall for this tactic and accept the China-side proposed terms.
It goes without saying that every country is different from every other country. But in terms of laws and regulations — and this is especially true of basic contract law — China is really quite similar to other countries. China’s contracts laws derive mostly from foreign models and they are also further constrained by China’s participation in the World Trade Organization (WTO), the World Intellectual Property Organization (WIPO), the Convention on the International Sale of Goods (CISG), and other international standards-setting bodies and conventions. In many respects, China’s laws hew closer to international standards than those of the United States, which has a reputation for “going it alone.” China’s laws are based on the civil law standard, while ours are based on the common law. So what often seems to a U.S. investor as an unusual legal provision is often nothing more than the difference between a common law approach and a civil law approach. China’s contract laws are in many respects similar to the contract laws in most Western European countries.
Our China lawyers deal with the “China is different,” tactic by putting the Chinese side to its proof. When the Chinese side claims China is different legally, we request that it direct us to the Chinese statute or regulation setting out the purported difference. When the Chinese side claims some government agency is requiring our client do something that makes no sense for our client, we either ask to speak directly with the government official with the purported requirement or we make clear that requirement necessitates a restructuring of the deal or our client will walk.
A couple years ago, we represented a U.S. magazine publisher that was seeking to license a magazine title and some of its content to a China publishing house. Our client owned the China trademark for its magazine title and its plan was to grant the China publishing house a limited license to use the China trademark within China. The Chinese publishing company insisted our client would instead need to transfer ownership of the trademark to the China publishing house and then when the contract terminated, the China publishing house would transfer the trademark back to our client.
Our response to the Chinese side’s nonsensical proposal was to suggest to our client that it request from the China publishing house a cite to the law requiring such a deal structure. Our client did this and the Chinese side said that because the applicable laws are only in Chinese and because our client was represented by American lawyers, there would be no point in providing the cite. We told our client to tell the other side that our firm has countless lawyers (including native Chinese lawyers) who could read Chinese and to just give us the cite. The Chinese said that would still not work because our client did not have any licensed Chinese lawyers on its legal team. We pointed out that we actually did have a Chinese licensed lawyer on our team (this should never have been relevant in the first place) and suggested our client again insist on getting a cite to the law. At this point, the Chinese publishing house admitted there was “no specific law” on this, but the Chinese government required it.
Our client stuck by its insistence that it would not do the deal if it had to transfer its trademark ownership. The deal eventually closed with our client giving the China publishing house a limited license to use its trademark in China and not transferring title.
Lately, and again, especially on tech deals, when we respond to a “China is different” argument by pointing out that we have done a dozen such deals without ever once having done one the way China now supposedly requires, the China side comes back and says it is a “new requirement” by the city or the province.
A decade or so ago, foreigners were generally prohibited from buying real estate for personal use in China. When China first changed this law (and before foreigners started catching on to the change) it was not uncommon for Chinese women (every matter involved a Chinese woman) to convince their Western boyfriend to buy a condominium in the girlfriend’s name. The girlfriend would insist that it would still belong to the Westerner, but it had to be done this way because he could not own it in his own name. Then when the couple would break up five or six months after the condo purchase, the boyfriend would contact us to sue the girlfriend to get “his” condo back. Just think for a moment how this case would play in a Chinese court. The girlfriend would explain how the boyfriend had gifted her the condo but now wanted it back after the break-up and all of the official documents would reflect the girlfriend’s full ownership. The boyfriend would then need to explain that his buying the condo for his girlfriend was actually all part of an elaborate scam to circumvent a Chinese law that did not even exist at the time of the scam. Really?
When a Chinese company argues that “China is different,” it typically means it wants the foreign side to accede to its unreasonable request. Your response to the “China is different” tactic should be to demand to see the law requiring the unreasonable condition. And when the Chinese side starts claiming that the government will not allow something, you should be clear that “if your government will not approve the deal as we wish it to be done, we will not do the deal.”
The next time your Chinese negotiating counterpart tells you that “China is different,” seek verification before you move forward.