Trust But Verify, or Paranoia Won’t Destroy You

November 27, 2012

This article first appeared in Agenda magazine. Check out the latest issue here.

I have been accused of being suspicious, cynical and overly cautious. This is an occupational hazard for corporate lawyers, particularly those of us who handle cross-border transactions that involve individuals from different countries. Once you introduce a foreign language, culture and legal system into the mix, you are guaranteed communication problems, and in countries like China, which only opened up to foreign trade and investment a few decades ago, these difficulties are still significant. It is common to refer to parties “not being on the same page” during negotiations, but I like to think of it as a gap between what the parties believe they understand and what is actually going on.

Unfortunately, imperfect as we human beings are, very often one or both of the parties to a deal will rush into that gap, taking advantage of misunderstanding, vague language and erroneous assumptions. If one of the parties is hopelessly naïve and trusting, things can get ugly. Once you have seen this play out a few times, it tends to make one a tad bit cynical and suspicious.

That being said, this kind of negative outlook does not necessarily lead to a string of failed business relationships. What is the solution, the happy middle ground between blind trust and paralyzing suspicion? Trust but verify.

So be on your best behavior out there, unless of course you spot one of these red flags:

  • The Guanxi Gambit

No, I am not going to talk about how important relationships (guanxi) are in China. Go get a cheap “Doing Business in China” book at the airport if you want that old speech. Instead, I will simply caution you that hucksters have been lying about guanxi in this country for thousands of years and are very good at it. Because China is not exactly the paragon of transparency, such boasts about business connections are often difficult, if not impossible, to verify. Personally, I tend to disregard all of these kinds of statements, but if guanxi is important to your business deal, find some way for the other party to back up his boastful claims.

  • We’ll Do It Later

It sure is easy to promise something when you have no intention of ever fulfilling that obligation. It is even better when the other party assumes that you are acting in good faith. Ah, there is indeed a sucker born every minute. My all-time favorite from the world of China investment is the old “Hey JV partner, don’t worry about the land. The local government assures me that we’ll get the certificate within a few months.” The lesson here is obvious: future promises are worthless unless you not only have them in writing, but also when you map out worst-case scenarios in advance. In contracts, these are called conditions precedent. So with that land transfer example, I would want a provision stating that if that land use rights certificate never materializes by a specific date, certain rights are conferred upon the other party automatically.

  • Get It In Writing

Is this one too obvious? You would actually be surprised how often promises are made without detailed agreements. This includes trade deals – no, people, a purchase order is not “good enough” – free licenses, and anything involving long-term partners. Just because you never had a problem with a distributor, licensee or buyer does not mean you will not be taken advantage of tomorrow. And by the way, the “local custom” excuse (i.e., an informal understanding is the norm) no longer applies here. These days, the local custom in China is to have a formal written agreement.

  • Is That A Copy?

You ever perform due diligence on a company and receive a box full of unsigned agreements? I have. Sometimes this is simply poor internal organization, like when someone misplaces the executed versions, but in other cases, it might point to shady practices. The best way to minimize that contract liability from a potential buyer? Only turn over a “sanitized” version! Knowing this might happen, it is best to accept only executed originals, to the extent possible. In some cases, you can even demand that agreements are executed again.

  • A Perfect Translation

Why would you ever rely on a translation given to you by the opposing party? It might just be possible that the translation is: 1) poorly done; 2) purposefully vague; or 3) different from the other version, and not in your favor. I have seen promises made in one language version of an agreement that were essentially stripped out in the translation. If you do not have an independent professional checking accuracy (e.g., a translation company or a lawyer, not your Chinese-speaking secretary), you are playing with fire.

Okay, I know what you are thinking at this point. How can I sleep at night with such a twisted, tortured outlook on life and so little faith in the goodness of my fellow man? Actually, so long as I question every oral statement, and scrutinize every written document that crosses my desk, I sleep like a baby. Give it a try.

6 thoughts on “Trust But Verify, or Paranoia Won’t Destroy You

  1. Jeff

    Sorry, I have to disagree with your view on the “Guanxi Gambit.” In my business (IT products and services), relationships are everything in China. When I first came to live and work in China 13 years ago, I was amazed that the Chinese decision process could care less about features and functions of products. If you knew someone, that was a different matter. Honestly, that hasn’t changed much over the years. If you don’t have the connections (particularly in government and military settings), you don’t sell squat no matter how good your product is.

    1. Stan Post author

      There are still many industries/sectors where guanxi is important, but far fewer than in years past. If you’re selling products to the government at any level, then unfortunately the old rules still apply.

      The more important point I was trying to make, though, was that if someone approaches you with a stereotypical guanxi story, you should be skeptical. If you can’t verify it, proceed with the utmost caution.

      1. Chris

        From a macro level, I understand what you are saying although it is very difficult substantiate. What we do is verify relationships in the interview process when new people are hired. If you ask a senior level Chinese sales person (irrespective of industry) what is most important, guanxi or product features, they will always say quanxi. I have to agree. As an example, in the IT sector there are SOE’s that have been doing business with their reseller partners for years. The SOE will rely on the recommendation of their partner to fullfill basic product functionality. What the reseller provides may not be the absolute best solution but it is “good enough” to fulfill the customer requirements. If one doesn’t have a relationship with that reseller, your product doesn’t get sold. So, it is much more than just government and military. In IT is at every level.

      2. Jeff

        Well, it is more than just government. In the IT segment, it is at every level; distributors, resellers, OEM’s, System Integrators, etc. SOE’s as an example have relationships with fulfillment partners that go back years. They don’t necessarily sell the best solution but they sell a solution that is adequate. So, if you are not intrenched with the channel partner, you don’t sell your product to the SOE. If you were to ask a Chinese senior sales executive what is most important, quanxi or product functionality, they will always respond that quanxi is most important. In my opinion (at least in my industry) quanxi is as important as ever. Verifying that someone actually has quanxi is a different matter and complicated at best. We try our best to verify the relationships an employment candidate says they have but it is a time consuming process. Generally, if there is verifiable success in a target market segment, the person probably has been successful in creating or enhancing these relationships.

  2. Ollumi

    Guanxi is not some sort of magical potion, in reality it’s more of a mask for the even-more-cynical-than-stan(and pragmatic) nature of the bureaucrats oiling the machine. Unlike Stan, they don’t trust, they assume your company and the things you’re trying to sell is crap to begin with, so when everyone sells crap, it’s really a matter of the devil you know and which one won’t end up with them personally on the sword.

    No amount of “guanxi” will get a bureaucrat, big or small, to stick their neck out for you if it means their particular “position” is at a larger than acceptable risk compared to their own, personal, immediate reward.

    But this is a bit off topic, I think Stan is simply saying do your dd and don’t trust the other party to always be acting in good faith, which is always fair advice to people used to an environment built on a more rigid support structure.

  3. Jay

    My job in China was to get foreign suckers out of trouble so I know you are right. I never saw so many suckers in my life and I never saw so many scams, tricks and deceits in my life. China is chock full of trouble for naive foreign businesspeople (and naive Chinese too). NEVER trust anyone – especially in China.