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.