Its treated as a contract by the chinese-----and yes they proberly can try to change the rules to suit themselves until full contract signing , but when you are targeting a Billion plus market in China best to play as they like to play.
In China, Treat A Memorandum Of Understanding Like A Binding Contract
Dan HarrisContributor
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The China lawyers at my firm often get contacted by Australian, British, Canadian or U.S. companies requesting we draft a contract based on a “just signed” Memorandum of Understanding with a Chinese company. And just about every time, we have to tell these companies that the “memorandum of understanding” they just signed with the Chinese company likely constitutes a binding contract under Chinese law and is almost certainly viewed that way by their Chinese counterparts.
In common law countries like Australia, Canada, the United Kingdom and the United States, MOUs typically mean little. Only the signed final contract really counts. This is not typically true in civil law countries like China which hold to a much stronger concept of good faith negotiation. Under that concept, it is not acceptable to simply walk away from an MOU if that would constitute “bad faith.” Since the traditions are so different, you can see where conflicts may arise.
What is bad faith under Chinese law? The standard example is signing an MOU with one Chinese company and then entering into a deal with another Chinese company. Under the common law, the party cut out under this scenario usually has no claim. Under Chinese law, the party cut out has a claim under the bad faith doctrine.
When one of our China attorneys is asked to draft a contract based on a signed MOU, we usually suggest our clients first alert their Chinese counter-parties of this plan. The Chinese counter-party usually responds by insisting that there is no need for another contract. Our clients signed the MOU thinking it was nothing and planned to come back and turn it over to their attorneys later to draft the final agreement. On the other side, the Chinese company signed it thinking that it embodied the deal.
The Chinese party will usually view insisting on drafting a new contract to replace the MOU as having acted dishonestly. Now you have a situation where what could have been a good relationship starts off poorly--or fails to start at all. If we go ahead and draft for our client a contract that differs at all from the MOU, or even just from how the Chinese party views the MOU, more problems arise.
Foreign companies doing business with Chinese companies often need to sign an MOU to keep their China deals moving along, but in doing so, it is important that they be sure not to allow what they sign to take them beyond where they want to go in terms of the deal. When dealing with China, it is important you treat an MOU with a Chinese company just as you would a binding contract.
In other words, call your lawyer before you sign one, not after.
Dan Harris is a founding member of Harris Bricken, an international law firm with lawyers in Seattle, Portland, San Francisco, Barcelona, and Beijing. He is also a co-editor of the China Law Blog.
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