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China Due Diligence - Free Look Scheme You Have Been Warned

Updated: May 21, 2020

There are many education and training providers who would like to sell their services in China. This article covers one of the most frequent scams such companies encounter.

First, foreign companies cannot (with the possible exception of the Shanghai free trade zone) set themselves up as “training” provider. This means in all but a minority of cases to provide any training or education in China will require the establishment of a joint venture with a Chinese partner.

Now a good quality provider is sure to attract a lot of interest from Chinese entities but please be aware of the following common scenario.

The Chinese side express interest in the foreign company and may well ask for an MOU or similar document.

As the relationship grows over months and many visits to China, the Chinese side asks to see some kind of syllabus information which the foreign side invariably sends, thus providing a “free look.” As months go by the foreign side will begin to wonder why nothing is progressing. On contacting them, the Chinese side will ask for increasing levels of detail on all aspects of course design. They will ask for adaptations for the Chinese market etc each time gaining more and more valuable information. That is until the foreign company eventually gives up in frustration.

In most cases here the Chinese side was never in a position to do this deal, however it costs nothing to get the foreign company to do work on its behalf for free.

Beware the free look scheme and always conduct due diligence early in the process.

But we signed an NDA I hear you say. Well ok a few things about that:

1. A typical NDA as used by most European and US firms will not hold up in China.

2. What you need is an NNN (non-disclosure, non-use, non-circumvention) specifically drafted in Chinese.

3. Do you really have deep enough pockets to litigate in China over a loss this small?

We have covered some of these contract issues in our article China Contracts – Why Chinese Law is on your side.

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