China Due Diligence – MOUs Friend and Foe
Updated: May 21, 2020
Memorandum of Understanding (MOU) are a very common part of Asian business culture and to that extent they are here to stay. Foreign companies are often happy to sign up as they are keen to progress a relationship and an MOU is perceived as very low risk. “Not worth the paper it’s written on,” right ?
Well sort of. First an MOU is legally binding in the People’s Republic and although the number of court cases brought is very small it does somewhat change the consideration when entering into such an agreement. (Do we even need to say you should have at least completed desktop due diligence before entering into a legally binding arrangement).
However there are a number of areas in which MOUs are misused. Remember an MOU is most often a statement of partnership that can be very useful to your Chinese partner.
Frequently we see the Chinese side keen to get something signed. There will be photos of course and this is a great publicity moment. However sometimes it’s the gain in status of “officially” working with a high value foreign partner that is all the Chinese side are interested in and there is never a serious intent to buy the goods or services.
This is particularly true when the Chinese side needs to apply to local government for a licence for a new venture – what better way than to be able to assure government that they can fulfill X or Y than by referring to the partnership that is sure to see quality practise being brought to whatever it is.
We have seen this particularly in healthcare / senior care where there are many new potential Chinese organisations keen to enter markets which the government has prioritised in recent years.
Essentially here the Chinese side is borrowing your reputation without spending a penny and you are wasting time money devaluing that reputation.
Often used in collaboration with the “free look” scheme which we have written about in China Due Diligence – free look scheme you have been warned.
So what to do – have we mentioned due diligence somewhere before ?
Be careful in the timing of the signing and be clear why it is needed.
Consider using time based milestones where appropriate.
Consider it a contract the same as any other which we have written about in China Contracts – Why Chinese Law is on your Side.