The companies that have signed a “memorandum of understanding” with a Chinese company likely constitutes a binding contract under Chinese law and is almost certainly viewed that way by their Chinese counterparts. There are so many pitfalls business owners need to understand thoroughly before signing out MOU with a Chinese company. The reason behind this is Chinese companies along with Chinese law and courts treat an MOU as the contract itself.
But in America, companies and American court do not treat an MOU as a contract. In the United States, a memorandum of understanding usually has less significance. Over here only the signed deal that matters. In China it is completely different and this country holds 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.” So you can see there is a stark difference between the two countries traditions, it is quite acceptable that conflicts will definitely arise some day.
MOUs are the most preferred tools for the Chinese companies. Over the years it has become a common practice with China business. Foreign companies doing business with Chinese companies often need to sign an MOU to keep their China deals moving along. There are two reasons why Chinese companies persuade foreign companies to sing out an MOU:
- Large Chinese firms more specifically SOEs, try to memorialize in writing the existing state of the agreement before the underlings at the Chinese company pass it on to their top hierarchy.
- To lionize the MOU in a way so that there could be scope to make additional negotiations that will only prove beneficial for that Chinese company only.
Whenever US based business owners request our China lawyers to draft a contract based on a signed MOU, we initially advised them to immediately alert their Chinese counterparts. They usually respond by insisting that there is no need for another contract. The American signed the MOU thinking its nothing and planning to come back and turn it over to their attorneys to draft the final agreement while the Chinese side signed it thinking that it embodied the deal.
American companies need to understand that not everything is bad about signing out an MOU. Sometimes singing out a memorandum of understanding is a great way to ensure a good and profitable deal. Our suggestion is to be cautious while a Chinese company is persuading you to sign an MOU. Keep in mind that when dealing with China, it is important you treat an MOU with a Chinese company just as you would a binding contract.