The Memorandum of Understanding in China Negotiations

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Jun. 6 – When negotiating in China, especially in the very early stages of potential joint venture discussions, it is common practice for the Chinese side to introduce the concept of the “Memorandum of Understanding (MOU).” While not in itself a legally binding document, it is designed to clarify the position of each party and ensure a documented mutual understanding of each others’ positions.

However, many foreign investors do not pay attention to the drafting of this, and this is a mistake. The Chinese side will refer back to any items identified within an MOU, and if there is any change in a documented agreement they will want to know why. This can lead to a breakdown of communication or mutual trust and may hold up the negotiation procedures. Accordingly, it is important that attention to detail is paid with regards to the content within the MOU and anything that may be misconstrued, or that is not intended, should be taken out.

MOUs act as a basic draft for the JV contract and articles. Getting the MOU wrong from the start and in subsequent drafts can cause tactical negotiation problems later on. Pay attention to it. Not doing so in China demonstrates a cultural naivety and is an early indicator to the Chinese side, at least, of potential bad faith. That is the last thing anyone wants when attempting to structure any business cooperation expected to last several years and be mutually profitable. MOUs also show the Chinese side that you are attentive and are taking the negotiations seriously at an early stage. Treat them with respect.

This article was adapted from China Briefing’s comprehensive guide, “Setting Up Joint Ventures in China (Third Edition),” written in conjunction with Dezan Shira & Associates. This guide is available for direct download on the Asia Briefing Bookstore.

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