MOUs and LOIs: The Pros and Cons

In The China MOUs and LOIs: Use Them At YOUR Peril we wrote about some of the problems that can arise from using Memoranda of Understanding (MOU) and Letters of Intent (LOI) with Chinese companies. Chinese companies (and to a large extent Chinese laws and courts) are much quicker to view an MOU/LOI as the contract itself than are foreign companies and foreign courts. Because of that, we warned of the dangers in using an MOU/LOI.

Since we did these posts we have received a number of emails from lawyers and companies saying they are having trouble eliminating MOUs/LOIs and asking what they should do. Also since that time, our own China lawyers have done a deal or two every month that involved an MOU/LOI. In other words, like them or not, MOUs/LOIs are a fact of life when it comes to doing business with China.

That being the case, in this post we address why MOUs are so common to China business and how you can and should handle them, short of just saying “no” and walking away.

MOUs are common with China businesses for the simple reason that Chinese companies love them. But why do Chinese companies love them? In our experience, we see them used typically to achieve the following two things:

1. To memorialize in writing the existing state of the agreement before the underlings at the Chinese company pass it on to their boss or bosses for approval. We frequently see this at large Chinese companies, particularly SOEs.

2. To memorialize in writing the existing state of the agreement and then to use that written document as a starting point for additional negotiations intended to favor the Chinese company only.

3. As a bragging piece for Chinese government officials.

If you are negotiating with a Chinese company that insists on an MOU, you should try to discern the reason the MOU is so important and if it is for reason number two above, you should make clear that once the MOU is signed, you will not be in a position to re-negotiate critical terms and you should stick by that statement.

If it is for reason number three, what it says should hardly matter and you should make sure it says pretty much nothing substantive.

Let’s face it, China MOUs are sometimes necessary for getting the deal done and an MOU that gets a good deal done is a positive. On the flip side, they can be used to lull foreign companies into going beyond where they wanted to go and as we have previously written, to create a binding agreement without the foreign company realizing that.

Those are the pros and cons of MOUs with China.

What do you think?