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Friday, September 9, 2011

WSJ on Global Business Norms and "Contracting" in China

G228586_chinese-flag-640 The concept of contract law is often novel in developing economies, especially communist or formerly communist ones.  Sparked by a dispute between Cosco, China's biggest state-owned shipping company, and foreign ship owners, the WSJ has an interesting discussion of business norms in China and a "Chinese corporate sector that doesn't always play by established global rules."  

Apparently, Cosco has halted or delayed payments for vessels it leased in 2008, at the height of the shipping boom.  Prices for these cargo ships have plunged since then.  Naturally, Cosco wants to renegotiate these leases, but unilaterally reneging the contracts defies established global business norms.

The article explains:

Foreign companies that do business in China are routinely warned that contracts aren't viewed in China with the same sort of legal sanctity that they receive in most developed economies. Jingzhou Tao, a Beijing-based lawyer with Dechert LLP, says that withholding payments is a frequent tactic used in China to force price negotiations. "A contract is not an unchangeable bible for Chinese companies," Mr. Tao said.

* * *

Analysts and lawyers say big Chinese state-owned companies can be especially aggressive in dealing with foreign companies because of their government backing and the enormous clout they wield within China in industries that are often oligopolies.

"State-owned enterprises that are dominant in their own sector and in some cases more powerful than government departments are used to having things their way," said Lester Ross, a Beijing-based partner at law firm WilmerHale. Mr. Ross said that Chinese companies in the minerals and cotton industries have a history of walking away from deals when prices move against them, and that foreign companies sometimes charge a premium for services to Chinese government companies because of the contract risks.

"These companies are only partly companies. They are also political entities," said Carl Walter, a former Beijing-based banker for J.P. Morgan Chase & Co. who has co-authored two books about China's state-owned enterprises. That means political imperatives, such as concerns over the value of national assets, can sometimes drive decisions by company chief executives, who at Chinese state-owned enterprises are appointed by the Communist Party. "When you do business with these major SOEs, you better make sure you make enough money to cover," Mr. Walter said.

Arthur Bowring, managing director of the Hong Kong Shipowners Association, argues that while Cosco's moves are worrisome for the industry, they won't likely be that damaging to the company long term. He adds that in late 2008, Australian iron-ore producer Fortescue Metals Group Ltd. backed out of its obligations under some shipping contracts. After a period of arbitration, the company said in October that it had settled all disputes with shipping companies.

"People are now doing business with [Fortescue Chairman] Andrew Forrest again...and it's almost like it never happened," Mr. Bowring said.

Mr. Bowring said Cosco, which has been operating internationally for decades, is too experienced to think that it can apply Chinese rules to overseas deals. Still, he said that company relationships are viewed differently in China than in many other places. "Chinese culture will build a relationship before the contract," he said. "The relationship is always something that can be talked about. The contract is just a set of papers that you keep in your bottom drawer."

In China, Some Firms Defy Business Norms, WSJ 9/6/2011.

[Meredith R. Miller]

http://lawprofessors.typepad.com/contractsprof_blog/2011/09/wsj-on-global-business-norms-and-contracting-in-china.html

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