Source: http://www.chinamericalegaladvisors.com/insights/
Timestamp: 2019-04-18 17:23:46+00:00

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(c) to conserve the resources of the parties, their counsel, and the judiciary.
The U.S. Supreme Court has held that a district court conducting pretrial proceedings pursuant to 28 U.S.C. §1407(a) has no authority to invoke 28 U.S.C. §1404(a) to assign a transferred case to itself for trial. See Lexecon Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998).
Many federal judges and attorneys are vaguely aware that the number of cases in MDLs has grown, but few are aware of the rate of recent growth. As of September 30, 2015, there were a total of 341,813 civil cases pending in federal court of which 132,788 cases were pending in MDLs. In sum, 38.9% of the civil cases pending in the nation’s federal courts were consolidated in MDLs. As of September 2017, more than 40% of the civil cases pending in the nation’s federal courts are consolidated in MDLs. That percentage will only continue to increase.
Since its creation in 1968, the JPML has centralized 553,249 civil actions for pretrial proceedings. By the end of 2015, a total of 15,844 actions had been remanded for trial. In short, the JPML remanded only 2.86% of cases to their original districts.
Writing in dissent for the Ninth Circuit, Judge Alex Kozinski presaged the U.S. Supreme Court’s ruling in Lexecon by characterizing self-transfer as “a remarkable power grab by federal judges,” because the practice exceeded the authority Congress granted to transferee judges.
Remand’s scarcity is caused by the uniform interest of repeat players (transferee judges, cooperative attorneys appointed to PSCs, defendants and fund administrators) in settlement.
An MDL is not a litigation. Attorneys appointed to the PSC are not appointed by the transferee judge to be litigators. These attorneys are not selected for the purpose of zealously advocating on behalf of their clients. Attorneys appointed to the PSC are cooperative dealmakers. Describing an attorney appointed to the PSC as “cooperative” means the attorney would never consider rocking the metaphorical boat of judicial efficiency.
(c) The attorney must have signed-up a large stable of clients which he or she is already directly representing.
It is helpful to remember what I refer to as “the three Cs” of any PSC: cooperation, control, and compensation. Greater cooperation (between the dealmakers) and control (in terms of a significant market share of plaintiffs) results in closing the deal faster with the defendant and clearing the docket faster which results in greater compensation. A happy transferee judge is a generous transferee judge. Obviously, I am referring to the compensation received by the members of the PSC. The hapless plaintiffs will most likely receive little or no compensation.
One of the most egregious examples of blatant collusion in MDL involves the well-known BP oil well blowout in the Gulf of Mexico on April 20, 2010. In this on-going MDL, a relatively small group of repeat and self-interested “cooperative” PSC attorneys, who are permitted to be grossly over-compensated for merely acting as dealmakers, uses a victims’ compensation fund and a settlement class action to maximize judicial efficiency and limit the liability of BP.
Kenneth R. Feinberg, masquerading as a “Fund Administrator,” was employed by BP to limit its liability.
The ultimate objective of Feinberg’s “Delay, Deny, Defend” tactic was to limit BP’s liability by obtaining a signed “Release and Covenant Not to Sue” from as many BP oil well blowout victims as possible.
The BP/Feinberg victims who executed a “Release and Covenant Not to Sue” (approximately 220,000 in number) were subsequently excluded from the settlement class action.
In February 2011, only 4 months after Judge Barbier appointed his cooperative attorneys to the BP oil well blowout MDL PSC and Plaintiff Executive Committee, settlement negotiations began in earnest. The PSC and BP negotiated a total amount which BP was willing to pay in order to settle the BP oil well blowout case.
The PSC and BP worked backwards from that agreed upon total amount to draft the terms and conditions of the settlement.
The Honorable Carl J. Barbier clearly states, “The long term effects [of the BP oil well blowout] on the environment and fisheries may not be known for many years.” Nevertheless, in order to limit BP’s liability, one tactic employed by BP and the PSC was to limit the compensation period to 2010.
The BP oil well blowout settlement contains various causation requirements for Business Economic Loss (“BEL”) claims. Two of the causation tests, the Modified V-test and the Decline-Only test, require a revenue calculation based on benchmark periods and, in addition, a decline in the share of total revenue generated by non-local customers or customers in Zones A to C as reflected in specified documentation.
RTP payments are simply magical.
If an MDL which resorts to a settlement class action rather than remand has resulted in a loss of faith in the U.S. federal judicial system, then an MDL which employs a Kenneth R. Feinberg victims’ compensation fund and a settlement class action virtually guarantees the eventual meltdown of the U.S. federal judicial system.
(a) Kenneth R. Feinberg denied payment to approximately 61.46% of the claimants who filed claims.; the average total amount paid per approved claimant was a paltry $27,466.47.
(b) The Deepwater Horizon Claims Center (“DHCC”) denied payment to approximately 60.03% of the submitted claims; the average total amount paid per approved claim was a paltry $64,700.02.
(c) BP paid Kenneth R. Feinberg $24.7 million for serving as the victims’ compensation “Fund Administrator” from approximately June 15, 2010 to April 15, 2012.
(d) The total compensation paid to the 19 cooperative MDL 2179 PSC attorneys and their law firms is guesstimated to be $3.035 billion.
(e) Since 2011, Judge Barbier has declined to permit formal discovery on Feinberg. To date, the lawsuits filed against Feinberg have been put on ice for approximately 7 years.
Buses no longer have to be boring. CRRC Zhuzhou Institute Co. has recently developed autonomous and semi-autonomous buses. The Autonomous-rail Rapid Transit (ART) system is able to be implemented at a fraction of the cost that it takes to construct lines for a new subway or light rail. The ART system can run with a single car or have 2-5 cars linked, allowing for up to a maximum of ~500 passengers.
The bus follows a guided route via lines painted on the road. This allows for the bus to follow a predetermined route more easily. The bus is equipped with multiple sensors that enable the bus to be able to drive autonomously even without the assistance of the guided dotted lines. A driver can override the system and take an alternate route when the bus notifies the driver that there is a traffic jam ahead.
The bus utilizes data from sensors along the road as well as data from other buses in operation. Sensors give priority to the bus as it approaches red lights, giving the bus green lights along its path. Passengers will be able to get to their destination more quickly.
Another feature of the bus is that each car has a permanent magnetic motor. This provides a smoother ride compared to traditional buses and allows for the bus to have a tight turning radius which is critical in urban settings.
It is ideal to use a high-occupancy vehicle lane (HOV) or a bus rapid transit (BRT) lane when operating the ART system. With a maximum speed of 43 mph (70 kmh), these buses will be able to travel just as efficiently as subways cars but at a fraction of the cost that it takes to construct rail for subways or light rail.
Nobody should be above the law. Read our Memorandum of Law requesting transparency and accountability from the BP oil well blowout multidistrict litigation court. The PSC, BP, and Juneau colluded to intentionally mislead the plaintiffs just prior to the fairness hearing. Ken Feinberg denied payment to approximately 61.46% of the claimants who filed claims with the GCCF. Members of the PSC and their law firms in MDL 2179 are quadruple-dipping.
Attorneys have a duty to put their clients before their pockets.
When I initially arrived in China towards the end of the summer of 2011, I felt like I was going back in time in terms of payment methods. Few vendors accepted credit or debit cards. Carrying cash felt strange as most payments in the U.S. were made with my card. In the past 6 years, China’s uptake in mobile payment has been incredible. It’s now both a cashless and cardless society. From buying a soda from a vending machine, a mango on the side of the road, or booking a hotel, QR codes are omnipresent. Leaving home without one’s wallet is no problem. Now when I return to the U.S. I feel like I’m walking back in time in terms of payment methods. China’s mobile payments market reached US$5.5 trillion in 2016, approximately 50 times larger than the size of the U.S. market. For a market that was nonexistent a few years ago, it is impressive that 425 million Chinese (65% of Chinese mobile users) utilize their phone as a wallet.
Chinese consumers have become accustomed to rapid change. In a country that is growing at China’s speed, a year’s time can yield a level of change that is difficult to fathom in developed countries. Consumer behavior and habit still have Americans reaching for their plastic cards instead of mobile phones. Mobile payment providers in the U.S. have realized that consumer behavior is difficult to break once habits are developed. China has in effect skipped the credit/debit card culture and has gone from cash directly to mobile payment.
International news outlets tend to focus solely on Apple Pay, Google Wallet, PayPal, or Amazon Pay when it discusses the rise of mobile payment. All of these companies represent a negligible percentage of the Chinese mobile payment market. For a company that prides itself on innovation, Apple entered the mobile payment market in China entirely too late. In the 4th quarter of 2016, Apple Pay failed to reach the top 10 in terms of market share.
To even further display Apple’s disconnect with the modern transformation of the Chinese economy, Apple partnered with UnionPay (the Visa of China). WeChat and Alipay dominate the mobile market with a combined 91% share of the mobile payment market. Apple Pay represents less than 1%. On China’s artificial holiday dubbed Single’s Day last year (November 11th), Alipay processed a staggering US$17.8 billion in online, mobile payments.
QR codes are by far the most preferred technology for completing a transaction. Consumers and vendors have two options for completing a transaction via scanning QR codes. The consumer can scan a QR code present at the shop, or the vendor can scan a QR code that is uniquely generated for each transaction on the customer’s phone. Near-field communication (NFC) is another means of completing a payment, but it’s adoption is very small in China. WeChat offers payments through the use of QR codes while Alipay and Baidu Wallet offer payments through the use of QR codes and NFC. Apple Pay only offers payments through the use of NFC, further limiting user uptake.
Apple recognizes they’re losing in this arena but can’t seem to gain traction when it comes to breaking into the mobile payment or services market. Its latest move will only continue to push Chinese consumers away as it enforces a 30% tax on WeChat “tips” made on Apple devices. WeChat has an option that allows for users to tip writers of posts. WeChat is THE app to use when in China. Apple takes a 30% cut on in-app purchases so it argues that since WeChat was downloaded through its store, Apple should receive 30% of the tips. This is not sitting well with Tencent (the creator of WeChat). Apple is used to being the top dog; however, in China, Tencent is the more dominant company.
Apple has threatened to remove the WeChat app from its store. However, Apple needs WeChat to continue to grow in China. Chinese consumers can do away with an iPhone, but WeChat has almost become a necessity in China. The battle that is beginning to take place between Apple and Tencent will be even more interesting than the battle between Uber and Didi.
Apple is in a precarious position in China as it’s a brand that excels in China due to its perception as being innovative and as a symbol for affordable luxury. However, sales have slumped recently. China sales in 2016 totaled US$46.5 billion, representing a 24% dip from 2015. This year isn’t starting off well either. The first quarter of 2017 was down 14% compared to the same quarter in 2016. Apple succeeds in China largely due to its hardware design and not due to its services or software. This is Apple’s weakness.
Additionally, areas such as Shenzhen have taken the world’s best hardware and now are creating mutants that are giving Silicon Valley a run for its money. Companies such as Huawei are delivering reliable products with a beautiful design and innovative features. Huawei introduced a second camera on its P9 phones six months prior to Apple releasing the second camera on the iPhone 7. One thing China has proven time and again is that when it wants to produce hardware well, it has the capacity.
Consumers have multiple options when it comes to mobile phones. Personal preferences are mostly subjective. However, one app that Chinese consumers increasingly cannot do without is WeChat. The app has penetrated the market in ways that Facebook can only dream of. This market penetration has allowed for WeChat to rapidly close in on Alipay’s market share.
It’s changing the way that Chinese users interact socially and professionally and even the way we think about using our mobile phones. Everything in China can be done through WeChat, from making an appointment with your doctor to booking a flight to ordering food delivery to paying for your electricity. WeChat is accomplishing what Facebook only dreams it can do in the U.S.
To further entice users to stay within the WeChat ecosystem, WeChat has added “mini programs” (Apple won’t allow for WeChat to use the term app) where users can use apps within WeChat without having to download a separate app. These apps are attractive to developers as they can work across Android and Apple devices.
Western companies have been attempting to emulate WeChat’s success in China. Facebook is trying to “copy” WeChat by integrating shops with its platform. WeChat has been offering integrated checkout since 2013. Additionally, chat bots seem to be all the craze in 2017. WeChat has also been offering chat bot services since 2013.
As China’s economy cools in some sectors, fintech and the internet of things will continue to accelerate. Copycats in China will continue to exist. The new challenge that western firms will have to compete with in China is not iteration but true innovation.
Feel free to download the slides from our seminar given on key points to consider in international business transactions.
With rising healthcare costs and aging populations, mobile health has been looked to as the panacea to our healthcare challenges. Mobile health offers the promise of increasing efficiency in healthcare while also mitigating the costs.
Many aspects of our life are “on demand” in a digitally connected world. However, healthcare has been a real laggard. It’s a topic that often floods our Twitter feed but has had slow penetration in the marketplace.
No country has taken to the use of mobile as quickly as China. From FinTech to the IoT, China is moving towards a cashless society. China is certainly a mobile first country where beyond the office, the majority of people use smart phones or tablets instead of laptop or desktop computers. Naturally, tech leaders have been bullish on the uptake of mobile health. Yet, healthcare in China has been slow to embrace digital health. Many tech leaders in China placed big bets on mobile health in 2016, bets that have been slow to see returns.
Despite mHealth’s relatively slow penetration in the market place, it is an industry that is expected to increase rapidly from its already considerable size. In 2016, the global market for advanced patient monitoring reached approximately US$35 billion. Patient monitoring is expected to reach US$49 billion by 2021.
MHealth offers the ability for people to have more control over their health while increasing the efficiency of the healthcare system as a whole. However, how we deal with hurdles currently facing it will determine if it lives up to the hype.
MHealth has an adoption problem. In order for mHealth to be truly effective, it needs to be frictionless. The vast majority of people will not engage with health apps that require them to be active. The ones who are willing to engage generally encompass the health-conscious demographic in peak physical condition.
Doctors believe optimizing one’s health should be the top priority for a patient so he or she should be willing to actively use the app. However, in a patient’s eyes, mHealth usually is just seen as creating more work for him or her. The user experience needs to be greatly improved. Open APIs so multiple organizations can share data from a given app is one way to significantly improve functionality. If an app is not multifaceted or has the perception of being too niche, adoption of the app will be limited. WeChat is such a powerful app because it has a plethora of functions. An app that analyzers many different data points with very little effort on the patient’s behalf is where mobile health is heading. The current state is much more fragmented, and this current fragmentation is one reason why 80% of health apps are abandoned in 2 weeks.
Many people consider the fact that in 2016 there were approximately 8.0 billion global mobile devices and connections would automatically lead to increased uptake in mHealth. Although many people are looking at a mobile screen for a significant portion of the day, the ability to hold onto a person’s attention is more difficult than ever. This is mobile health’s greatest challenge. Let’s imagine a scenario a typical, adult mobile user. We will call him Jeff.
Jeff has a chronic heart condition. The doctor and Jeff both intellectually understand the value of regular monitoring of Jeff’s blood pressure and heart rate. The doctor feels he is doing Jeff a service by prescribing an app to Jeff. Jeff sees this as more work. For up until last year, Jeff was completely unaware of his heart condition. He believes that he is living with no symptoms, and that his health is presently not in any critical danger. The variety of tasks Jeff completes on his phone throughout the day (whether for work or social purposes) take priority over his healthcare app. Jeff’s brain focuses on the app that requires the most immediate attention, pushing his health app to the bottom of the list.
Furthermore, people don’t utilize health apps the same way they utilize social apps. The human need to share has allowed for apps like WeChat, Pinterest, Instagram or Snapchat to become wildly popular. Yet, the desire to share information about your health is not there. When people look at their cell phones, there is a small shot of dopamine released. Responding to a chime from a text message taps into the human reward system. Health apps are different. For people involved in healthcare, there is this ideology that if an app can help you be healthier, then people will want to actively use it. This is not the case.
Moreover, the need for mHealth is greater than ever since chronic diseases are on the rise. According to a recent study conducted at the Boston University School of Public Health, researchers argue that diabetes is responsible for 12% of deaths in the U.S. rather than the 3.3% indicated from death certificates. Chronic diseases pose a risk to society because of the fact that cures are usually not attained. Therefore, prevention and proper monitoring are critical for successful outcomes.
A good doctor is one who is experienced yet also up-to-date with the latest clinical trials. Patients are willing to spend a greater amount on a well-known physician due to the trust factor. MHealth has the opportunity for doctors to monitor patients from afar. MHealth is designed to strengthen the patient-doctor relationship, not replace it. However, it is a relationship that doctors must acknowledge is evolving. Historically, the relationship has almost been a patriarchal one as the doctor had all of the data and knowledge. MHealth gives the patient the ability to control his or her data. A new, stronger relationship is evolving.
Patient monitoring is one area that is eyeing significant growth. It allows for physicians or nurses to be able to see beyond the 15-minute checkup in the clinic. Prevention is one of the most effective strategies for living a long, healthy life.
Notifications that indicate outlying value points or points of concern could be clues for an underlying disease that is developed, a clue that may otherwise go unchecked in traditional physicals. Physicals offer very limited insight since the data the doctor traditionally records is only a snapshot at that specific time when the patient is present. Being able to visualize the trends in a patient’s data over several months provide powerful data for a physician.
Reimbursement for mHealth products has been an issue that has been slowing the uptake of mHealth, particularly in China. For the most part, mHealth companies in China rely upon private insurers for reimbursement. Public insurance policies mostly do not cover mHealth services. Despite Beijing pushing for public insurance to ease the burden for the public sector in funding healthcare, citizens have been slow to trust private insurance providers or hospitals.
Policy and lawmakers can create the incentives for doctors and hospitals to be mobile friendly.
Hospitals aren’t always keen to sharing data with companies due to protection of their patient’s privacy while also having the fear of being exposed to liability. In order for A.I. to be effective in healthcare, companies must have access to a vast amount of data. Robin Li, Baidu’s chairman, said that a dearth of medical data was hindering their ability to develop algorithms for the basis of artificial intelligence.
One way of overcoming this issue is giving patients more options about what healthcare providers can do with patients’ data. Special insurance rates can be given to those who participate in sharing certain data. Additionally, as blockchain evolves into healthcare, patients can have more confidence that they are anonymously and safely sharing their data.
MHealth is still in its infancy. When investing or looking to enter the mHealth sector, it’s important to understand the policies and goals of the country in which one is operating. When value is added that aligns with the goals set for by policymakers, companies can experience a plethora of opportunities.
Is a Memorandum of Understanding (“MOU”) or a Letter of Intent (“LOI”) Legally Binding in the U.S. and China?
An MOU and an LOI are each fundamentally an “agreement to agree.” Both define the intent of the parties. The main difference between an MOU and an LOI is the number of the signatories. In an MOU, more than two parties may be involved but for an LOI only two parties are involved. MOUs imply that all the parties involved have to be signatories, while an LOI needs only the party which proposes the agreement to be a signatory.
Like an MOU, an LOI is a document which describes an intention to take some action. From the business perspective, it is defined as an agreement between two parties before the agreement is finalized. It is basically a compilation of key points of an agreement between the two parties who intend to conduct a business transaction.
An MOU or an LOI is executed for the purpose of declaring that the various parties involved are negotiating a contract. Each is something that the parties fall back on if the negotiation between the parties is terminated in bad faith. In sum, each is the agreement signed prior to the final agreement.
Most nations today follow one of two major legal traditions: common law or civil law.
In common law, prior judicial decisions (“Precedent”) are used to decide cases at hand.
Under civil law, legislative decisions (codified statutes and codes) rule the land.
The common law tradition emerged in England during the Middle Ages and was applied within British colonies across continents. The civil law tradition developed in continental Europe at the same time and was applied in the colonies of European imperial powers such as Spain and Portugal.
Common Law is now the basis of legal systems in UK and former British colonies including U.S. and Canada.
Civil Law is now the basis of legal systems in Continental Europe, including Eastern Europe and former Soviet Union, China, Japan, most of Africa and Latin America, Louisiana and Quebec. Divided into French (Napoleonic) and German Codes.
Under common law, contracts are not based on statutes and codes. Each contract can be drafted more easily to fit the transaction instead of a statute or code. As a result, U.S. lawyers are involved in extensive legal analysis of an international business transaction and the negotiation process. The fact that there’s a greater risk of litigation in common law countries might have something to do with this extensive involvement by legal counsel.
Under civil law, lawyers are limited by statutes and codes. Contracts need to qualify for one of the many standards set by statutes or codes. The lawyer’s role is merely to demonstrate that the statutory rules should or should not apply. As a result, Chinese lawyers are not generally involved in extensive legal analysis of an international business transaction and the negotiation process but are often only engaged to address contract disputes after the fact.
In the civil-law tradition, contracts are shorter than their common-law counterparts and attempt to address fewer contingencies. That’s presumably because civil-law codes address issues that in common-law systems are routinely covered in contracts.
Generally, under U.S. law (common law), no party is exposed to any liability during the negotiation period; liability arises only after the parties have executed a formal, written contract. Under this rule, if the written document clearly states that it is non-binding, no liability arises.
An MOU or LOI is frequently used by buyers and sellers to memorialize their agreement on the material terms of a transaction such as price, closing date, financing, due diligence and other important deal points. The MOU or LOI can provide a measure of comfort that the parameters of a workable deal are in place and the parties can safely proceed to contract drafting and, possibly, the due diligence stage of the transaction. Details, boilerplate and remaining issues excluded from the MOU or LOI are typically addressed during the contract drafting stage by the parties and their attorneys. Though an MOU or LOI is almost universally intended to be non-binding, it frequently contains binding provisions governing confidentiality and marketing or negotiating exclusivity. The hybrid binding and non-binding nature of an MOU or LOI begs the question: when is a non-binding MOU or LOI binding?
Let’s take a look at LOI case law. A typical LOI contains a broad disclaimer that the parties will not be bound by its terms unless and until a separate binding agreement has been negotiated and executed by the parties. However, despite the presence of broad disclaimers, some courts have held that an LOI can evidence a “meeting of the minds” on the terms of an enforceable contract sufficient to award damages for breach. This is true even when one of the parties possessed the subjective belief that it never intended to be bound by the LOI. The rationale for this conclusion results from the court’s use of an objective test in lieu of a subjective test in determining the existence of a binding contract: the interpretation of an offer or acceptance is not what the party making it thought it meant or intended it to mean, but what a reasonable person in the position of the parties would have thought it meant.
In determining whether an LOI is binding upon the parties, Florida courts will generally consider several factors to determine whether “a meeting of the minds” occurred, including: (1) the type of contract at issue; (2) the number of terms agreed upon relative to all of the terms to be included; (3) the number of details to be ironed out; (4) the relationship between the parties; and (5) the degree of formality attending similar contracts as compared to the LOI. Midtown Realty, Inc. v. Hussain, 712 So. 2d 1249, 1252 (Fla. Dist. Ct. App. 1998). Below are two illustrative cases.
In Med-Star Cent., Inc. v. Psychiatric Hospitals of Hernando Cnty., Inc., 639 So. 2d 636 (Fla. Dist. Ct. App. 1994), Med-Star and Psychiatric Hospitals signed a document titled “Transport Proposal” which (1) identified the parties and listed the liabilities that both parties “shall” have under the agreement; (2) provided that there was an “independent contract relationship between the parties;” (3) provided that the agreement would bind the parties for a minimum of 12 months; and (4) established rates for transportation and a payment schedule for services. Id. Med-Star sued Psychiatric Hospitals alleging it had used another company to transport its patients. Psychiatric Hospitals defended on the basis that the proposal was not an enforceable contract, but only a proposal as the title indicated. The court of appeals reversed the trial court’s holding in favor of Psychiatric Hospitals and held that an issue of fact existed as to whether the proposal created a binding contract. Psychiatric Hospitals’ contention that it did not intend to enter into a binding contract was irrelevant. “The test of the true interpretation of an offer or acceptance is not what the party making it thought it meant or intended it to mean, but what a reasonable person in the position of the parties would have thought it meant.” Id.
In Midtown Realty, Inc. v. Hussain, 712 So. 2d 1249 (Fla. Dist. Ct. App. 1998), the court held that a letter of intent is not considered a binding contract when the parties are continuing to negotiate essential terms of the agreement. In that case, Midtown Realty entered into a listing agreement with Mr. Hussain (“Seller”) for the sale of a gas station. Mr. Fiori (“Purchaser”) signed a two-page LOI that stated it was a “proposal” for the purchase of the gas station and contained: (1) a proposed purchase price; (2) plan for financing; (3) proposed inspection period; (4) proposed closing date, and (5) a statement that if the terms of the LOI were acceptable to the Seller, the Purchaser would present a more detailed and formal Purchase and Sale Agreement (“PSA”). A few weeks after executing the LOI, the Purchaser presented a more detailed and formal PSA. When the parties could not agree on its terms, the Seller withdrew the property from the market and the Purchaser filed suit alleging that the LOI represented a binding agreement. The court disagreed, stating that “[i]t is well established … that a meeting of the minds of the parties on all essential elements is a prerequisite to the existence of an enforceable contract, and where it appears that the parties are continuing to negotiate as to essential terms of an agreement, there can be no meeting of the minds.” Id. The court examined the language of the LOI and the surrounding circumstances in coming to this conclusion and noted that, among other things, the parties repeatedly called the LOI a “proposal,” indicating it was not an offer but rather an initial statement for consideration. Furthermore, the LOI stated that after execution, Purchaser would present to Seller a “more detailed and formal Purchase Agreement.” The court concluded that the Purchaser, like the Seller, believed that until the PSA was executed, there would be no binding contract and the LOI was a non-binding agreement.
Do not characterize the LOI as a binding or final agreement in communications with the other side; insisting that the LOI contains material terms binding on the other side or represents the final agreement can prove costly in subsequent litigation.
Under Chinese law (civil law), the rule in China is exactly the opposite from U.S. law.
The Contract Law of the PRC has formally adopted the German law principle of liability for negligence in contracting (缔约过失责任). Contrary to the classic common law view of the United States, under this principle, parties to a contract owe one another a duty of good faith.
In a case where negotiations have commenced but no contract is concluded, the party that caused the failure to contract can be liable to the other party for damages. The damages in this situation are not contract damages, but rather damages for compensation for loss resulting from the reasonable reliance of the damaged party on the conduct of the other.
any other conduct which violates the principle of good faith.
What is bad faith? The standard example is a U.S. party signing an MOU or LOI with a Chinese party and then negotiating with two parties at the same time without informing the two parties and using the MOU or LOI to keep one party from taking the initiative on a venture. And then sign a deal with the other party, cutting the first party out of the deal. This sort of strategy is not rare in common law countries, particularly in the mining/minerals and other natural resources businesses. Under the common law, the party cut out under this scenario usually has no claim. Under civil law, the party that has been cut out has a claim under the bad faith doctrine.
Very few U.S. (common law) lawyers are even aware of this issue or they say that the Chinese are “wrong.” However, China is a civil law country. It makes no sense to say the Chinese are just wrong. In fact, to the extent that the matter is subject to Chinese law, the Chinese are “right” by definition.
Extreme care must be taken to make clear the terms of negotiation and the commitments being made by the negotiating parties. An abrupt termination of negotiations with no warning and no explanation is very dangerous under this principle. However, even more dangerous is the failure to conclude a deal when the terms have been memorialized in a detailed MOU or LOI.
Direct damages: These include costs incurred in preparing for the business venture, including the costs of drafting (attorney’s fees), research and development, and travel. These also include costs for time spent negotiating and the costs spent in preparing and delivering product samples.
Indirect damages: These include costs arising from abandoning negotiations with a third party for a similar transaction, lost profits from the other needing to pursue the project independently, or from needing to pursue other funding or related business opportunities.
The vast majority of U.S. companies believe that they have no risk by entering into an MOU or LOI with a Chinese company for the following two reasons.
First, the MOU or LOI clearly states that it is not binding and that no liability will arise for either party.
Second, the MOU or LOI clearly states that interpretation of the MOU or LOI is subject to U.S. law.
These arguments do not work. The good faith requirement of Article 42 is not a principle parties need to create by written contract; it is a statutory requirement that applies to all parties who negotiate contracts in China. It is an obligation that exists entirely separate from the agreement of the parties. More important, the requirement of good faith applies to the conduct of the parties, not to what they say in a written document. For this reason, a court will examine the underlying conduct of the parties to determine whether liability arises.
Thus, self-serving statements of a party that no liability will arise will be ignored. Even worse, such statements could be seen as a part of the plan to deceive the Chinese party about the U.S. company’s bad faith intent to cause harm. Reference to U.S. law will also be ignored, because liability arises under compulsory statutory law, not the consensual agreement of the parties.
In sum, there is no way to escape the application of the defect in contracting principle for any party who negotiates in China. This is particularly true when applied to a foreign company that has caused damaged to a Chinese entity. Since the basic principle is the opposite of what most U.S. companies think is the rule, extreme caution is therefore required.
Just about the only time an MOU or LOI should be used is when the parties need to set out specific steps that will be taken to complete due diligence for a specific transaction. In this case, such a document should be treated not as an MOU or LOI, but rather as a due diligence contract. The U.S. party should understand that it will be held liable if it does not perform strictly as required in the contract.
Once negotiations have begun in China, the rule of good faith applies. If no contract is ultimately concluded, then the risk of Article 42 damages is always there. For this reason, if no contract is concluded after negotiations have begun, the foreign side should carefully document the reasons and should provide those reasons in writing to the Chinese side.
There is a major gap between the U.S. and Chinese legal systems. It is not culture, it is the legal system itself.
Both the U.S. and Chinese sides are behaving in a manner completely consistent with their own legal system. But in the end, both sides look to the other as though they are acting in bad faith, when in fact both sides are doing nothing more than trying to reach a deal as best they know how.
Neither side has a bad intent. The Chinese side just puts a lot more stock in the MOU or LOI than the U.S. side. The U.S. side will sign the MOU or LOI thinking it is nothing more than “an agreement to agree” and planning to turn it over to their attorneys to draft the final agreement. U.S. companies should almost never enter into an MOU or LOI containing any detailed deal provisions with a Chinese company. All parties to any international business transaction should retain competent, local legal counsel.
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What’s Next for China’s Diagnostic Market?

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