MCC dispute casts shadow

AN $80 million legal battle between a Perth miner and one of China’s biggest state-owned companies has again cast the spotlight on the challenges of tapping Chinese capital.

Cape Lambert Resources last week said it was taking China Metallurgical Construction Corp (MCC) to court to claim $80 million still owed on the $400 million purchase of the Cape Lambert magnetite project in the Pilbara two years ago. Cape Lambert says the payment was due last month.

It is the second time the project has hit such difficulties, following Delong Steel’s failure to live up to a $230 million acquisition agreement signed in 2006.

The case is one of a several high-profile disputes involving Chinese partners in recent years, including Shougang Steel’s withdrawal last year from a project funding deal for Australasian Resources’ proposed $2.7 billion Balmoral South magnetite venture.

Similarly, Mt Gibson Iron successfully pursued three Chinese customers for reneging on supply contracts in late 2008. Ironically, the matter would have bankrupted Mt Gibson but for an emergency placement to Chinese investors.

In another high-profile case, China National Offshore Oil Co scrapped a $30 billion gas supply deal with the Gorgon gas project in 2006 after it could not get a price discount matching that given by the North West Shelf when it struck Australia’s first Chinese gas supply deal in 2002.

And in 2005, Fortescue Metals Group fell out with three Chinese groups it claimed had signed “binding contracts” to fund and build its Pilbara iron ore operations.

Norton Rose partner Ian McCubbin, a senior legal adviser on Chinese deals for two decades, said contractual disputes were no more likely with Chinese companies than with local firms.

Instead, he said disputes usually arose because of honest differences of opinion between the parties that were often amplified by the significant cultural differences.

Obviously, there was a “greater capacity for misunderstandings” when dealing with a non-English speaking partner from a country with a totally different legal system.

In particular, he said Australian firms needed to understand the different perception of contracts in China and the view that any contractual dispute could be resolved by negotiation.

“What contracts mean to the Chinese, they are a milestone along the road of the relationship between the parties and are a statement of the parties’ intentions at the time,” Mr McCubbin said from Beijing.

“Historically, Chinese companies will rarely get involved in litigation because they believe if something is going wrong they can sit down and negotiate. The role that the written contract plays is as a starting point for those negotiations.”

It was also important to recognise that the Chinese parties’ were themselves were subject to government policy and approvals requirements, which could change.

Mr McCubbin said it was therefore vital to get professional advice that “reflects the China-side reality” and to devote considerably more time to pre-deal homework.

That included providing Chinese language versions of all documents and minutes to reduce the potential for misunderstanding.

“If you want the benefits that come from dealing with a Chinese company … the price is that you have to do more homework and work more closely with them,” he said.

Allens Arthur Robinson partner Seamus Cornelius agreed such considerations, which meant being flexible, were pivotal.

“You can do pretty much anything you want in China as long as you are flexible … and are prepared for fluctuations,” he said from Shanghai.

Mr Cornelius said the need for such flexibility was a reason that Chinese contracts deliberately favoured “vagueness over specificity”.

Atlas Iron managing director David Flanagan the perceived risks of Chinese contracts was “often overplayed” and was sometimes just a cover for the real reasons behind a dispute.

But negotiation was an integral part of Chinese culture, and it was not unusual for a Chinese counterparty to try to continue negotiations after an agreement had been finalised, he said.