It started out as a lucrative US$17 million deal with a business partner based in Beijing. But after missed payments and two terminated contracts, Ballard Power Systems (TSX:BLD) was left with a “costly and embarrassing toast-up” as it was trying to gain a foothold in the world’s second-fastest-growing market.
The hydrogen fuel cell maker announced in January it was cutting ties with Azure Hydrogen, citing breach of contract after Ballard spent nearly two years providing fuel cell modules for hydrogen buses and later licensing its telecom backup power system. Services were being provided, but money eventually stopped coming in, according to Ballard.
The one saving grace was that no intellectual property (IP) was transferred to Azure before the contracts were terminated, said Mike Burke, who served as the U.S. delegate to the 2003 legal exchange of the U.S.-China Joint Commission on Commerce and Trade.
The Washington, D.C.-based lawyer at Arnall Golden Gregory LLP said he’s seen other companies, eager to seize upon the Chinese market, end up losing millions and forfeiting IP when due diligence isn’t performed.
But the deal-gone-sideways still cost Ballard US$7.5 million and made it miss its fourth-quarter revenue expectations.
“There’s an old saying – and I think there is some truth to that – about China: the negotiations start once the contract is signed,” Burke said, adding Ballard might have been reluctant to police the contract early on because China represents a large market that it wanted to remain active in.
CEO Randy MacEwen, who joined Ballard in October after the deal with Azure was already signed, admitted to investors in a February conference call “This was obviously a costly and embarrassing toast-up for us.”
He said Ballard wouldn’t curb its activity in China, but the company will pursue only “strong, well-capitalized local partners.”
Doug Purdie, a partner in the assurance practice at PwC’s Vancouver office, said a better understanding of China’s business culture, as well as more diligence when researching companies, can prevent many of these fiascos.
“The Chinese marketplace cannot be generalized. Every province, every city, every region has slightly different nuances and business practices and laws, and they change regularly,” said Purdie, who has spent the past two decades dealing with businesses in China.
“You really do have to have, I’d say, people on the ground that have your interests and your interests only on their mind first and foremost.”
Burke noted that there is less transparency in China compared with North America when it comes to researching the background of companies. Furthermore, the country’s legal system might make a foreign corporation reluctant to litigate.
Eng Wee Chong, an associate director at Duane Morris & Selvam LLP’s Shanghai office, said there are litigation options in China, but his international firm often works with local law firms on transactions involving foreign direct investment to ensure it doesn’t come to that.
“If necessary, we may also advise our clients to engage trusted investigative consultancy [whom we work with] to conduct background research or investigations on the relevant individuals or entities,” he said in an email to Business in Vancouver.
Purdie said the concept of the rule of law is becoming more westernized in China, but progress has been slow.
“Traditionally in the culture there, you don’t litigate,” he said. “You’re just setting yourself up for further challenges if you want to count on that as your key remedy mechanism. Historically, it’s been an arbitration-type environment.”
Ballard said it was still considering “legal remedies” to resolve the dispute with Azure. •
