Yesterday I appeared as a guest speaker in a two hour long class about American contract law and contract negotiations. I was expecting the students to be shy, but I wasn’t prepared for them to be that shy! Their English skill was excellent. They followed my notes on the board and seemed to understand everything I said; but there whenever I asked a question there was very little feedback. I spoke for fifty minutes about cross cultural issues that impact contract negotiation, about basic contract law, about general policies related to contracts and enforcement, and about some general provisions that ought to appear in any contract. After this, it was time for a ten minute break.
At the start of their ten minute break, I divided the students into groups and gave them a hypothetical situation. Half the class were to represent a fictitious American company that sold aluminum baseball bats. To reduce labor costs but maintain quality, the American company wanted to find a Chinese manufacturer to produce high quality baseball bats. The other half were to represent a Chinese manufacturer which was capable of manufacturing the bats and hoping to sell out its factory to capacity. The students were given some basic facts regarding cost information, exchange rate, projected sales, manufacturing capacity, etc.. They were assigned to groups of buyers and sellers and told that when they returned from break, each group would be asked to negotiate a contract with the other party. To my surprise, most of the students in the class promptly went to sleep, waking up again when the bell rang at the end of their ten minute break.
My plan was to have the students negotiate the contracts and come up with some basic terms. Then, we would throw in some hypothetical changes of scenario to illustrate various challenges which might come up in the future and how those contingencies might perhaps have been proactively addressed in the contract (e.g. linking price to an index, what happens if goods fail to meet contract specifications, etc.).
The first obstacle for some was that they didn’t know what a baseball bat was. So I explained that. In the time allotted, the six teams of students were able to negotiate a fair price in the general ballpark that would be required for each company to make a profit on a slim margin. Then, I altered the basic scenario by asking about my hypothetical "problems." These included variance in exchange rate, change in cost of raw materials, issues related to on-time delivery, and defective product quality.
Finally, for good measure and hoping to leave the class with some "food for thought," I threw in a fifth hypothetical situation. I drew the fifth scenario almost exactly from the lead paint and glue substition scenarios so recently in the news. Here is the hypothetical as posed:
"The typical paint used in China to paint consumer aluminum products contains an ingredient that is not legal in the USA. Because of this unique need, Dynamo [purchaser] agrees to supply paint to Hercules [manufacturer] for use in painting the bats. Hercules learns that there is a very high demand for the USA-made paint in China. It can sell the paint on the local market for three times the price. It can substitute another paint that meets all of Dynamo’s specified quality standards and increase profit margins substantially. What should Hercules do?"
First, let me ask, how would you have responded to this question? What factors would you have thought important? For example, what about the issue of the Chinese paint being illegal in the USA? Is that important? What about the issue that the paint was supplied by the American company for this specific use? Would that be relevant to your analysis? If these factors were relevant, these students didn’t mention it.
There were ony two students brave enough to answer the challenge, and this only after I reassured them that they were not being tested and there were no "right" or "wrong" answers. The first student to venture an opinion thought that the manufacturer should substitute the cheaper paint and sell the purchaser-supplied paint on the open market. The student’s reasoning was that the manufacturer was justified in making the substitution because that’s what was required to keep from going bankrupt. A second student disagreed. This student argued that the paint should not be substituted because the hypothetical plainly stated that quality was important to the purchaser.
I note that the students were not familiar with any of the recent news accounts about the manufacturer’s substitutions. Moreover, I was not about to bring it up. It might have been a hot potato topic considered too sensitive for young ears. Some of the facts have been reported in the China Daily, but it is an English language newspaper. I don’t know what has been reported in the Chinese language press. Moreover, many internet sites, including most law sites, are blocked at their university. If they hoped to do research in law related to contracts with western companies and international contract law, it would be impossible to do so given their resources. As I was on my way home, I thought about how incongruous it might be for me to think that these students ought to sample the English language press, when I only read English and western news sources for my own news. (Sometimes, the news as reported by Asian press is jolting when it reveals the bias in what has "not" been reported by the Western press.)
Nevertheless, given my own recent thoughts about the ethics of this case, as I’ve discussed on this blog, I was somewhat awestruck that the answers were so at variance with my own. But not only this, I was struck by the innocence of the responses. There was no desire to break the law or to do harm. It was simply a matter of survival. If this is what your company needs to do in order to survive, then that’s what must be done. Likewise, it’s not necessarily about law or about the reason for the illegality of the paint. Their thoughts didn’t extend anywhere near the bottom line issue, which fundamentally is the question of what duty is owed to the ultimate consumer (which is the basic purpose of the law).* I was also struck that the student who argued against substitutition did so not on the basis of contract rights or money or the fundamental purpose of the paint, but rather based on the relationship with the other party and what may meet their basic need for "quality".
I closed the class without discussing these issues any further. Rather than talk about those things, I closed the class with what I intended to close with. The following in bold: FULL DISCLOSURE. If you want to substitute something, sure. The parties are free to agree to whatever they choose. But they can only substitute after full disclosure. Full disclosure brings so much into the open, shining light in many dark places. That’s all it would take to get the discussion rolling, enabling the two companies to hash out the issues, right? I mean, if you wouldn’t tell your mother, your tax advisor, or your business associate, then you shouldn’t do it, right? At least, that’s what I think.
*Though I did talk about the difference between Asian and Western cultural assumptions regarding extent of perceived duty when I was talking about cultural differences that affect intercultural contract negotiations (and deliberately left my "circle of responsibility" diagram — taken from Hall’s book Beyond Culture — on the board from the very beginning to the very end of class), the students didn’t appear to feel any concept of duty to the consumer — a person outside the bounds of any inner circle of family, friends, or acquaintances — beyond the need to have the the consumer be happy with the product. The rationale for this was that the consumer needed to be happy with the product so that he come back to buy more of it. To pursue this thought a bit further, I gave a shoot-from-the-hip hypothetical in which I asked: suppose your company makes 100 M RMB per year profit on the manufacture of a remedy for the common cold. You also have the ability to make a limited quantity of a drug which would cure cancer, but it would generate only a tiny profit, or perhaps no profit at all. Should you make the anti cancer drug? The answer from the class was "no," because there would be no profit from manufacture of the cancer drug. (Of course, this is the correct answer from a purely capitalist viewpoint as well, and it is the same rationale that underlies the class of drugs commonly known as "orphan drugs" — useful, even life-saving drugs which are unavailable to consumers because there is no profit to justify their manufacture.)