Tuesday, December 1, 2009

Verbal Agreement vs Contract

Russian market analyst Eldar Murtazin wrote in his blog a history of a conflict between Sony Ericsson and Euroset, the largest handset retail chain in Russia. According to Murtazin, one year ago, Sony Ericsson pushed their handsets to Euroset really hard, being very happy to supply to Euroset with as many phones as possible at any conditions. Euroset set a very important condition: to pay to SE no sooner than when the handsets are sold. It was a verbal arrangement, that was always a preferred way of doing business for Euroset. The SE guys believed that verbal arrangements meant nothing, only printed contracts were important. SE sent some handsets to Euroset, but sales were pretty weak. After a few months, SE started asking for money for their handsets from Euroset, but Euroset reminded SE about the agreement and refused to pay. That is how the conflict began. During next few months, SE and Euroset were blaming each other for unfair practices, that was not good for anyone — the vendor, retailer and consumers. Recently, SE announced that the company has no claims against Euroset and agreed to renew supplies to the retailer in 2010 (I should say, SE market share decreased dramatically and takes only 3% in Russia).

Putting aside all the boring business issues, I see clearly cross-cultural nature of this conflict. Sony Ericsson, being a western company, pays attention to papers, contracts and fine print, while Russian business tends to trust verbal agreements considering papers nothing but a mere formality. In Russia’s business (and criminal) culture, a person is absolutely responsible for his words, it is a virtue to be responsible for your words. Papers are treated with less (or no) respect. Both sides of the conflict developed their expectations regarding the deal on the base of their own business culture and experience. No surprise that neither Euroset’s nor SE’s expectations were met.