By now, it’s too late for Golden Dynasty to regain its project or at least recover some of the investments made. But nonetheless, there are practical lessons that could save others a tonne of grief down the road. Given the power imbalance in their relationship – a small, foreign junior versus a powerful state-owned company – what are some of the things a little player can do to tilt the playing field in its favour?

Lesson one: Have a meaningful dispute resolution clause in the agreement. In the case of Golden Dynasty, its agreement has an arbitration clause that specifies Beijing as the location for the legal proceeding. That’s a big mistake right there. If the arbitration were to take place in China, Golden Dynasty would still be at a disadvantage in having to deal with unfamiliar laws and processes. In the unlikely event that it wins, it would still have to face additional rounds of appeals.

If from the very beginning, the company managed to have an international arbitration clause inserted into the joint venture agreement, its chances of winning a judgement against its much bigger partner would increase significantly.

Hong Kong would be a logical jurisdiction for arbitration. It is no accident that Hong Kong is a leading global financial centre.  It has become a major commercial hub because the rule of law is strong there.  Businesses can count on a well-developed legal system to resolve disputes. There’s a traditional of judicial independence in Hong Kong. The same cannot be said of the rest of China.

As mentioned in the article in the Northern Miner, even the Chinese law firm representing Golden Dynasty in Beijing was reticent in taking on a state-owned enterprise. The law firm did not wish to use its own letterhead when sending a letter to Xinjiang Nonferrous.

Granted, Xinjiang Nonferrous would probably be very reluctant to agree to an international arbitration clause specifying Hong Kong as the venue for dispute resolution in the joint venture agreement.  This may or may not have been the deal-breaker. But if Golden Dynasty had insisted on this, it probably would have got it.

The best time to have such a clause in the agreement is at the beginning when relations between the parties are still amicable, not later on when the going gets rough.

The end result: The odds of winning a judgement against its deceitful partner would have increased significantly.  Even if it’s difficult to enforce the judgement against a player such as Xinjiang Nonferrous in China, the award would still be outstanding and one day, the delinquent party will have to face the music.

Lesson two: Have a strong local representative. As suggested by an expert quoted in the article, Golden Dynasty should have engaged a foreign law firm that in turn would help it find a former government official or someone with strong government connections to represent it in China.

This is good advice, but may not be appropriate in this situation for the simple reason that Xinjiang is a backwater province so far from the dynamic eastern region of China. It would not be so simple and easy to find a qualified Chinese national who can also speak and read English and who is willing to act as country manager for Golden Dynasty in a place that is climatically, if not culturally, challenging.

Lesson three. Know your odds. The exploration business is risky enough. Exploring in a jurisdiction that has virtually no tradition of respect for the law makes the venture even more risky.

It’s not an exaggeration to say China has a lot of work to do to institute the rule of law which is important to instill business confidence. In numerous ways, sparsely-inhabited Xinjiang Province, China’s westernmost province is likely the most Wild West place of all when it comes to the rule of law.

Given the vast distance between Beijing and the provincial capital of Xinjiang, even the best country manager likely would not be able to represent Golden Dynasty’s interests adequately and thwart the theft of the property by state officials.

Conclusion: The story of Golden Dynasty in Xinjiang is one of huge ambition and misplaced optimism in the goodwill and good conduct on the part of local officials.  11 years and $12 million later, the Canadians are much wiser, if not disillusioned. Meanwhile, corrupt Xinjiang  officials are rubbing their hands with glee.

Does the story have to end this way? Not if management were vigilant in watching out for red flags in the initial stage and taken a strong stance in insisting on arbitration in a neutral jurisdiction.