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CHinese NDA Important Clauses
CHinese NDA Important Clauses
If you’re like many other American businesses that sell physical products, whether
online or in a brick and mortar store, you may have considered getting your
products manufactured in China because of the exceptional cost savings.
While there are lots of advantages about getting your products manufactured in
China, there are also pits for the unwary that could cost you and your business
dearly.
1 Non-disclosures in China
What entrepreneurs need to realize is that the Chinese legal system is its own
beast and you cannot assume that certain standard procedures that apply in
Western law will apply equally in China.
Non-disclosures in China
One such example is the use of non-disclosure agreements (NDAs) in China, also
known as confidentiality agreements. NDAs are a common legal tool that
business owners, CEOs and entrepreneurs use to protect their proprietary and
confidential information.
Although these agreements can be highly effective when created and enforced
correctly, it is almost pointless to have a Western-style NDA in China. Why is
this?
One of the biggest problems that business owners face when getting quotes or
outsourcing their manufacturing to China is the risk of their intellectual property
and idea being stolen by their Chinese manufacturer.
Help? Just ask.
Not only is this a genuine threat, but aggressive Chinese manufacturers have
been known to compete with their clients by approaching the client’s customers
directly and offering the same product but at a lower price. Even if the Chinese
factory does not poach your current customers, they may decide to sell your
products in a market that you’re intending to expand to, thus halting or limiting
the growth of your business.
A Western-style NDA normally requires that the party that is receiving confidential
information (“Receiving Party”) to maintain confidentiality of the secrets that they
receive.
The real risk is not exposure of your confidential information to the public, but
the appropriation and misuse of your confidential information to create similar
products to compete against you.
On top of this, most Americans entering the Chinese market for the first time
don’t understand how the Chinese market works, much less how its legal system
is different from a Western-style legal system.
Clause #1 – Duration
Just like a NDA agreement, a NNN agreement should expressly state how long the
Receiving Party is going to be bound by the agreement.
You should define what would be considered confidential information for you.
Just like a NDA agreement, confidential information canJust
Help? cover a whole range of
ask.
different types of information including intellectual property, concepts, ideas,
know-hows, client lists, designs and technical procedures.
Try as much as you can to list down all documents that you would consider
confidential as this creates awareness.
Clause #4 – Non-Disclosure
You may also wish to add that the parties to the agreement are not allowed to
share the information with other employees, sister companies, subcontractors or
third parties unnecessarily.
To prevent this, you may wish to make the Chinese manufacturer responsible for
the behaviour of any of their agents as well as liable for any “leaks” that may
occur to unauthorized third parties.
Clause #5 – Non-Competition
You can include a non-competition clause expressly stating that the Chinese
manufacturer is barred from using any of the confidential information that you
have provided or misuse any advantages that they may have acquired in the
course of your manufacturing relationship to compete with you.
Here’s an example:
Clause #7 – Non-Solicitation
Similar to the non-circumvention clause but this time in relation to your staff, the
non-solicitation clause prevents the Chinese manufacturer from poaching any of
your employees.
This part of the agreement tends to be another area that too many American
companies have already slipped up in. Most American companies don’t know or
understand Chinese law and due to their fear, will normally opt for their local
Help? Just ask.
American state law to apply to the agreement with jurisdiction being in a court
that is also based in America.
A major problem with insisting on using American law and jurisdiction is that in
the event of a breach, even if you were to prevail in the American court, you won’t
be able to enforce your judgement in China.
This is because there is no treaty between China and the US regarding the
enforcement of judgements. Even if a Chinese court were to accept consideration
of the merits of the case before it, it would do it from its own view according to
Chinese law and not to American law.
If you intend to do business with a Chinese manufacturer, you should get the
NNN’s jurisdiction and governing law to be based in China so that you have legal
recourse in China itself against the manufacturer in the event of a breach.
Another huge difference between a Western-style NDA and a NNN is that in most
NDAs, injunctive relief is normally the preferred legal remedy.
However, if your NNN’s jurisdiction and/or governing law was not based in China,
you would be wasting valuable time trying to get your judgement enforced in
China against the Chinese manufacturer.
In the meantime while you’re struggling to get a Chinese court to enforce your
American judgement, the Chinese manufacturer may put you out of business by
poaching all of your customers.
Therefore, injunctive relief is normally not the best remedy in China but liquidated
damages are. Your NNN agreement should state that the liquidated damages are
an agreed monetary fine for any breach of the agreement.
Help? Just ask.
When deciding what amount to put in your NNN agreement, bear in mind that
these damages are normally more of a realistic assessment of what damages you
would incur if the Chinese manufacturer did indeed breach the NNN agreement,
rather than a real penalty.
As you can see, there are many traps for the novice American company wanting
to do business with a Chinese manufacturer for the first time.
Bear in mind that once you have a suitable NNN agreement in place and you’re
able to successfully find a Chinese manufacturer that you feel comfortable
working with, you’ll need to move next to a Manufacturing Agreement or OEM
(Original Equipment Manufacturer) Agreement for the actual production itself
which will have more detailed provisions in relation to the manufacturing process
itself.
Other Agreements
Help? Just ask.
This article is not a substitute for professional legal advice. This article does not create an attorney-client
relationship, nor is it a solicitation to offer legal advice.
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