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What you need to know before doing business in China

Malcolm Campbell, ||

China is universally regarded as an exciting growth opportunity for Australian companies of all sizes. The opportunity includes selling your products and services into one of the largest economies in the world or taking advantage of the production capabilities available to launch your product into many different markets globally.

Before you start to do business in China there are a number of considerations to be taken into account, with the most important being protecting your company’s confidential information.

Can a Non-Disclosure Agreement (NDA) be used in China?

A non-disclosure agreement (NDA) is a legal contract used to protect the disclosure of confidential and sensitive commercial information between parties in a commercial context. These agreements ensure that the receiving party of the confidential information does not disclose such information to a third party.

Australian NDAs hold little to no value when dealing with Chinese manufacturers and suppliers. This is due to the fact that NDAs are not recognised in China as they are not written in mandarin, fail to reflect Chinese law as the governing law or specify Chinese jurisdiction over the agreement. Australian companies with dealings in China often find that in failing to successfully protect confidential information through the appropriate agreements, Chinese companies may simply replicate products or use the confidential information for their own benefit competing directly against your business.

What agreements are needed when dealing with Chinese Manufacturers and Suppliers?

Chinese NNN Agreements

If your business is considering dealing in China, you will need to draft an appropriate “NNN Agreement” to best protect your companies’ interests. The NNN abbreviation is broken down into three categories forming the agreement in its totality being; Non-Use, Non-Disclosure and Non-Circumvention.

Non-Use:

The non-use element of a Chinese NNN Agreement means that the Chinese counterparty agrees not to use your product or idea in a way that directly or indirectly interferes or competes with you.

Non-Disclosure:

The non-disclosure element of the Chinese NNN Agreement is comparable to Australian NDAs as its objective is to prohibit disclosure of confidential information to the public or third parties.  It is often the case that Chinese companies will not directly breach the non-use prohibition but rather disclose your concept or product to a third party the company works with. Consequently, it is important that your NNN Agreement makes clear that the disclosure is specifically prohibited within the group, third parties or the public.

Non-Circumvention:

The non-circumvention element of the Agreement is a safeguard which prevents Chinese companies from selling products directly to your customers for a lower price.

In addition to the above, when drafting your NNN agreement, the following aspects should be taken into consideration:

  • To be enforceable in China, your NNN agreement should be written in Mandarin, reflect Chinese law as the governing law and state that exclusive jurisdiction is in a Chinese Court. This is due to the fact that most foreign judgements remain unenforceable in China, rendering the Agreement useless.
  • Your NNN agreement should stipulate the appropriate dispute resolution channels that are most successful in China, that being arbitration. Foreign arbitration decisions are ordinarily less enforceable in China. Therefore, the dispute resolution clause contained within the agreement should specify that any dispute resolution methods should be resolved directly within Chinese jurisdiction.
  • Your NNN agreement should contain suitable damages provisions which ensures that the Chinese counterpart acknowledges the consequences of breaching the NNN and provides for a specific level of damages.

Chinese Manufacturing Agreements

When doing business in China, it is vital that your manufacturing agreement protects your product or design from being appropriated by Chinese suppliers or manufacturers or mass reproduction without authorisation. The Agreement must licence your intellectual property for the pure purpose of manufacturing the product during a specific term of the agreement. It is important to note a purchase order does not constitute a manufacturing agreement.

Applying for Intellectual Property Rights

Used in conjunction with your companies NNN and manufacturing agreement, it is important to register any intellectual property rights in both Australia and China.

Whether you’re considering China as a marketplace or resource facility, protection of your confidential information is paramount through use of an appropriate agreement that has been drafted to ensure maximum enforceability. If you require advice on expanding your Company into the Chinese market or harnessing Chinese production capabilities, please do not hesitate to reach out to a member of Coleman Grieg’s Commercial Advice Team, who would be more than happy to assist you.

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