Various Responses Elicited by Binding NNN Contract in Chinese Context

In the last post, enforcing NNN agreements was discussed in the Chinese context. The issue raised was that the contracts having some support so that they can be beneficial to the party doing business with Chinese manufacturers. Now, properly formulating an NNN contract can reduce the chances of infringement by Chinese factories and also any kind of litigation subsequently. The reasons for the same will be discussed in the following paragraphs.

The basic reason is that the Chinese manufacturing companies are scared of their courts. They are not afraid of an order from the court stating them to behave properly. However, they are afraid of a verdict stating that a certain sum of money must be paid to the counter party or the court will seize assets and auction them for compensation. What they most afraid of is a prejudgment seizure during which the court will seize the property and retain it until the court case is settled. They are very much aware that a properly drafted NNN agreement cantered around China factory practices is powerful enough to move the court and get an order to freeze the factories’ assets. This is the last thing the factories want.

Kinds of responses against NNN Contracts

Chinese factories respond in the following 3 manners against a well drafted contract:

  • Refusing to SignThere are companies which refuse to sign any kind of agreement; they had planned to steal the trade secret right from the beginning. In fact, examples state that some companies are so aggressive and blatant about their intention that they refuse and say that they wanted to appropriate the trade secret. If they cannot do so, then they won’t continue to talk. However, this can be a blessing in disguise because accepting the intention right at the beginning can save business parties from committing a grave mistake. However, this kind of situation is rare but when happens benefits the business organization or the client.

  • Negotiation ProcessSome Chinese manufacturers will start a serious discussion on particular matters that they will not accept as part of the NNN contract. These companies take the agreement seriously and thus want certain provisions to be excluded and incorporate elements reflecting their own interest. In such cases, usually the concerns of the companies are mostly false, but in certain cases they reveal that they have a similar technology which they do not want compromised. This could be a positive sign because it will imply that the company is unreasonable and difficult to do business with. In case they already have an existing technology, the discussion will be fruitful as both the parties will be trying to protect individual technologies. The chances of establishing a proper contact is possible under such a circumstance. The foreign companies mostly used to think that the Chinese do not have a technology of their own in place, but that is not true anymore. Even they have their technologies and the foreign companies need to enter into a contract that is beneficial to both.

  • Serious ContractIn this scenario, the Chinese factory will treat the NNN contract very seriously and approach the 3 obligations with care. This does not mean that they will discard years of bad practice, but in most cases litigation for violation is not required. It is resorting to a threat of litigation against violation which will make them more careful and not step onto your foot while doing business. This is particularly helpful during circumvention.

These points explain the general approaches taken by Chinese firms towards the NNN agreements. With foreign companies, it is more like using the agreement as a threat to litigate in case of any violation. However, the contract should be able to convince them regarding their tricky situation. They are particularly afraid of a monetary litigation. Foreign companies can use it to their benefit. Remember that they are expert at seeing through bluffs, so make the contract literally binding with lot of support and corroborating facts so that they are compelled to take it seriously.

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Vital Elements in NNN Agreement- Turning Chinese Law Loopholes into Practical Solutions

As discussed in the last post that there are 3 basic elements to a proper NNN contract, now we are going to take it forward by discussing few things about making the contract enforceable in the Chinese context. Chinese law does not have any provision to enforce IP contract unlike common law. A common lawyer has 2 major issues to be concerned with- 1) a rule which does not favor liquidated damage provisions, 2) the law distinction that facilitates injunctive assistance in case of unavailability of a law.

Usually under common law, any kind of infringement of IP rights is remedied by injunctive relief as lawyers maintain that it is difficult to remedy it in terms of money. This is an effective system once the infringement has been proven in court under common law. Common law lawyers in fact think that this would work in the Chinese context as well; but that is a mistake. In fact, all that is not allowed under common law is actually allowed under Chinese law. The Chinese law does not follow common law rules. In fact, liquidated damages are favored under Chinese law. Moreover, using contract damages is properly established under Chinese law and legalized by statute.

Chinese law does not follow law equity distinction either. The judges of Chinese courts are not confined by common law distinctions. Hence, there is actually no need to justify injunctive relief in China. Common law lawyers should quit wasting time over this. If you thought that this is a relief, then you must understand the powers of Chinese judges in a little more detail. They have unlimited coercive power to seize assets for compensating any kind of monetary damage. It is vital for anyone doing business in China to know about the power of judges. To balance this unlimited power, the judges there are not allowed to enforce any party to take any kind of action by order. The irony therefore is that, they have the power to issue injunctive orders but do not have any authority to implement them. Keeping this in mind, Chinese judges seek to convert any decision into a monetary sum that can be paid against damages.

Since, the Chinese legal system works in a way that is contrary to the other parts of the world. Common law lawyers have to think out of the box to prepare contracts that are enforceable in the relevant context. The lawyer must keep one thing in mind, not to leave scope for any injunctive relief in the Chinese context. They understand a specific monetary value in terms of compensation for any kind of infringement or violation of NNN agreement. This extends to each and every act of breach. Avoiding injunctive relief is the goal and including monetary relief is the aim.

This is the most substantial part of an NNN contract prepared by any lawyer for China. Including a specific sum of money as penalty is enforceable by Chinese court through order of seizure of defendant’s assets. Otherwise you will waste time trying to include injunctive relief. Punitive damages and extensive consequential damages are not allowed by the Chinese legal system. Hence, it is extremely important to include an amount that makes up for the loss to seek as penalty by the other party at the court. By following this approach, the prosecuting party can still continue to do business with the Chinese manufacturer only by incorporating a particular amount of money as compensation. This makes it easy for the court to make a decision and enforce it helping the party that has sued the company. In this way you will not require ending the contract with the company also.

This is a practical solution to the problem with regard to Chinese law which follows certain rules that fully contrast with other common laws around the world. The Chinese law in theory is difficult but in practicality it can come into play with its loopholes being tapped into by the lawyer. There is no need to cry over the difficulties; instead use them to your best interest with the help of an expert Chinese business lawyer.

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