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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