China NNN Agreements: Watching the Sausage Get Made

China NNN AgreementsChina lawyers for NNN Agreements are by far the most common China contract we draft. China NNN Agreements are used to protect your confidential information and to prevent your Chinese counter-party from competing with you or going around you to your customers or vendors. In other words, they make sense for almost every company doing business with China or looking to do business with China. And because they make sense before contract or deal negotiations begin, it is not uncommon for us to draft one only to have our client immediately determine that there is no chance of a deal. And when our client is trying to determine the Chinese company with which it wishes to conduct business from among four or five such companies, we draft four or five NNN Agreements.

Because we do so many China NNN Agreements, we have various systems set up to speed them along, both for our law firm’s benefit and for our client’s benefit. We charge a flat fee for our China NNN Agreements and so the more efficient we are with them, the less time they take us. On the flip side, our clients benefit from getting their completed China NNN Agreement quickly and with clear instructions of what they need to do with it.

When our China lawyers send out final drafts of pretty much any China contract we do so via an email explaining what our client should do next and what to expect. We do this because China contracts tend to be very different from American and European contracts and even what it takes to get a China contract properly signed tends to be very different as well. See China Contracts: Make Them Enforceable Or Don’t Bother. Because our China lawyers have so much experience with how China companies respond to NNN Agreements that put the Chinese company at financial risk for breaching the NNN Agreement, we explain to our NNN clients what they can expect by way of negotiations from the Chinese side.

By way of a quick aside, for more on negotiating with Chinese companies, check out the following:

Anyway, some variation of the below is what we usually send out after we have completed a China NNN Agreement. But to avoid anyone thinking there is one standard NNN Agreement that can work for every situation, I have added “Editor’s Notes” to highlight how what is described below is for one particular situation and your mileage may (and almost certainly will) vary.

With respect to this NNN Agreement, please note the following:

1.  Here is your NNN agreement. This is not a traditional NDA agreement. A traditional NDA agreement relies on the concept of trade secrecy. As a practical matter, the information you disclose will almost never meet the technical legal standard for trade secrecy. This agreement takes a different and more practical approach: if you disclose, the Chinese side cannot use the information in competition with you. This is a very simple approach that is most effective in your situation. EDITOR’S NOTE: For more on why Western-style NDAs do not work for China, check out Why Your NDA is WORSE Than Nothing for China.

2. You can see this NNN agreement does not describe your confidential information in detail. We draft these this way because it is usually better not to describe your confidential information with specificity. The key is that if you expect the information you transfer to the Chinese side to be treated as confidential, you need to identify it as such at the time you disclose it to the Chinese side. EDITOR’S NOTE: Sometimes it does make sense to disclose the confidential information in the NNN Agreement.

3.  We have highlighted the places where the Chinese party’s information should be inserted. Note that it is important that you use the correct Chinese name. EDITOR’S NOTE: We include this sentence when our lawyers have been tasked with drafting a China NNN Agreement that our client can use again and again with multiple Chinese parties. It though is absolutely crucial that you get the correct Chinese name of your Chinese counter-party in your China contracts and that involves — at minimum — checking the name of the Chinese company provided to you against official Chinese corporate records.

4. Note that this is a one-way agreement. In other words, we have drafted this to protect information you give to the Chinese company and to the reverse. Sometimes the Chinese side will claim it too has information it wants to protect. In that situation, it is not a good idea to convert the NNN Agreement we have provided you into a mutual NNN agreement. Instead, the Chinese side should provide its own agreement. In many cases, the agreement the Chinese side provides you will be an unenforceable NDA you can sign.

5.  We drafted this with no set term. In other words, The Chinese side can NEVER use your confidential information; it is a permanent obligation. EDITOR’S NOTE: Occasionally there will be times when it makes good sense to put a time limit on the this obligation.

6.  Related parties/subcontractors. One of the most common ways confidential information is lost in China is when the Chinese recipient discloses that information to a related entity (owned by a relative) or discloses to a subcontractor (owned by a relative or a business associate). For this reason, we are very careful in this area. In principal, at the NNN stage, there is no reason for a Chinese company to disclose your confidential information to subcontractors. However, if this happens, our approach makes the Chinese company that signs the NNN Agreement liable for any violations by a related party or by a subcontractor. EDITOR’S NOTE: Oftentimes, the NNN Agreement must be drafted to allow for certain confidential information to be revealed to certain other parties. In these circumstances, a determination has to be made as to whether to secure NNN Agreements with those other parties as well or to just rely on the blanket liability provision included in the original NNN Agreement.

7.  Dispute resolution is in the Chinese courts. This is the best method for your situation. EDITOR’S NOTE: There is no one best method of dispute resolution across the board and choosing the best method for your particular contract will always vary depending on a whole host of factors. For more on choosing your dispute resolution jurisdiction for your China contracts, check out the following:

8. The agreement provides for contract damages in a specific monetary amount for every act of breach. This provides you with two primary benefits. First, it makes clear to the Chinese party that it will face real and quantifiable consequences if it breaches the NNN agreement. Second, a specific monetary amount provides for a specific minimum level of damages. This sum certain amount then provides a Chinese court with the basis for a pre-judgment seizure of assets. A credible threat of your seizing your China counter-party’s assets greatly increases the likelihood of the Chinese company abiding by your NNN agreement. Please let me know if you wish to adjust this amount but note that this amount needs to be a reasonable estimate of your damages likely to arise from the Chinese side’s violations of the NNN Agreement. For more on the importance of a well-crafted damages provision for your China contracts, check out The Effective China Contract: Liquidated Damages and China Contract Damages: What To Do, What To Do.

Please review and get back to me with any questions.

 

This article was written by Dan Harris and published on China Law Blog. Original Post: https://www.chinalawblog.com/2018/07/china-nnn-agreements-watching-the-sausage-get-made-3.html      

View the original article here.

Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.