China NNN Agreement Explained in Plain English
Tags: Doing Business in China, IPRs, OEM, Outsourcing, SMBs and SMEs
For your reference, please find a sample China NNN Agreement agreement (in bilingual language versions) following this blog.
Small businesses are facing significant challenges in 2023. Many SMEs attempt to curtail expenditures by scrutinizing current suppliers or plan to engage new original equipment manufacturers (OEMs). When an SME engages a new OEM in China, IP protection is definitely on top of its to-do list.
While everyone agrees that IP protection is critical when outsourcing to China, many people overlook the NNN Agreement.
What is an NNN Agreement?
The “NNN” stands for the three main obligations that the agreement imposes on the information-receiving party: non-disclosure, non-use, and non-circumvention.
When outsourcing production overseas, you’ll have to share your IP with the overseas manufacturer or supplier. This may include patents, designs, and know-how, business secrets, and other confidential information. You would take actions to prevent the other party from disclosing trade secrets, using such for their own benefit, or bypassing you altogether. China NNN Agreements are a crucial tool to achieve these goals.
What are the most important clauses in a China NNN Agreement small business owners need to understand?
Let’s take a look at some of the most important clauses in China NNN Agreements. In the end, there is a sample NNN Agreement in both English and Chinese versions for your reference.
How to define “Confidential Information”?
This clause should clearly define what constitutes confidential information. The definition will explain the scope of the protected information, such as trade secrets, technology, know-how, and designs. It is important to ensure that the scope of the confidential information is broad enough to protect your business interests. In the meantime, it shouldn’t be too broad that it becomes difficult for any reasonable information recipient to possibly agree. It often requires case-by-case analysis instead of a universally applicable rule.
Non-disclosure obligation explained
This clause should outline the receiving party’s obligation to keep the confidential information secret. It also requires the recipient not to disclose it to any third party without your written consent. The non-disclosure obligation even applies to an affiliate company, its shareholder, or the employees of the recipient, except for the benefit of the business cooperation. Such obligation is very important because sometimes the controlling shareholder of a supplier may be your competitor. Of course, the identity of its controlling shareholder should have been covered in your due diligence.
Non-use obligation explained
The recipient should not use confidential information for its own benefit, or any other purpose. As a small business, you cannot afford the risk that the Chinese party used your design or know-how to produce similar products without your consent. However, this happens more than most business owners would believe due to the lack of any contractual restrictions.
Non-circumvention obligation explained
Non-circumvention clause serves a similar goal as the non-use clause. This clause prohibits the manufacturer or supplier from using your business secrets for their own benefit. It usually involves their secretly manufacturing similar products, bypassing you to deal with your customers or distributors, and becoming your competitor in their home market. Thus, these restrictions are especially important for a small business that relies on its design for its competitive edge.
How is the agreement terminated?
Any agreement needs to have a term and also needs to specify how parties can terminate the agreement. You need to be comfortable with the conditions for termination, which are often part of the negotiation. You also want to ensure that even if the project finishes, certain obligations remain in effect for as long as the confidential information is not in the public domain.
How is a dispute resolved?
This clause specifies the law that governs the NNN Agreement and the jurisdiction where the parties resolve any future disputes. One of our previous blogs has discussed the governing law and dispute resolution clauses in detail.
English or Chinese language prevails?
When dealing with China, it is often the case to sign contracts In both English and Chinese versions. When you have two language versions, they may differ due to variations in language, translation, or interpretation. To avoid disputes, the parties need to agree on which version will prevail in the event of discrepancies. Please refer to one of our previous blogs for a discussion on how to avoid contract disputes caused by language issues.
Why do you need a customized NNN Agreement drafted by a China-Qualified Lawyer instead of a template?
Although many business owners prefer using templates for various reasons, a customized China NNN agreement drafted by a China-qualified experienced lawyer can much better safeguard your interests and help you avoid risks.
Addressing your unique needs
A customized NNN agreement can better reflect your specific needs and the industry your business operates in. A template would not adequately address your unique circumstances and concerns. As a result, it would lead to potential gaps, ambiguities, or oversights. By tailoring the agreement to the specific circumstances of the business, a customized NNN agreement can better protect the business’s interests, and establish the foundation for a sustainable outsourcing relationship.
Ensuring enforceability in Chinese courts
A customized NNN agreement drafted by an English-speaking Chinese lawyer can help North American small businesses comply with Chinese laws and regulations. Legal issues and regulations differ from country to country. Failure to comply with local regulations would result in barriers to enforcement. A China-qualified experienced lawyer can ensure the agreement is enforceable in a Chinese court in the future. Enforceability is critical for any contract, and you want to ensure the contract you sign is valid according to local law. If needed, the lawyer can also advise on the best enforcement strategies and mechanisms, such as injunctive relief and damages.
Building a balanced and sustainable relationship
A customized NNN agreement can provide a better balance of interests between the parties. A template is usually one-sided. It is not an easy task for most people to revise the template to meet your situation. An experienced lawyer usually understands the market practice and would not be over-aggressive. She can help the parties negotiate and draft a more balanced agreement that takes into account the interests and concerns of both sides.
Ensuring consistency of bilingual versions
It is crucial to ensure that the intended meaning and obligations are consistent across both English and Chinese versions. Discrepancies, ambiguities, or omissions in the agreement may lead to future misunderstandings, disputes, or unenforceability. A lawyer who is familiar with both English and Chinese languages and international legal practice can help avoid such situations.
Overall, a well-drafted tailor-made China NNN Agreement is crucial for small businesses that outsource production to China. Trustiics offers such customized drafting services at a fixed price. In 5 business days, you will get a customized bilingual China NNN Agreement drafted by an experienced English-speaking lawyer. During the process of the service, you can also chat with this lawyer through the secured platform of Trustiics.
Trustiics is a Canada-based legal service online marketplace built on AWS in North America. It is listed as one of the qualified service providers by the Canadian Trade Commissioner Service.
Please find below a sample bilingual China NNN Agreement for your reference. Create a free account on Trustiics today. As a member, you can book free Zoom calls at any time directly on your Trustiics dashboard.