Practical Advice on Doing Business in China

Many British companies do business in China.  In particular, the low cost of production in China has made it an attractive location for manufacturing of products which are then exported.

However, it is very common to hear stories of British companies designing innovative new products for manufacture by a supplier in China, only to find some time later that almost identical competing products (usually at lower cost) are entering the market and their source can often be traced back to the same Chinese manufacturer, or to a related company.

The British company will often seek to rely on an NDA (Non-disclosure agreement) with a Chinese manufacturer in such situations.  However, NDAs are primarily intended to prevent the disclosure of confidential information.  They are often ineffective in stopping the sale of counterfeit goods or the misappropriation of technology.  Indeed, NDAs are frequently ineffective in preventing disclosure of confidential information in China!  This is because Chinese companies often do not view disclosure of information to another company in their group as being in breach of a non-disclosure agreement.  Also, it is common for one state-owned enterprise (“SOE”) to view other SOEs as within the same group and also therefore as being legitimate parties to share information with.

When initially negotiating with a prospective Chinese manufacturer, an NNN agreement is far more useful than an NDA.  An “NNN” is a Non-use, Non-disclosure and Non-circumvention agreement.

The non-circumvention and non-use provisions are specifically intended to prevent a Chinese supplier from becoming a source of competing products. The Non-use element means the Chinese company agrees by written contract not to use your idea or product in a way that competes with you, the disclosing party. The key factor is that this obligation arises by way of contract law, not from some abstract property rights arising under intellectual property law. The agreement should be drafted such that there is a specific monetary amount provided for each and every breach of the contract – this acts as a very considerable deterrent.

In order for the NNN to be readily enforceable in China it is essential for it to be written in Chinese and for Chinese language and law to be the governing language/jurisdiction.  Obviously it is important that the document is professionally drafted by an experienced Chinese attorney, and also that a competent English translation is prepared so that both parties understand their respective obligations.  We should be pleased to help connect you with our network of Chinese associates if you think an NNN would be useful for you.

If you have any questions on this issue, please feel free to get in touch with your regular Nash Matthews contact.