China NNN Agreements: Watching the Sausage Get Made

China lawyers for NNN Agreements

China 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 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 contract lawyers have so much experience with how China companies respond to NNN Agreements, 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. This NNN agreement does not describe your confidential information in detail. We usually do this because it is usually better not to describe your confidential information with specificity. 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.

3. We have highlighted the places where the Chinese party’s information should be inserted. Note that it is important 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 is absolutely crucial you use the correct Chinese name of your Chinese counter-party and that involves — at minimum — checking the name of the Chinese company provided to you against official Chinese corporate records.

4. This is a one-way agreement.We drafted this to protect information you give to the Chinese company, not 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 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: Sometimes it makes 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 to a subcontractor (owned by a relative or a business associate). There is seldom any reason for a Chinese company to disclose your confidential information to subcontractors at the NNN stage. 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: There are times when we must. draft the NNN Agreement 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 crafting dispute resolution provisions for your China contracts, check out the following:

8. The agreement provides for contract damages in a specific monetary amount for every breach. We do this to make clear to the Chinese party that it will face real and quantifiable consequences if it breaches the NNN agreement and because setting out a specific monetary amount provides for a minimum level of damages. This sum certain amount also provides a Chinese court with the basis for a pre-judgment seizure of the Chinese company’s 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 China Contracts that Work: Liquidated Damages and China Contract Damages: What To Do, What To Do.

9. If the Chinese side accepts the terms of this agreement, you should first sign and date the agreement but then not do anything more (such as sending your confidential information) until you get back a fully executed agreement. At minimum, the final executed agreement should bear what appears to be the Chinese side’s company seal.

Please review and get back to me with any questions.

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