Globalization has enhanced international trade and many American companies are expanding into China for various business arrangements and joint ventures. This article contains tips on contract formation and enforcement when doing business with Chinese companies. An overview of three major topics are provided: i) contracting entity, ii) protection of confidential information, and iii) dispute resolution.
Contracting Entity – Are you contracting with the right party?
The differences between American and Chinese culture are a known challenge that impedes contract negotiation. After the business deal is secured, the next challenge for an American company is ensuring it is contracting with the party who is ultimately responsible for carrying out the duties and obligations under the business arrangement. The difficulty is amplified due to the language barrier and unfamiliarity with the Chinese legal system. Some tips when researching into the proper contracting entity include: a) distinguishing the contracting manufacturer from its holding company; b) in a multinational parent-subsidiary structure, ensuring both the parent company and subsidiary are named in the contract according to division of obligations; and c) most Chinese companies do not have an official English name, so ensuring you have the correct Chinese legal name of the business on the contract is important.
Protection of Confidential Information – What is a NNN agreement?
A traditional U.S. Non-Disclosure Agreement (NDA) is insufficient to protect your confidential information, such as intellectual property, copyright and trade secrets. It is important to use a “NNN” agreement before information exchange. “NNN” stands for non-use, non-disclosure, and non-circumvention. A properly drafted NNN agreement would deter the receiving Chinese party from using your idea, disclosing your idea to third parties, and directly doing business with your clients.
Dispute Resolution – The Reality of Contract Enforcement
A contract, no matter how well written, is useless if it is not enforceable. When contracting with a Chinese company, it is important to understand how the Chinese legal system works and plan for an effective method of dispute resolution. First, U.S. court system should not be utilized as a venue for dispute resolution because China does not enforce judgments rendered by U.S. courts.
Second, where there is involvement of intellectual property, it is important to choose the Chinese court system rather than international arbitration because only a Chinese court can issue and enforce an injunctive order. Third, it is essential to execute your contract in both English and Chinese, or solely in Chinese. This is because although your English contract is legally enforceable, a Chinese court will still have to translate it into Chinese to read it. Your contract is therefore only as legally enforceable as the accuracy of the employed translator.
Above are a few tips every American company should keep in mind when contracting with Chinese companies. If you would like additional tips customized for your international business deal, please contact Attorney Lois Li for a free consultation.