Many Chinese factories produce with competitive costs and good quality for their customers. That is why China is a good source when a business person conducts business.
But, you should ensure the safety of confidential information of your company.
You are not liable by any foreign law or foreign judgments in China. Instead, the Chinese law and the Chinese court protect your right.
So, you should prepare a confidentiality agreement in China. This contract protects you from your China supplier company. In this case, the NNN agreement is the most helpful contract.
Let’s discover more about this manufacturing contract.
What is a NNN agreement?
The Chinese NNN agreement is like the Western NDA.
This manufacturing contract protects your confidential information from a Chinese factory. Otherwise, most Chinese companies will create more competition for you.
The three Ns means:
– Non-Disclosure: To not tell anyone
– Non-Use: To not use the information
– Non-Circumvention: To not go around your back
This agreement is enforceable by the Chinese court. The Chinese factory that breaches this agreement will face jurisdiction by the Chinese court.
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Three basic rules of NNN agreement
Let’s see the three basic rules of the NNN agreement:
1. Avoid using a US-style NDA
The focus of US-style NDA is to prevent the disclosure of trade secrets to the public.
But, the Chinese companies do not tell your ideas to the general public. Instead, these Chinese manufacturers use them for their benefit.
So, you should use the NNN agreements. It prevents the Chinese companies from using your information and becoming your competitors.
2. Use the NNN agreement to liaise with the Chinese manufacturers
There are three Ns in the NNN agreements: non-disclosure, non-use, and non-circumvention
- Non-Use
Non-use tells your Chinese manufacturer not to copy your idea or concept. This contractual clause protects you better than just intellectual property.
When the suppliers sign it, it further prohibits your Chinese suppliers from using your works.
- Non-Disclosure
The non-disclosure provisions prevent disclosure of your secrets to the public.
In fact, you need not worry too much about disclosure by the Chinese manufacturers to the public. They typically use your ideas for their purposes.
The trick is that a Chinese company might not use your idea but disclose it to someone else. It includes its business partners, family members, or Chinese subcontractors.
They will then claim that they did not use your secrets.
So, it is crucial to get your Chinese supplier to sign the non-disclosure clause. It will prevent them from disclosing to any party within its business group.
- Non-circumvention
It prevents the Chinese factories from creating more goods from your order.
In general, foreign companies buy from a Chinese manufacturer. Then, they mark up before they start selling the goods to their customers.
But, what if your Chinese suppliers sell directly to your customers?
Not only can they make similar quality, but also at about 50% lower prices. It will threaten your business. That is why the non-circumvention agreement is crucial.
3. Draft an effective NNN agreement that is enforceable in China
You should prepare an enforceable NNN agreement to protect you in the Chinese courts.
The contract with a China-focused approach allows quick actions towards your Chinese defendant. Your Chinese counterparts must be fully liable for the violation of this contract.
In this case, your Chinese contract should persuade your Chinese manufacturer not to breach it. Besides, you should draft it with a suitable damages provision.
Remember to draft this manufacturing contract to avoid litigation too.
Difference between NNN agreement and NDA
Non-Disclosure Agreement(DNA)
The standard NDA mainly states the protection of proprietary information to prevent disclosure. The American companies depend on the non-disclosure provisions from a single NDA.
Their governing language is English, and the governing law is US law. These non-disclosure agreements are only enforceable in the US state. But, it has no value in China.
NNN Agreement
The NNN agreement gives your company more comprehensive protection from your Chinese counterparty.
Not only these Chinese counterparts cannot disclose your trade secrets. They could not even use or circumvent your intellectual property and ideas.
Other differences between an NNN agreement and an NDA agreement are as below. You should use the Chinese language, Chinese law, and exclusive jurisdiction by Chinese courts.
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Some traps you must be cautious
Whenever I order something, the first thing that comes to mind is whether I am safe. The NNN agreement helps me out.
The NNN agreement is a useful manufacturing contract when buying from China. But, there are some pitfalls you need to be aware of:
- Modifications
Your NNN agreement must mention that all modifications need all parties to sign. Otherwise, the unethical Chinese company will change the agreement.
- Confidentiality
You must label confidentiality in all your information. It tells your Chinese supplier, employees, and agents not to disclose your information.
- Governing Law and Governing Language
Choosing Chinese law and using the Chinese language in your agreement is crucial. You can keep your English translation.
But, avoid using two different languages in your NNN agreement.
- Jurisdiction
You must choose the jurisdiction by the Chinese courts for effective results.
- Subcontractors Responsibilities
You must get your Chinese manufacturer and all subcontractors to sign the agreement. It is to prevent misuse and exploitation of your confidential information by any party.
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FAQs
1. Why is the NNN Agreement so effective?
It is because this agreement provides for liquidated damages despite injunctive relief.
Liquidated damages are the fine on the counterparty who breached the NNN contract. The Chinese court will often generate a prejudgement for an initial asset seizure.
That is why the Chinese company will ensure to adhere to this manufacturing contract.
2. What are examples of confidential information in an NNN Agreement?
Confidential information relates to the provider company’s business, finances, operations, or technology.
It also includes trade secrets, patents, trademarks, product specifications, processes, etc.
This information can be oral, graphic, written, electronic, or physical.
3. Should I use an NNN Agreement template?
You might want to save money and use a NNN contract template.
But, you must make sure that it suits your business. It is because each business model is different from another.
If your business ideas are unique, you should consider hiring a China law company.
4. Is it time-consuming to draft an NNN contract?
The time required to draft an NNN agreement depends on your needs. It also involves the time of deal negotiation that can add up to your timeline.
It might only take a few days to draft a basic one-page agreement. In contrast, a complex contract could consume several weeks or months.
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Final thoughts
To conclude, the NNN agreement is a vital contract when dealing with China suppliers.
The fundamental reason to use it is to protect your ideas at the early stage. It ensures a better working relationship with your new supplier.
It is good to label all information as confidential to prevent disputes in the Chinese courts. Make sure you choose Chinese law and use the Chinese language as the official language.
I hope this article shares essential information about the NNN agreement. Talk to Leeline Sourcing if you need further information about sourcing from China.
