NNN Agreements? The Basics for Transactions in China

What is a NNN Agreement?

A NNN Agreement includes non-disclosure provisions, but it is much more than just a NDA. Each “N” in the title refers to a different type of contractual obligation:

- NON-USE: this creates an obligation to not use your idea or information in a way that is competitive with your business.

- NON-DISCLOSURE: this creates an obligation to maintain the confidentiality of your information. The primary limitation of this (and one reason why a simple NDA is insufficient) is that confidentiality does not protect ALL your interests. A secondary limitation is that Chinese companies often view confidentiality loosely by taking a broad interpretation of related entities owned by family members and/or “state owned entities.”

- NON-CIRCUMVENTION: this creates an obligation to not use the similar products (often made and sold more cheaply) to go around your product to your potential customers.

NOTE: If you're looking for information about NDAs, specifically, make sure to read our Top Tips for your NDAs and Confidentiality Agreements.

A NNN Agreement is Different from a Typical NDA

Using a NNN Agreement protects you throughout your relationship with a Chinese company. Your NDA only protects part of your relationship, and ultimately it probably isn’t even protecting the most important part of your relationship.

If you rely on a typical NDA, you are only protecting your confidential information. While your confidential information might seem to be paramount in the beginning conversations with a Chinese manufacturer, the confidential information quickly becomes less important than all of the publicly available information about your product. In particular once you start selling your product, it will no longer be confidential and, therefore, probably won’t be protected by your NDA.

In contrast to a typical NDA, a NNN agreement protects your business more comprehensively throughout your relationship with your Chinese counterparts. It requires they keep your confidential information secret. It requires they don’t use your information themselves. And it requires they don’t go around you with their own products or help others to go around you.

Common NDA Pitfalls in China

Dan Harris with Harris Bricken, a go-to law firm for Chinese law, states it very plainly—“Your NDA is actually WORSE than nothing for China!”

That’s really bold. And Dan backs it up with the following points:

- When you use a NDA that is legally worthless in China, your Chinese counterparty sees you as a target

- When your NDA requires disputes to be resolved outside of China, Chinese courts will not allow you to bring applicable legal actions in Chinese courts

- When your NDA requires disputes to be resolved outside of China, your Chinese counterparty effectively avoids all potential liability because they have no assets in the country where you can get a judgment

Watch Out for These NNN Agreement Pitfalls

While NNN Agreements are the best way to protect your business, there are still many pitfalls that can weaken your ability to effectively enforce your NNN Agreement.

Pitfall #1: Delays

Delays are one of the most typical problems with poorly written NNN Agreements. Specifically, using the wrong terms can delay your ability to enforce your agreement. And introducing delays like this can weaken your negotiating position because Chinese counterparts will recognize they will have time to continue breaching your agreement during these delays. Here are several ways that your enforcement might get delayed:

- Using English, instead of Chinese, as the governing language requires courts to translate your agreement after it is already signed. Additionally, these translations are subject to additional disputes. Similar issues can arise if you try to use a dual-language agreement where both Chinese and English are intended to be the governing language.

- Using foreign laws, instead of Chinese laws, as the governing law requires courts to interpret the foreign laws. Additionally, these interpretations might require arguments to prove the correct interpretations.

Pitfall #2: Unenforceability

Unenforceability is another common problem. Your ability to enforce your agreement at all depends on the possibility that a court will simply characterize your agreement as unenforceable. Here are some of the reasons your NNN Agreement might be deemed legally unenforceable:

- Your agreement must be properly signed and executed by the correct company using the correct form of signature (or chop).

- Your agreement cannot create “forum shopping” in the wrong Chinese jurisdiction, usually where the Chinese counterpart is registered or conducts business.

- Obtaining a judgment in a foreign jurisdiction will generally lead to your inability to enforce the judgment in China.

- If the monetary damages in your NNN Agreement are too high and characterized as punitive (or possibly consequential), then your agreement can be seen as unfair and unenforceable.

- Don’t limit your ability to enforce your NNN Agreement to only the signing party. They will frequently work with other companies, contractors, and representatives who also need to be subjected to your agreement, either directly or through damages applied to your counterpart if their additional parties breach the agreement.

Your Template NNN Agreement Will Get Broken

If you are new to the world of Chinese manufacturing, you must understand that you are negotiating with people who have learned over decades all the ways to limit their own liability. And even if this feels very one-sided or unfair, it is a completely acceptable approach from a cultural standpoint.

Although you might want to save money and use a template NNN Agreement, you will definitely need help negotiating that agreement through the very end. Your counterparts are used to deflecting and derailing negotiations that put more immediate liability on their company and disguising negotiations that weaken your position (especially by introducing delays and unenforceable language, as explained above).

Their approach might seem collaborative when, in fact, it is entirely protective of their own financial interests. Without experienced and savvy legal counsel, you are entering a situation where small changes can change the whole balance of the relationship.

You wouldn’t go skydiving without an expert guide. Similarly, your first experiences with Chinese businesses should not be without the safeguard of an expert legal guide.

Your NNN Agreement is a Tool for Negotiations, Not Litigation

While a lot of people think of contracts as a safeguard in case a relationship fails, think about your NNN Agreement as a tool to help establish the right relationship from the start.

You are using an agreement to help establish your part of the relationship. You are also using an agreement to help the other party understand that you’re familiar with the typical limitations about how they can and cannot treat you. It’s not that the NNN Agreement will change a bad partner into a good one. Rather, a well-drafted NNN Agreement might help you avoid a bad partner who was looking to take advantage of an amateur or a foreigner.

Use the NNN Agreement discussions and negotiations to filter out potential partners who are not willing to accept reasonable legal conditions for a fair business relationship.

A Few More Things...

Your NNN Agreement is essential, but it might not cover everything you need with your manufacturer.

If you're working on anything that involves custom molds, then you also want to make sure you have provisions to control and own the molds. This might mean you pay for the molds up front. Or you might work out a deal where you own the molds after you've purchased a number of units from the manufacturer. Either way, make sure you don't give up ownership or control of the molds for your product.

Also, make sure you own or have control over any intellectual property that is developed by the manufacturer for your products. While your manufacturer might bring a lot of "background IP" to the relationship (and so will you), there might be additional IP that is developed by the manufacturer specifically for your product or under the agreement. Also, there might be additional IP that is developed jointly. Make sure you address who will own and/or control that new IP.

In Conclusion…

While you probably shouldn’t draft and negotiate a NNN agreement by yourself, make sure you get familiar with the typical issues around why a NNN agreement is essential to your business and how to avoid some of the major pitfalls.