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LEGAL: How to Protect Your Interests When Entering into Commercial Contracts with Chinese Partners (Part III)

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Magazine - 2016 June

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How to Protect Your Interests When Entering into Commercial Contracts with Chinese Partners (Part III)

By Manuel Torres (Managing Partner of Garrigues China) & Xuezhou Chen (Corporate Associate)


BT 201606 130 03 LEGALFollowing the article of last month, this article will continue introducing the key points to protect your interests when entering into commercial contracts with companies of the People's Republic of China ("PRC"). For purpose of this article, the commercial contracts will refer to the international goods sale and purchase agreements ("SPA"), which is entered into between a foreign company and its PRC partner. For this last part, we are going to address on the following three sections:


1. Confidentiality - Protect Your Trade Secrets


Under the PRC laws, trade secrets refer to technical information and operational information that are not known to the public, can be used to bring economic benefits to the right holders and have practicability, and for which the right holders have taken measure to ensure confidentiality.


You may find it helpful to protect your trade secrets by stipulating clearly the following provisions in the SPA:


BT 201606 130 01 LEGAL Confidentiality in Nursing1.1 Scope of trade secrets
You could state clearly the scope of trade secrets in the SPA. Also, you could additionally list the specific trade secrets to be protected in the SPA, such as customer list, raw materials, market strategy, pricing, etc..


1.2 Person obliged
It is advised to state clearly in the SPA persons who are obliged to keep the trade secrets confidential and not to disclose the same. In this regard, you could consider including the separating employees and external visitors of the Chinese companies in the scope.


1.3 Security measures
It is also recommended to limit the access to trade secrets to a small group of people, and restrict that the confidential documents and relevant equipment should only be stored in a restricted area and be labelled properly. Also, regarding the confidential documents or sample provided, the parties shall establish an enforceable storing system and returning procedure.


1.4 Consequences of disclosing or misusing the trade secrets
You could request to stipulate in the SPA that the SPA shall be terminated if the other party breaches its obligations under the terms of confidentiality and the breaching party shall pay the damages or bear other breaching liabilities.


Despite the provision we just mentioned, entering into confidentiality agreements with the Chinese companies is also a good option.


2. Governing Law & Dispute Resolution


BT 201606 130 02 LEGAL2.1 Governing Law
The parties should choose and stipulate explicitly in the SPA the governing law of the contract. If the PRC law is chosen, it is worth mentioning that the international conventions that China enters into, such as the United Nations Convention on Contracts for the International Sale of Goods, is also a part of the PRC law, and thus could be applied to the SPA.


If the parties do not choose the governing law, the PRC laws and regulations could be applied if it is decided by the dispute resolution institution that the PRC is the country with the most significant connection to the contract.


2.2 Dispute Resolution
In general, despite mutual negotiation, the parties could resort to litigation or arbitration for dispute resolution. In the table on the next page, we compare these two mechanisms. In the table, arbitration in China refers to dispute resolution made by arbitration institution in China, and arbitration out of China refers to dispute resolution made by arbitration institution out of China.


BT 201606 130 04 LEGALComparing with litigation, arbitration has the following merits: its award has greater enforceability; its procedures are simpler and more flexible; it could be more professional; it is time-efficient, private and receives less from local protectionism than litigation.


Therefore, if the arbitration award is issued in any of the contracting state of New York Convention and the object of enforcement or person subject to enforcement is located in any of the contracting state of the New York Convention, it is recommended that the parties could resolve the dispute through arbitration.


In any case, please also consider the following three key points before stipulating any dispute resolution clause in the SPA:


-Based on the PRC Civil Procedure Law and PRC Arbitration Law, the parties could not stipulate the litigation and arbitration clauses in the contract at the same time.


-If the arbitration clauses are adopted in the contract, the parties should stipulate clearly the issues for arbitration, arbitration institution, arbitration rules, place of arbitration, composition of arbitral tribunal, etc.


-Under the PRC Civil Procedure Law, if the litigation clauses are adopted in the contract, provided that the jurisdiction by level and exclusive jurisdiction requirements are met, the parties could choose for jurisdiction among the court where the defendant is domiciled, where the contract is performed, where the contract is executed, where the plaintiff is domiciled, where the dispute object is located and other court whose location has an actual relationship with the dispute.


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