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In English and Chinese

NNN Agreement

(non-disclosure, non-competition, non-circumvention)

A contract made between the discloser and recipient of information to protect the information, ideas, inventions, processes, and other IP-related information when working with a company in China.

What is a NNN Agreement?

An NNN agreement is often used where buyers (also referred to as the disclosing party) intend to purchase products or services from sellers (also referred to as the receiving party or supplier) in China but concerned the sellers may take advantage of the provided proprietary information intended for review, development, and manufacturing or execution of services.  These concerns can include using the proprietary information for personal gain, operating businesses in conflict with the disclosing party, or unfaithfully contacting or luring customers away from the disclosing party.

A typical NDA does not protect from the real risk when sourcing and manufacturing in China.  It is not the exposure of confidential information, but the appropriation and misuse of confidential information to create similar products to compete against you.  From a legal and practical perspective, NDAs are not recommended when dealing with Chinese companies as it provides no real protection.

Maxguard’s comprehensive NNN Agreements include these essential clauses to provide maximum protection.

The Non-Disclosure Clause

The non-disclosure clause is similar to that of a Non-Disclosure Agreement (“NDA”) you may see in western countries. Its purpose is to stop trade secrets and proprietary information from being disclosed to unauthorized third parties or made public. The non-disclosure clause states what information is protected and who is allowed to receive and view this information within a group. If there is an infringement made by any member of the group, then the receiving party that made the disclosure should be made fully liable.

A well-defined non-disclosure clause should also include a disclosure-by-approval process to prevent additional risks. It is common suppliers use outside technical consultants and sub-contractors in the same industry to fulfil their duties. A disclosure-by-approval provision can allow the disclosing party to better manage who receives the proprietary information and deter third parties associated with the supplier from taking unfaithful advantage of the information.

The Non-Competition Clause

The non-competition clause states the receiving party who signs the agreement can’t use the protected information to engage in or be involved in any business that might compete with the disclosing party.  In an event the receiving party is doing the same business as the disclosing party, a conflict of interest can easily arise. The receiving party may have the motivation to gain more market share through use of the proprietary information. The non-competition term ensures the receiving party, by themselves or in conjunction with any parties, are not allowed to use the products or ideas to compete with the disclosing party and can’t sell its products or services to its competitors.

It’s important to note, in some NNN agreements, a non-competition clause exists as only an implied provision within a non-use clause defined through what constitutes proper use of the information.  This weakens the protection of the disclosing party by not directly addressing the methods of competition.  Therefore, it is critical to know not all NNN agreements are created equal.


The Non-Circumvention

The non-circumvention clause states the receiving party is not allowed to bypass the disclosing party and reach out to their customers directly. In practice, a supplier can easily figure out how the products or services are distributed and know which markets their buyers are selling to.  The supplier can be motivated to go directly to their buy’s customers and sell at a lower price while the buyer’s customers also get a lower price.  Win-Win right?  Not for you.

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What is covered in the agreement?

Key Provisions in this Agreement:

  • Receiver and Discloser Information

  • Definition of Proprietary Information

  • Exception for Certain Information

  • Non-Disclosure

  • Use of Proprietary Information

  • Duties with Respect to Third Parties

  • Non-Competition

  • Non-Circumvention

  • Terms of Termination

  • No Grant of License

  • Disclaimer

  • Liabilities, Waiver and Remedies

  • Governing Law

  • Dispute Settlement

  • Mediation
    Mediation is when a neutral third party (mediator) is retained to help the disputing parties come to a consensus. Rather than imposing a solution, a professional mediator works with the conflicting sides to explore solutions. Working with both parties together and sometimes separately, mediators can help them negotiate a resolution that is agreeable, sustainable and voluntary. Unlike arbitration and litigation, meditation on its own as a form of dispute resolution is not enforceable by the judicial system. In China, the disputing parties generally do not engage in mediation as the first form of dispute resolution but rather as a secondary option during an arbitration or litigation where the arbitrator or judge asks if the disputing parties can come to a settlement. During this process the arbitrator or judge will act as the mediator and in doing so, a consent judgement order or arbitral award will be applied based on the settlement agreement, thus making the mediated agreement legally binding.
  • Arbitration
    Arbitration is an alternative dispute resolution in which disputes are resolved outside of the judicial court system. A neutral third party(s) is commissioned to serve as a judge (arbitrator) who is responsible for resolving the dispute and renders the arbitration or arbitral award. An arbitral award is legally binding on both sides and enforceable. The disputing parties can negotiate virtually any aspect of the arbitration process subject to flexible arbitration rules then in force. Arbitrators hand down decisions that are usually confidential and cannot be appealed. The consent to enter into arbitration is typically pre-agreed by the contracting parties and incorporated within the terms of their agreement by stating arbitration will be the form of dispute resolution and which arbitration court will be used. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Arbitration Convention or New York Convention, has about 165 member states, China included. Arbitral Awards rendered in any member state can be enforced in any other member state. However, restraint orders on assets to serve an arbitral award to be enforced by another member state may lead to difficulties in obtaining actual compensation.
  • Litigation
    Litigation is the most familiar type of dispute resolution. Litigation cases will be heard and trialed by a judicial court, usually involving two parties, a plaintiff(s) and a defendant(s). Litigation proceedings are more conservative when compared to arbitration proceedings with more stringent standards. According to the civil procedure laws of China, documentation materials and evidence produced outside of China need to be notarized and verified before submitting them to the courts and any texts in a language other than Chinese need to be translated into Chinese. A judgment rendered by the “first” hearing court is not necessarily final, as the “losing” party may appeal the judgment and a higher court is required to hear the case. When serving a judgement outside of China regarding foreign-related cases, decisions made by a court in another country can involve a lot of time and effort in obtaining a final judgment of enforceability in China. Seeking remedies through litigation may be the only option if the parties disputing parties have not had a prior agreement as to the form of dispute resolution (i.e. arbitration).


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