Is an NDA a useful tool when doing business in China?

7 minute read
24 August 2021

LUXI CHEMICAL ("LUXI"), a Chinese listed company in the Chemical industry, recently received a Civil Ruling from Liaocheng Intermediate People's Court in Shandong Province in China, which ruled to recognise the arbitration award made by the Arbitration Institute of the Stockholm Chamber of Commerce in Sweden on November 07 2017 in relation to the breach of the Non-Use and Confidentiality Agreement on Low Pressure Carbonyl Synthesis Technology signed among the Chinese company, Johnson Matthey Davy Technology Ltd. and Dow Global Technologies Ltd.



According to the arbitration award, LUXI should compensate the total of various costs of approximately CNY 749 million (over USD 100 million) and disable a planned plant of the Chinese company. This is the first recognition by a Chinese court of a foreign arbitral institution's award on a non-disclosure agreement ("NDA"), and sets a new record for the amount of the subject matter of a case to enforce a foreign arbitral award.

Typically, parties doing a joint project together would enter into an NDA[1], or an NNN (Non-disclosure/non-use/non-circumvention) Agreement, to protect the disclosing party's trade secrets, key technologies, know-hows and/or confidential information to be disclosed to the receiving party from being misused or misappropriated. However, Western clients can, more generally, hold doubt over the effectiveness of signing such agreement with their Chinese partners.

The LUXI case's ruling has far-reaching implications. On the one hand, it is a wake-up call for all companies with operations in China often acting as the disclosing parties, once again reminding entrepreneurs and in-house counsels of such companies that China's protection of confidential information and intellectual property rights is being strengthened, And that companies should seriously consider using available legal tools, including signing NDAs, to better manage and prevent infringements of its 'crown jewels'. On the other hand, companies on the receiving party's side may want to look into the potential legal risks of a breach of its obligations under an NDA, with Chinese business partners and Chinese courts keeping up with the Western world.

Additionally, the LUXI case also has several noticeable and interesting details[2]:

  • The two applicants of the arbitration actually did not enter into the substantial contract phase with LUXI, and yet still successfully obtained fairly significant compensation and an injunction to suspend LUXI's factory construction;
  • LUXI's officers has argued on public presses that they did not violate the applicants' rights on the confidential information. The original wording of the confidential information is too wide and general and that LUXI has misunderstood the scope of the confidential information;
  • According to LUXI, the applicants never disclosed the confidential information in dispute to LUXI. The technology that LUXI is using is currently obtained from pubic or third parties' resources. Therefore, LUXI would not be able to know if the applicants' confidential information is violated, even if using this information;
  • The Stockholm Chamber of Commerce issued its arbitral award in November 2017. Since LUXI did not perform its duty under the arbitral award, the two applicants therefore initiated the foreign arbitral award recognition process in China from June 2018. This award was finally recognised by the Chinese court in August 2021; and
  • The court that issued the recognition ruling is not a court located in first tier cities. It is actually where LUXI is based, i.e. LUXI's home court.

Five key NDA considerations for businesses

These interesting details trigger many considerations as to how best to contemplate a useful NDA:

  1. A template is not enough. Law firms frequently encounter scenarios where clients ask whether an NDA template can be shared with them. To ensure enforceability and practicability of an NDA, one would always need to adapt the NDA to the specific context.
  2. Every clause, and even the definitions of terms in the NDA, are important. Whether the disclosing party or receiving party, one should understand the consequence of agreeing any terms in the NDA.
  3. The place of arbitration is important when it comes to enforcement of arbitral awards.
  4. Foreign companies signing NDAs with Chinese companies would require extra consideration and contractual arrangements to ensure effective protection.
  5. Chinese companies should also cast greater attention on the potential legal risks of signing NDAs with foreign parties. Violation would be caught even if foreign law or foreign forums are chosen in the agreement. 

If you find this article helpful and would like to ask further questions, please contact Le Rong.

Footnotes:

[1]> For convenience, we will call the type of document an NDA. However for a document entitled as an NDA, NNN Agreement, or otherwise, the key purpose of this type of document remains the same. It could be very simple to just cover the confidential information protection during the negotiation period, or it could cover a wider range of subjects such as protection of IP during the whole period of cooperation.
[2] We are not able to obtain the actual arbitration award. This paragraph is written based on news and information available on the Internet or from other open resources.


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