How to protect your interests when entering technology developing contract with Chinese manufacture

• What’s technology contract?

According to Article 843 of The Civil Code of the People’s Republic of China ("Civil Code") , it stipulates that a technology contract refers to a contract whereby the parties establish their rights and obligations in respect of the development, transfer, licensing, consultation or service of technology.

Given the importance and complexity of a technology contract, this article, from the edge of Chinese law, taking a commissioned development contract as an example, sets terms in the contract and sorts out the list of risks from the perspective of litigation, in order to protect the interests of foreign enterprises, as the commissioning party, and help to avoid risks and disputes arising from improper setting of terms in the contract.

• The basic Terms of a commissioned development contract

According to Civil Code, a commissioned development contract generally contains such clauses:

1.the name of the project,

2.the content, scope and requirement of the subject matter,

3.the plan, place and method of performance,

4. the confidentiality of technical information and materials,

5.the ownership of the technical achievements and the method of distribution of the benefits therefrom,

6.the standard and method of inspection and acceptance,

7.the explanation of terms and phrases, etc.

• List of Key Points and Risks in the Drafting/Review of the commissioned Development Contract

1.The commissioned development contract shall be made in writing and the nature of the contract shall be specified

According to Article 851 of Civil Code, a technology development contract shall be made in writing. Technology development contracts include commissioned development contracts and cooperative development contracts. In case of different natures of technology development contracts, the rights and obligations of the parties differ, and the ownership of the technical achievements shall be different.

A commissioned development contract refers to a contract whereby one party commissions the other party to undertake research and development. A cooperative development contract refers to a contract whereby the parties jointly undertake research and development. When drafting a contract, the nature of the contract shall be first determined based on the specific business circumstances, accurately named and clarifying contract clauses. When reviewing a commissioned development contract, the nature of the contract should not be determined solely based on the contract name, so as to avoid misunderstanding of the nature of the contract, and it is impossible to take precautions against the layout of the contract.

2. The commissioned development contract shall specify the development contents.

The development content is the core clause of the commissioned development contract, which embodies the main content of the rights and obligations of the parties. The commissioned development contract shall specify the specific tasks, needs and functions of technology development, as well as the technical scope and conditions, etc. The development content is not only the basis for the rights and obligations of the parties, but also the basis for checking the performance of the contract.

Due to the inherent specialization and complexity of the development content, it is more appropriate to hand such content to technical personnel for drafting and checking. The failure to describe the development content or a lack of detailed description of the function and requirements of the development content shall avoid causing the project to fail to proceed or causing the rights and obligations of the parties to be unclear.

3.The commissioned development contract shall specify the schedule

The schedule involves the specific clauses to determine the appropriateness of performance of the contract by the parties, and the specific standard to judge whether the parties have breached the contract. Whether the performance plan, schedule, period, place and manner of the contract are clarified or not is of great significance for handling disputes over the commissioned development contract. The schedule of a project shall be clear and specific, including the time of completion, corresponding development tasks and work (key steps include development, installation, testing, trial running, formal running, acceptance inspection, warranty, etc.), delivery methods, deliverable results, delivery deadline, acceptance inspection, etc.

4. The commissioned development contract shall specify the quality requirements for the deliverable.

The commissioned development contract needs to provide detailed and accurate description of the deliverable and avoid any ambiguity or lack of agreement as to the quality of the deliverable. In addition, due to high technical requirements in the commissioned development contract, the entrusting party is advised to specify the key development personnel in the contract and require the commissioned party not to replace the key development personnel without consent of the entrusting party so as to avoid inability to perform the contract. Meanwhile, the entrusting party must stipulate a non-infringement clause in the contract, stating that the technological achievements provided by the commissioned party will not infringe on the rights of any third party and the supporting measures for breach of contract.

5. The commissioned development contract shall specify the acceptance standards and methods.

This clause refers to the technological and economic index and appraisal method to be met for accomplishing the tasks stipulated in the commissioned development contract. The inspection and acceptance standards may be contents agreed upon in the technology contract by both parties, or national standards, industry standards, enterprise standards or other inspection and acceptance standards agreed upon by both parties. For a commissioned development contract, the inspection and acceptance standards are generally determined by the entrusting party's service needs.

As to the methods of acceptance, the methods include technical appraisal meetings or expert demonstration meetings, etc., and the method of acceptance may also be unilaterally approved by the entrusting party. Upon completion of acceptance, the entrusting party shall issue the certificate or document of acceptance as the basis of contract acceptance. In the event that no quality defects occur or are detected due to the inspection methods and cognitive level, the entrusting party shall add the provision that "the inspection and acceptance cannot be deemed that the entrusting party has no objection to the internal quality defects of the project or the equipment, and can only be deemed that the products have attained the current inspection standards", and further agree on the warranty liability for defects within a reasonable period.

In practice, the deliverable under an commissioned development contract are often inspected and accepted in phases. Due to the characteristic of payment in phases, the entrusting party may detect some technical problems before inspection and acceptance or during operation and maintenance, but continues to pay the corresponding prices for design, testing, online operation and other phases. Whether such payment can be deemed as tacit acceptance remains controversial in judicial practice, especially when there is no express stipulation on tacit acceptance in the contract, or when the entrusting party has been using the deliverable for a period of time, and even used them for profit. In light of the above, we suggest that the Client should not "cool", silence or refuse to accept the interim results that are still being tested or accepted to avoid deemed as tacit acceptance by judicial authorities and take the corresponding risks.

6. The commissioned development contract shall clarify the handling of development failure or failure to pass inspection.

Article 858 of the Civil Code provides for risk-bearing and obligation of notification in a commissioned development contract, that is, the parties shall bear such risk-bearing and obligation; in the absence of such stipulation, the parties shall reasonably share such risk-bearing and obligation.

A commissioned development contract involves the development of an unknown technology, so there is the risk of development failure. We suggest that the parties explicitly define the handling of development failure or failure to pass inspection at the time of conclusion of the contract. If allocation of risk liability is not stipulated or clearly stipulated at the time of conclusion of the contract, the entrusting party may still be required to pay the commissioned party reasonable expenses, even if the commissioned party, due to technical difficulties it cannot overcome, fails to provide qualified technical achievements as agreed in the contract. For this reason, we suggest that the entrusting party avoid bearing risks through provisions of the commissioned development contract.

In addition, the entrusting party may stipulate development failure or failure to pass inspection as causes for termination of the commissioned development contract, and specify the time limit for exercising the right to terminate the contract. If the time limit for exercising the right to terminate the contract is not stipulated in the contract, the entrusting party shall promptly exercise the right upon the occurrence of causes for termination, so as to avoid extinguishment of such right in the event of failure to exercise the right within one year (commencing from the date on which the party who has the right to terminate knows or should have known the causes for termination) or within a reasonable time limit after being urged by the entrusting party.

7. The commissioned development contract shall clarify the ownership of the intellectual property rights

The Contract Chapter of Civil Code stipulates in a special chapter on technology contracts, the core of which is to solve the issues of ownership and utilization of technical achievements. According to Article 1 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Technical Contract Dispute Cases (Amended in 2020), a technical achievement refers to a technical scheme involving products, processes, materials and the improvements thereto, which is made by using scientific and technological knowledge, information and experience, including patents, patent applications, technical secrets, computer software, integrated circuit layout designs, new varieties of plants, etc.

Generally speaking, as long as valuable technical achievements are likely to be produced or involved, the ownership and use of the technical achievements shall be clearly stipulated by considering relevant provisions of the technology contract and adopting measures such as "stipulation to exclude the default rule of law". Even if the value of the project achievements is low, the ownership of the intellectual property rights shall be stipulated in practice to avoid disputes between the parties.

Article 859 of the Civil Code clearly stipulates the ownership of the technical achievements of the invention and creation of a commissioned development project. That is, unless otherwise stipulated by law or agreed by the parties, the right to apply for a patent belongs to the party that undertakes the research and development.

Article 861 of the Civil Code provides that the ownership and sharing of the technical secret achievement shall be agreed by the parties to the contract, i.e. the right to use and transfer the technical secret achievement, and the method for distributing the income therefrom shall be agreed by the parties; if there is no such agreement or such agreement is unclear, nor can it be determined in accordance with Article 510 of the Civil Code, the parties shall have the right to use and transfer the technical secret achievement before a patent right is granted for the same technical solution. However, the party that undertakes the commissioned development project shall not transfer the achievement to a third party before delivering the achievement to the commissioning party.

In accordance with the above provisions of the law, it can be clearly stipulated that the ownership of the technical achievement and the technical secret achievement of the invention and creation of a commissioned development project may be determined in accordance with the agreement between the parties by way of "stipulation to exclude the default rule of law". Given that the ownership of a technical achievement is the most important issue, if the commissioning party has paid the research and development fees and remunerations, the commissioning party shall specify the ownership of the technical achievement in the contract to avoid unnecessary losses arising from the application of the default rule of law in the absence of express agreement thereon.

8. The price and payment method shall be specified in the commissioned development contract.

The commissioned development contract, as a non-gratuitous contract, may be agreed on price and payment method by the parties through negotiations. In practice, it is recommended to adopt the payment by transfer so as to preserve the trace of payments and alleviate the difficulty of proof of payment by the commissioning party. The times and schedule of payments include lump-sum payment and installment payment. If the payment is made in lump-sum, there shall be specific time and terms for the payment. If the payment is made by installments, the number of installments and the time limit and amount of each installment shall be expressly specified. In practice, it is more reasonable to make the payment by installments, i.e. acceptance and payment of the corresponding price shall be mutually treated.

9. The commissioned development contract shall specify the confidentiality terms and conditions of technical information.

A confidentiality agreement is one of the approaches adopted by the company to protect its business secrets. Where any state secret or technical secret is involved, both parties to a contract may, when concluding a technology contract, reach a written confidentiality agreement prescribing the scope, secret grade, term and obligations of confidentiality, or set forth a confidentiality clause in the technology contract, and shall consider requiring the personnel of the commissioned party participating in the project to sign a confidentiality promise letter. The validity of confidentiality agreement and confidentiality clause is relatively independent and is not affected by the validity of a technology contract. Besides, after the termination of the technology contract, either party or both parties may agree that they should undertake the confidentiality obligation for related information and materials within a certain period and area. The setup of the clause may protect the confidential information and prevent infringement on the technology rights and interests and devaluation of the technology due to disclosure of the confidential information. In addition, this clause shall be accompanied by stipulating measures for breach of contract so as to bind the contracting parties, and plays a vital role in safeguarding rights after confidential information is disclosed.

However, we strongly suggest to sign an additional NNN Agreement with the commissioned Party if you are a foreign company.

Disclaimer:

This article has been prepared for general reference purposes only and should not be relied on as legal advice or regarded as a substitute for detailed advice in individual cases.