Sent: Monday, April 12, 1999 2:22 PM

To: clnet@u.washington.edu

Subject: Technology Contracts in China

Dear Colleague:

Does anyone know whether a technology transfer contract with a choice of law clause is still subject to in some aspects Chinese regulations or procedures? If the contract is between a foreign company and a wholly-owned foreign company incorporated in China, and the choice of law clause of the contract specifies the governing law, which is not Chinese law, will this bring the contract out of Chinese laws? Thank you for your assistance in advance.

J.J. Zhang

To: "'clnet@u.washington.edu'"

Subject: RE: Technology Contracts in China

Dear Mr. Zhang

The new Contract Law apparently did not change the existing regime with respect to technology contracts (import or export) between foreign parties and PRC companies (including FIEs). In fact, probably the most noticeable amendment to the draft law circulated to foreign law firms in Beijing was the deletion of a section on foreign technology contracts (which would have restated many of the existing requirements anyway). As such, the new Contract Law is not unified with respect to foreign technology contracts.

Technology contracts between a foreign entity and a PRC entity may choose foreign governing law. However, as in the past, such contracts must still comply with PRC laws with respect to such capacity issues as approvals. Thus, the provisions of the Technology Import Contract Regulations (SC, 1985); Implementing Rules (MOFTEC, effective 20 Jan 1988); and Administration of Trade in Importation of Technology and Equipment Provisional Measures (MOFTEC, March 1996) still apply on the import side. The latter purported to change the system from an approval to a registration system in some situations. However, in practice, it appears that MOFTEC continues to apply a substantive review to technology contract registration that is the same as the review in the case of approval. Accordingly, the approval authorities generally will require that the licensor comply with many of the burdensome terms imposed on licensor's by the various regulations. See Technology Transfer Tango, China Business Review, Jan-Feb 1997, 25-29.

Choosing a foreign governing law does not get you out of compliance with many other rules either, such as PRC product liability and consumer protection requirements, though these are less directly applicable. Also, the licensor may ultimately need to enforce its rights under the contract in China (for example, to get an injunction against an infringement; or if damages are awarded against the licensee but the licensee has no assets abroad, etc.).

Technology export rules (including state secrets rules) are also still applicable to technology exports.

Finally, it does not appear that contracts between two domestic entities (even if one is an FIE) can be governed by foreign law or provide for dispute resolution abroad under the new Contract Law.

I would be very interested in finding out from anyone on the list the reasons behind the last minute revisions to the Contract Law that left the current system in place. Who was for and who was opposed and why?

Randy Peerenboom

UCLA School of Law

Sent: Monday, April 12, 1999 6:25 PM

To: clnet@u.washington.edu

Subject: RE: Technology Contracts in China

Dear Mr. Zhang

If the contract is formed beween a china legal entity and a foreign legal entity, they may choose the govering law through negotiation in accordance with "LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON ECONOMIC CONTRACTS INVOLVING FOREIGN INTEREST" now and after Oct.1, in accordance with New contract law. If you are dealing with matter now, please refer to the articles of the former law. here are some relevant articles for you,

Article 4

In concluding a contract, the parties must abide by the law of the People's Republic of China and shall not harm the public interest of the People's Republic of China.

Article 5

The parties to a contract may choose the proper law applicable to the settlement of contract disputes. In the absence of such a choice by the parties, the law of the country which has the closest connection with the contract shall apply. The law of the People's Republic of China shall apply to contracts that are to be performed within the territory of the People's Republic of China, namely contracts for Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and Chinese- foreign cooperative exploration and development of natural resources. For matters that are not covered in the law of the People's Republic of China, international practice shall be followed.

Article 6

Where an international treaty which is relevant to a contract, and to which the People's Republic of China is a contracting party or a signatory, has provided differently from the law of the People's Republic of China, the provisions of the international treaty shall prevail, with the exception of those clauses on which the People's Republic of China has declared reservation.

Of course, if it's technology import contract, it shall be approved by relevant authority.

Wang Chuan-hui

Sent: Monday, April 12, 1999 6:45 PM

To: 'clnet@u.washington.edu'

Subject: RE: Technology Contracts in China

Hello all,

The responses to the question about contractual choice of law have indicated that the parties may generally select the governing law. Doesn't the third sentence of Article 5 (quoted by Wang Chuan-Hui and reprinted below) cast doubt on that proposition?

Article 5

. . . The law of the People's Republic of China shall apply to contracts that are to be performed within the territory of the People's Republic of China, namely contracts for Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and Chinese-foreign cooperative exploration and development of natural resources. . .

Chris Stanton

To: "'clnet@u.washington.edu'"

Subject: RE: Technology Contracts in China

The original issue posed by Mr Zhang was whether the parties could choose foreign governing law in a technology contract between a foreign entity and a PRC entity. That answer is still yes. Article 5 repeats the previous rule that certain types of contract must be governed by PRC law. But these are not technology contracts. While the JV contract itself must be governed by PRC law, technology contracts need not be. For awhile, MOFTEC was taking that the view that a technology contract attached to a JV contract would have to be governed by PRC law if the JV contract provided that all appendices were an integral part of the JV contract. But that was always a dubious position and not followed in practice by many local COFTECs, and in any event could be circumvented by then not making the technology contract an appendix to the JV contract.

Hope this helps.

Randy Peerenboom