China: An Interpretation Of The Provision Of Article 24 Of The Administrative Regulations Of The People's Republic Of China On Technology Import/Export

Last Updated: 28 April 2017
Article by Watson & Band Law Offices

Article 24 of the Administrative Regulations of the People's Republic of China on Technology Import and Export (hereinafter the "Regulations") provides that "a technology supplier in a technology import contract shall ensure that he is the legitimate owner of the technology supplied or that he has the right to assign or license such technology." It is generally understood that this provision imposes an obligation on the transferor to warrant against defects. Consequently, transferors are often concerned about whether or not such provision has mandatory legal force; in other words, whether or not parties to a contract may opt out of the provision by agreement. Transferors are also concerned about how to mitigate or even eliminate its impact. With these questions in mind, the author offers analysis and commentary below:

The Regulations were formulated in 2001 and took effect the following year. So far, however, there has not been any precedent to which this provision of Article 24 has been applied; nor have there been any relevant judicial interpretations issued. Further, there is no specific stipulation on whether or not the provision is mandatory under both Chinese law and international treaties to which China is signatory.

The author believes that to determine whether Article 24 provides a general or compulsory obligation, we must analyze the legal nature of the Regulations. In other words, we must determine whether a technology import/export contract should be classified as a "general contract" or a "special contract". A "general contract" does not have major implications for the public or the national interest, and the parties may reach agreement in accordance with the general principles of the Contract Law and the General Rules of Civil Law. On the other hand, since a "special contract" involves to a certain extent the interest of the general public or the nation, the parties' specific obligations are regulated and controlled via compulsory provisions of law.

If the technology import and export contract contemplated in the Regulations is identified as a "general contract", the parties thereto are entitled to opt out of Article 24 by agreement in accordance with the Contract Law.

According to Article 2 of the Regulations , technology import/export contracts must be categorized as technology contracts under the Contract Law and must be classified under subcategories including technology license agreements, technology transfer contracts, technology research and development contracts, technical consulting contracts and technical service contracts. According to Article 353 of the Contract Law , the parties may through separate agreement specify the sharing of liability in the event that the use of technology infringes the lawful interests of a third party. It is obvious that if a technology import/export contract is considered a "general contract", the parties are permitted to include terms on the establishment and waiver of a technology supplier's obligation to warrant against defects and the extent to which such obligation must be performed under the Contract Law.

This concept is the same as the judicial practice in other countries that adopt a civil law system. For instance, German case law deals with a "license agreement" as a general contract, to which specific principles in connection with leasing and rental under the German Civil Code apply . Under this circumstance, if the parties to a license agreement fail to agree on the licensor's obligation to warrant against defects in rights, the licensor is still required to warrant that the rights contemplated therein are valid and effective; if not, the licensee is entitled to terminate or withdraw the agreement and file a claim.

If a technology import/export contract touches upon the public or national interest, it must be regarded as a "special contract", and the parties cannot opt out of Article 24 by mutual agreement.

For a long time, differing opinions regarding whether or not technology import and export contracts concerns the public/national interest have surfaced. At the time the Regulations were formulated back in 2000, in most cases it was foreign advanced technology that was imported into China. Consequently the Chinese party, generally a licensee (or a transferee), was in a relatively weak contractual position. To protect the interest of the Chinese party, it was commonly accepted that the provision of Article 24 was compulsory at that time. Great changes have taken place in China over the past few years, and the Chinese economy has undergone a tremendous transformation as more and more Chinese technology is exported to foreign countries. Consequently, an increasing number of people now believe that the parties to a technology import/export contract may agree to the sharing of obligation.

Although it's better to interpret and manipulate the provision of Article 24 in a flexible fashion based on actual circumstances in different historical periods, considering the prevailing understanding of this provision in current judicial practice, it is advisable to regard Article 24 as a compulsory provision for licensors from a risk mitigation perspective. Accordingly, when drafting a technology import/export contract, one should avoid exempting a transferor from warranty against defects, so as to guard against the possibility that the agreement will be found invalid or the parties will be subjected to administrative liability as a result of the contractual violation of a mandatory provision of law.

If the application of Article 24 cannot be directly avoided by agreement, is it feasible for a transferor to circumvent the provision by way of indirect licensing (transfer)? Let's discuss this possibility using the following two scenarios.

1. A contract signed for a transaction between A Co. and the transferee's legal representative located in a foreign country is subject to the laws of that foreign country.

Since evasion of the law is not permitted under Chinese law , a contract shall not be subject to foreign law if any act thereunder is intended to bypass Chinese compulsory or prohibitive provisions of law. Under this circumstance, A Co. cannot avoid the application of Article 24, and the legal risks are still present.

Regardless of the circumstance in which a contract is found invalid due to acts circumventing the law, whether or not A Co. must undertake the warranty obligation also depends on applicable foreign law. If the laws of the foreign country do not specify legal warranty obligations on a transferor, A Co. may be exempted from such obligations by way of negotiation and consultation with the other party. Accordingly, whether or not indirect licensing (transfer) can avoid a transferor's legal obligation to warrant against defects remains uncertain.

2. A Co. licenses to its Chinese subsidiary before sublicensing the same in the name of such subsidiary.

A contract between A Co. and its subsidiary must not circumvent the provision of Article 24; accordingly A Co. must its obligation to warrant against defects to the subsidiary under the law. The sublicense agreement signed by A Co's subsidiary and B Co. is a domestic technology license that does not touch upon technology import/export. Under the provisions of Article 353 of the Contract Law, the parties thereto may specify the sharing of liability through separate agreement in the event that the exploitation of such technology impairs a third party's rights and interests. Consequently, one cannot circumvent Article 24's legal force against a transferor by way of indirect licensing (transfer).

The foregoing analysis suggests that the provision stipulating a transferor's obligation to warrant against defects under Article 24 of the Regulations cannot be completely avoided by way of either agreement or indirect licensing (transfer). Nevertheless, the Regulations do not prohibit or impose restrictions on the parties against agreeing on methods for a transferor to perform its obligation to warrant against defects or the extent thereof. For this reason, we believe that the parties may specify in a contract how a transferor must perform its obligation to warrant against defects, as well as the extent to which this obligation must be performed.

Based on the foregoing analysis, we recommend that a technology transferor mitigate the impact of Article 24 by agreeing with the other party on contractual terms as set forth below:

1. Provide Limitation of Liability in the Contract

1) Clearly Limit the Condition of Warrant against Defects

(a) Where a licensee exploits a licensor's technology strictly in accordance with an agreement, but is determined by effective law or judgment to have infringed a third party's rights, the licenser shall bear proportional and limited liability in accordance with the contract signed between the parties;

(b) Where a licensee knows or ought to know that the licensed technology has defects or is at risk of infringing a third party's rights when he/she signs a contract, the licenser shall not be liable for damages arising therefrom;

(c) In the event that a third party's rights are infringed for a reason that is attributable to the licensee (such as exploitation beyond the scope of the license or unauthorized modification of technology), the licensor shall not be liable for damages arising therefrom.

2) Specify the proportion of liability that each party must bear if third party damages arise;

3) Specify the limitation of liability that a licensor is subject to for any damages arising out of the performance of the contract or any claims arising therefrom in any circumstance.

2. Choice of Governing Law and Forum for Dispute Resolution

The parties may circumvent the application of Article 24 by choosing an appropriate governing law and/or forum for dispute resolution:

1) Provide that the law of a foreign country that is selected as the governing law (a law that does not impose statutory liability on a licensor to warrant against defects), and that in the event of a dispute the parties must seek resolution by arbitration with an arbitral authority in a foreign country;

2) Provide that Chinese law shall be the governing law, but in case of a dispute the parties shall seek resolution by arbitration with an arbitral authority in a foreign country.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions