With the ongoing commitment to reform and opening to the outside world and the steady implementation of the Belt and Road initiative, the percentage of China’s entire trade regime accounted for by international technology is growing larger and larger. International technology licenses are among the major forms of technology trade between countries. Due to the differences in legal systems, legal regimes, and legal cultures of the various trade participants, lawyers are highly encouraged to pay particular attention to the following issues when drafting and reviewing international technology agreements.
Differences in Intellectual Property Law
The intellectual property legal systems of different countries vary. More specifically, there are differences in the patent and trademark registration systems, moral rights in copyright, title to jointly developed works, the scope of protection of data offered by copyright, and so on. With respect to the definition of patented technology, there are differences between countries with regard to the terms and conditions of protection.
When drafting or reviewing an agreement, special attention needs to be paid to the provisions that define patented technology, and the types and term of protection need to be noted, so as to avoid misunderstandings and differences of interpretation between the parties.
Export Restrictions
In most international technology licenses, technology, money, or goods will travel across national borders, which makes the transaction subject to import-export trade laws. The main laws controlling the import and export of technology in China are the Foreign Trade Law and the Administrative Regulations for the Import and Export of Technology. Of course, different controls also apply to different industries. In the context of Sino-US nuclear power technology transfers, for example, not only do such transfers involve the above-mentioned laws and regulations, but they are also subject to special controls on nuclear power technology. Direct transfers of such technology also involve the issue of transfer to third countries, which may bring additional challenges of their own (e.g., Iran and other such countries are under special watch by the US).
When drafting or reviewing an agreement, special attention needs to be paid to the issues of the validity of the agreement and compensation that arise due to export restrictions.
Exchange Control
Based on the issue of balancing foreign exchange payments, some countries will require that administrative approval of government authorities be secured before a cross-border technology transfer agreement enters into effect. Such currency control policies may make currency exchange or cross-border payment difficult. This issue needs to be expressly provided for in the agreement, for example by specifying that the agreement will enter into effect only after governmental permission or approval has been secured – and risks arising from the failure of the agreement to enter into effect need to be reasonably apportioned.
Another point requiring attention is that when payment conditions are being drafted the currency exchange rate must be set and the currency unit in which the payment is to be made must be indicated. It should be noted that the word “dollars” could be ambiguous; accordingly, if the client is indicating the US currency, the term “US dollars” should be used.
Tax Burden
China has entered into tax agreements with numerous countries where taxes may be withheld from certain income (e.g., copyright income). Under such circumstances, the withholding percentage usually falls between 10% and 20%. This sounds fine on its face, but some licensors, particularly startup enterprises, may not be required to pay any enterprise income tax because they have yet to become profitable.
Additionally, withholding of income tax can be carried out only within a certain period of time, which will make it impossible to carry out a withholding set-off. In the agreement, the parties need to provide for the tax burdens, and fully consider whether reasonable shifting is possible. This does not only involve domestic taxation, but also the issue of setting off cross-border income.
Dispute Resolution and Governing Law
Dispute resolution in international trade is often problematic, especially in the choice-of-forum context. In international trade, neither party will usually be willing to provide that disputes be heard and resolved in the courts of the country where the counterparty is resident, which would give that counterparty home court advantage. In addition, for a variety of reasons an effective court judgment from the counterparty’s country may not be enforceable in other jurisdictions.
In contrast, an arbitration award can be enforced through the New York Convention, which is observed by numerous countries (including the People’s Republic of China). Accordingly, arbitration is commonly used in international trade, often conducted in a neutral place. Unfortunately, the process of enforcing an award can still be long and expensive.
When drafting or reviewing an agreement, attention needs to be paid to the difference in the law governing the arbitration agreement and the law governing the license contract. Where the arbitration agreement does not expressly provide for the governing law, in general, the laws of the seat of arbitration will govern.
Language
Where the languages used by the parties differ, the agreement may be translated into a different language. The parties should indicate in the agreement which language is to prevail to avoid a situation where there is no way to make a choice. If the official language of the agreement is in a foreign language, but the lawyer does not know that language and is reviewing a Chinese-translated version of the agreement, a lawyer from the jurisdiction where that foreign language is spoken should be retained to co-operate with the Chinese lawyer, because even if the Chinese lawyer can converse in that foreign language, full understanding of that language’s nuances is almost impossible – and of course such nuances are extremely important in legal agreements. Needless to say, if a dispute arises between the parties, leading to arbitration proceedings, translation expenses will also be a necessary expenditure.
In addition to presenting the issues common to all technology transfer agreements, international technology transfer agreements also present these differences in legal systems, export restrictions, exchange control, taxation, dispute resolution and language. When drafting or reviewing agreements, lawyers need to take into full consideration the differences in cross-border agreements and tailor them to the client’s requirements.
By Jiacai Tan, Partner, Dentons Shanghai
This Article was originally published in Issue 5.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
