Article for CBBC IPR Newsletter

Licensors, Chinese licensees and rights

Before entering into a software licence agreement with a licensee in China, it is essential to take legal advice in relation to the laws of the People’s Republic of China (Chinese law). Licensors need to be aware for instance that certain of their standard Terms and Conditions might be invalid under Chinese law. 

Licensors should not assume that their English law and jurisdiction clause applies

Even if the governing law of a licence agreement is English law and the contract is subject to the exclusive jurisdiction of the English courts, if the use of the software in question is within the PRC, the performance of the licence agreement and the use of the software must not contravene Chinese law.

If, for example, the licence contains a provision requiring that a Chinese licensee undertakes not to copy, translate, adapt or modify the software except to the extent expressly permitted in the agreement, it is likely that this will contravene Article 16 of the Regulations on the Protection of Computer Software.  Under that provision, the owners of legal software copies enjoy the right to carry out necessary revisions for the purpose of using the software. 

In addition, under Article 329 of PRC Contract Law a technology contract which illegally monopolizes technology, impairs technological improvement or infringes third party technology is invalid.  Article 10 of the Interpretation of the Supreme People’s Court concerning Some Issues on Application of Law for the Trial of Cases on Disputes over Technology Contracts further elaborates that restricting a party’s ability to make new research and development in relation to the technology or restricting a party’s ability to use the improved technology, or non-reciprocity in relation to the conditions for both parties to exchange the improved technology, would fall foul of Article 329.

It is clear therefore that a Chinese licensee has certain legitimate rights to modify or improve the software and any attempt to restrict this ability might contravene these laws and regulations and render the clause invalid under Chinese law.  

Similarly, if the use of the software is within the PRC, provisions which seek to exclude warranties and conditions, whether express or implied by statute, common law or otherwise (such as those relating to satisfactory quality and fitness for purpose) must not contravene Chinese law. Certain limitation of warranties may not be enforceable if they are in conflict with Chinese law or impair the public interest.   Therefore, any provisions in a licence should make it clear that exclusion of warranties and conditions shall be permitted not only in accordance with English law but also with Chinese law.

Provisions that seek to place a ceiling on damages for a breaching party’s liability under the contract may contravene Articles 113 and 114 of PRC Contract Law.  Under these provisions the amount of damages incurred due to the breach of contact shall be equivalent to the other party’s loss resulting from the breach, including any benefit that may be accrued from performance of the contract, provided that the amount shall not exceed the likely loss resulting from the breach which was foreseen or should have been foreseen by the breaching party at the time of conclusion of the contract.  A party may petition a Chinese court or arbitration committee, who would have the power to increase or decrease the amount depending on whether the amount prescribed in the agreement exceeds or falls short of the loss resulting from the breach.  Other provisions which seek to exclude liability may also not be enforceable under Chinese law.

Further, even in circumstances where a licensor has proved that English law is the governing law in respect of the agreement, if the PRC court is unable to locate the content of the relevant foreign legal provision, the PRC court may still apply PRC law in relation to some or all of the issues in the contract.

What about the enforceability of a foreign judgment by a court in PRC?

Although there is a mechanism for enforcement of foreign judgments in China (by way of an order of enforcement), in reality it is very rare that such judgments are enforced by PRC courts in China.  Equally, there is no straightforward mechanism for the enforcement of a judgment obtained in a Chinese Court in the United Kingdom.

Any party wishing to enforce a Chinese judgment in the UK will have to rely on the complex common law rules as there is no reciprocal enforcement of judgment treaty between Britain and China.  However, both Britain and China are signatories to the New York Convention of 1958. This means that an arbitral award obtained in an arbitration (as opposed to Court proceedings) may be enforceable in China.   

Where use of the software is within the PRC, even the few examples highlighted above demonstrate how a licensor’s ability to exploit its rights is only permitted to a certain extent and that there are plenty of protections in place for Chinese licensees.  Licensors should be aware of the implications of entering into such agreements.

Claire O’Brien

Associate

Wragge & Co LLP

With thanks to Fangda Partners for their contribution