Chinese Factory Won't Sign Your NNN Agreement? 5 Lessons From a China Lawyer

Short answer: most Chinese factories refuse an NNN agreement, or push for a very low penalty, because the draft they are given is one-sided. A balanced, Chinese-controlling NNN with a reasonable penalty worked out under Chinese law gets signed far more often. And some factories should not get your files at all, signed or not.

I'm Matthew Chou, a PRC-licensed attorney. Much of my work is drafting and negotiating NNN agreements between foreign brands and Chinese manufacturers, from Amazon sellers to companies making exhibition pieces and premium consumer products. "The factory won't sign" is one of the most common things I hear. Here is what I have learned from those negotiations.

Why Chinese factories refuse to sign an NNN

It is tempting to assume that a factory refusing an NNN is planning to copy you. In my experience that is rarely the main reason. More often, the agreement itself is the problem.

A typical draft a factory receives is written in English under US law, places every obligation on the factory and none on the buyer, and ends with a penalty of hundreds of thousands of dollars. From the factory's side, that reads like a trap. Its sales staff may not understand the English, its boss sees an unlimited risk attached to a small order, and the easiest answer is no.

The fix is not to drop the protection. It is to balance the rights and obligations of both sides. An NNN that is Chinese-controlling, clearly structured and fair to the factory gets read, understood and signed. The NNN I use with clients runs to about 22 pages in Chinese and English, including schedules, so it is not short. What matters is that the factory can see its own position is protected too.

1. Balance the agreement, and write it in Chinese

The Chinese version should govern. It is the version the factory reads, and the version a Chinese court or arbitration body will work from. A bilingual agreement where the English controls invites arguments about what the Chinese text "really" meant.

Balance also means being specific. Instead of "all information is confidential", the agreement should say what is being protected: drawings, tech packs, samples, tooling, pricing, customer details. A factory is much more willing to sign a clear list than an open-ended promise.

2. Carve out the factory's own existing technology

The biggest worry for most factories is that signing will stop them making their own products. A factory that has made similar items for years does not want an agreement that lets a new customer claim its standard processes.

Say clearly in the NNN that the factory's prior technology and general manufacturing know-how are not covered. Then define what is yours. This removes the most common objection, and it makes the agreement stronger, not weaker. A court is far more willing to enforce a clause that only protects what the buyer actually brought to the table.

3. Don't chase a big penalty

Buyers often want the biggest number they can get. A huge penalty does two things, both bad. It scares the factory away from signing, and it is unlikely to be enforced in full.

Under the PRC Civil Code (Article 585), a court can reduce a penalty that is excessively higher than the actual loss. In practice, a penalty more than 30% above the loss is generally treated as excessive. So an inflated figure buys you a harder negotiation and very little extra protection.

A better approach is to have a lawyer work out a reasonable penalty under Chinese law before the draft goes to the factory. It can be tied to something the factory understands, such as the order value or the value of the tooling, and combined with the right to claim the factory's profits from a breach and any loss above the penalty. A figure the factory sees as fair is more likely to be signed, and more likely to be paid.

4. Some factories should not get your files at all

This is the line I hold firmly with every client. Some small companies have little awareness of intellectual property. They care about the order far more than about protecting your design. With these companies, do not sign, and do not send drawings, samples or tech packs.

The warning signs are usually visible before you share anything:

• a history of intellectual property lawsuits, especially as the defendant;
• very low registered capital compared with the size of the order;
• a company name, address or bank account that does not match what they told you;
• pressure to send full drawings before any agreement is in place.

This is why supplier verification should be done before the NNN, not after. Check the registered Chinese name, the Unified Social Credit Code, the litigation record and who can sign for the company. If the checks raise problems, an NNN will not fix them. It is better to walk away before your designs leave your hands.

5. Don't sample with more than two factories at once

Many buyers send the same design to five or six factories to compare samples and prices, and ask each one to sign an NNN. It feels safer. It is not.

Every factory that holds your files is one more place they can leak from. And once your design appears on Alibaba or in a competitor's catalogue, the hardest question is which factory leaked it. With six possible sources, proving it against any one of them becomes very difficult, and an NNN you cannot enforce against a specific party does little for you.

My advice is to verify first, narrow the list, and send your files to no more than two factories at a time. More NNNs does not mean more protection.

What if the factory still won't sign?

Sometimes a factory refuses even a balanced agreement. That can be a useful signal in itself, especially when the order is small and the design is valuable. Before giving up on a factory you want to work with, there are a few options:

• Put the core non-use and non-circumvention terms into the purchase contract or purchase order, so accepting the order means accepting them.
• Share information in stages, starting with what the factory needs to quote, and keep the full tech pack back until the agreement is signed.
• Keep a dated record of what you sent, when and to whom. If a dispute comes later, this record is often the most important evidence you have.

Frequently asked questions

Is an NNN agreement enforceable in China?

Yes, if it is drafted for China: Chinese-controlling, governed by PRC law, with a Chinese court or arbitration body for disputes, and signed by the correct registered company. An English-only NDA under US law is much harder to enforce against a factory whose assets are in China.

What is a reasonable penalty in a China NNN?

There is no single number. It depends on the order value, the value of the design and tooling, and what a breach would realistically cost you. Because Chinese courts can reduce excessive penalties, the figure should be worked out under Chinese law rather than set as high as possible.

Should I sign an NNN with every factory I contact?

No. Verify factories first, then share your designs with no more than two at a time. Each extra factory adds leak risk and makes it harder to prove who leaked.

Should I verify a Chinese factory before signing an NNN?

Yes. Verification tells you who you are actually contracting with and whether the company has warning signs, such as IP litigation or very low registered capital. An NNN signed by the wrong company, or by a company you should not have trusted, protects very little.

If your factory has refused an NNN, or offered a penalty that feels too low, I'm happy to look at where the negotiation stands.