Liuming International China Business Lawyers

The language used for a China contract is very important

March 23rd, 2016

The language used for a China contract is very important. Cross border contracts in general raise many issues beyond those in purely domestic contracts, including those of governing language. China related contracts need special consideration if they are going to be both technically sound and practical in use. The language used for a China contract is particularly important if dispute resolution, arbitration or court, is to take place in China, but that is not the only consideration.

Common approaches to the language used for a China contract

The four common approaches to the language used for a China contract are (for simplicity, here we assume here that the foreign language is English):

  1. Chinese or English only (English only is now relatively uncommon, but still seen);
  2. Chinese only with a “reference” translation to English;
  3. English only  with a “reference” translation to Chinese; and
  4. Both Chinese and English versions of the same contract as a single document or set of documents.

We need to think about contracts in principle. A practical definition of a contract is an agreement enforceable at law. A key part of what lawyers do is to ensure that an agreement becomes a contract by being technically and practically  enforceable at law.

The language used for a China contract is not just about enforcement

If the trappings of enforceability are there, but there is no true agreement there may not be a contract at law: even if there is a contract at law, without full understanding of the content, there are likely to be issues with performance. You might wonder how a party can agree to the detailed content of a contract where they lack the language skills to read and understand it. At best, they are relying on an assurance of what it contains, at worst, they do not know the detailed content. Understanding the content of a contract is integral to its performance, and performance issues are usually raised well after signing and in the absence of advisers. At that point, there is just the contract itself.

“Reference” translations

Any suggestion of using either language with a “reference only” translation, whether in writing or delivered orally should be considered carefully and skeptically. “Reference” in this context usually means that the translation is not complete.  At best, “reference” may means something like “we think this is accurate but we are not prepared to include it in the contract itself, just in case it is not completely accurate”.

Of course, there is a chance that the “reference translation” is both complete and accurate, but if it is, why is it not contractual?

In some ways the use of “reference” translations is understandable.  As previously commented, it is not easy to get good contract translation.  It has a cost and requires highly skilled people. Not every law firm can or wants to provide this. Sometimes a party, without fully understanding the risks they are taking, accepts the “reference” approach for economy. It is false economy in most cases.

A rarely discussed issue with translations that are not incorporated in the contract document set is that they lack authority and acceptance and may also be lost. Oral translations are ephemeral and of little practical use.

Our policy is that the only really sensible approach to the language for a China contract is that the contract should be accurately set out in the languages of both parties: ie Chinese and English.

Issues with using more than one language for a China contract

Once the bilingual approach is accepted, it immediately raises the question of what is to happen if there are differences between the language versions.  In most bilingual contracts a “governing language” provision is used to deal with this. Typically, one or the other of the languages is stated to prevail in the case of conflict between versions.  If dispute resolution is to be in China, making the English govern can raise as many problems as it solves, as mentioned below.

Arbitration can be conducted in a foreign language in China, but if the arbitrator(s) are Chinese they will be most comfortable and fluent in Chinese.  Human nature being what it is, and irrespective of the “governing” clause, they are likely to refer to the Chinese language version, at least for guidance;

If a Chinese court is the chosen dispute resolution venue, all evidence, including the English governing version,  will have to be translated into Chinese by a court designated translator. In a bilingual contract this is unnecessary, unproductive, and also a needless cost.

A compromise position, frequently used when the parties are unable to agree on a prevailing language,  is a provision that states that both language versions are equally authentic.  The consequence of this is that the tribunal or court can decide which language version they will use – in China, it will most probably be the Chinese version.

Of course, the contract can provide that the Chinese version governs. Properly explained, a foreign party will usually agree to this.

Overall, if a bilingual approach is to be adopted, accurate translation will be important. Unfortunately it cannot be assumed that all translators will be competent for a legal document. They are not. Legal translation, like legal drafting itself, is a special skill. Never be embarrassed about inquiring who will do the translation and how it will be checked for accuracy.

Practical benefits of bilingual contracts

The most important benefit of using a bilingual contract is that the parties will each have adopted the details of the terms it contains during the negotiations and ultimately by signing. It is the most certain way of ensuring that both parties understand and have agreed to its content, including:

  1. their rights and obligations – who will do what and when;
  2. the processes to be adopted if something unforeseen arises – consultation, notices, etc etc;
  3. the method for the resolution of disputes that the parties are unable to resolve themselves.

Hard to imagine how a contract can function otherwise. Practically, the signing a contract in a language that a party cannot read and understand is likely to lack the personal adoption and commitment that very often is the key to successful performance.

Another often underestimated benefit is that the translation is an inherent part of the contract document.  It cannot be separately misplaced. It is there when, as often happens, the people originally involved in the contracting process have moved on, taking with them their corporate memory including details of the reference translation.

The Language used for a China contract is important because it is the only tool that the parties and the tribunal or court have to work with.  A contract is too important for any party to rely on anything less than a contract that they can read in their own language.

Take away points

  • China related contracts are likely to be most effective if they are bilingual because it is important that both parties understand what is required of them.
  • A bilingual contract requires accurate legal translation, but this is not always easy to get. Why should you accept anything less than accurate translation in a bilingual contract?
  • The consequences of specifying a governing language in a bilingual contract need to be thought through.
  • Overall, any additional costs involved in preparing a quality bilingual contract are likely to be far outweighed by the increased confidence in the contracting process.

© 2016 Graham Brown. All rights reserved.

 

Posted in Articles, Contracts, Translation | Comments Off on The language used for a China contract is very important

Trademark infringement – Opple Illumination faces RMB 50 million claim.

March 13th, 2016

Trademark infringement cases on the increase?

Trademark infringement in China can have a high cost.  This is a relatively new development. The New Balance case set the high water mark and it seems very likely that others will be inspired by the award in that case.

The emerging high cost of China trademark infringement also seems likely to change the behavior of trademark owners – at least some are likely to allow infringement to run for longer so that they can seek higher provable damages.

It is really early days, but already there are cases emerging with plaintiffs seeking substantial damages. If successful they will, in turn, inspire others.  Anyone doing businessin China, Chinese or foreign, needs to be aware of the potential high cost of China trademark infringement.

According to local media, a case seeking substantial damages from OPPLE Illumination (“OPPLE”), a leading illumination manufacturer in China, has been filed at and accepted by the Chaoyang court.

OPPLE has been sued for trademark infringement by three Chinese individuals for infringing their trademark  “欧普 (The Chinese characters for OPPLE) and device” in Class 9 (wire, plug, socket etc.) with the registration number 1423367. The plaintiffs claim damages of RMB 50 million (Approximately USD 7.7 million).

An OPPLE distributor in Beijing is also being sued by the plaintiffs in the same case for selling the infringing products in Beijing.

Background

OPPLE applied to register the Chinese characters for OPPLE (欧普) in all 45 classes in China and has successfully registered in most classes.

However, for reasons unknown, OPPLE only registered this mark on very limited products in Class 9 (i.e. battery, flash light etc.) in 2002, but did not register it on plugs and sockets in Class 9 apparently because it was previously registered by another Chinese company in 2000 (“Prior Trademark”).

The plaintiffs bought the Prior Trademark from its original owner in 2010 and now claim that OPPLE has infringed their trademark rights by selling plugs and sockets using a trademark similar to the Prior Trademark.

An Internet search of OPPLE products indicates that OPPLE did not directly apply the Chinese character OPPLE trademark on its plugs and sockets. However, the package for these items  does show the Chinese characters trademark for OPPLE. This appears to be the basis for the trademark infringement case.

Calculation of damages for trademark infringement

OPPLE is a listed company in China and  it has to publicly disclose its financial reports annually.

OPPLE’s 2013 financial report shows its business revenue generated from “illumination controllers and others” was RMB 492 million, of which, “electric device” accounts for 45.85% with a gross profit ratio of 52.02%.

OPPLE’s 2014 financial report shows its business revenue generated from “illumination controllers and others” was RMB 677 million, of which “electric device” accounts for 37.86% with a gross profit ratio of 50.66%.

Relying on these public accounts, the plaintiffs say that the RMB 50 million damages they claim for trademark infringement is less than the profits unlawfully obtained by OPPLE from the sale of the products that are the subject of their trademark infringement case (plugs and sockets, classified within “electric device” in the financial reports).

The case has not yet been decided, and we will update this report in due course.

Commentary

It must be noted that this case is yet to be heard and the information here summarizes the plaintiff’s case only.  As with any case it is the outcome that is important and often claims made in pleadings are not made out in court.

The case is significant, however, on a number of grounds.  All parties are Chinese, confirming that IP rights are taking their place generally in China commerce, not just foreign related trade; the damages sought are large; and the method for calculating the damages claimed is interesting because it may be difficult for OPPLE to argue against their own accounts.

The status of the plaintiffs, beyond the fact that they own the relevant trademark is not yet known. Similarly the nature of their business, if any is not known to us.

Take away points

  • Trademarks are becoming even more important in China.
  • It is not enough to “just register” a China trademark. Registration needs to be done in the context of a well thought out trademark strategy that takes account of on the ground reality, including the categories of goods covered and the descriptions used in China.
  • Thorough searching is important in the registration process – the cost is money well spent in risk management. A cheap China trademark is likely to be anything but cheap in the long run.
  • You ignore previously registered trademarks at your peril.  The cost of China trademark infringement is high. If you become aware of a relevant prior China trademark do not proceed further with use in China until the issues are resolved.
  • A distributor can be held liable for China trademark infringement.  A prudent distributor in China should ensure that their principal holds relevant, valid and comprehensive China trademark registrations.

© 2016 Graham Brown And Wei Xin. All rights reserved. The assistance of Peng Wei in preparing this article is acknowledged.

 

Posted in Articles, Intellectual Property Rights, Trademark, Trademark damages, Trademark infringement, Uncategorized | Comments Off on Trademark infringement – Opple Illumination faces RMB 50 million claim.

OEM manufacturing in China with a China trademark: – China SC rules on infringement criteria

March 8th, 2016

OEM manufacturing in China with a China trademark – a changed landscape

OEM manufacturing in China with a China trademark was clarified by a recent decision of the Supreme People’s Court of the PRC which held, on the facts of the case before it, that OEM manufacturing in China with a China trademark but solely for export did not infringe the rights of the owner of the China trademark.

The judgment, issued on November 26, 2015, appears to be the first time that the Supreme People’s Court has directly addressed the issue of OEM manufacturing in China with a China trademark but solely for export.

This decision of the Supreme People’s Court clarifies a previously confusing array of local court judgments in cases regarding OEM manufacturing in China with a China trademark. Some local courts have issued conflicting decisions on apparently similar facts, others have consistent outcomes supported by materially different reasoning.

China is a civil law country and legal precedents have no binding legal effect. Despite this doctrinal position, it is expected that local courts in China will follow the decision of the Supreme People’s Court when facing similar cases regarding OEM manufacturing in China with a China trademark but solely for export, bringing a degree of certainty to this important part of China related business.

Background

The plaintiff, Focker Security Products International Limited (“Focker”) is a Hong Kong company and obtained the China registered trademark No.3071808 “PRETUL with an oval” from an individual on March 27, 2010. This trademark is registered on “hardware, hardware lock, padlock, metal lock and etc.” in Class 6 in China (“TRADEMARK”).

The defendant, Pujiang Yahuan Locks Co., Ltd. (“Yahuan”) is a Chinese manufacturer of locks and other hardware in Zhejiang Province, China.

In 2010, Yahuan signed two contracts with a Mexican company, providing that they wouldmanufacture 684 dozen padlocks for a total price of USD 3,069.79 and 10,233 dozen padlocks at the total price of USD 61,339.03. As required by their Mexican customer, Yahuan would affix “PRETUL” as a trademark on the locks.

Trial at first instance

On January 30, 2011, Focker filed a lawsuit at Ningbo Intermediate Court (“Trial Court”) claiming that Yahuan infringed its TRADEMARK rights by using an identical mark in the manufacture and export of locks. Remedies sought included:

  1. an order that Yahuan immediately stop the infringing activities;
  2. forfeiture of the infringing locks, packaging materials, and tools used in the manufacture of the infringing locks; and
  3. RMB 450,000 (a little more than USD 70,000) compensation to Focker.

Findings of fact

The Trial Court found the following facts:

  1. “PRETUL” was affixed and used on the body of the locks manufactured and exported by Yahuan, the keys of these locks and their product specifications.
  2. “PRETUL with an oval” was affixed and used on the sales package of locks.
  3. In the sales package, the Mexican customer was identified as the consignor with its address, telephone number, fax number, etc. indicated on the package. The words “Made in China” were also shown on the package but there was no information about Yahuan.
  4. The Mexican customer had registered “PRETUL” and “PRETUL with an oval” as trademarks in Mexico in Class 6 and Class 8.
  5. The Mexican customer issued a written authorization to Yahuan on March 24, 2011. In the authorization, it confirmed that it was the legitimate owner of the relevant “PRETUL” trademarks in Mexico and Yahuan was engaged to manufacture locks bearing this mark on its behalf for export only to Mexico.
  6. Yahuan agreed with the Mexican customer that: it should not sell any of the locks in China; the Mexican customer owns all trademarks and related IP rights; it should not apply for or register any trademark or copyright, directly or indirectly; and the Mexican customer was entitled to terminate the transaction at any time.

Trial Court judgment

The Trial Court held that:

  1. Yahuan was an OEM manufacturer for the Mexican customer; and
  2. its use of “PRETUL” on the body of locks, keys and product specifications should not be regarded as infringing the trademark rights of Focker with respect to the TRADEMARK because the mark used was not identical to the TRADEMARK and the goods would not be available in the China market.
  3. Yahuan’s use of “PRETUL with an oval” on the sales package of locks should be regarded as infringement of the TRADEMARK.

The Trial Court ordered Yahuan to immediately stop the use of “PRETUL with an oval” on the lock package and to pay compensation of RMB 50,000 (almost USD 8,000) to Focker.

Appeal of the Trial Court Judgment to the Zhejiang High Court

Both Focker and Yahuan appealed to Zhejiang High Court (“Zhejiang HC”) for review. No additional evidence was submitted by either party and no new facts were found.

Zhejiang HC overturned the decision of the Trial Court regarding the use of “PRETUL” on the body of locks, keys and product specifications holding that it did infringe the TRADEMARK but let the other part of the Trial Court’s findings stand.

Accordingly, Zhejiang HC revoked the trial judgment and held that Yahuan should immediately stop all use of “PRETUL” and “PRETUL with an oval”, and compensate Focker with RMB 80,000 (approx USD 12,500).

Supreme People’s Court review and judgment

Yahuan applied to the Supreme People’s Court for review of the Zhejiang HC judgment. The Supreme People’s Court approved the application on January 2, 2014, set the hearing date for April 11, 2014 and issued its judgment on November 26, 2015.

In its judgment, the Supreme People’s Court held that, OEM manufacturing in China with a China trademark should not be regarded as use of the trademark under the China Trademark Law because the basic function of a trademark is identifying the source of goods.  It cannot be infringement because there is no possible confusion in the China market.

The use of an identical or similar mark on the same or similar products in OEM manufacturing in China with a China trademark should not be regarded as infringing the rights of the owner   of the China registered trademark, because the goods are not available in the China market.

Based on its findings, the Supreme People’s Court revoked the trial judgment and the judgment of the Zhejiang HC, and rejected all claims by Focker.

Commentary

This decision, although apparently logical is not in accord with the position in some other jurisdictions and to that extent may not be welcomed by many that have their products manufactured in China.

Anybody having goods manufactured in China should ensure that their trademarks are registered in the likely destination jurisdictions because that will probably have to be relied upon if counterfeits are manufactured in China.

Customers with China registered trademarks being applied to OEM goods solely for export may need to develop a strategy to keep their trademarks alive as this decision suggests that they would not meet the “use” test if their trademark is challenged.

It remains to be seen whether this decision will be followed in local and other courts and also whether it will be applied in practice by China Customs.  In the latter case, there is a potential question of liability if goods solely for export are detained at the request of the owners of a China registered trademark.  This is an area to be watched closely.

Take away points

  • Overall, the effect and scope of this decision will take some time to work through the China courts and China Customs.
  • Despite that, we suggest that anyone involved in OEM manufacturing in China needs to reconsider their trademark strategy and OEM documentation to ensure that they are still relevant in the changed China OEM landscape.
  • Action should be taken now because the consequences of inaction are serious.

© 2016 Graham Brown And Wei Xin. All rights reserved. The assistance of Peng Wei is gratefully acknowledged.

 

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