Confidentiality agreements in China – what are the practical implications for commercial contracts?

Confidentiality in commercial contracts is a useful tool to help parties protect trade secrets, whether that’s advanced technology or lists of competitors or customers. For businesses operating in China, however, confidentiality operates under a very different mandate.

China’s mandate of confidentiality

The key distinction between China compared to jurisdictions such as the UK or the US is that confidentiality in China is often mandatory and protected under the aegis of the concept of ‘state secrets’. There are several legislative sources governing confidentiality in China, which make a distinction between state secrets and trade secrets.

A state secret is any information which is classified as such by a government agency and will fall into one of three categories: highly confidential, classified and confidential. Laws that govern state secrets include the Law of the PRC on Guarding State Secrets 2010 and Implementing Regulations on Guarding State Secrets 2014. Chinese law prohibits a wide range of offences relating to state secrets including illegally reproducing, selling or transmitting them changing software security settings, linking secure to non-secure servers, and so on. Punishment for these offences is often harsh and can range from administrative penalties to imprisonment for a minimum term of five years and in extreme circumstances, death.

Trade secrets are classed as information that is unknown to the public, is of commercial value and has been subject to corresponding confidentiality measures by the rights holder. These are governed by the Anti-unfair Competition Law of the PRC 2019 and Provisions on Several Issues concerning the Application of Law in the Trial of Civil Cases of Trade Secrets Infringement 2020, among others. Infringers of trade secrets can be subject to damages under civil liability and prison sentences under criminal liability, depending on the seriousness of the offence.

So how does this mandate impact confidentiality agreements such as NDAs or other contractual arrangements?

Confidentiality agreements in China

Confidentiality agreements are fairly common in the UK, either as imbedded provisions within a commercial contract or as a separate agreement. However, in China these agreements are often trumped by governmental requirements to disclose the information. The 2021 Civil Procedure Law, amongst other legislative measures, grants a number of authorities the power to require disclosure. These authorities include regulators, law enforcement and the courts. In practical terms, this means that should an authority require the release of information that falls under a confidentiality agreement, the agreement will not be sufficient to prevent disclosure. The doctrine of mandatory or permitted disclosure is common in commercial contracts in other jurisdictions (including the UK), but in China the power to require disclosure is much more wide-ranging. This is an important consideration for businesses seeking to enter commercial contracts in China.

Additionally, information that may be deemed as purely commercial in other jurisdictions may be regarded as a state secret in China. Any attempt to disclose such information to a third party must be approved by the government. When entering into a contract with a Chinese state-owned enterprise, parties ought to consider whether any information involved could be considered a state secret.

It is important to understand the extent to which the recipient of confidential information can or should push back against authorities demanding the release of information. A business operating in China therefore needs to have a clear policy for how to deal with such demands.