The use of artificial intelligence (AI) tools to draft commercial contracts has become a common practice. However, when it comes to international manufacturing and supply agreements, particularly involving operations in China, the technology frequently acknowledges its own limitations. It is common for AI-generated contracts to feature an explicit gap in the dispute resolution clause, accompanied by a warning that applicable law, venue, governing language, and enforcement mechanisms must be defined by professionals with technical expertise.
This omission is not a minor detail. Dispute resolution provisions determine whether an agreement will have any practical utility if a breach occurs. For manufacturing contracts where the factory and equipment are located in mainland China, obtaining emergency relief generally must occur through Chinese courts. Despite the warning generated by AI tools, many companies ignore the recommendation and fill in the blanks on their own.
The Risk of Filling Gaps Without Guidance
A frequent scenario involves companies that, upon encountering a blank clause, insert the jurisdiction that seems most favorable to them—usually the law of their home jurisdiction—and then ask the AI whether the choice is valid. The tool, in turn, often provides a reassuring but inaccurate response regarding cross-border realities.
A practical example illustrates the consequences of this practice. A company shared its product designs with a sourcing intermediary in Hong Kong under a Non-Disclosure Agreement (NDA) governed by Texas law. The intermediary forwarded the designs to a factory in mainland China. After the commercial relationship ended, the designs surfaced online. The company sought to send a demand letter requiring the factory to stop using the designs, return the equipment and inventory, and disclose who else had received the information.
Practical Limitations and Ineffective Demand Letters
A demand letter only yields results when backed by a viable legal claim or practical leverage. In this scenario, significant structural flaws were present:
- Enforcement of court orders: Even if the company sued the intermediary in the United States and prevailed, a U.S. court decision would require a separate proceeding in Hong Kong to reach the intermediary’s assets. Furthermore, coercive orders (such as an order to return equipment) do not transfer from a U.S. court to Hong Kong as readily as a monetary judgment for a fixed sum.
- Litigation costs: If the contract allowed an action to be brought directly in Hong Kong, the company would first need to prove the content of Texas law before the Hong Kong court, an excessively costly undertaking.
- Defects in contractual scope: The NDA did not prohibit the intermediary from using the designs for its own benefit or competing directly with the company. Nor did it hold the intermediary liable for the factory’s use of the designs.
- Absence of privity with the factory: The factory in mainland China had signed no agreement. Without a contractual obligation, there was no commercially viable basis for a direct claim against it.
The Need for NNN Agreements
Using a standard Non-Disclosure Agreement (NDA) is typically insufficient to protect assets in China. Proper practice requires an NNN Agreement—covering Non-Disclosure, Non-Use, and Non-Circumvention. This instrument expressly prohibits the counterparty from using proprietary information to compete with the company or circumventing the business relationship to act independently.
Moreover, the original agreement lacked provisions governing the ownership, use, or return of machinery and inventory. Consequently, the company’s primary demands had no contractual backing. Sending a formal notice without a credible threat of legal enforcement is not only ineffective, but can also trigger unwanted responses from the other party.
Practical Conclusion
Distribution, licensing, employment, and investment contracts each raise distinct issues and demand specific approaches. In international manufacturing agreements, however, the dispute resolution clause is the most complex and critical section of the document. Overlooking the limitations of AI tools and selecting foreign jurisdictions without evaluating local enforcement viability can render an agreement practically useless when a company needs it most.
This content is for informational purposes only and does not constitute legal advice. For guidance on specific matters, consult a qualified lawyer.
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