Implied Warranties in a Technology Import Transaction

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The statutory imposition of certain warranties has caused uncertainties. Article 25 of the Regulations of the People's Republic of China for the Administration of Technology Import and Export (Technology Regulations) provides that the licensor of a technology import contract shall (应当) warrant, among other things, that the licensed technology is "complete, free of error, effective and capable of achieving the agreed technological target". This statutory requirement seems mandatory, since it uses the term 'shall' and does not otherwise allow the parties to agree on any exceptions. Arguably, the imposition of these mandatory warranties in a technology licence contract is misleading.

Does the term 'shall' mean 'mandatory' in all cases?

Although there are few clear and established rules for identifying 'mandatory' terms for a contract, a rule of thumb is to try to ascertain a public policy rationale. Some Chinese legal scholars indicate that whether the term 'shall' introduces a mandatory term should be determined on a case-by-case basis. Therefore, it would be fair to argue that although Article 25 of the Technology Regulations uses the term 'shall', it does not necessarily make it a mandatory term if a public policy rationale is lacking.

What is the rationale?

The statutory language in the Technology Regulations originates from the Contract Law of the People's Republic of China (Contract Law), which contains an almost identical provision on warranties that a technology transferor is required to give in a technology transfer contract (see Article 349). A technology transfer contract under the Contract Law refers to a contract that involves one of the following four types of transactions: (i) assignment of patents; (ii) assignment of patent applications; (iii) assignment of technical expertiseknow-how, or (iv) license of patents.

A transfer by license or assignment of patents or patent applications resembles a transfer of personal property. The same is true for assignment of unpatented inventions (or technical know-how). In this case, certain warranties applicable to a contract involving the transfer of personal property may be triggered when transferring intangible personal property like patents or unpatented inventions. It follows that a minimum standard of quality required by personal property may be applicable to intangible property if the contract is silent in this regard.

The public policy rationale to support the imposition of implied warranties is intended to protect third parties against risks posed by defective goods supplied by sellers. If what is being transferred is analogous to personal property, the technology being transferred should possess a minimum quality standard. That said, a plausible public policy rationale is absent. The imposition of mandatory warranties means that the licensed technology must attain a higher standard of being "complete, free of error, effective and capable of achieving the agreed technological target". Furthermore, the imposition of such mandatory warranties is unrealistic in certain industry sectors like the computer software industry.

Can a party disclaim implied warranties?

Under PRC law, a seller under contract for the sale of goods can disclaim implied warranties by indicating in the contract that the goods do not possess all the properties for use that are required by such goods. In this context, the public policy is to ensure protection of parties' freedom of contract as long as the interests of third parties are not harmed. By the same token, a technology transferor should also be able to disclaim implied warranties relating to the quality aspect of a licensed technology with detrimenting the interests of third parties.

Arguably, another public policy underlying the Contract Law, to "facilitate the progress of science and technology" and to "accelerate the commercialization, application and dissemination of the achievements of science and technology" (see Article 322), should favour a disclaimer of such implied warranties. Otherwise, inventors would be hesitant to transfer their technologies to others due to concerns over potential liability for breach of those mandatory warranties that cannot be disclaimed. Nonetheless, this position is unclear under both the Contract Law and the Technology Regulations.

In the context of technology licence contracts, it appears that labelling implied warranties as mandatory would be incorrect. By definition, a mandatory term may not be waived or amended by the parties, while an implied term, although imposed by operation of law, can be waived or amended by the parties. In view of all the public policy rationales considered here, there is a valid argument that Article 25 of the Technology Regulations is not mandatory because the correct term to be assigned to Article 25 should be 'implied warranties', which can be disclaimed.

When do the 'implied warranties' apply?

It is certain that even if implied warranties may be applicable, only the four types of transactions specified in the Contract Law would be affected. This would allow parties to other types of technology transfer contracts involving software licence and technical services to ignore such implied warranties. Furthermore, if the parties have chosen the laws of a foreign jurisdiction as the governing law of their contract, the implied warranties imposed under PRC law can be avoided in their entirety.