I. Typological and Structural Thinking in Commercial Transactions

For a commercial transaction project, the core work of the transaction lawyer is, together with the client, to design and negotiate the transaction structure, and on that basis to draft the transaction documents. In a sense, the transaction contract corresponds at law to the transaction structure, and the transaction structure in turn reflects the commercial usages of the trade or the business wisdom of the parties.

Beyond a comprehensive command of legal knowledge and analytical skills, sound transaction structuring presupposes a working understanding of the client's industry and business background; and the drafting of transaction documents depends in equal measure on a typological grasp and structural thinking of the principal legal features of the transaction. This is because a complex commercial transaction usually comprises not only the rights and obligations that determine its principal legal character (the primary obligations or primary debts), but also a host of ancillary rights and obligations. It is the structure of the primary legal obligations that fixes the legal characterization of the transaction. Typological and structural thinking is therefore essential to drafting the contract and its clauses, and equally essential to the correct application of law.

Typological and structural thinking in commercial transactions means grasping, for any given commercial transaction, the legal features of the various types and structures of nominate contracts. How a commercial transaction is to proceed turns on the parties' primary performance obligations under the contract (their contracting purposes). Typological and structural thinking is thus the legal foundation of transaction structuring, and the foundation for grasping the structure of a transaction at law. Its principal features are:

• grasping the statutory definitions of the legal features of each nominate contract type;
• grasping the trade usages generally observed in the relevant industry;
• designing the transaction structure within the framework of typology and trade usages; and
• recognizing that the drafting of contract clauses is the legal response to, and solution for, the potential risks of the transaction.

The statutory definition of each nominate contract is, in effect, the "legislation" or "legal solution" outline for the type and structure of that commercial transaction. Transaction structuring answers how the transaction is to proceed and how each party's interests are to be realized; the transaction contract and its clauses answer how the primary obligations (primary debts) of each party are to be fully performed at law.

Depending on the type of transaction regulated, the law also prescribes the risks and liabilities that the parties should consider, in order to provide gap-filling legal protection when the contract is silent. But those provisions should rather serve as drafting and review checklists — the parties should make detailed provision, and should not count on statutory gap-filling when a dispute or lawsuit arises.

By way of example, Article 595 of the Civil Code provides: "A sales contract is a contract whereby the seller transfers the ownership of the subject matter to the buyer and the buyer pays the price." Article 596 provides that, apart from the matters prescribed in Article 470, a sales contract may also contain clauses on packaging, inspection standards and methods, method of settlement, and the language of, and the effect of, the contract. Accordingly, whether the subject matter is movable or immovable property in the property-law sense (tangible assets), equity interests or the right to use construction land, patents, trademarks or copyrights in the IP-law sense (intangible rights), or a mixture of tangible property and intangible rights, the transfer of ownership in exchange for payment is the dominant legal feature of the sales transaction structure. All structuring and drafting serve that end.

Another example: Article 851 of the Civil Code provides: "A technology development contract is a contract concluded by the parties with respect to the research and development of new technologies, new products, new processes or new materials and their systems." Article 858 provides that where, in the course of performing a technology development contract, research and development fails wholly or partially because of insurmountable technical difficulties, the risk liability is allocated as agreed by the parties; absent agreement or where agreement is unclear and cannot be determined under Article 510, the risk liability is reasonably borne by the parties. Clearly, whether a technology development contract takes the form of commissioned development or joint development, its purpose is to obtain intellectual property rights — new technologies, new products — and their ownership, whether by way of commission or joint development. But because intellectual property is intangible and cannot be "exclusively possessed" by one party in the way a physical object can, and because the very character of "new technologies, new products" makes confidentiality critical, while the risk of development "failure" is considerable, these are the dominant legal features of a technology development contract. The structuring and drafting of such contracts must therefore give full weight to these features, and make explicit and specific provision for the confidentiality, ownership, use, further development and use, and the allocation of failure risk and costs of the intellectual property, so as to eliminate, so far as the law can, the seeds of future disputes.

International trade usages are the most typical embodiment of typology and structure in international transactions. The "Trade Terms" of the International Chamber of Commerce, for instance, represent different allocation of delivery conditions, risk, transport, insurance, loading and unloading costs and liabilities; the "methods of settlement" usages (the UCP for letters of credit; the URC for collection, D/P and D/A) represent different modes of payment and different degrees of payment risk.

In a complete-plant import, for example, structuring the transaction and drafting its clauses naturally and unavoidably involves the import of equipment (sale of goods), the introduction of technology (patents, know-how, technical training services — commissioning and personnel training), and international settlement. All of these must be designed and drafted on the basis of a firm command of the usages, according to the dominant legal features of each category of transaction structure, and the agreed allocation of risk and responsibility.

II. The Importance of Typological and Structural Thinking

The heads of terms (term sheet) of a commercial transaction is both the framework agreed between the parties and the premise "facts" on which the transaction lawyer designs and drafts the clauses. The type and structure of the transaction determines the character of the primary legal obligations in the framework, and determines how these "facts" are to be analyzed and translated, at law, into transaction clauses through the contract building blocks — representations and warranties, rights and obligations, conditions precedent, discretionary powers, remedies for breach, and definitions. A deep typological and structural grasp of the transaction is therefore the precondition for translating a commercial transaction into a commercial contract (clauses).

Insofar as the commercial contract (clauses) is the "law" between the parties, both the transaction structure and the corresponding contract are means of realizing the commercial terms. Whether structure or clauses, what they supply is a legal solution for achieving the commercial terms — how the transaction will proceed according to the terms, how potential risks and liabilities during performance are to be allocated at law, and how the transaction is to be terminated or brought to an end. Structural thinking enables the lawyer, whether at the negotiating table or at the drafting desk, to view the "facts" from a systems-engineering perspective — as interconnected and interactive — and to select the appropriate building blocks for the purpose of the deal.

The importance of typological and structural thinking is further shown by the fact that complex commercial transactions are necessarily combinations of different transaction structures and mixtures of nominate contracts of different legal character — mixtures, in other words, of primary rights and obligations of different nature. A complex commercial contract can rarely be pigeonholed into a single statutory contract type; it is usually a hybrid of several types. As noted, a large complete-plant import combines equipment and technology (involving equipment, technology transfer, installation, commissioning and technical training services), and a major construction contract may combine technology and financing. But the structure and its drafting must distinguish the primary from the ancillary. The dominant structure or primary performance (primary debt) determines the direction of legal application and interpretation and their value orientation — which is of the first importance in construing the contract (its purpose, clauses and wording) once a dispute or lawsuit arises.

Most importantly, transaction structuring and contract drafting or review today routinely start from templates. Template contracts and template clauses abound online and in bookshops, inviting shallow copy-paste without understanding. Many disputes and lawsuits are closely connected to defective transaction clauses. Only by firmly mastering typological and structural thinking can one identify where the focus, the risk and the control of a particular transaction lie. In a sense, commercial drafting is drafting "for risk": the contract building blocks are the transaction lawyer's legal toolkit for allocating risk — wherever there is risk, there should be a clause that responds to it. Typological and structural thinking is thus the framework and boundary within which one drafts from templates or reviews and amends the counterparty's text, and it should be firmly observed and grasped.

Concluding remarks: Guided by typological and structural thinking, a good transaction contract is more than a set of legal rules between the parties: it also carries the transaction patterns (usages), the ways of thinking, and the wisdom of the trade in solving transactional problems. Only by mastering this wisdom can one better identify and analyze risk, deliberately deploy the contract building blocks (representations and warranties, rights and obligations, conditions precedent, discretionary powers, remedies for breach, definitions) to allocate risk, reduce the risk of future disputes arising from unclear provision, and add value to the transaction.

I. Legal Characteristics of Technology Contracts

Article 843 of the Civil Code provides: "A technology contract is a contract concluded by the parties to establish mutual rights and obligations with respect to technology development, transfer, consultation or services." A technology contract is in essence still a civil contract, but because its subject matter involves technological results and technology services, it has legal characteristics distinct from ordinary contracts, mainly in five respects:

First, special parties. At least one party to a technology contract must be a natural person, legal person or other organization that masters certain technology and can supply technology or technology services to others.

Second, intangible subject matter. The subject matter of a technology contract is a technological result or technology service — systematic knowledge, technical solutions — which is intangible property. The technology itself is intangible, while its carriers (design documents, drawings, tapes, complete plants, etc.) are tangible. A single technology can be mastered and used by multiple parties at the same time, allowing its value to be realized repeatedly.

Third, purpose of use. The purpose of a technology contract is not primarily to transfer ownership, but to exploit the technology (the right of use) to create wealth. In a technology transfer contract, for example, the transferee accepts the technology in order to produce qualified products — it accepts technology that can be converted into productive capacity, not a merely theoretical technology. The most important subject matter of a technology transfer contract is therefore the right to use the relevant intangible rights, not the intellectual property or the technology itself.

Fourth, special performance. Performance of a technology contract consists mainly in granting technology licenses or supplying technology services, not in delivering goods. Performance frequently gives rise to questions of ownership of other technology-related rights, and the contract is governed not only by the Contract Book of the Civil Code but also by intellectual property regimes such as the Patent Law. Because of the uncertainty of technological results and the riskiness of technology development, the doctrine of specific performance under contract law may be unworkable in technology contracts — where the technical difficulty exceeds the developer's actual capacity, specific performance is in fact impossible. In addition, a technology contract is concluded on the basis of trust and has a personal character: the primary obligations must be performed by the parties themselves and can hardly be performed by third parties. Given the confidentiality of technology and the fact that performance consists mainly in technology implementation, the duty of cooperation and the duty of confidentiality are of particular importance.

Fifth, dual legal regimes. A technology contract is governed by the Contract Book of the Civil Code and also by laws protecting technological results, such as the Patent Law and the Anti-Unfair Competition Law. Issues of ownership of technological results are governed by the Patent Law and related IP law; issues of exploitation of technological results are governed by the Anti-Unfair Competition Law (in particular the protection of trade secrets); and the formation and performance of the contract are governed by the Contract Book of the Civil Code. This dual regime requires the technology contract lawyer to command both contract law and intellectual property law across fields.

II. Key Points in Drafting Technology Contract Clauses

Article 845 of the Civil Code sets out the general clauses of a technology contract: the project name; the content, scope and requirements of the subject matter; the plan, progress, time limits, place and mode of performance; confidentiality of technical information and data; allocation of risk liability; ownership of technological results and the method of sharing proceeds; acceptance standards and methods; the price, remuneration or royalty and the method of payment; the method of calculating liquidated damages or damages; the method of dispute resolution; and interpretation of terms and expressions. Below I address the core clauses that most deserve attention in practice.

(1) Content, scope and requirements of the subject matter — the core clause. This is the heart of a technology contract and the basis for determining the parties' rights and obligations. Different types of technology contracts have different emphases: a technology development contract aims at obtaining a technological result and should specify the technical field, project content, technical composition, level of science and technology, economic benefit targets and ownership of intellectual property; a technology transfer contract aims at obtaining the right to exploit the technology to create wealth and should specify the field of the result, its substantive features and effects of implementation, the degree of industrial development and ownership of intellectual property; a technology consultation contract is concerned with decision-making services and should specify the content of the consultation and the requirements for the report and opinions; a technology service contract is concerned with solving specific technical problems and should specify the content of the services, the work product and the technical requirements.

(2) Allocation of risk liability. During performance, a technology contract — above all a technology development contract — may fail wholly or partially because of insurmountable technical difficulties: this is the risk of performance. Article 858 of the Civil Code provides that the risk liability in a technology development contract is allocated as agreed; absent agreement or where agreement is unclear, it is reasonably borne by the parties. In practice the contract should expressly provide the duty to notify of risk, the duty to mitigate loss, and the proportion of risk sharing; one should never rely on the statutory default rule.

(3) Ownership of technological results and sharing of proceeds. A technology transfer contract does not itself create new technological results, but the improvement of the transferred technology after transfer does create new results. It is best to make express provision for the ownership of, and benefit sharing in, these new results. The general principle is that ownership of a technological improvement belongs to the party that made it; where the parties exchange improvements, they should do so on a reciprocal or equivalent basis by way of cross-licensing, and refuse one-sided "grant-back" clauses.

(4) Price and method of payment. The price of a technology contract is influenced by eight factors: economic benefit, social benefit, degree of maturity, cost of research and development, market supply and demand, degree of industrial development, difficulty of implementation, and number of transfers. Article 846 of the Civil Code prescribes four methods of payment: lump-sum payment in full; lump-sum payment by installments; running royalty; and running royalty plus an initial down payment (front-end fee). In practice, "front-end fee plus running royalty" — under which the parties share risk and share reward — is the most common payment method in technology transactions both at home and abroad. The front-end fee, generally 10%–20% of the total price, is the first payment made before benefits accrue.

(5) Special clauses of technology license agreements. A technology license agreement is the most complex form of technology transfer contract. Beyond the general clauses above, special attention should be paid to:

• License Grant: expressly define the type of license (exclusive license, sole license, non-exclusive license, sub-license) and the scope of the rights of use, manufacture and sale and their geographical limits.
• Technical warranty and title warranty: the licensor warrants that the technical documentation supplied is complete, reliable and correct and that, if properly used by the licensee, will achieve the agreed product quality and technical specifications (technical warranty); and warrants that it has lawful title to the technology, and that if a third party alleges infringement, the licensor bears all liability (title warranty).
• Confidentiality: the confidentiality period should match the nature and life cycle of the technology. The obligation of confidentiality survives termination of the contract, unless and until the information enters the public domain.
• Review of restrictive business clauses: identify and refuse unreasonable clauses, such as requiring the licensee to purchase technology or equipment it does not need, restricting the licensee's output volume or resale prices, or prohibiting the licensee from continuing to use the imported technology after expiry of the contract.
• Expert mechanism in dispute resolution: disputes over technology contracts frequently involve professional technical questions; the parties may agree that each shall appoint an independent expert to render an opinion, with detailed provision for the sharing of expert fees.

III. Common Pitfalls in Practice

(1) Insufficient understanding of the technical subject matter. In technology transfer contracts, the transferee is often at a disadvantage for lack of technical intelligence and because technology is difficult to evaluate. In practice one should bear in mind: to be the subject matter of a technology transfer, the technology must have specific and complete technical content forming a technical solution rather than an abstract theory, must have specific technical specifications, functions and scope of application, and must be a technological result already in the possession of the parties. Technology still under development, not yet mastered, or whose patent has expired (and which is thus public knowledge) cannot be the subject matter of a technology transfer contract.

(2) Neglect of risk liability clauses. In technology development contracts, parties often fail to provide for risk-sharing, the duty to notify of risk, and the duty to mitigate loss. Once development fails, they must fall back on the statutory default rule of "reasonable sharing," which easily breeds disputes. It is advisable to specify in the contract: what constitutes "development failure," the procedure and time limits for risk notification, the concrete requirements of loss mitigation, and the proportion of risk cost sharing.

(3) Inadequate measures to protect trade secrets. The legal protection of know-how presupposes that "appropriate confidentiality measures have been taken." The standard for adequacy is: measures which, given the characteristics of the technology and under the existing physical and technical conditions, the right holder reasonably takes and which can effectively control and protect the technology. The governing principle is "respect reality; do not demand the impossible" — confidentiality measures are like a lock on a door: they do not stop the determined thief, but they must manifest the intention to keep the secret.

In practice, the following three situations are not regarded as taking confidentiality measures: (1) no clear intention to keep the secret — the object of confidentiality was not disclosed to the person assuming the obligation; (2) disclosing the technology without the other party being willing to assume confidentiality obligations — no foundation of trust was formed between the parties; and (3) the product itself reveals the trade secret, or the secret is obtained by reverse engineering — the technology has then entered the public domain. It is recommended that enterprises establish systematic confidentiality regimes (confidentiality rules, document registration, visitor registration, etc.) and set up complete confidentiality clauses in technology contracts, so as to protect trade secrets through double safeguards.

(4) Mindless use of templates. In line with the article "Typological and Structural Thinking in Commercial Transactions," drafting technology contract clauses must never be mere copy-paste. Template contracts and template clauses can only be a starting point; every clause must be reviewed and tailored to the technical characteristics, commercial conditions and risk allocation of the specific transaction, using typological and structural thinking. Only by firmly mastering typological and structural thinking can one identify where the focus, the risk and the control of a particular transaction lie, and add value to the transaction.

Concluding remarks: The technology contract is one of the most complex types of commercial contract, and its complexity stems from the intangibility of the subject matter, the special character of performance, the uncertainty of risk and the dual legal regimes. Mastering the typological features of technology contracts — taking the statutory contract types as the analytical unit to precisely locate rights and obligations — is the precondition for drafting high-quality technology contracts. A complete, clear and well-drafted technology contract is the product of the transaction lawyer's structural thinking, translating the commercial terms of the deal into a legal solution. It carries not only legal rules, but the wisdom of the trade and the art of risk allocation.