Our China lawyers love liquidated damages provisions (a/k/a contract damage provisions). We love such provisions for the simple reason that they work.
In our experience (and that of other China attorneys with whom we have discussed the issue), putting the right liquidated damages provision in your China contract consistently does the following important things:
- Increases the likelihood that your Chinese counterparty will abide by your contract.
- Increases the likelihood of your being able to avoid litigation if your Chinese counterparty breaches your contract.
- Increases the likelihood of your being able to prevail quickly in litigation if you do end up needing to sue your Chinese counterparty.
The below email is typical of what our China lawyers often send to our clients after they complain of how the damages provision we have put into their contract (be it an NNN Agreement or an OEM Agreement or an IP Licensing Agreement or a China Distribution Agreement or whatever) is too low:
I would not advise our raising the amount of the contract damages, and even the $350,000 we have put in here is fairly high. Note that this is a per event penalty and it is intended to represent a fair estimate of your losses from each breaching event. When the amount of the contract damages is too high, the Chinese side is unlikely to sign the agreement because they will think that you are being unreasonable and or demonstrating your inexperience with how to conduct business in China. Equally importantly, a Chinese Court is unlikely to enforce a much higher amount because it will view it as not having a sufficient relation to the actual damages.
That said, there is nothing “magical” about $350,000. Let’s talk more about what your losses are likely to be and see whether we can come to a number we both like.