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:

This is an old contract.
This is an old contract.
  1. Increases the likelihood that your Chinese counterparty will abide by your contract.
  2. Increases the likelihood of your being able to avoid litigation if your Chinese counterparty breaches your contract.
  3. Increases the likelihood of your being able to prevail quickly in litigation if you do end up needing to sue your Chinese counterparty.
Writing a liquidated damages provision for a China contract is two parts art and eight parts experience. The trick is determining the right amount to assess the Chinese company in damages. You want that amount to be high enough so as to deter your Chinese counterparty from breaching the contract, yet you also want it to be low enough so that your Chinese counterparty will actually sign the contract and so that a Chinese court will enforce it. Chinese courts will often simply invalidate or just ignore a contract damages provision if they deem it to be too high. Far too often American companies will put in a way too high amount “needed” to cover any potential lost profits they might lose from a breach, but in doing so they have shot themselves in the foot because no Chinese court will enforce it.

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.
Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.