Our China lawyers often stress to our clients the importance of a well-crafted contract damages provision that contains a “just-right” amount of damages the Chinese counter-party much pay for a breach. We are often asked what is just the right amount and our answer is that depends on the specific facts and to what the Chinese side will agree.
The other day, one of our China attorneys wrote the following to a client regarding a contract damages provision in a China NNN Agreement we had drafted. We had recommended one figure for the contract damages, but against our advice, our client had insisted on a much higher figure. The Chinese supplier rejected the higher figure our client waned and this frustrated our client so much it suggested we dispense entirely with the provision. The below email is our response to that:
The Chinese company ended up quickly agreeing to $130,000 in liquidated damages/contract damages.
This showed us yet again the importance of NOT putting in an unreasonably high amount for contract damages. It seems whenever our clients push for a higher amount than what our attorneys recommend, the Chinese side resists and problems begin. It is far better to come in with a reasonable amount right off the bat. If the Chinese side resists that, we then know our client has a problem with its Chinese counterpart. But when we start with an unreasonable amount for contract damages, the Chinese side quite correctly can (and almost always does) conclude that 1) our client has little to no experience in China and is basically an unreasonable company that will be difficult to deal with in the future. It is just a bad idea all around. And the thing is that most of the time clients that insist on numbers much higher than we are recommending are disproportionally inexperienced.
We have vowed to push back harder against our clients before going back to the Chinese side with an inflated number.
What are you seeing out there?