China contract damages

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:

I can understand why your [Chinese] supplier is balking at the $350,000 figure we suggested. As we discussed when drafting the initial NNN agreement, that is a relatively high amount, and considerably more than the $100,000 to $150,000 figure we recommended be used. Choosing this amount in any contract is more art than science. It is not supposed to be a penalty, but rather a realistic assessment of the damages you would incur if the Chinese side were to breach this NNN agreement, say by selling a container full of your products directly to a third party.
I understand your frustration with your dollar figure being rejected, but we virtually always can get reasonable Chinese parties to agree on reasonable contract damages amounts for our China NNN Agreements. It may be a tiny bit tougher here because the Chinese side might be irritated at us for our initially inflated figure, but I remain confident we can all agree on a number and quickly.
I therefore very strongly advise against deleting this language entirely because it is this provision — more than any other — that gives this agreement its teeth. This provision tells the Chinese side the minimum damages it will almost certainly have to pay if it breaches this contract and Chinese companies know Chinese courts enforce these provisions. They also know Chinese courts use these provisions to freeze assets before judgment. With this provision we can go to a Chinese court before trial — literally days after we sue — and get it to freeze your Chinese supplier’s assets. No company wants that, especially Chinese companies which typically do not have much money on hand. This provision is a huge advantage for you and not something you should ever relinquish willingly.

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?

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Photo of Dan Harris Dan Harris

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

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

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

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His 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.

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

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. 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 Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses 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.