One of the things I love about my work is the different sort of clients my law firm gets. Some of our clients hardly care about the rationale behind what we as lawyers do. Other of our clients prefer an explanation for everything. The other day, one of our China lawyers cc’ed me on an email she sent to a client who wanted to know more about the contract damages provisions (a/k/a liquidated damages) we had put into a number of contracts we had just drafted for this client. I am running that e-mail below (modified slightly) because it is relevant to most China contracts and therefore relevant for just about anyone doing business with China.
The PRC Supreme Court has ruled that contract damages are always subject to being adjusted to actual damages. Adjustment can be up or down, based on the facts. That is why we never provide for a “too high” contract damage amount; we draft our contract damage provisions to comply with the actual and foreseeable damages standard.
For the following reasons, we nearly always provide for contract damages:
1. Injunctive relief is difficult to get in China.
2. One of the best ways to stop Chinese companies from infringing on your intellectual property rights (IPR) is with a prejudgment writ of attachment. To get that you need a reasonable standard for the damages for the writ. Contract damages provides that reasonable standard. The amount we specify in our contract damages provisions is clear and fair and because of that it serves as a good basis for a prejudgment write of attachment motion.
3. Under PRC Supreme Court interpretations, contract damages forms the basis for the court decisions on the damage amount. If the contract damage provision is reasonable and based on a specific method of calculation that is ultimately based on an external fact, it is unusual for a defendant to be able to convince a court to reduce the amount. On the other hand, if the contract damages is based on nothing or is clearly a penalty amount, the court will simply ignore it. When a court ignores the contract damages amount set forth in your contract, your having such a provision does you more harm than good.
For more on the benefits of contract damages provisions and how to draft such provisions, check out the following: