In international trade disputes, Chinese courts decide compensation based on the Civil Code of the People’s Republic of China (PRC), the PRC Law on the Application of Laws to Foreign-Related Civil Relations, and relevant international conventions (e.g., the United Nations Convention on Contracts for the International Sale of Goods, CISG, if applicable).
The court’s decision is influenced by the nature of the dispute, the contract terms, and the evidence presented. Below is an overview of how Chinese courts approach compensation in such cases:
- Legal Framework
Domestic Laws Civil Code of PRC:
General provisions on breach of contract and compensation are found in Articles 577–590. These govern liability, damages, mitigation, and foreseeability. Compensation aims to restore the non-breaching party to the position they would have been in if the contract had been properly performed.
International Conventions CISG (United Nations Convention on Contracts for the International Sale of Goods):
If both parties are from different countries or the contract chooses the CISG, its provisions on compensation and damages will apply. Articles 74–77 of the CISG govern compensation for losses, including foreseeability and mitigation requirements.
- Principles for Determining Compensation
Chinese courts follow these principles when awarding compensation:
- Actual Losses and Expected Gains:
Compensation covers actual losses incurred by the non-breaching party and, in some cases, lost profits.
- Foreseeability:
Damages are limited to losses that the breaching party could reasonably foresee at the time of contract formation (similar to Article 74 of the CISG).
- Mitigation of Losses:
The non-breaching party is obligated to take reasonable measures to mitigate losses. Failing to do so may reduce the amount of compensation awarded.
- Proof and Evidence:
The claimant must provide clear evidence of the losses, such as invoices, contracts, shipping documents, financial records, or expert opinions.
- Types of Compensation
- Direct Losses:
Costs incurred directly due to the breach, such as non-delivery of goods, defective goods, or delayed performance.
- Indirect Losses:
Consequential damages like loss of market opportunities or reputational harm, provided they were foreseeable.
- Liquidated Damages and Penalties:
If the contract specifies liquidated damages, the court generally enforces them unless they are deemed excessive or unreasonable. Penalties are enforceable but may be adjusted if unreasonably high.
- Interest:
Compensation often includes interest for delayed payments, calculated at the agreed rate or, if not specified, at the statutory rate.
