• Larry Zhou

Can I Claim Loss of Profit Against Chinese Suppliers?

As a business man, it is good if your trade partner is a honest and nice people. However, sometimes you may face dishonest guy and they breached the contract. This is when you need to claim your rights under the law. Recently, we received a lot of consultation regarding the losses in profit. Could you claim for lost profit damages when your counter party breached the contract under PRC law?



The concept of Lost profit damages under PRC law


Under PRC law, lost profit damage is called losses in acquirable interests. Article 113 of the Contract Law of the PRCis related, it provides that:“Where a party failed to perform or rendered non-conforming performance, thereby causing loss to the other party, the amount of damages payable shall be equivalent to the other party's loss resulting from the breach, including any benefit that may be accrued from performance of the contract, provided that the amount shall not exceed the likely loss resulting from the breach which was foreseen or should have been foreseen by the breaching party at the time of conclusion of the contract. ” In short, lost profits in China are an estimate of the total sum of the loss of profits that can be realized and acquired if the contract is fully performed.


When you can claim for lost profit damages in china


Firstly, the other party breached the contract. This is a precondition for you to claim losses in acquirable interests. Secondly, you suffered the profit losses. The two main elements to judge whether the lost profits exist are predictability and certainty. Predictability means the breaching party should have anticipated your loss in profits when entered into the contract. If the breaching party does not breach the contract, you should make the lost profits if you duly performed the contract. To judge whether the breaching party has foreseen your lost profits, the court usually judge based on the specific facts of the case, for example, the purpose of the contract, the behavior of the breaching party. For the content to foresee, the mainstream opinion is that the breaching party not only has to foresee the type of lost profit, also the degree of the loss. How to determine the lost profit is certain? In legal practice, there are two main opinions. One think that certainty only means the fact that the non-breaching party lost profits is certain, not including the amount of the loss is certain, the amount of the lost profits is a question for calculation. The other opinion think that the amount of the lost profits shall also be certain. Generally speaking, the principle to determine certainty is that if there is no breach of the contract, you are sure to make that lost profit.


The calculation of the lost profits


For the calculation of the lost profits, in Guiding Opinions of the Supreme People's Court on Several Issues concerning the Trial of Cases of Disputes over Civil and Commercial Contracts under the Current Situation (“No.40 guiding opinion”), it provides “In the calculation and determination of the losses of acquirable profits, the people's court shall comprehensively apply the foreseeability rule, mitigation rule, rule of offset of increase and decrease, rule of contributory negligence, etc., deduct from the total amount of compensation for acquirable profits claimed by the non-defaulting party the losses unforeseeable to the defaulting party, additional losses as a result of inappropriate expansion of losses for reasons of the non-defaulting party, profits obtained by the non-defaulting party due to the breach, losses caused by any negligence of the non-defaulting party and necessary transaction costs. ” Specifically, there are five methods the court usually use. 1.Agreement If you and the breaching party has agreed on the number of the lost profits, unless the number is too high or too low, usually the court will follow your agreement. 2.Difference method If there is no agreement on the lost profits, the most common method the court will use to calculate is the difference method. Under difference method, the amount of the losses of acquirable profits equals the amount of the property if the contract duly performed minus the amount of the property when the damage occurs. 3.Analogy method Sometimes the court will analogy to the amount of the profits which the non-breaching party made in the same period in the past, or the profits will make under the same circumstance. 4.Estimation method If the non-breaching party can provide some evidence to prove the lost profits, and the lost profits can be calculated based on those evidence, sometimes the court will estimate the losses of acquirable profits considering the facts and evidence of the case. 5.Comprehensive discretion method This is also a common method the court usually use, the court will consider all kinds of elements to calculate, for example, each party’s fault, economic situation and so on.


Burden of Proof


For the burden of proof, it stipulated in the No. 40 Guiding Opinion: “When determining the losses of acquirable profits, the people's courts shall reasonably allocate the burden of proof. Normally, the defaulting party shall bear the burden to prove that the expansion of losses is caused by the non-defaulting party's failure to take appropriate measures to mitigate losses, the non-defaulting party obtains profits due to the breach and the non-defaulting party also has fault; the non-defaulting party shall bear the burden to prove the total amount of losses of acquirable profits incurred and necessary transaction costs. The burden of proof as for foreseeable losses may be assumed by the non-defaulting party or be subject to the discretion of the court as the case may be.”


Evidence


As a non-breaching party, to prove the lost profits, you can apply for authentication, sometimes the court will refer to the expert opinion when determine the amount of the losses of acquirable profits. The tax record sometimes also will be helpful. To protect your benefit, we advise you disclose the purpose of the contract or the amount of the acquirable profits to increase the predictability. You can also agreed on the calculation of the acquirable profits with your counter party in the contract. If you have any other question regarding the losses in acquirable profits after reading this article, please feel free to contact us.


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Larry Zhou, Partner

Landing Law Offices China

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