by Dan Harris
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 should there be a breach. We are often asked what the just right amount should 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 an 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 and out of a desire to get going quickly, our client suggested that we just dispense entirely with the provision. The below email is our response to that:
With regard to our proposed language about minimum damages, I can understand why this supplier is balking at our $350,000 figure. 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. This amount is more art than science. It is not supposed to be a penalty, but rather a realistic assessment of the damages that 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 would strongly advise against deleting this language entirely, though as specified contract damages are what helps to give this agreement real teeth, not least because they allow the Chinese court to impose a pre-judgment seizure of assets. That is a big advantage for you, and not one that you should give up willingly.
In a subsequent discussion among our China law group regarding this situation, one of our China attorneys wrote the following email to the rest of our group: