The Global Damages Review: China
Chinese law2 mainly comprises laws (enacted by the National People's Congress or its Standing Committee) and administrative regulations (enacted by the State Council). The Supreme People's Court of the People's Republic of China (SPC) promulgates judicial interpretations from time to time. Those judicial interpretations are binding upon all the courts in adjudicating disputes and are sometimes considered to be part of PRC law and regulations. In addition, practice guidance notes issued by the SPC and other PRC courts and case precedents serve as important references for judges and legal practitioners.
The law on damages is typically engaged upon the occurrence of either a tort or a breach of contract. Damages arising out of tortious conduct can be compensatory, restitutionary, punitive or exemplary in nature, and the quantification of which may be complicated, especially where the losses relate to environmental, intellectual property, reputational or personal injury. In the sphere of contract, damages are compensatory in nature, and restitutionary damages apply only in rare circumstances. This chapter will focus on contract-related damages, including its legal basis, principles, quantification, the use of experts in assessment and recent cases.
Concerning contractual damages, the most relevant provisions are found in the Civil Code,3 which took effect on 1 January 2021. The Civil Code was drafted combining old laws with recent judicial developments, and it is an updated, unified and comprehensive law on Chinese civil legal relationships. A courtesy English version of the Civil Code can be found at the National People's Congress website (http://www.npc.gov.cn/englishnpc/c23934/202107/7c7f9fc3765947a89627ef67e89e8b84/files/da0d8a6da39a478ab93639efd815b685.pdf). The Civil Code replaces several important pre-existing laws on contractual damages (i.e., the Contract Law, the General Principles of the Civil Law and the General Provisions of the Civil Law). 'Book One: General Part' and 'Book Three: Contracts' of the Civil Code have brought some changes to laws on contractual damages. This year's China chapter will introduce these changes.
Note that according to Article 1 of the SPC Provisions on the Retroactivity in the Application of the Civil Code, for civil disputes arising out of facts occurring before the Civil Code came into effect, the disputes shall be governed by the laws and judicial interpretations then in force, unless otherwise stipulated by laws and judicial interpretations.4 As the Civil Code came into effect quite recently, it is possible for cases to still be governed by the Contract Law and relevant judicial interpretations. It should be noted that most of the cases quoted in this chapter arose from facts prior to the entry into effect of the Civil Code and therefore would have been decided based on the Contract Law. Nonetheless, these cases are still relevant and helpful in understanding contractual damages in Chinese law.
Quantification of financial loss
Compensatory in nature
Article 584 of the Civil Code provides that '[w]here one of the parties does not perform a contractual obligation, or does not perform a contractual obligation as agreed, resulting in losses to the other party, the total amount of compensatory damages shall be equivalent to the total losses incurred by the other party through the breach of contract, including profits that the other party would have been able to obtain upon the contract being performed; but the amount shall not exceed the total losses that the breaching party, at the time of concluding the contract, foresaw or should have foreseen would probably result from breach of contract'. Thus, damages should be equal to the losses suffered by the affected party. This provision lays the cornerstone of contractual damages, which is that the underlying principle of damages under Chinese law is to compensate the foreseeable losses of the affected party. Where the plaintiff has not suffered any loss, even if the defendant has breached the contract, the plaintiff is not entitled to damages. As can be seen, the function of damages in contractual disputes is to compensate the innocent party, rather than to punish the breaching party.
Comparing Article 584 of the Civil Code with the previously operative Article 113 of the Contract Law, one may notice that the two provisions are basically the same except for a change of punctuation before the phrase 'but this amount shall not exceed . . . foresaw or should have foreseen would probably result from breach of contract' from comma to semicolon. When the punctuation was a comma, under the now superseded Contract Law, the said phrase comes after the definition of loss of expected profits and appears to be meant to define the scope of loss of expected profits. Thus, when the Contract Law applied, there was controversy regarding whether the principle of foreseeability applies only to losses of expected profits or whether it should also apply to actual losses. Some argued that foreseeability does not apply to actual losses because the amount of actual losses is relatively easy to ascertain.5 Scholars and practitioners generally believe that, in Article 584 of the Civil Code, since a semicolon is used before the principle of foreseeability, it has become much clearer that the principle of foreseeability applies to both actual losses and losses of expected profits.6
Damages can be either agreed between the parties or ascertained by the operation of law. Where an agreement on liquidated damages is present, the court has discretion to make necessary adjustments to the agreed amount stipulated or the amount calculated according to the agreed method for calculating the liquidated damages. Without an agreement on liquidated damages, damages will be ascertained by the operation of law.
As mentioned earlier, Article 584 of the Civil Code provides that the affected party shall enjoy full compensation. Full compensation includes compensation for its direct losses and indirect losses. Direct losses refer to those losses suffered as a direct consequence of the breach of the contract. Indirect losses refer to loss of profits (not loss of revenue) that the suffering party has expected and other consequential or incidental losses. A detailed analysis on relevant principles on determining loss of expected profits will be discussed later.
A new development is that the Civil Code also recognises the possibility for compensation for harm to personality rights resulting from breaches of contract. Article 996 of the Civil Code provides that, '[w]here the personality rights of a party is harmed by the other party's breach of contract and the injured party has thus suffered severe emotional distress, if the injured party elects to request the other party to bear liability based on breach of contract, his right to claim for compensation for pain and suffering is not to be affected.' It appears thus that claims for pain and suffering can be included in a contractual claim.
Before the Civil Code took effect, such claims in contractual disputes were often denied by the courts. For example, Article 21 of the old version of the SPC Provisions on the Application of Laws in the Trial of Tourism Disputes specifically provides that, '[i]f the tourist claims for emotional damages in a lawsuit of contractual breach, the people's court should inform the tourist to file a tort claim; if the tourist insist on filing a contractual claim, emotional damages shall not be supported by the people's court'. This restriction has been removed in the amendment to the said judicial interpretation effective from 1 January 2021, probably to maintain consistency with Article 996 of the Civil Code.
A recent case illustrating this issue is Zhang v. China Travel Services Co, Ltd . In this case, the plaintiff was scalded when travelling with the defendant travel agency. The Primary People's Court of Chaoyang District of Beijing Municipality acknowledged the emotional distress suffered by Zhang and awarded her a compensation of 10,000 yuan for such distress. The decision was later upheld by the Third Intermediate People's Court of Beijing Municipality in the second-instance trial.7
Adjustment of liquidated damages
Article 585 of the Civil Code provides that '[w]here the agreed liquidated damages are lower than the losses caused, the people's court or an arbitration institution may increase the amount upon the request of a party. Where the agreed liquidated damages are excessively higher than the losses caused, the people's court or an arbitration institution may make appropriate reduction upon the request of a party'. Pursuant to Article 585, the court, upon request of a party, has the discretion to make necessary adjustments to the agreed amount of liquidated damages to reflect the actual losses of the plaintiff.
Article 11 of the SPC Meeting Minutes on the Implementation of the Civil Code by National Courts explains the basis in adjusting liquidated damages and the relevant burden of proof.8 The basis for adjusting liquidated damages is the scope of damages laid down by Article 584 of the Civil Code, which includes both actual losses and loss of expected profits, subject to the principle of foreseeability. The court may also take into consideration other factors including the progress of contract performance, the relative fault of the parties and the principles of fairness and good faith. If the liquidated damages exceed losses by 30 per cent, generally a court would consider it to be 'significantly higher than the losses' identified by Article 585. As regards the burden of proof, the party requesting an adjustment should prove that the agreed liquidated damages are unreasonably high, while the party resisting such adjustment should prove that the agreed liquidated damages are reasonable. As for the standard of proof, in judicial practice, the SPC has ruled that the burden of proof of the party requesting for adjustment is satisfied as long as the party's reasoning and evidence are enough to cast doubt on the reasonableness of liquidated damages. The burden is then on the party resisting such adjustment to prove that the agreed liquidated damages are not unreasonably high. If the party resisting such adjustment fails to justify that the amount of liquidated damages is proportionate to the losses it has suffered, the court may exercise its discretion and adjust the amount of liquidated damages (see Cheng & Zhejiang Yongle v. Dangdai Beifang  in Section IV).
In Qingdao Zhengshang Property v. Qingdao Yushi Real Estate , the liquidated damages clause provides that, if the defendant fails to obtain the necessary permissions before the agreed date, the defendant shall pay to the plaintiff 0.05 per cent of the total price (470 million yuan) each day. The High People's Court of Shandong Province (Shandong High People's Court) took into consideration the following factors: whether the defendant was intentional in breaching the contract; the actual amount of investment of the plaintiff; the plaintiff's evidence regarding its losses. The court finally decided that the liquidated damages should be reduced to 0.05 per cent of the actual investment (150 million yuan) each day.9
Sometimes, a defendant may make a defence based on contesting liability without contesting quantum, for instance by arguing that the underlying contract was not formed, not effective, invalid, or there was no breach of contract, without simultaneously making an argument that the amount of liquidated damages claimed by the plaintiff was unreasonable and should be adjusted. In this situation, if the court contemplates a decision in favour of the plaintiff's case on liability, the court may indicate to the defendant that he or she may consider making a challenge regarding the amount of liquidated damages claimed by the plaintiff.10
Method of compensation
There are generally three ways to compensate for losses, namely restoration, monetary compensation and compensation through other means.11 Restoration refers to restoring the non-breaching party to its previous position, that is, the position before the conclusion of the contract. As a simple example, a buyer may return a malfunctioning machine and demand a return of the purchase money as restoration. This would restore the buyer to the position before he or she bought the malfunctioning machine. In addition to the original purchase money, the buyer may also claim interest to compensate for the loss of the time value of the purchase money.
However, restoration is not always possible, for example, where a customer had received an unpleasant service, it is impossible for the provider to 'return' the service. In such a circumstance, the court may order the defendant to pay a reasonable amount of monetary compensation to the plaintiff. Where the breaching party does not have sufficient funds, it may also be possible for him or her to compensate the non-breaching party with other objects that the non-breaching party is willing to accept. That being said, if the dispute is brought to court, it is quite unlikely that the court will order the defendant to compensate the plaintiff with any object other than the subject matter of the dispute. The court order is usually in the form of monetary compensation, and in further enforcement proceedings, the court may order an auction on the defendant's assets in order to liquidate enough funds to compensate the plaintiff.
In terms of method for compensation, a new development is Article 581 of the Civil Code. Article 581 of the Civil Code provides that, '[w]here a party fails to perform his obligation or his performance does not conform to the agreement, if the obligation cannot be enforced by virtue of the nature of the obligation, the other party may request such party to bear the expenses of a substitute performance by a third person'. This is in essence a type of monetary compensation. The significance of this provision is that it allows the non-breaching party to engage in self-help and seek reimbursement. This is especially helpful when the underlying obligation is non-monetary in nature. For example, in a service contract, the non-breaching party can hire a third-party service provider and seek reimbursement of the relevant fees.
Quantification of damages
Quantification of damages involves identification of the subject matter, time and location. The general practice is to use the relevant market value of the subject matter in question to determine the quantum of damages. That is to say, in most circumstances, an objective market standard will be adopted. However, in rare circumstances, the court may take into consideration subjective factors in ascribing value to an item. Time and location may also affect the quantification of damages, and the general practice is that the time when the breach occurred and the location where the breach occurred would be referred to when the court determines quantum of damages. With regard to compensation for emotional harm and distress, Article 996 of the Civil Code does not provide a quantification method. It is likely that the judge will rely on an expert's opinion or make a judgement call when quantifying the damages of emotional harm and distress.
Earnest money and liquidated damages
The Civil Code incorporates laws on earnest money from several pieces of legislation and provides for a comprehensive set of rules regarding earnest money in Articles 586 to 588. To summarise, the rules on earnest money includes the following, (1) the contract of earnest money becomes effective upon payment of the earnest money (Article 586);12 (2) the amount of earnest money cannot exceed 20 per cent of the price of the contract, and anything exceeding this shall not be regarded as earnest money (Article 586); (3) the basis for forfeiting or returning the earnest money is the frustration of the contract (Article 587);13 (4) the non-breaching party can choose either to refuse to return the earnest money or to make a claim for liquidated damages, but not both (Article 588);14 and (5) if the amount of the earnest money is inadequate to compensate the harm incurred, the non-breaching party can claim for additional damages (Article 588).
The burden of proof in regard to damages is no different from the general burden of proof in civil cases, i.e., the party who raises a claim has the onus to support its claim with evidence. In some special categories of tort cases, the burden of proof may be reversed;15 in contractual disputes, however, the burden of proving damages is almost always on the plaintiff. According to Article 11 of the SPC Guiding Opinions on Trial of Civil and Commercial Contract Disputes, for a claim for loss of expected profits, the plaintiff has the onus to prove the amount of expected profits and necessary transaction costs; while the defendant needs to adduce sufficient evidence if it seeks to establish that the plaintiff failed to mitigate its losses, that the plaintiff had benefited from the breach, or that the plaintiff had also contributed to the breach. In practice, we have seen cases in which the SPC rejected claims of expected profits in entirety since the plaintiff had failed to provide reasonable evidence.16
The majority of the PRC rules on evidence lie in the Civil Procedure Law17 and the SPC Provisions on Evidence for Civil Procedure (the SPC Provisions on Evidence). According to Article 63 of the Civil Procedure Law, evidence can be in the following forms: party statement, documentary evidence, physical evidence, video-audio evidence, electronic evidence, appraiser opinion and investigation record.18 Nowadays, electronic evidence has become increasingly important with the development of technology, and electronic data such as WeChat communication records are often relied upon as evidence. Recently, PRC courts have officially recognised evidence authenticated through electronic signature, credible timestamping, hash value verification and blockchain, which may be admitted as evidence in valid forms.19 Parties can apply for the court to investigate and collect evidence,20 and can also apply for the court to order an opposing party to disclose evidence.21 If there is serious concern that evidence may be destroyed or lost, a party can apply for evidence preservation pursuant to Article 81 of the Civil Procedure Law.22
iii Date of assessment
In PRC law, the presumed date of assessment for damages for most tort cases is the time when the damage was suffered;23 however, this date can be adjusted to maximise the benefits of the plaintiff within a reasonable range.24 In comparison, there is no statutory date of assessment for general contractual disputes. The most commonly used date of assessment would be the date of breach. The date of assessment, however, may be disputed if the relevant subject matter has changed in value between the date of the breach and the date of the judgment. If the value of the property at issue has declined or increased over the period since the breach occurred, the plaintiff may be advantaged or disadvantaged by the damages being assessed at the date of breach. For example, if shares in dispute enjoy a sharp increase in price after the date of breach, it is questionable whether the price increase between the date of breach and the date of judgment shall be considered as a part of plaintiff's loss.
An interesting tort case may shed some light on how this issue may be dealt with. In Zhang v. ICBC et al. , the defendants defrauded Zhang to obtain her permission to deal with her stocks on her behalf and then sold Zhang's shares in a listed company without her permission in 2005. The SPC decided that Zhang had a right to all benefits derived from her shareholding (including price increase, dividends and share allotment) from 2005 to May 2008 (the last time of share allotment). The court looked into Zhang's track record of dealing with stocks and found that Zhang barely understood how to buy or sell stocks and had not dealt with the stocks for more than a year since she inherited them from her late husband. The court reasoned that it was very unlikely for Zhang to buy or sell the stocks on a frequent basis, and as such, it was likely that she would not deal with the shares from 2005 to 2008, and in turn, Zhang should have been able to receive all benefits from her shareholding from 2005 to 2008. The court did not use 2005 (time of breach), but instead used 2008, as the relevant time for assessing the plaintiff's losses. From this case, it can be seen that the court can exercise its discretion in determining a date of assessment that best reflects the plaintiff's losses.25
iv Principles to assess loss of profits under Chinese law
According to Article 9 of the SPC Guiding Opinions on Trial of Civil and Commercial Contract Disputes, the main types of expected profits include: (1) loss of production profits; (2) loss of operational profits; and (3) loss of resale profits. The SPC Guiding Opinions on Trial of Civil and Commercial Contract Disputes require courts to ascertain which of the above types of loss of expected profits has occurred.26
In ascertaining the amount of loss of expected profits, if the parties had agreed on how the loss of expected profits shall be calculated, the parties' agreement may be adopted by the court. Without such agreement, a court would at its own discretion decide what the appropriate amount of loss of expected profits based on parties' submissions should be. The court would make its decision in view of several principles, namely the principle of foreseeability, the principle of mitigation of losses, the principle of offsetting losses with gains and the principle of contributory liability. As such, a brief formula to calculate loss of expected profits27 may be:
loss of expected profits to be compensated = expected profits - unforeseeable losses - losses that could have been mitigated - profits derived from the breach by the plaintiff - losses that were contributed by the plaintiff itself
Having said the above, where the parties had agreed on how to calculate the loss of expected profits pursuant to Article 585 of the Civil Code, or where the breach had led to personal injury or death, the above principles may not apply.28
Principle of foreseeability
Article 584 of the Civil Code provides that damages for loss of expected profits cannot be higher than what the breaching party could have foreseen when entering into the contract. In Xinjiang Yakun v. Xinjiang Kangrui , the SPC found that the lower court had included losses caused by a fall of market price into the loss of expected profits awarded, so the SPC overruled the lower court's judgment. The SPC's reasoning was that the fall of market price was not foreseeable by the defendant, neither was it caused by the defendant; plaintiff's loss of resale profits was a profit that could be realised when the market price was at a low point, rather than at a high point; as such, losses caused by the market should not be borne by the defendant.29
Principle of mitigation of losses
Article 591 of the Civil Code provides for the duty of the non-breaching party to mitigate losses.30 Where there were reasonable means for the plaintiff to mitigate its losses but the plaintiff failed to exercise such means, the part of losses that could have been mitigated should not be borne by the defendant.31 This principle is commonly used to reduce the loss of expected profits claimed by the plaintiff. In Zhongxin Honghe v. Anshan Finance Bureau , the SPC found that although Zhongxin had lost the opportunity to participate in the underlying transaction because of Anshan Finance Bureau's failure to obtain necessary government approval, this would not prevent Zhongxin from seeking other business opportunities. Based on this reasoning, the SPC only granted 10 per cent of the loss of expected profits claimed by Zhongxin.32 In practice, where a contract has a long term, say 20 years, depending on the circumstances of the case, it would be advisable to claim for loss of expected profits for only a reasonable number of years and not the full duration, as a reasonable non-breaching party would be expected to try to find another opportunity to do business with other partners, rather than sit and wait for the entire remaining duration of the contract. Alternatively, a party may claim for the loss of profits for the whole duration and then propose to discount its loss of profits.
Principle of offsetting losses with gains
This is to ensure that the plaintiff only recovers its net losses. Generally, 'gains' refer to costs that can be avoided, residual value of the subject matter, taxes and duties that would have been paid, etc.
Principle of contributory liability
Before the Civil Code came into effect, the principle of contributory liability in PRC law was not contained in a statute, but in the SPC Interpretations on Sale and Purchase Contract, which applied to sale and purchase contracts. Article 592 of the Civil Code has now statutorily expanded the application of the principle of contributory liability to all contractual disputes.33 This principle is also reflected in existing judicial practice and judicial opinions (e.g., SPC Guiding Opinions on Trial of Civil and Commercial Contract Disputes). The rationale of this principle is that if the non-breaching party failed to reasonably protect himself or herself from losses or has violated laws, based on the principles of fairness and honesty, the breaching party shall not be liable for the part of loss that was not caused by him or her.
v Financial projections
Financial projections are not specifically regulated by PRC laws. The use of expert witnesses is not yet a common exercise in PRC civil litigation. As such, the court has a wide discretion to draw its own inferences from the facts to determine a reasonable amount of damages. The recently published book Understanding and Application of the Book of Contract of the Civil Code (published by the People's Court Press) provides some guidance by listing five common methodologies for determining the loss of expected profits.34 This book is compiled by the SPC leading group on the implementation of the Civil Code.
This methodology looks at what the plaintiff would have received if the contract had been fully performed. This methodology is suitable to estimate expected profits of operation if the plaintiff has stable operations. For example, a plaintiff may use its profits from previous months or the profit level of a similar business to demonstrate potential loss of profits for future months. It is generally advisable for a plaintiff to prepare its financial statements of several previous years to show its level of profits. In Beijing Xindacheng v. Beijing Saiwai , the First Intermediate People's Court of Beijing Municipality (Beijing First Intermediate People's Court) found that the profits of the previous year alone were not convincing evidence on the plaintiff's future profit level and that simply applying the profits from the previous year would neglect consideration of the business risks.35
This methodology applies when it is difficult to accurately ascertain the losses suffered by the plaintiff. In this situation, the court may decide on a reasonable amount of loss of expected profits. There is no statutory requirement for the judge to appoint an appraiser or order the parties to submit financial projection reports prepared by professionals, and the judge has the discretion to award any amount of loss of expected profits. In Beijing Xindacheng v. Beijing Saiwai , the Beijing First Intermediate People's Court used its discretion to reduce 200,000 yuan from the loss of expected profits claimed by the plaintiff, and reasoned that such deduction reflected market risks of the catering industry and potential increases in costs.
Where the parties had reached some agreement in terms of expected profits, the agreement may be taken into consideration by the court. For example, if the parties have agreed on an estimation of future profits, the court may rely on their estimation to determine the loss of expected profits. That being said, a court may deviate from the parties' agreement where it considers that relying on the parties' agreement would lead to an unfair result.
By difference in price
This is especially useful for sales contracts. For example, in a property sales contract, if a party by its actions frustrates the performance of the contract and the contract is therefore rescinded, the price increase between the time of the intended transaction and the time of the litigation can be considered as the loss of expected profits. A good example is Han v. Sun & Li . In this case, the Third Intermediate People's Court of Tianjin Municipality found that, in a property sales contract, the increase in the property's market price should be considered to be the expected profits of the buyer, and the price of similar properties can be used to ascertain the price increase of the underlying property. When ascertaining the final amount of compensation, the court took into consideration factors including the area of the property, the nature of the breach, the foreseeability of the price change, the fault of the parties, etc, and held that the final amount of compensation should be no less than 50 per cent of the price increase. The High People's Court of Tianjin Municipality affirmed the above decision in the retrial.36
By considering a totality of factors
Sometimes, the above four approaches cannot provide a satisfactory answer as to the determination of a plaintiff's loss of expected profits. In such circumstances, the judge will take into account all relevant factors and exercise his or her discretion on the amount of expected profits.
The integrity of any financial projection is dependent on the assumptions underpinning the specified model used. Assumptions for financial projections are not regulated by PRC laws. It is up to the court to decide whether assumptions relied on by a party are reasonable or not. Commonly applied assumptions include: the currency involved would not experience significant level of appreciation or devaluation; there would be no major unforeseen events that would significantly impact general market confidence; and the business would not cease to exist in the remaining term of the contract.
vii Discount rates
Discount rates reflect the time value of money. As a plaintiff making a claim for loss of profits may be receiving money in advance via a court judgment and would be able to use this money to re-invest or for other purposes, it may be considered appropriate for the plaintiff to only receive a discounted amount. Unlike in some jurisdictions, there is no statutory discount rate in the PRC. Some professional associations, such as the China Appraisal Society, have issued guiding documents. For example, the No. 12 Guidance for Asset Evaluation Experts has provided detailed guidance on how to ascertain matters such as risk-free rates, market risk premiums, beta and other parameters.37
In judicial practice, courts recognise the importance of discounting future profits. In Zijincheng Security v. Beijing Xuhui , the plaintiff's quantum expert did not discount future profits on the basis that the parties had agreed not to consider a potential increase of the rent payment and in order to be fair, that there was no need to discount future profits. The High People's Court of Beijing Municipality found that experts must take into account factors such as the discount rate and tax when projecting future profits.38
In practice, several kinds of approaches may be utilised to determine the applicable discount rate. Some examples include taking the parties' expected internal rate of return, applying WACC (weighted average cost of capital) and adopting the interest rate on bank loans. Some industries have their own discount rates, for example, in some hotel management disputes, an 8 per cent discount rate was adopted in 2017.
viii Currency conversion
Whether a Chinese court can award damages in currencies other than the yuan is unclear from the provisions of the statutes and judicial interpretations. Article 8 of the Regulations on Foreign Exchange Administration39 provides that '[i]t is prohibited to circulate foreign currencies in the People's Republic of China or use foreign currencies for pricing or account settlement'. However, court practice is not unified in this aspect. Some courts, while awarding damages in a foreign currency, make it clear that if payment is to be made in mainland China, the payment shall be made in yuan of the equivalent amount. This practice is criticised as it encourages defendants to choose the venue of performance so as to avoid currency exchange rate fluctuation and minimise their payment obligations.40
If a court-ordered payment in a foreign currency has to be converted into yuan, a question to be considered is, what is the exchange rate. The SPC Reply to Request for Instructions on How to Determine the Exchange Rate of CNY to Major Foreign Currency in the Trial of Foreign-Related Civil and Commercial Cases41 made it clear that, from 4 January 2006, the central parity rate of yuan to a major foreign currency should be determined as per the rate published by the China Foreign Exchange Trade System, while the exchange rate for any other foreign currency should be calculated through its exchange rate to the US dollar.
ix Interest on damages
There are three stages in which interest on damages accrue. These are from the date of breach to the date of judgment, from the date of judgment to the deadline of performance as specified in the judgment and from the deadline of performance to the date of enforcement. In each stage, a different interest rate may apply, either based on parties' agreement or on statutory provisions.
From the date of breach to the date of judgment
The plaintiff may claim for interest accrued on damages. Sometimes, the contract provides for an interest rate agreed by the parties. Alternatively, the contract may contain a liquidated damages clause, providing that a penalty interest shall accrue on an outstanding payment. Such a liquidated damages clause may in essence be regarded as an interest rate provision. Without such agreement, generally, the plaintiff can claim for a reasonable interest. Usually, when the plaintiff files the lawsuit, the plaintiff would specify how the interest would be calculated. It should be noted that there are some specific legal provisions on interest for certain types of contracts.
For private lending contract disputes, according to Article 680 of the Civil Code, absent any specific agreement on interest, the court will not uphold a claim on interest.42 Where the parties have agreed on an interest rate to be applicable in the event of breach, the court has the discretion to adjust the interest rate.
For sale of goods disputes, according to Article 18 of the SPC Interpretations on Sale and Purchase Contracts, where a plaintiff claims for interest and there is no relevant contractual basis for this, if the default occurred before 19 August 2019, the court may apply the benchmark interest rate for loans of the same type in the same period prescribed by the People's Bank of China (PBC); if the default occurred after 20 August 2019, the court may apply the one-year LPR (loan prime rate) at the occurrence of the default as the basis, and adjust such LPR rate by 30 to 50 per cent upward to calculate losses.43
For construction contract disputes, according to Article 25 of the SPC Interpretations on Issues Concerning the Application of Law in the Trial of Cases of disputes over Contracts on Construction, where the parties have no contractual provisions regarding interest on payments advanced by a contractor for the performance of work for an employer, the contractor's claim for the interest on such payments shall not be upheld; where there is a contractual provision providing for interest to be payable on such advances, such interest shall not exceed the interest rate of a similar type of loans at the time of advance or the LPR of the corresponding period.44
From the date of judgment to the deadline for performance
A judgment usually provides for a grace period for performance. For the period between the date of judgment to the deadline for performance, generally, the judgment would order that interest shall continue to accrue. In some provinces, this judicial practice is formalised by court guidance. For example, the Shandong High People's Court has issued the Notice regarding Regulating Expressions on the 'Date When Default Interest Stops Accruing' in the Main Context of Civil Judgments , pursuant to which it is required that court judgments shall make clear that interest will not stop accruing until the time that the liable party pays the ordered amount in full.45 If a liable party only performs part of the judgment, interest will continue to accrue in regard to the outstanding amount.
From the deadline for performance to the date of enforcement
During this period, the interest ordered by the court will continue to accrue as the defendant has not duly performed the judgment. In order to deter late performance, under the SPC Interpretations on Several Issues concerning the Application of Law to the Calculation of Interest on Debt for the Period of Deferred Performance in the Enforcement Proceedings, where the defendant fails to perform its obligation under a judgment before the date specified in the judgment, the defendant is liable to pay a penalty (calculated on the basis of: principal amount not paid × 0.0175 per cent per day × number of days over the delayed period) in enforcement proceedings.46
Another issue to note is whether a contractual clause on interest is legally valid. As mentioned above, the court has the discretion to adjust liquidated damages agreed upon by the parties where the court believes that such clause is unfair. Following the same logic, the court also has the right to adjust an agreed interest rate if such interest rate is regarded as being unfair. The SPC Interpretations on Private Lending provide some guidance on when a stipulated interest rate would be deemed as being unreasonably high. According to the SPC Interpretations on Private Lending,47 one of the key revisions relates to the upper limit of the agreed interest rate to be upheld by the court; this was changed from the 24 per cent/36 per cent per annum standard to four times the LPR per annum (at the time when the contract is formed) issued on 20th of each month by the National Interbank Funding Center. Taking the LPR per annum (3.85 per cent) issued on 20 July 2020 as an example, four times will be 15.4 per cent, which is much lower than 24 per cent/36 per cent. This change pegs the maximum applicable interest that may be awarded to the prevailing market interest rate.
Costs generally include litigation fees (charged by courts), legal service fees (attorneys' fees) and other costs (parties' out-of-pocket expenses). In PRC laws and judicial practice, there is no principle that costs should 'follow the event'.
According to Article 29 of the Measures on the Payment of Litigation Fees,48 litigation fees shall be borne by the party who loses the lawsuit, unless the party that wins the lawsuit bears the fees at his or her free will. Where a party partially wins a lawsuit, the court may, at its discretion, decide on the allocation of the litigation fees. In China Real Estate v. Suzhong Construction , the SPC ordered China Real Estate to reimburse the litigation fees paid by Suzhong Construction and made it clear that the fee paid for property preservation forms a part of litigation fees.49
Legal service fees and other costs
The general rule is that parties shall bear their own legal services fees and other costs. However, there are certain types of cases in which the party at fault should bear the legal service fees of the opposing party in entirety, for instance: cases on exercising revocation rights in contractual disputes;50 cases on copyright disputes;51 and cases on trademark disputes.52 There are also certain types of cases in which a court may exercise its discretion to determine the allocation of legal service fees as between the parties, for instance: patent infringement cases; unfair competition cases; guarantee cases; personal injury, defamation and traffic accident cases.53 According to Article 22 of the SPC Opinions on Further Promoting the Efficient Distribution of Complex and Simple Cases and Optimizing the Allocation of Judicial Resources,54 where a party abuses litigation rights or procrastinates in making a claim or in its conduct of a case, and has led to direct loss of the counterparty or a third party, the court may order the party to compensate for the other party's reasonable fees, including legal service fees.
For arbitrations cases, rules of arbitration institutions in mainland China generally provide that the tribunal has discretion to allocate costs, including arbitration fees and expenses. In practice, arbitral tribunals often adopt the 'costs follow the event' principle.
Awards of damages may be subject to taxation if the damages are in the nature of remuneration, business income or other types of income as listed under the relevant tax laws. Usually, the party receiving compensation shall pay corresponding tax on the sum he or she receives. In employment contract disputes, the party performing the judgment may deduct tax beforehand and pay the rest to the other party. For example, in an enforcement case in the employment context before the Intermediate People's Court of Shenzhen City of Guangdong Province (Shenzhen Intermediate People's Court, Guangdong), Shenzhen Sike v. Gao , the court ruled that Shenzhen Sike was justified in deducting taxes before paying the compensation to Gao for wrongful termination of the employment contract. The Shenzhen Intermediate People's Court, Guangdong specifically stated that 'to pay taxes according to law is the duty of each citizen . . . money awarded by court judgment is not exempt from taxes'.55 It should be noted that an employment contract dispute is a special kind of contractual dispute, and legal provisions in this regard may be different from those applicable to general contractual disputes.
Some losses that would have been taxable if there had been no wrong will not necessarily be taxable by the operation of law. For example, Article 41 of the State Compensation Law provides that no tax shall be levied on the compensation a claimant has obtained in regard to state compensation cases.56 Similar exemption is given to compensation awarded in personal injury cases.57 In contractual disputes, the party receiving compensation generally needs to pay taxes for the awarded amount.
There is no system of parties relying on 'expert witnesses' in Chinese court proceedings. As with some other civil law countries, China has adopted the 'appraiser' system, which basically refers to the use of court-appointed experts. However, under the appraiser system, judges may rely too much on the appraiser's opinions, and the parties may lack the expertise to comment on or challenge the appraiser's opinions. In judicial practice, the courts have tried to invite parties to comment on the appraiser's opinions, however, the effect is not satisfactory as parties generally would not have sufficient knowledge to provide effective comments. As such, the SPC introduced the concept of 'persons with specialised knowledge' in the 2001 version of the SPC Provisions on Evidence. The role of 'persons with specialised knowledge' is to assist parties, rather than the courts, to comment on an appraiser's opinions and to provide opinions on issues involving professional knowledge. A 'person with specialised knowledge' is not a witness in the sense that he or she does not provide testimony; instead, his or her comments and opinions would be regarded as party statements. As such, it should be understood that there are no party-appointed expert witnesses in Chinese litigation, and the corresponding roles in law are appraisers together with persons with specialised knowledge. Thus, it can be said that Chinese litigation adopts an expert evidence system comprising appraisers and persons with specialised knowledge.
ii The role of expert evidence in calculation of damages
Under PRC law, an appraiser may be either an institution (the appraiser's opinion needs to be formally sealed and endorsed by the institution and signed by the person in charge of the appraising work) or an individual person. An appraiser is entrusted by the court to assist the judge in understanding issues involving special knowledge and is required to have relevant qualifications. According to Articles 30 and 31 of the SPC Provisions on Evidence, the court can appoint a qualified appraiser if the court is of the view that certain facts should be proved by appraisers. The parties may also apply to the court to appoint an appraiser. In such a situation, the court will request the parties to reach an agreement on choosing a qualified appraiser; if the parties cannot reach such an agreement, the court will appoint a qualified appraiser at its discretion from the list of appraisers maintained and publicised by relevant courts.
Persons with specialised knowledge
Persons with specialised knowledge have two functions: (1) to comment on the appraiser's opinions; and/or (2) to provide opinions on issues involving professional knowledge. They are party-appointed and their role is to assist the party rather than the court. According to Article 83 of the SPC Provisions on Evidence, a written application shall be submitted to the court by the party seeking permission for such person to appear before the court. A party may only apply to the court for one or two persons with specialised knowledge to attend the hearing. The written application shall contain the information of the persons and the purpose for these persons to appear in court. As there is no statutory qualification requirement for persons with specialised knowledge, this information is supplied mainly for the purpose of confirming the identity of the persons. The purpose for such persons to appear in court is supplied to give the opposing party notice and the opportunity to make the necessary preparations. There is no requirement for a person with specialised knowledge to declare independence or impartiality.
In PRC judicial practice for civil and commercial cases, the subject matter of appraiser's opinions may involve various aspects, such as the quality of equipment or products, and the costs or other financial factors of a construction project. According to the Provisions on Judicial Appraisal Practice Categories issued by the Ministry of Justice,58 accounting is a category of appraisal; however, the court may not ask the appraiser to issue opinions on the exact amount of damages. The court may appoint an appraiser to evaluate relevant aspects of the case (for instance, the residual value of equipment or the costs of a construction project). This will facilitate the court's judgment on the final amount of damages. Even if there is no appraiser involved, a person with specialised knowledge may be engaged by a party to provide opinions on professional issues, such as to give a view on the amount of damages that should be awarded, for instance in complicated tort cases that may require specialised knowledge for assessment (i.e. environmental pollution disputes and medical disputes).
It should be noted that, in PRC arbitration, quantum expert witnesses are commonly engaged to give their views on damages quantification.
iii The court's role excluding and managing expert evidence
Appraiser's opinions are a named form of evidence in PRC law. According to Article 34 of the SPC Provisions on Evidence, the court shall ask the parties to examine any appraiser's opinion obtained; an appraiser's opinion that has not been examined by the parties involved cannot be used as basis for decision-making. For more effective examination, the parties may hire persons with specialised knowledge to comment on the appraiser's opinions.
Comments or opinions of persons with specialised knowledge
The comments provided by persons with specialised knowledge on an appraiser's opinions will assist judges in better understanding the appraiser's opinions. According to Article 122 of the SPC Interpretations on Civil Procedure Law, the opinions of persons with specialised knowledge on issues involving professional knowledge are regarded as statements by the party which has engaged them. Pursuant to Article 84 of the SPC Provisions on Evidence, judges may ask questions to persons with specialised knowledge, and as permitted by the courts, the parties may also raise questions to the said persons; the persons with specialised knowledge of each party may engage with each other regarding relevant issues in dispute; however, persons with specialised knowledge are not allowed to participate in court proceedings beyond the scope of commenting on the appraiser's opinions and providing opinions on issues involving professional knowledge.
iv Independence of experts
Appraisers have to be independent. It is required by law that they have to sign a declaration of independence, impartiality and honesty.59 However, for persons with specialised knowledge, there is no requirement regarding independence and impartiality, as the person is deemed to be a representative of the party who engages him or her.
v Challenging experts' credentials
Article 76 of the Civil Procedure Law generally provides that appraisers must be qualified. In practice, the court would appoint appraisers from the list of appraisers issued by relevant courts. Further, according to Articles 6 and 7 of the newly issued SPC Provisions on Several Issues concerning the Appointment by the People's Court on Appraisal in Civil Procedure,60 as for appraisal institutions, the court shall examine the qualification of the appraisal institution and its scope of business; in addition, where the court found that parties' choice of appraisal institution may harm the national interest or the interest of third parties, the procedure of choosing an appraisal institution by party agreement shall be terminated and the appraisal institution shall be chosen randomly (from the court's list of appraisers); according to Article 9, as for individual appraisers, the court shall examine strictly, inter alia, the individual's professional ability, experience, industry reputation, scope of practice, qualification of appraisal, the validity of the person's credentials and whether there are any reasons such as conflict of interest for refusing to appoint the person.
For persons with specialised knowledge, there is no statutory requirement regarding their credentials. It is up to the parties to choose who they wish to engage as persons with specialised knowledge by using their best judgement.
vi Oral and written submissions
Pursuant to Article 35 of the SPC Rules of Evidence, an appraiser shall complete the appraisal and submit his or her appraiser's opinions within the time limit set by the courts. Articles 37 and 38 further provide that either party may raise objections to the appraiser's opinions in written form, and the court shall require the appraiser to provide explanations or supplementations; if the objecting party insists on his or her objections, the court would ask that party to prepay the expenses for the appraiser to appear in court and inform the appraiser to attend the hearing. In this way, an appraiser may provide oral and written submissions to the courts.
Article 79 of the Civil Procedure Law, Article 122 of the SPC Interpretations on Civil Procedure Law and Article 83 of the SPC Rules of Evidence all provide that persons with specialised knowledge can appear in court. As such, persons with specialised knowledge can make oral submissions in court. Pursuant to Article 84 of the SPC Provisions on Evidence, the court has the right to ask questions, but whether the parties can examine the person with specialised knowledge is subject to the court's approval. There is no legal provision prohibiting persons with specialised knowledge from making written submissions, so, conceivably, persons with specialised knowledge can submit written opinions, especially when the issue at dispute is complicated.
Recent case law
Under the civil law tradition, previous court judgments are non-binding. However, in judicial practice, they serve as important references for courts and parties. In fact, case law has been becoming increasingly important in judicial practice. Since 2012, the SPC has started to publicise guiding cases, and so far has publicised 162 such cases.61 In 2020, the SPC issued the SPC Guiding Opinions on Unifying Applications of Law and Strengthening Search of Similar Cases (for Trial Implementation),62 under which, in certain circumstances, the courts are required to search for similar cases and examine them before issuing judgments. The scope of search includes SPC guiding cases, case precedents of the SPC, case precedents of the high people's court of the relevant province/city, case precedents of a higher court and case precedents of the court itself, in this order of priority. Except for the SPC guiding cases, the courts should also prioritise searching for cases from the preceding three years. Where a retrieved precedent is an SPC guiding case, the court shall apply it mutatis mutandis in decision-making, except for cases that conflict with new laws, administrative regulations or judicial interpretations or have been replaced by new guiding cases. For other types of similar cases, the court may use these cases found as references in decision-making.
Cheng and Zhejiang Yongle v. Dangdai Beifang 63
In 2016, Dangdai Beifang (Beijing) Investment Company (DB), Zhejiang Yongle Film Production Co, Ltd (ZY) and Cheng Lidong ((Cheng) the controlling shareholder of ZY) entered into a major asset restructure framework agreement (the restructure agreement). The parties agreed that DB would ensure that Dangdai Dongfang Investment Shares Limited (the listed company, an entity controlled by DB's legal representative) would acquire 100 per cent of ZY's shares by issuing additional shares and with cash. The parties agreed that (1) none of the parties (or their employees) would contact or negotiate with any third party regarding restructure after signing the restructure agreement; if a party breaches this provision, the breaching party shall pay to the non-breaching party liquidated damages of 100 million yuan; (2) once the restructure agreement was signed, DB would provide ZY with earnest money of 50 million yuan, which Cheng could use to invest in new filming projects; (3) the parties would try their best to complete the restructure by 31 December 2017; (4) once the restructure was completed, the listed company would provide ZY with no less than 1 billion yuan as support for new filming projects.
On 8 January 2017, DB transferred 50 million yuan to an escrow account and the parties signed a supplementary agreement to record this fact. The supplementary agreement specifically provided that, although Cheng was free to use the money for new filming projects, the nature of the 50 million yuan as earnest money would remain unchanged. Further, once the transaction documents for the restructure were signed and the public announcement was made, Cheng should start to pay an annual interest of 10 per cent on the 50 million yuan. Cheng should repay the 50 million yuan once ZY received the monetary support from the listed company after the completion of restructure, or, in any circumstance, without the agreement of DB, the 50 million yuan should be repaid by 31 December 2017. On 18 January 2017, ZY made a partial repayment of 20 million yuan.
The restructure did not go as planned. Before the completion of the underlying restructure, the listed entity decided to acquire another filming production company called Shouhui Jiaodian Technology Co, Ltd (SJ). SJ and ZY had overlapping businesses. As the restructure cooperation broke apart due to the listed company's acquisition of SJ, Cheng and ZY filed a lawsuit to claim for liquidated damages of 100 million yuan. On the other hand, DB filed a lawsuit to demand repayment of the remaining earnest money of 30 million yuan, which DB believed to be an overdue loan.
In the case filed by Cheng and ZY, the court of first instance found that DB had breached the restructure agreement by allowing the listed company to acquire SJ. In terms of liquidated damages, the court adjusted the amount from 100 million yuan to 10 million yuan. Cheng and ZY were not content with the adjustment and appealed. The second instance court upheld the decision and reasoning of the first court. Cheng and ZY thus applied for retrial before the SPC. As the disputed facts occurred before the Civil Code came into effect, the SPC applied the Contract Law and the relevant judicial interpretations. The SPC first considered the burden of proof regarding adjusting liquidated damages. The SPC stated that as it is generally difficult for the breaching party to prove the exact amount of losses suffered by the non-breaching party, the burden of proof only requires the breaching party to bring sufficient evidence that would allow the judge to cast doubt on the reasonableness of the liquidated damages provision, therefore, DB was not obliged to prove that the exact amount of losses suffered by ZY and Cheng were 10 million yuan instead of 100 million yuan in order for the court to make the adjustment. Secondly, the SPC examined whether the adjustment was appropriate. With regards the adjustment, the SPC reasoned that:
- The fundamental factor to consider when adjusting liquidated damages is the real losses of the non-breaching party and the real losses should be examined in accordance with the principle of foreseeability. DB could not have foreseen that ZY and Cheng lost business opportunities with third parties when signing the restructure agreement. Neither could DB have foreseen that ZY and Cheng were to bear redemption obligations to some of ZY's shareholders once the restructure fails. As such, these expenses should not be deemed as foreseeable losses.
- It was unreasonable for ZY and Cheng to use the stock price of the listed entity on 31 December 2017 as a reference to prove that the profits they should receive if the restructure went well was around 171 million yuan, because the restructure was still ongoing on 31 December 2017.
- DB was at fault as it had intentionally deviated from the exclusivity clause of the restructure agreement by acquiring SJ instead of ZY.
Based on the above considerations, the SPC upheld the adjustment of liquidated damages from 100 million yuan to 10 million yuan. The authors believe that the SPC could have done more to explain the reasonableness of the amount of 10 million yuan, as this would have been more informative and helpful for future cases.
In the case filed by DB, the major disputed issue was whether the 30 million yuan should be considered as earnest money or a loan investment. The Primary People's Court of Gongshu District of Hangzhou City, Zhejiang Province briefly reasoned that, once the transaction documents for the restructure were signed and the public announcement was made, the underlying amount began to bear interest, as such, the amount had changed in nature from earnest money to a loan investment. The authors believe that the court could also have mentioned why the nature of the money changed despite the fact that the parties had agreed that the nature of the money as earnest money should remain unchanged. A possible alternative is that ZY and Cheng should not withhold the earnest money because they had filed a separate lawsuit to pursue liquidated damages.
1 Lijun Cao is a partner and head of the firm's dispute resolution department, Sylvia Jiang is a non-equity partner of Zhong Lun Law Firm and Angela Yan is an associate at the firm.
2 Note that this chapter only covers laws in mainland China. The legal systems in Hong Kong SAR, Macao SAR and Taiwan are different from that in mainland China.
3 Civil Code of the People's Republic of China (Presidential Decree No. 45), effective from 1 January 2021.
4 See Article 1 of the SPC Provisions on the Retroactivity in the Application of the Civil Code (Fa Shi  No. 15), effective from 1 January 2021.
5 Bixin Jiang et al., 'The Understanding and Application of Judging Rules in Guidance Cases of the Supreme People's Court Volume I of Contract Law', The China Legal Publishing House, pp. 457-458, (2018).
7 Zhang v. China Travel Services Co, Ltd,  Jing 03 Min Zhong No. 1362.
8 SPC Meeting Minutes on the Implementation of the Civil Code by National Courts, Fa  No. 94, effective from 6 April 2021.
9 Qingdao Zhengshang Property v. Qingdao Yushi Real Estate,  Lu Min Zhong No. 232.
10 See Article 8 of the SPC Guiding Opinions on Trial of Civil and Commercial Contract Disputes under the Current Situation (Fa Fa  No. 40), effective from 7 July 2009.
11 SPC leading group on the implementation of the Civil Code, 'Understanding and Application of the Book of Contract of the Civil Code', The People's Court Press, p. 719, (2020).
12 Article 586 of the Civil Code provides that, '[t]he parties may agree that one party deposits earnest money to the other party to secure his claim. An earnest money deposit contract becomes effective upon actual delivery of the earnest money. The amount of the earnest money shall be agreed by the parties, except that it shall not exceed 20% of the value of the object of the principal contract, and any excessive part does not have the effect as earnest money. Where the amount of the earnest money actually delivered is more or less than the agreed amount, the agreed amount of the earnest money shall be deemed to have been changed'.
13 Article 587 of the Civil Code provides that, '[a]fter a debtor has performed his obligation, the earnest money shall be calculated as part of the price or be refunded. Where a party paying the earnest money fails to perform his obligation or fails to perform it in conformity with the agreement, so that the purpose of the contract cannot be achieved, he is not entitled to request refund of the earnest money. Where a party receiving the earnest money fails to perform his obligation or fails to perform it in conformity with the agreement, so that the purpose of the contract cannot be achieved, he shall refund twice the amount of the earnest money to the other party'.
14 Article 588 of the Civil Code provides that, '[w]here the parties agree on both liquidated damages and earnest money, when a party defaults, the other party may choose to apply either the clause on the liquidated damages or the clause on the earnest money. Where the earnest money is not sufficient to compensate the losses caused by one party's default, the other party may request compensation for the losses in excess of the amount of the earnest money'.
15 For example, Article 1230 of the Civil Code provides that the defendant shall bear the burden to prove that he is not liable for the pollution in environmental pollution disputes.
16 Qingdao Wutong Investment Development Co, Ltd v. Qingdao Beihai'an Economic Zone Development & Construction Co, Ltd and et al.,  Min Yi Zhong Zi No. 14.
17 Civil Procedure Law of the People's Republic of China (Presidential Decree No. 71), as amended on 1 July 2017 and effective from 1 July 2017.
18 Article 63 of the Civil Procedure Law provides that '[e]vidence shall include: (1) party statements; (2) documentary evidence; (3) physical evidence; (4) audio-audio materials; (5) electronic evidence; (6) witness statement; (7) appraiser opinion; and (8) investigation records. Evidence must be verified to be true before it can be used as the basis for ascertainment of facts.'
19 See Article 11 of the Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Cases by Internet Courts (Fa Shi  No.16), effective from 7 September 2018.
20 See Article 20 of the SPC Provisions on Evidence.
21 See Article 112 of the SPC Interpretations on Civil Procedure Law and Article 45 of the SPC Provisions on Evidence.
22 See Article 81 of the Civil Procedure Law.
23 See Article 1184 of the Civil Code.
24 Fuqing Guanqiang Garden Flower Co, Ltd v. Fuqing Municipal People's Government, SPC  Xing Pei Shen No. 360.
25 Zhang Chunying v. ICBC Changji Branch, Xinjiang Securities Co, Ltd, Yao Tao and Zhang Weimin, SPC Bulletin, Issue 2, 2013.
26 Article 9 of the SPC Guiding Opinions on Trial of Civil and Commercial Contract Disputes provides that, '[a]s for breaches of sales contracts for producing equipment and raw materials, the buyer's loss of expected profits caused by the seller's breach of contract are usually loss of production profits. As for contracts on contracting operation or leasing operation, and contracts on provision of service or labour, the loss of expected profits caused by a party's breach of contract are usually loss of operational profits. As for successive sales contracts, the seller's loss of expected profits under the latter resale contract due to the breach of contract by the seller in the original contract are usually loss of resale profits'.
27 See Article 10 of the SPC Guiding Opinions on Trial of Civil and Commercial Contract Disputes.
29 Xinjiang Yakun Trade Co, Ltd v. Xinjiang Jinghe Kangrui Cotton Processing Co, Ltd, SPC  Min Er Zhong Zi No. 111.
30 Article 591 of the Civil Code provides that, '[a]fter a party defaults, the other party shall take appropriate measures to prevent further loss. Where the loss is aggravated due to the failure of taking appropriate measures, no compensation shall be claimed for the aggravated part of the losses. The reasonable expenses incurred by a party in preventing the aggravation of the loss shall be borne by the breaching party'.
31 See Article 591 of the Civil Code.
32 Zhongxin Honghe Mining Co, Ltd v. Anshan Finance Bureau, SPC  Min Zhong No. 803.
33 Article 592 of the Civil Code provides that, '[w]here one party's default causes loss to the other party, and the other party's fault contributes to the occurrence of such loss, the amount of compensation may be mitigated accordingly'.
34 SPC leading group on the implementation of the Civil Code, 'Understanding and Application of the Book of Contract of the Civil Code', The People's Court Press, pp.768-771, (2020).
35 Beijing Xindacheng Property Management Co, Ltd v. Beijing Saiwai Feiyang Hot Pot Restaurant,  Jing 01 Min Zhong No. 5658.
36 Han v. Sun & Li,  Min Shen No. 1665.
37 No.12 Guidance for Asset Evaluation Experts – Deciding on the Discount Rate to be used in Income Approach Evaluation of Company Value, China Appraisal Association, Zhong Ping Xie  No. 38.
38 Zijincheng Security v. Beijing Xuhui,  Jing Min Zhong No. 421.
39 Regulations on Foreign Exchange Administration of the People's Republic of China (Order of the State Council No.481), as amended on and effective from 5 August 2018.
40 Fei He, 'The payment of foreign currency debt should adhere to the principle of benefiting the observant party', https://www.chinacourt.org/article/detail/2014/10/id/1459793.shtml.
41 Reply of the Supreme People's Court to Request for Instructions on How to Determine the Exchange Rate of CNY to Major Foreign Currency in the Trial of Foreign-Related Civil and Commercial Cases ( Min Si Ta Zi No.30), effective from 15 January 2010.
42 Article 680 of the Civil Code provides that, '[w]here there is no agreement on payment of interest in the loan contract, the loan shall be deemed as bearing no interest'.
43 Interpretations of the Supreme People's Court on Issues regarding Laws Applicable for Trial of Sale and Purchase Contract Dispute Cases (Fa Shi  No. 17), effective from 1 January 2021.
44 Interpretations of the Supreme People's Court on Issues concerning the Application of Law for the Trial of Cases of Dispute over Contracts on Construction Projects (Fa Shi  No. 25), effective from 1 January 2021.
45 Notice of the Shandong High People's Court regarding Regulating Expression on the 'Date When Default Interest Stops Accruing' in the Main Context of Civil Judgments (Lu Gao Fa Ban  No. 61).
46 Interpretations of the Supreme People's Court on Several Issues concerning the Application of Law to the Calculation of Interest on Debt for the Period of Deferred Performance in the Enforcement Proceedings (Fa Shi  No. 8), effective from 1 August 2014.
47 Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases (Fa Shi  No. 17), effective from 1 January 2021.
48 Measures on the Payment of Litigation Fees (Order of the State Council No.481), effective from 1 April 2007.
49 China Real Estate Development Group Harbin Co, Ltd v. Jiangsu Suzhong Construction Group Stock Co, Ltd, SPC  Min Zhong No. 437.
50 See Article 540 of the Civil Code.
51 See Article 26 of the Interpretations of the Supreme People's Court regarding the Application of Laws in the Trial of Civil Disputes over Copyright (Fa Shi  No. 19), effective from 1 January 2021.
52 See Article 17 of the Interpretations of the Supreme People's Court regarding the Application of Laws in the Trial of Cases of Civil Disputes Arising from Trademarks (Fa Shi  No. 19), effective from 1 January 2021.
53 See Article 22 of the Interpretations of the Supreme People's Court regarding the Application of Law in the Trial of Cases on Patent Disputes (Fa Shi  No. 4); Article 20 of the Anti-Unfair Competition Law of the People's Republic of China; Article 1179 of the Civil Code.
54 Opinions of the Supreme People's Court on Further Promoting the Efficient Distribution of Complex and Simple Cases and Optimizing the Allocation of Judicial Resources (Fa Fa  No. 21), effective from 12 September 2016.
55 Shenzhen Sike Industrial Co, Ltd v. Xuhao Gao,  Shen Zhong Fa Zhi Fu Zi No. 89.
56 Article 41 of the State Compensation Law of the People's Republic of China (Presidential Decree No. 68) provides that '[w]here the claimant for compensation claims for state compensation, the organ under compensatory obligations, the reconsideration organ and the people's court shall not charge any fee from the claimant for compensation. Tax shall not be levied upon the compensation money obtained by the claimant for compensation.'
57 Article 4 of the Individual Income Tax Law of the People's Republic of China provides that '[t]he following categories of individual income shall be exempted from individual income tax: . . . (4) welfare benefits, compensation and relief funds'.
58 Provisions on Judicial Appraisal Practice Categories (Si Fa Tong  No.159), effective from 1 January 2000.
59 See Article 33 of the SPC Provisions on Evidence.
60 Provisions of the Supreme People's Court on Several Issues concerning the Appointment by the People's Court on Appraisal in Civil Procedure (Fa  No.202), to be effective from 1 September 2020.
62 Guiding Opinions of the Supreme People's Court on Unifying the Application of Laws and Strengthening Similar Case Retrieval (for Trial Implementation), effective from 31 July 2020.
63 Cheng & Zhejiang Yongle Film Production v. Dangdai Beifang, SPC  Min Shen No. 2522; Cheng & Zhe Jiang Yongle Film Production v. Dangdai Beifang,  Zhe Min Zhong No. 575; Cheng & Zhejiang Yongle Film Production v. Dangdai Beifang,  Zhe 01 Min Chu No. 363; Dangdai Beifang v. Cheng & Zhejiang Yongle Film Production,  Zhe 0105 Min Chu No. 13744.