Chinese Civil Code Art. 584: Breach damages cover foreseeable losses. Undisclosed rent not recoverable. Disclosed rent, resale profit, production profit may be claimable.
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We recently helped a foreign client with a contract dispute. The manufacturer failed to deliver on time. After we sent a lawyer‘s letter, the manufacturer agreed to refund the deposit. But our client was still not satisfied. He said he had rented a shop overseas specifically for these goods, and because there was nothing to display, he wanted the manufacturer to compensate him for the rent loss.
Is this claim reasonable?
Article 584of the Chinese Civil Code provides that damages for breach of contract include the loss caused by the breach, including the benefits that would have been obtainable from performance of the contract, but shall not exceed the loss that the breaching party foresaw or ought to have foreseen at the time of conclusion of the contract.
In other words, the law tries to put the non-breaching party in the position they would have been in if the contract had been performed — including the profits they would have made. But this liability is not unlimited. The manufacturer is only liable for losses that were “reasonably foreseeable” at the time the contract was signed.
Several examples help illustrate this logic.
1. Rent not disclosed — not recoverable
The manufacturer had no idea that the buyer had rented a shop. The profit on this batch of goods might have been only a few thousand yuan, but the buyer rented a shop with an annual rent of hundreds of thousands of yuan. Holding the manufacturer liable for that would clearly be unreasonable.
2. Rent disclosed in advance — potentially recoverable
If the buyer had told the manufacturer at the time of contracting: “I am renting a shop specifically for these goods, and the rent is X yuan per month” — and could provide evidence (lease agreement, payment receipts, etc.) — then the rent would have entered the scope of “reasonable foreseeability”.
The manufacturer knew about the special purpose of the goods. If they chose to enter the contract, they accepted the corresponding risk. In that case, the rent loss could be claimed.
3. Resale profit — recoverable
The most typical type of recoverable benefit is resale profit. Suppose the buyer told the manufacturer at the time of contracting: “I am going to resell these goods to a supermarket and make a profit of X yuan per unit.” If the manufacturer defaults, the buyer can claim that resale profit — because it was already “foreseen” by the manufacturer.
4. Production profit — recoverable
A factory buys equipment for production and tells the seller at the time of contracting: “This machine can produce X units per day, and each unit generates Y yuan in profit.” If the seller delivers late, the factory‘s daily production loss (the profit that would have been made) is a foreseeable and recoverable benefit.
This is the principle under Chinese law regarding the scope of damages for breach of contract. To better protect your legal rights, the best practice is to have a lawyer prepare your contract before you start doing business.
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