The Effective China Contract: Liquidated Damages.

Writing a liquidated damages provision for a China contract is two parts art and eight parts experience. The trick is determining the right amount to assess the Chinese company in damages. You want that amount to be high enough so as to deter your Chinese counterparty from breaching the contract, yet you also want it to be low enough so that your Chinese counterparty will actually sing the contract and so that a Chinese court will enforce it. Chinese courts will often simply invalidate or just ignore a contract damages provision if they deem it to be too high. Far too often American companies will put in a way too high amount “needed” to cover any potential lost profits they might lose from a breach, but in doing so they have shot themselves in the foot because no Chinese court will enforce it.

I would not advise our raising the amount of the contract damages, and even the $350,000 we have put in here is fairly high. Note that this is a per event penalty and it is intended to represent a fair estimate of your losses from each breaching event. When the amount of the contract damages is too high, the Chinese side is unlikely to sign the agreement because they will think that you are being unreasonable and or demonstrating your inexperience with how to conduct business in China. Equally importantly, a Chinese Court is unlikely to enforce a much higher amount because it will view it as not having a sufficient relation to the actual damages.