Personal injury

In short: limiting contractual liability in China


Limitation of liability

Prohibition of exceptions and limitations

What are the obligations that cannot be excluded or limited by the supplier in the contract?

Exemption or limitation of liabilities clauses refer to terms agreed upon by the parties that are intended to limit the liabilities of one or both parties in the future, thus reducing the risk of a claim for both parties. In general, Chinese law allows parties to agree on exemption or limitation terms, but they cannot violate the principle of good faith and the public interest. According to the Chinese Civil Law, the following exclusion clauses in the contract are null and void:

  • those that cause personal injury to the other party;
  • those that involve damage to the property of the other party as a result of willful intent or gross negligence; or
  • Those who endanger the interests of the state, the collective society or a bona fide third party.

Moreover, given that the essence of the exemption or limitation clause is to confirm and allocate potential risks in advance (in particular, to exempt obligations incurred due to events arising after the signing of the contract), the parties must not hide practical risks occurring before or during the signing of the contract. According to the Chinese Civil Law, where the two parties agree to exempt or relieve the seller from his liability for subject matter defects, and the seller fails to inform the buyer of subject matter defects intentionally or due to gross negligence, the seller has no right to claim exemption or release from his liability.

In addition, where the terms of exemption or limitation are standard terms, the party providing the standard terms must consider further obligations. If the party providing the Standard Terms unreasonably excludes or reduces its liability, which increases the other party’s liability; limits the principal rights of the other party; or exclude the other party’s principal rights, the Standard Terms will be null and void.

financial hats

Are there any legal controls on the use of financial caps to limit liability for breach of contract?

Under Chinese law, liability for breach of contract is more about compensation than punishment or penalty. The circumstances giving rise to liability for breach of contract are defined as the failure of the contracting party to perform its obligations under the contract, or the failure of its performance to be consistent with the agreement, thereby causing losses to the other party.

In such circumstances, the financial maximums for limiting liability for breach of contract shall be equal to the losses arising from the breach of contract, including interest accrued after the performance of the contract, but shall not exceed the potential losses arising from the breach of contract. A contract that was expected or should have been expected by the breaching party when the contract was concluded. If the contracting parties agree on liquidated damages, the People’s Court or arbitration body still has the right to adjust the amount of liquidated damages if this amount is extremely inappropriate compared to the actual losses.


Are there any legal controls on indemnities used to cover liability risks in contracts?

The concept of compensation does not exist in Chinese law regarding commercial contracts.

Indemnities mitigate liability risks in contracts, which are defined by a clause in which one of the contracting parties agrees to indemnify and protect the other from any liabilities, obligations, costs and expenses arising from specific events or actions. Compensation can be unilateral or bilateral. Once activated, the compensation becomes an independent debt added to the debt that is the subject of the contract.

Under Chinese law, there is no provision or provision to control the terms of compensation, while in principle, wherever a breach of contract occurs, the breaching party must compensate for the actual losses caused by the breach of contract. The principle of “explicit reliance” is rooted in Chinese law and judicial practice in determining the burden of liabilities arising from a breach of contract.

damage caused

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

Liquidated damages are expressly permitted under Chinese laws. According to Chinese civil law, the parties to a contract may agree on liquidated damage clauses, which can either stipulate a certain amount of liquidated damages in light of the circumstances of the violation or a method for calculating the damages incurred as a result of the violation.

However, China’s civil law also gives people’s courts and arbitral tribunals the discretion to adjust the amount of liquidated damages. In circumstances where the amount of liquidated damages agreed upon is less than the losses incurred, the court or arbitral tribunal may increase this amount at the request of the parties on the basis of the actual loss arising from the breach of contract. When the amount of liquidated damages agreed upon is excessively higher than the losses incurred, the court or arbitral tribunal may reduce this amount appropriately at the request of the parties. The amount of liquidated damages may be considered excessively higher if it exceeds 30 percent of the losses caused.


Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button