China: How To Claim Loss Of Acquirable Interest

Loss of acquirable interest refers to the loss of expected interest due to the breach of contract by one party. The expected interest can be acquired by the other party if the contract is properly fulfilled.

I. Legal ground for claiming loss of acquirable interest

According to Article 113 of the Contract Law of P.R.China: where a party fails to perform its obligations under the contract or its performance fails to conform to the agreement and cause losses to the other party, the amount of compensation for losses shall be equal to the losses caused by the breach of contract, including the interests receivable after the performance of the contract, provided not exceeding the probable losses caused by the breach of contract which has been foreseen or ought to be foreseen when the party in breach concludes the contract.

II. Several types of loss of acquirable interest

Depending on the nature of transaction, purposes of the contract etc, generally speaking, there are several types of loss of acquirable interest as below:

• Loss of production profit. For example, in a sales contract in relation to the sales of production equipments and raw materials, which is for purpose of production, the loss of expected interest suffered by the buyer due to the breach of contract by the seller shall belong to the loss of production profit.
• Loss of operation profit. For example, in a service contract, the loss of expected interest suffered by the service provider due to the breach of contract by the other party shall belong to the loss of operation profit.
• Loss of resale profit. In a sales contract where the buyer intends to resell to a third party, if the goods are not delivered due to the breach of contract by the seller, the loss of acquirable interest suffered by the buyer shall belong to the loss of resale profit.

III. Distribution of burden of proof in the litigation for claiming loss of acquirable interest

For the party claiming loss of acquirable interest, the following evidences shall be collected and submitted:

• The fact of breach of contract by the other party;
• The total amount, ground and calculation of the loss of acquirable interest;
• The necessary transaction cost.

When calculating the loss of acquirable interest, the non-breaching party shall provide corresponding evidences to prove the acquirable interest which can be obtained if the contract is fulfilled. For example, if the goods is for resale, the non-breaching party shall provide resale contract, the price for resale, etc.

However, for the breaching party, he is not always passive when facing the claims by the non-breaching party. To reasonably reduce the loss, the breaching party may defend himself from the following aspects:

1. Defense in respect to f oreseeability. According to Article 113 of Contract Law, the loss of acquirable interest due to the breach of the contract by the breaching party shall not exceed the probable losses caused by the breach of contract which has been foreseen or ought to be foreseen when the breaching party concludes the contract. In the litigations, almost each of the breaching party will defense himself on the basis of foreseeablity. It could be a good defense but the breaching party must submit evidences of foreseeability for courts' reference and prove the claimed loss by the non-breaching party has actually exceeded the one he can foresee. Without any solid evidences, the court will determine whether to accept the defense or not at its discretion.

2. Defense of loss mitigation. The ground for loss mitigation defense lies in Article 119 of the Contract Law: where a party breaches the contract, the other party shall take the appropriate measures to prevent the losses from increasing; where the other party's failure to take appropriate measures results in additional losses, it cannot demand compensation for the additional losses. Loss mitigation defense will grant the breaching party the chance of questioning the reasonability of the claimed loss of acquirable interest. And if the breaching party is able to prove that the additional loss is caused due to non-breaching party's failure to take necessary measure, which leads to the expansion of loss, such additional loss cannot be deemed as reasonable loss and shall not be compensated.

3. Defense of loss and benefit offset. In some special situations, for example, in a sales contract in relation to perishable goods, the buyer fails to make payment as agreed. In order to avoid more losses due to delay in sale, the seller resells the goods to others. The proceeds from the sale shall be deemed as benefit to the seller and such benefit shall be deducted from the loss claimed by the seller.

4. Defense of contributory negligence. If the non-breaching party shall also be blamed to the occurrence of the breach of contract by the breaching party, the breaching party is entitled to request the non-breaching party to take responsibility for the loss.

IV. How to correctly claim the loss of acquirable interest

In our experience, in order to have its claim for loss of acquirable interest support by the court, the non-breaching party shall take into the followings consideration:

1. To reasonably evaluate the risk of breach of contract. Before the contract is concluded, one party shall fully evaluate the other party's capacity for contract performance, level of credit, supply and demand condition in the market, price risk, etc. which may result in potential risk for breach of contract. A reasonable plan shall be prepared for these risk;

2. To properly define the purpose of contract. As mentioned, the various nature and purpose of the contract may lead to different types of acquirable interest. Accordingly, the required evidences for claiming the loss of acquirable interest may vary. Meanwhile, in consideration of the defense to be raised by the breaching party on the basis of foreseeability, we suggest the purpose of the contract shall be clarified in the contract. For instance, in sales contract, the buyer needs to generally clarify that the goods purchased will be used for its own production or for resale purpose. The proper statement of purpose of contract will make the evidences in relation to the claims more acceptable to the court and make the loss claimed by the non-breaching party as foreseeable loss.

3. To properly collect and keep the evidences for determining and calculating the loss of acquirable interest. In the litigation in respect to the claim of loss of acquirable interest, most of the evidences submitted by the non-breaching party are related to itself or a third party. Under such circumstances, the breaching party usually will question the authenticity and reasonability of the evidences. Therefore, the non-breaching party shall particularly pay attention to the points mentioned below when collecting evidences: (i)Authenticity of the evidences. The evidences provided by the non-breaching party shall be consistent with historical logic. For example, when the non- breaching party claims for the losses of resale profit, the date for concluding the resale contract with the third party shall be contained in the contract so that the time sequence of the two contracts can be identified.(ii) Relevance of the evidences. During the litigation, the evidences provided by the non-breaching party usually will be questioned by the other party in terms of relevance. That is, the breaching party will question the causal relationship between the evidence relating to the loss and the act of breaching. In this aspect, besides the demonstrative measures such as the statement of the purpose of the contract, the non-breaching party shall ensure the reasonable and presumable causal relationship exists between evidences relating to the loss and the act of breaching. (iii) Legitimacy. All evidences provided by the non-breaching party shall be legal ones and cannot be forged. This is because although the evidences provided by the non-breaching party in relation to the loss of acquirable interest may have no direct links to the breaching party, the breaching party will try its best to find out the legitimacy of such evidences. Once the court has reasonable doubt towards the legitimacy of the evidences, then non-breaching party may find difficult to have the court support its claim for loss.

4. To take necessary measures to prevent the losses from increasing. In case of breach of the contract by one party, the non-breaching party shall have an obligation to take necessary measures to prevent the losses from increasing. The required measures may vary depending on the situations. However, from the perspective of litigation skills, we suggest the non-breaching party send written notice to other party stating the measures taken or to be taken to prevent the losses from increasing after the breach of contract has occurred. Such evidence may deliver a positive signal to the court that the non-breaching party has actively taken measures to prevent the losses from increasing, which may help respond to the defense by the breaching party on the basis of mitigation of damages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.