China · Case commentary

What a Chinese Court Actually Does With Your Damages Clause

Overseas buyers put a large round number into a confidentiality or exclusivity clause on the theory that a frightening figure deters the supplier. Six published PRC judgments show what courts do with those figures: one clause survived at RMB 2,000,000, another collapsed from RMB 6.92 million to RMB 120,000, and one produced nothing at all.

Responsible lawyer: Adrian Liu · PRC-licensed attorney, Xiamen · English & Chinese · Published September 27, 2026

What does Chinese law say about a liquidated damages clause?

Article 585 of the Civil Code lets the parties agree a sum payable on breach, or a method of calculating damages. Where the agreed sum is excessively higher than the loss caused, a court may reduce it appropriately — but only on the application of a party.

The Supreme People's Court interpretation on the general provisions of the contract part (Fa Shi [2023] No. 13, art. 65) supplies the working test. The court takes the loss under article 584 as the base, weighs the identity of the parties, the transaction type, performance, degree of fault and the background, and applies fairness and good faith. A sum exceeding the loss by more than 30% may generally be treated as excessive. A party that breached in bad faith will generally not get any reduction.

So the size of the number is rarely what decides the outcome. What decides it is whether the clause is anchored to something the court can compute, and whether the party attacking it produced evidence of its own.

Six judgments, and what each one changes about your drafting

Case	The clause and the outcome	What to draft because of it
Ningbo Intermediate Court (2025) Zhe 02 Min Zhong No. 7605 29 January 2026	Trade mark licence naming the single permitted production site; unauthorised third-party production was a fundamental breach at RMB 2,000,000. Notarised site visits proved four unapproved locations. Full RMB 2,000,000 upheld. The licensee had already sought approval for four other sites, so it knew the rule and broke it deliberately.	Name the permitted production site. A deliberate breach by a party that knew the rule engages the bad-faith limb of article 65, and reduction is then generally refused.
Anhui High Court (2024) Wan Min Shen No. 621 22 April 2024	Processing agreement barring supply of similar components to third parties. Contractor argued the drawings' ownership was unsettled and the mould fee unpaid; neither was a condition of the clause. RMB 350,000, built as 30% of the buyer's lowest selling price × 160 sets sold.	Keep your cost and pricing records. A court will do this arithmetic without an expert valuation when the numbers are in front of it.
Suzhou Intermediate Court (2019) Su 05 Min Zhong No. 4940 26 November 2019	RMB 1,000,000 per instance, RMB 5,000,000 on serious breach. The buyer's rent and fit-out costs had no shown connection to the breach; the manufacturer produced nothing on excess and never disclosed its unauthorised sales. RMB 1,000,000 — the per-instance figure.	Add an audit or records obligation. The party alleging the sum is excessive bears that burden, and a supplier's silence about its own sales works against it.
Jingmen Intermediate Court (2017) E 08 Min Chu No. 47 27 August 2018	Damages set at five times the value of contracts with shared customers, with a worked example in the clause. Breach established. The buyer never proved a single shared customer, so the method could not be applied. RMB 6,920,777 claimed, RMB 120,000 awarded. The drawings' "controlled document" stamp carried no confidentiality wording, so the designation requirement failed too.	A simple provable base beats an elaborate unprovable one. And if the agreement requires material to be designated confidential, the marking has to say so.
Qingdao Intermediate Court (2017) Lu 02 Min Chu No. 1428 17 June 2019	Five times the drawing transfer fee for leaks, twice the value of any loss. The claimant reasoned back from the defendant's subsidiary's total annual sales; the court refused that base, there being no evidence all its products used the technology. Royalties actually paid used instead. RMB 4.88 million claimed, RMB 600,000 awarded. No liability for the parent, absent proof of commingling.	Tie the loss base to products that actually used your information, and name the affiliates you want bound rather than relying on piercing.
Shanghai Changning District Court (2008) Chang Min Er (Shang) Chu No. 112 25 June 2008	RMB 100,000 if the customer commissioned a second manufacturer. The developer found its sample at a third party and called the police. No contract with that party, no completed products, no delivery records. Claim dismissed. The court would not impose so severe a liability on the basis of a possibility. The defendant's seal was forensically tested and found genuine.	Make the breach itself provable — an unapproved site, an unauthorised subcontract, a sale to a named competitor. A clause built on "misuse" makes you prove the misuse first.

Five of the six are intermediate or basic-level decisions; one is a provincial high court ruling refusing a retrial. None is a guiding case, and PRC courts are not bound by earlier decisions as a common-law court would be. They show the reasoning applied to articles 585 and 65 in commercial supply relationships. They do not fix a rule, and outcomes in other matters turn on their own records.

The pattern across the six

Read together, the outcomes track one variable: how close the agreed figure sat to something the court could calculate. The RMB 2,000,000 that survived was backed by an identifiable licence fee and a deliberate breach. The RMB 6.92 million that collapsed rested on a formula whose inputs nobody could produce.

The second variable is what the breaching party did in court. Suzhou is the clearest illustration: the manufacturer never disclosed its own sales, and the figure was fixed without that information. Silence is not neutral, and drafting an audit obligation gives you a second route to the same numbers.

Nothing in these cases suggests that a modest number is safer than a large one. Anhui produced RMB 350,000 from a clause that gave no figure at all, because the buyer had its costs and its selling prices ready.

Where the clause sits in the rest of the document

The damages provision is one of eight drafting points that decide whether a China NNN does anything. The others are the definition of protected information, the language versions, the forum, subcontractor access, execution and the chop, survival, and return or destruction. A strong damages clause inside a document that defines the protected information loosely is a number attached to a claim you cannot establish.

Questions from overseas buyers

Is there a figure that is safe to put in the clause?

No, because the test is relative. RMB 2,000,000 was upheld in Ningbo and RMB 6.92 million became RMB 120,000 in Jingmen. The difference was whether the number connected to a computable loss and whether the breach was deliberate.

Does the 30% rule cap me at 130% of my loss?

Not quite. Article 65 says a sum exceeding the loss by more than 30% may generally be treated as excessive, which guides the court's assessment rather than capping recovery. It only operates if the defaulting party applies, and generally not at all where that party breached in bad faith.

What if the supplier refuses to disclose how much it sold?

That silence is not neutral — see Suzhou, where the court fixed the figure without it. An audit or records obligation in the agreement gives you a separate route to the same information.

Penalty or damages formula?

PRC law does not draw the common-law distinction between a penalty and a genuine pre-estimate, and article 585 covers both an agreed sum and an agreed method of calculation. A method tied to identifiable inputs is easier to defend, and the two can be combined.

Can I claim legal costs as well?

Where the agreement provides for them, in part. Suzhou allowed RMB 100,000 of claimed costs. Other courts have treated legal and notarisation costs as already included within the sum awarded rather than recoverable on top.

Have the clause looked at before you sign

Send the agreement and a short description of the project. A focused written review identifies the provisions that would not hold up in a PRC court and what to put in their place, at a fee agreed in writing beforehand.

Request a review →Scope and fees

General commentary on PRC law, not advice on your matter, and not a prediction of any outcome.