The analysis of compensation of obtainable interest after breach

Abstract：If the request for compensation of obtainable interests could be supported by court? What is the court’s attitude toward the obtainable interest prescribed in the contract law article 113? From our analysis, the court is likely to support such request, on condition that authoritative source provides a specific number of your loss.

1

The legal basis for obtainable interest

The legal basis for obtainable interest have been clearly prescribed in China contract law. If either party to a contract causes losses to the other party by failing to perform its obligations under the contract or failing to perform its obligations according to contractual agreements, the amount of compensation for loss shall be equivalent to the loss caused by the breach of contract and shall include the profit obtainable after the contract is performed, but shall not exceed the amount of the loss that may be caused by breach of contract and that has been or ought to be foreseen by the party in breach in concluding the contract. This article explicitly rules that the non-breaching party could claim damages including not only the cost, but the obtainable interested had the contract been performed without breach. Also, the same article imposes a restriction on obtainable interest damages, which is, such damages must be in the reasonable contemplation of breaching party at the time of contract.

After, in order to further specify the scope for obtainable interests, the Supreme Court issued Notice of the Supreme People's Court on Printing and Circulating the Guiding Opinions on the Trial of the Cases Involving Disputes Arising from Civil and Commercial Contracts in the Current Situations, in calculating and determining of the obtainable loss, the predictable rule, the loss mitigation rule, the benefits rule, and the contributory negligence rule shall be integrated. Therefore, China judicial system has established a series of rules in obtainable interest damages. At least, technically the laws are in support of claim of obtainable interest damages. 

2

The precedents of compensation of obtainable interest damages

From the perspective of practice, since there is no clear formula or standard on calculating obtainable interests, Article 131 of Contract law is rarely applied. We will discuss the judicial application of this rule below.

Case : Mr. Zheng signed a subscription agreement with Q Company in purchasing a retail shop upon 5,035,400 yuan. They also reached agreements on down payment and mortgage rate. After that, Q Company conveyed the retail shop to Mr. Zheng, and Mr. Zheng subsequently rent the shop to the third party. However, Q Company has never finished the final closing procedure with Mr. Zheng. A few years later, Q Company sold this retail shop to B Company and completed the closing procedure.

Mr. Zheng filed a suit for damages of the appreciation of the retail shop, which in legal jargon, the obtainable interest damages. The Supreme Court held that in the current case, Q Company should reasonably foresee such damages lead by the appreciation of retail shop’s value at the time the contract was signed. Considering that Mr. Zheng has exercised possession over this property for over 6 years, along with factors such as background, reason and price of the second convey, the first instant court held that the damages should be equal to the differences between purchase price of Mr. Zheng and fair market price at the point Q company ceased to perform, thus the court order the damages of 11,513,700 to Mr. Zheng. However, the Supreme Court believes that amount is beyond the scope of foreseeable damages, so the Supreme Court reduced the amount to 5,035,400.

Although in the judgment of this case, the court claimed that such judgment is made according to the article 131 of contract law, as you can see, this case requires the evaluation from the professional appraisal institution. Therefore, in absence of specific rules, the court actually applied a higher standard in determining the obtainable interests.

Also, we found two other cases, both are remanded to first instance court because of the omission of obtainable interests in judgment. In these two cases, the second instance court instructs the first instance court to take into consideration that the foreseeability of loss at the time of contract, the performance of mitigation obligation and the degree of faults of both parties. Moreover, in the case concerning exploitation right, in determining the loss, the first instance court is required to consider not only the cost of producing ironstone, but also in lack of exploiting right, the potential market risk the non-breaching party could face in the process of productions and transactions.

Unfortunately, we could not find the subsequent retrial judgments. Therefore, we are not able to make a further conclusion on the determination, calculation and standard of obtainable interest. 

3

Conclusion

In summary, Docvit dispute resolve team believes that undoubtedly the obtainable interests shall be compensated at the time of breach. However, China judicial department rarely apply foreseeability doctrine, they tend to apply certainty doctrine to determine the existence of obtainable interests. The courts often reject plaintiff’s pleading of obtainable interests for uncertainty. Therefore, to have a court support the obtainable interests damages, the non- breaching party are supposed to submit the specific amount of loss calculated by professional third party evaluation institution. In which way the non-breaching party could “fix” the obtainable interests. Otherwise, solely based evidence on data analysis, sales changes and costs, courts are unwillingly to support the obtainable interest damages. 

Disclaimer

While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. The professional articles of Docvit Law Firm WeChat Official Account are all original to our lawyers team.If you need to reprint, please leave a message on our WeChat background.Please do not reprint without authorization.

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