China Contract Disputes: Breach, Termination and Damages under the PRC Civil Code

The framework: Book III of the Civil Code

Contract rules in China sit in Book III (Contracts) of the PRC Civil Code, in force since January 1, 2021 — principally Chapter 7 on termination of contractual rights and obligations and Chapter 8 on liability for breach. The leading interpretive document is the Supreme People's Court's Interpretation on the Application of the General Provisions of the Contract Part of the Civil Code (Fa Shi [2023] No. 13), effective December 5, 2023, which settled several points that had divided lower courts for years. Under Article 577, a party that fails to perform, or performs inconsistently with the contract, bears liability for breach — a rule courts apply as strict liability, so the claimant generally does not need to prove fault.

Damages under Article 584

Article 584 measures damages as the actual loss plus the benefit the aggrieved party would have obtained had the contract been performed — the Chinese formulation of lost profits (可得利益) — but caps the total at what the breaching party foresaw or ought to have foreseen when the contract was formed. The 2023 Interpretation gives that general rule real shape: where the non-breaching party terminated and made a substitute transaction, damages are the substitute price minus the contract price; otherwise the market price minus the contract price, measured over a reasonable period at the place of performance (Article 60). For continuing-performance contracts such as rent or service fees, damages cover only the reasonable period needed to find a substitute, not the entire remaining term (Article 61), and where lost profits cannot be fixed, the court may consider the breaching party's gain and the degree of fault under principles of fairness and good faith (Article 62).

Liquidated damages and the 30% benchmark

Parties may agree a fixed sum or a formula for breach under Article 585, but either side may ask the court to adjust it: increase it if it is too low relative to the loss, or reduce it if it is "excessively higher" than the loss. The 2023 Interpretation (Article 65) treats a penalty that exceeds the actual loss under Article 584 by more than 30% as generally excessive, and a party that breached maliciously is generally denied a reduction. This is a rebuttable benchmark, not a fixed ceiling — courts also weigh fault, the type of contract and the degree of performance. A clause stating that the penalty may not be adjusted is ineffective (Article 64).

Termination: notice, grounds and the one-year window

Termination can be agreed (Article 562) or statutory (Article 563): force majeure frustrating the contract purpose, anticipatory repudiation, failure to cure delayed performance of a main obligation within a reasonable period after demand, and other breach frustrating the purpose. It is exercised by notice under Article 565, and the contract is discharged when the notice reaches the other party. The trap for the unwary is Article 564: the right must be exercised within the agreed or statutory period, or — if none is fixed — within one year from when the right-holder knew or should have known of the ground. Sit on a termination right and it lapses. Under Article 566, termination does not bar damages; where termination follows breach, the terminating party may still claim liability for breach.

Mitigation and contributory fault

Two rules cut both ways in every Chinese contract dispute. Article 591 requires the aggrieved party to mitigate — to take reasonable steps to limit the loss — and bars recovery of the avoidable portion, while reasonable mitigation costs are borne by the breaching party. Article 592 apportions liability where both parties breached and reduces damages where the aggrieved party's own fault contributed to the loss. Document the steps you took to resell, replace or otherwise limit damage; the absence of that record is where defensible claims quietly lose value.

Limitation: three years

Contract claims are subject to the three-year limitation period of Article 188, running from when the claimant knew or should have known of the breach and of the obligor, with a 20-year outer cap. Written demands interrupt the period, so send demands in writing and keep the evidence.

Foreign-related contracts and the CISG

For foreign-related contracts, Article 41 of the Law on the Application of Law for Foreign-related Civil Relations lets the parties choose the governing law; absent a choice, the law most closely connected with the contract applies. The CISG, which China acceded to in 1986 (in force for China in 1988), applies automatically to international sale-of-goods contracts between parties in different contracting states unless excluded — but note that China has withdrawn its written-form reservation while maintaining its reservation under Article 95, so the CISG does not apply merely because Chinese conflict-of-laws rules point to a contracting state's law. The single most valuable drafting step for a foreign party remains a clear governing-law clause plus a workable arbitration or forum clause; we return to that subject in our guide to enforcing foreign arbitral awards in China. Our dispute resolution team handles contract claims through negotiation, litigation and arbitration.

The provisions summarized here are current as of the date of writing; statutory numbers and interpretive rules are subject to the latest official texts, so confirm the operative version before relying on any single article.