You should state in your contract such loss may be incurred in advance. As such, at least you should inform the supplier of such loss in the course of execution of the contract and seek his/her consent.
1. You should specify such loss in your contract
You should clarify in your contract with the supplier the following:
“The supplier undertakes to deliver to you goods which meet the requirements specified in a timely manner. You sell goods to your customer based on your trust in such undertaking. If the supplier does not timely deliver the goods or the goods do not conform with agreed requirements, it may result in a situation where you have to compensate your customer. The supplier undertakes to indemnify you for any such loss incurred.”
If the above-mentioned is stated in the contract, then the court may support your claim against the supplier for reimbursing your compensation to the customer.
Also, it’s even better if you specify how much you’re going to compensate your client, which can make Chinese judges more willing to support your claim.
Why do you need to include such a clause in your contract?
In accordance with Article 584 of China’s Civil Code, the defaulting party shall compensate the other party for the loss, and the amount of compensation shall be equivalent to the amount of losses caused by the breach. However, the amount of compensation may not exceed the possible losses resulting from the breach of contract which has been foreseen or should have been foreseen by the defaulting party at the time of conclusion of the contract.
In short, the defaulting party should be liable for damages that could have been “foreseeable at the time of conclusion of the contract”.
Thus, if the above clause is included in the contract, you can prove to the Chinese judge that the defaulting party could reasonably “foresee” the losses “at the time of concluding the contract” (not at the time of breaching the contract ).
2. What if the damages clause is not specified in the contract? Let the supplier know the damages.
If the above clause is not included in the contract/order, can you claim damages against the supplier?
It is very difficult.
Because the supplier may argue that he/she did not foresee such losses when he/she entered into the contract.
However, there are a few things you can do over the course of contract performance to improve your chances of success in a lawsuit.
For example, you can tell the supplier: do not breach the contract or you may have to pay damages for your customers; if such damage occurs, the supplier shall compensate you for such loss.
This is useful for two reasons:
(1) Let the judge realize the dishonesty of the supplier, so as to win the sympathy of the judge. The judge may, as a matter of equity, try to support your other claims to make up for your losses hereof.
(2) Once the supplier acknowledges, by email, confirmation letter, or other documents, that he/she will indemnify, a supplementary contract is therefore formed between you and the supplier regarding such indemnification. Then the judge can support your claim on the basis of the supplementary contract.
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Contributors: Meng Yu 余萌