Breach of Contract

Overview

Breach of contract is the single most common commercial dispute we handle for overseas parties. In China, contract disputes are governed primarily by Book 3 of the Civil Code of the PRC (民法典·合同编, in force since 1 January 2021), which consolidated and replaced the earlier Contract Law. For cross-border sales of goods, the United Nations Convention on Contracts for the International Sale of Goods (CISG) frequently applies as well — China is a signatory and the CISG governs automatically unless the parties expressly opt out.

The practical consequences matter a great deal: China is a civil-law jurisdiction, so your rights and remedies come from the statute and the four corners of the contract — not from common-law notions of "penalty clauses" being unenforceable or of implied duties being easily read into the deal.

The legal framework

• Civil Code (民法典) — effective 1 Jan 2021. Books 3 (Contract) and 7 (Tort Liability) govern breach and damages. It preserved the core rules of the old Contract Law while modernising several provisions.
• CISG — China ratified it in 1986. It applies to international sale-of-goods contracts between parties whose places of business are in different contracting states, unless the parties exclude it. It governs formation, obligations, and remedies but not the validity of the contract or title to goods.
• Limitation period — the general limitation period for civil claims is three years from when you knew or should have known of the breach and the identity of the obligor (Civil Code Art. 188). A written demand can interrupt and restart the clock, so documenting every demand letter is critical.
• Choice of law & forum — in cross-border contracts, a governing-law and dispute-resolution clause is normally respected. Absent a clause, Chinese conflict rules may point to Chinese law and a Chinese court or arbitral institution.

How these disputes actually arise

Most overseas claimants fall into one of a few recurring fact patterns:

• Non-payment — a Chinese buyer stops paying, or pays only the deposit and then goes silent on the balance.
• Non-delivery / late delivery — a Chinese supplier misses agreed shipment dates, often around peak seasons, or fails to deliver at all.
• Quality non-conformity — delivered goods do not match the specifications, sample, or agreed standard (see also our Product Liability page for the tort side of this).
• Scope creep / unilateral changes — one side changes specifications, quantity, or price mid-performance and then denies the change.
• Distribution and agency — a distributor breaches exclusivity, poaches customers, or fails to meet minimum purchase obligations.

What you must prove

To succeed in a Chinese breach claim you generally need to establish four elements with documentary evidence:

1. A valid, binding contract — signed and sealed (公司公章) where possible. A bilingual contract is strongly recommended; courts will normally rely on the Chinese version if the two diverge.
2. A breach — non-performance, defective performance, or late performance.
3. Causation — the loss flows from that breach.
4. Loss / damages — the amount claimed, supported by invoices, payment records, and loss calculations.

Evidence is heavily documentary. Chinese courts place real weight on the written contract, signed delivery notes, invoices, bank records, WeChat/email correspondence, and inspection reports. Oral promises are very hard to prove, which is why "get it in writing" is more than a slogan here.

Available remedies

• Specific performance (继续履行) — ordering the breaching party to perform. Common for unique goods or where money alone is inadequate.
• Liquidated damages (违约金) — a contractual sum for breach. Courts may adjust it upward or downward if it is manifestly disproportionate to the actual loss (in practice, a common judicial benchmark is roughly 30% above actual loss), but unlike common law, a reasonable penalty clause is enforceable.
• Compensatory damages — actual loss including lost profit within the scope reasonably foreseeable at contracting.
• Price reduction — for non-conforming goods, the buyer can reduce the price proportionately.
• Termination (解除合同) — for fundamental breach, the aggrieved party may rescind after giving notice; statutory grounds exist where the breach defeats the purpose of the contract.
• Interest — on overdue payments, usually at a rate set by reference to the Loan Prime Rate (LPR) if not contracted.

Litigation vs. arbitration

The forum you choose at drafting time controls your options at dispute time:

• Arbitration (CIETAC, BAC, SHIAC, HKIAC) — generally preferred for cross-border deals because awards are enforceable in 170+ states under the New York Convention, and proceedings are confidential and typically final (no broad merits appeal).
• People's courts — used where there is no arbitration clause. First instance is usually at the intermediate court for substantial foreign-related disputes; appeals go to the high court.

If your contract is silent on the forum, the default is often the competent Chinese court, which may or may not suit you. Never leave this clause blank.

Typical process and timeline

A well-run breach case usually follows this arc:

1. Demand letter — a formal written notice (催告函) demanding cure or payment, which also interrupts limitation.
2. Negotiation / mediation — a large share of commercial disputes settle before filing.
3. Asset preservation — where recovery risk is real, apply to freeze the counterparty's bank accounts or assets early.
4. Filing and evidence exchange — pleadings, evidence, and any expert reports.
5. Hearing and judgment / award — a first-instance commercial case commonly takes 6–18 months; arbitration varies by institution and complexity.
6. Enforcement — converting the judgment or award into actual payment.

Practical tips for overseas parties

• Sign a bilingual contract with a clear governing-law and arbitration clause.
• Keep a complete documentary trail: purchase orders, delivery notes, inspection records, bank transfers, and email/WeChat threads.
• Define specifications and acceptance criteria precisely — vague quality terms are the root cause of many losses.
• Address liquidated damages and interest explicitly so they are not left to judicial discretion.
• Act within the limitation period and send written demands that clearly reset it.