By Li Shu | Beijing YunTing Law Firm
When a contract is terminated because of a breach, the innocent party is not necessarily limited to recovering payments already made or expenditure already incurred. Subject to the applicable requirements, it may claim benefits that proper performance would have produced. The central questions are which benefits can be established, how they should be calculated and what limits apply.
1. Termination does not automatically exclude lost profits
Article 566 of the Civil Code permits the party entitled to terminate a contract for breach to seek breach-of-contract liability, unless the parties have agreed otherwise. Article 584 includes benefits obtainable through performance within the scope of contractual damages, subject to foreseeability at the time of contracting.
Termination alone therefore neither defeats a lost-profits claim nor proves the entire amount claimed. The analysis must still address contractual validity, the basis for termination, causation and the effect of any contractual provisions governing compensation.
2. Distinguish gross contract revenue from reasonable profit
Lost profits generally cannot be equated with all unpaid contract revenue. A claim for production, operating or resale profit should establish the expected revenue and account for reasonable costs attributable to entering into and performing the contract. Incurred expenditure, costs saved after termination and other heads of compensation must be treated consistently to avoid duplication.
Article 60 of the interpretation on the general provisions of the Civil Code’s contract book also provides methods based on replacement transactions and market-price differences. Following lawful termination, an actual replacement transaction may support a price-difference claim. A replacement price that materially departs from the local market price may require adjustment under the applicable rule. Where no replacement transaction occurred, the relevant market price is assessed at the place of performance within a reasonable period after breach.
3. Match each calculation to evidence
Useful evidence may include the contract and supplementary agreements, pre-contract communications explaining intended use and returns, orders and resale contracts, historical transactions, cost records, financial statements, and valuation or audit opinions supported by identifiable underlying materials.
The evidence should establish a coherent chain: performance would have provided a realistic basis for the claimed return; the breach caused that return to be lost; and the calculation accounts for reasonable costs, market changes and project risks. A unilateral profit forecast unsupported by orders, capacity, costs and conditions for performance may carry limited weight.
4. Foreseeability, mitigation and contributory fault
Recoverable loss is limited to what the party in breach foresaw or should have foreseen, when the contract was made, as a possible consequence of breach. Claims involving special uses or unusual commercial opportunities should be supported by evidence that those circumstances were known at that time.
The innocent party must also take appropriate measures to prevent loss from increasing. Articles 591 and 592 of the Civil Code address mitigation, breaches by both parties and fault contributing to the loss. Benefits from replacement transactions, saved expenditure and potentially overlapping compensation should be reconciled within one calculation. Different labels for claims do not justify double recovery.
5. Settlement terms and the formulation of claims
A termination agreement should address repayment, settlement for completed work, liquidated damages, compensation, guarantees and dispute resolution. A party intending to preserve a lost-profits claim should avoid broad releases that do not reflect its actual intention, such as an unqualified statement that no disputes remain.
In litigation or arbitration, identify the bases for actual-loss, lost-profits and liquidated-damages claims separately, explain any overlap and state their intended order of application. Continuing contracts, including long-term leases and cooperation arrangements, require attention to rules concerning a reasonable replacement period. Revenue for the entire remaining term should not simply be treated as the amount of damages.
Principal authorities
Civil Code, Articles 566, 584, 585, 591 and 592; Articles 60–63 of the interpretation on the general provisions of the contract book.