By::Cheng Shigang, Associate in King & Wood’s Domestic Litigation and Arbitration Practice
Unclear provisions have frequently caused liability disputes for late payment damages. Clearly a non-breaching party may claim damages for late payment. Yet, opposing parties have often advanced differing methods for calculating damages depending on which method provides a more favorable outcome. In the past, courts also proposed differing principles for deciding cases. This lack of uniformity often led to confusion.
1. Judicial Authority
On Feb12th, 1999 the Supreme People’s Court promulgated the “ damages”clause (J.E  No.8), which stated:
When contracting parties have not reached an agreement on calculating late payment damages, People’s Courts may use the past-due loan interest charge set by the People’s Bank of China (PBC) as the standard for calculating late payment damages.
Based on the above judicial explanation, when contractual parties fail to reach an agreement on calculating late payment damages; courts will adopt financial institutions’ past due loan interest charge as the standard for calculating damages. Multiple courts have affirmed this principle.
Since past due interest charges are frequently adjusted by the PBC, parties should expect to use the current rate at the time of bringing a claim to calculate late payment damages.
At present, according to “The Announcement on relevant RMB Loan Rate issues”, promulgated by the PBC on Dec 10th, 2003:
…the overdue loan interest rate will change from a fixed 2.1% per day to a floating 30%-50% per day of the current loan interest set by the PBC.
In other words, parties calculating late payment damages during litigation or arbitration; should apply the new floating standard of 30%-50% of the current benchmark loan rate per day, rather than the previous fixed 4% or 2.1% per day rates. The benchmark loan rate is adjusted frequently by the PBC for financial institutions.
Contracting parties may contractually stipulate any method of calculating damages. However, a court may use its own discretion to adjust the parties’ agreed method. The breaching party may also move for a reduction of damages based on the non-breaching party’s actual losses. Only a court or arbitration commission may decide whether to grant such a motion.
2. Keeping a Contract Airtight
In conclusion, after the transition from a fixed rate to floating rate for damages, conflicts may still arise during litigation or arbitration.
Therefore, it is important to not only clearly state in the contract that a breaching party will pay damages on a late payment, but also the method for calculating those damages. For instance, “a breaching party will pay damages equal to a certain percentage of a late payment.” Parties may avoid the uncertainties of a floating rate with a well drafted agreement.
Since a breaching party may ask to reduce damages for late payment, we suggest parties clarify in the agreement that there is assent and understanding to the said calculating method even if the non-breaching party incurs no actual loss. In the event of a dispute it is also important to state there will be no reduction of damages. A solid agreement should state the non-breaching party, in addition to late payment damages, may also claim other damages. In other words a non-breaching party may also claim a “delay in performance” which could give rise to other damages. Furthermore, a non-breaching party may also pursue other remedies such as continued performance, compensation for losses, etc.