Liquidated Damages in Chinese Contracts: 违约金 and Civil Code Article 585

Liquidated damages in China are agreed damages for breach of contract . The Chinese term is 违约金. A contract may say, for example, that the supplier must pay a fixed amount for unauthorized disclosure, a daily amount for late delivery, or a percentage of the order value for certain breaches.

Term 违约金 liquidated damages

违约金 (wéiyuējīn) is the standard Chinese term for agreed damages payable on breach. Art. 585www.court.gov.cn中华人民共和国民法典 - 中华人民共和国最高人民法院最高人民法院政务网站,最高人民法院网，最高人民法院，最高人民法院网是人民群众了解和联系最高人民法院的重要窗口，承载着司法公开、法治宣传、服务群众、接受监督等重要使命。是最高人民法院的政务网站，是最高人民法院在互联网上唯一的正式身份。www.court.gov.cn↗ lets the parties fix an amount or a calculation method in advance.

These clauses matter because they turn a vague breach into a number. But they are not untouchable. Under Article 585 of the PRC Civil Codeenglish.www.gov.cnenglish.www.gov.cn↗, a court or arbitral tribunal may adjust the agreed amount if it is too low or excessively high compared with the loss.

In supplier disputes, the clause is useful only if it supports the next move: negotiation, a China supplier demand letter, arbitration, or settlement pressure.

The short definition

Liquidated damages are damages agreed in advance. They can be a fixed sum, a daily rate, a percentage, or a calculation method.

They are common in:

• late-delivery clauses;
• quality and warranty clauses;
• payment-default clauses;
• NNN agreements;
• mold and tooling agreements;
• exclusivity or non-circumvention provisions;
• confidentiality and IP-related clauses.

The point is not only compensation. A good liquidated damages clause also creates leverage. It tells the supplier what a breach will cost and gives the demand letter a concrete number.

The Article 585 logic

Article 585 of the Civil Code allows parties to agree on liquidated damages or a method of calculating damages . If the agreed amount is lower than the actual loss, the court or arbitral tribunal may increase it on request. If it is excessively higher than the loss, it may reduce it on request.

Statute Art. 585 liquidated damages

Art. 585www.court.gov.cn中华人民共和国民法典 - 中华人民共和国最高人民法院最高人民法院政务网站,最高人民法院网，最高人民法院，最高人民法院网是人民群众了解和联系最高人民法院的重要窗口，承载着司法公开、法治宣传、服务群众、接受监督等重要使命。是最高人民法院的政务网站，是最高人民法院在互联网上唯一的正式身份。www.court.gov.cn↗: on a party’s request, a court or arbitral tribunal may increase agreed damages below the loss or appropriately reduce them if excessively higher than the loss. Adjustment is never automatic.

That means two things.

First, a liquidated damages clause is useful. It is not merely decorative.

Second, an absurd number can backfire. If the amount looks punitive and disconnected from any real commercial harm, the other side may ask for reduction . The clause still helps frame the dispute, but the final number may not survive unchanged.

Statute Art. 65 the 30 percent excess guideline

SPC Contract Book Interpretation, Art. 65www.court.gov.cn权威发布 - 中华人民共和国最高人民法院最高人民法院政务网站,最高人民法院网，最高人民法院，最高人民法院网是人民群众了解和联系最高人民法院的重要窗口，承载着司法公开、法治宣传、服务群众、接受监督等重要使命。是最高人民法院的政务网站，是最高人民法院在互联网上唯一的正式身份。www.court.gov.cn↗: agreed damages exceeding the loss by 30 percent can generally be deemed excessively higher. Courts also weigh performance, fault, and deal background.

How to draft a practical clause

A practical clause should define the trigger. What exactly counts as breach? Late delivery by more than how many days? Failure to meet which specification? Disclosure to whom? Use of which drawing? Circumvention of which customer?

It should define the calculation. A fixed amount may be appropriate where loss is hard to prove, such as misuse of confidential information. A daily rate may work for late delivery. A percentage of order value may work for quality or delivery defaults, but the formula should be clear.

It should define whether other remedies remain available. Can the buyer still claim actual loss above liquidated damages? Can it seek refund, replacement, injunction-type relief, asset preservation, or arbitration costs? If the contract is silent, disputes may arise.

It should fit the dispute-resolution clause. A strong damages clause is less useful if the forum clause is weak.

Supplier-contract examples

For late delivery, a clause may use a daily percentage of the delayed goods’ value , with a cap and the buyer’s right to terminate after a certain delay. The daily rate should reflect real commercial harm: lost season, missed retail window, storage cost, customer penalties, or project delay.

Statute Art. 585 delay damages, duty to perform

Art. 585, para. 3www.court.gov.cn中华人民共和国民法典 - 中华人民共和国最高人民法院最高人民法院政务网站,最高人民法院网，最高人民法院，最高人民法院网是人民群众了解和联系最高人民法院的重要窗口，承载着司法公开、法治宣传、服务群众、接受监督等重要使命。是最高人民法院的政务网站，是最高人民法院在互联网上唯一的正式身份。www.court.gov.cn↗: where damages are agreed for delayed performance, the breaching party must still perform the obligation after paying them. A daily rate fits this rule naturally.

For defective goods, a clause may connect damages to the defective batch, inspection cost, rework cost, replacement shipment, customer claim, or price reduction. The contract should still preserve the right to reject goods where the defect is serious.

For NNN breaches, a fixed amount may make sense because proving the exact loss from copying, unauthorized use, or customer circumvention can be difficult. But the amount should be tied to expected order value, development cost, market harm, or commercial sensitivity.

For mold or tooling disputes, the clause may cover failure to return molds, unauthorized use, delay in handover, or transfer to another factory.

How it helps a demand letter

A demand letter without numbers often sounds like frustration. A demand letter with a clear liquidated damages clause can be sharper:

The contract says late delivery triggers RMB X per day. The goods are Y days late. The current contractual damages are RMB Z. If the supplier does not ship, refund, or settle by the deadline, the buyer will claim that amount plus other remedies.

That structure is much harder to ignore than “you caused us serious loss.”

Common mistakes

The first mistake is using a huge penalty number with no commercial logic. It may scare the supplier during negotiation, but it may be reduced later.

The second mistake is failing to define the breach. If the trigger is vague, the damages formula becomes another dispute.

The third mistake is forgetting evidence. Even with liquidated damages, you still need to prove the contract, breach, dates, delivery terms, specifications, or prohibited use .

Evidence Art. 64 burden of proof on adjustment

Interpretation, Art. 64www.court.gov.cn权威发布 - 中华人民共和国最高人民法院最高人民法院政务网站,最高人民法院网，最高人民法院，最高人民法院网是人民群众了解和联系最高人民法院的重要窗口，承载着司法公开、法治宣传、服务群众、接受监督等重要使命。是最高人民法院的政务网站，是最高人民法院在互联网上唯一的正式身份。www.court.gov.cn↗: adjustment must be raised by counterclaim or defense. The breaching party proves the amount is excessively higher; the claimant should still evidence its own loss.

The fourth mistake is drafting liquidated damages while ignoring asset preservation and arbitration. A number on paper is not recovery. You still need a route to pressure or enforce.

The bottom line

Liquidated damages in China are enforceable in principle, but adjustable in practice. That is not a reason to avoid them. It is a reason to draft them carefully.

For supplier contracts, NNN agreements, and settlement schedules, a good liquidated damages clause can make the difference between a vague complaint and a credible legal claim.

If you want to review a China contract, NNN agreement, or supplier dispute before sending a demand letter, contact me. I can help test whether the damages clause is strong enough to support negotiation, arbitration, or litigation.

References

1. Supreme People’s Court, PRC Civil Code, including Articles 584 and 585: https://www.court.gov.cn/zixun/xiangqing/233181.htmlwww.court.gov.cn中华人民共和国民法典 - 中华人民共和国最高人民法院最高人民法院政务网站,最高人民法院网，最高人民法院，最高人民法院网是人民群众了解和联系最高人民法院的重要窗口，承载着司法公开、法治宣传、服务群众、接受监督等重要使命。是最高人民法院的政务网站，是最高人民法院在互联网上唯一的正式身份。www.court.gov.cn↗
2. Supreme People’s Court, Interpretation on the General Provisions of the Contract Book of the Civil Code (Fa Shi [2023] No. 13), including Articles 64 and 65: https://www.court.gov.cn/fabu/xiangqing/419382.htmlwww.court.gov.cn权威发布 - 中华人民共和国最高人民法院最高人民法院政务网站,最高人民法院网，最高人民法院，最高人民法院网是人民群众了解和联系最高人民法院的重要窗口，承载着司法公开、法治宣传、服务群众、接受监督等重要使命。是最高人民法院的政务网站，是最高人民法院在互联网上唯一的正式身份。www.court.gov.cn↗
3. PRC Civil Code, official English translation (gov.cn): https://english.www.gov.cn/atts/stream/files/5feda5b8c6d0cc300eea77acenglish.www.gov.cnenglish.www.gov.cn↗

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This article is part of the China Legal Glossary series. Related reading: What Is an NNN Agreement in China?, That Contract Clause You Ignored Could Cost You Everything, and Before You Pay a Chinese Supplier, Check These 10 Things.