In the countries using civil law system, there is often an issue with misunderstanding the scope of limited compensatory liability. Contrary to what we can see in American TV shows, in real life, it would be very difficult to find a country in Eurasia in which suing somebody for sustained damages would be a significant source of income. In a way, it is justified, as the legislator’s intention was to compensate the damage and not to transform it into a source of benefit.
The legal system in both China and Poland is similar, but realistically the misunderstandings in those matters arise fairly often. When preparing a lawsuit in China, we always ask the Client for the showcase of all the costs they sustained due to the failed transaction. In practice, they often include the cost of the dismount of damaged machinery, utilization costs, contractual penalties for failure to meet the deadline etc. Unfortunately, we often have to verify their expectations by pointing out the costs which are capable of being recovered.
In case of winning the case in the Chinese court, there is a high chance of recovering the cost of the court fee. Besides that, we cannot expect much more, especially if the costs are poorly justified, documented or their connection to the case is insufficient. On the other hand, when it’s justified in the case, and the documentation is adequate, it is possible to demand the recovery of, for instance, warehouse costs.
One of the biggest challenges in this matters is, for example, the costs of the Client’s workforce. Despite the fact that those costs in the shape of additional labor are both certainly justified and a natural consequence of the other party’s breach – it is difficult to document them. If the workers usually work in a designated area and they were not hired to complete, for example, a disassembly or refund visits, it is difficult to prove that there was an additional cost or loss of profits. They need to be classified as lucrum cessans (a Latin term from civil law system, mostly unknown in China due to the exclusion of Latin language from legal education there). In conclusion, we know that this situation causes the disruption in workflow, as the workers cannot complete the assigned tasks, which then constitute the subject of the Client’s business activity and therefore are the source of their income. Unfortunately, this stance is surprisingly difficult to prove in China.
In theory, all of the costs should be able to be divided into damnum emergens – the costs which were in fact lost, and lucrum cessans – lost profits. It is worth noting that in Polish law we can divide the costs into two additional categories: costs which are a natural consequence and costs which are not a natural consequence. All of those matters can be sometimes overlooked and therefore limited to the particular judge’s legal opinion.
To understand the character of those concepts we need to look at the appropriate legislation:
Basics in Poland
According to Article 361 of Polish Civil Code, in order to assign liability to a person, there needs to be an adequate causal relationship. In practice, it means that the one who is obliged to pay compensation bears liability only for normal consequences of the actions or omissions from which the damage arises. Moreover, remedy of damage covers the losses which the aggrieved party has suffered, and the benefits which it could have obtained had it not suffered the damage.
Basics in China
Article 584 of Chinese Civil Code stipulates that in case a party fails to perform the contractual obligation or the performance does not conform to the agreement so that the other party suffers losses, the amount of compensation shall be equivalent to the losses caused by the breach of contract, including the benefits expected to be obtained should the contract had been performed. This amount, however, cannot exceed such losses that the breaching party foresaw or should have foreseen at the time of conclusion of the contract.
Considering the regulations listed above, it can be concluded that in legal sense, the situation seems to be similar. Both factual losses and unobtained benefits are implied within the foreseeable possibilities. It is apparent that the compensation in contract dispute serves more as a remedy to the injured party rather as a penalty to the liable party. Direct losses are the losses suffered as a direct consequence of breaching the contract. Indirect losses are the losses of reasonably expected profits and other secondary and incidental losses. The plaintiff is not entitled to compensation if he did not suffer any loss, even when the defendant has actually breached the contract.
The less stringent regulation in this matter is article 74 of CISG (United Nations Convention on Contracts for the International Sale of Goods; Vienna, 1980). In reality, the most important aspect is the country of origin of the court. Another significant matter, although not mentioned earlier, is procedural formalism.
Conclusions – what will I get compensated for?
Chinese litigation is significantly more formalized, adversarial and puts much more emphasis on evidentiary preclusion. It does not require much thought to admit that damnum emergens losses are remarkably easier to prove than lucrum cessans losses. Sometimes we can prevent the losses from happening. For example, when having a building equipment meant for dismount after using it, we have a choice whether to delegate the task to our internal workers or to outsource it. In the first case we lose the labor which could have been assigned to the workers, meanwhile in the second case we lose money, which we have to pay upfront. To conclude this dilemma, it is important to assess our confidence in winning the case. If we are confident, then maybe it is more worth it to invest, so we can receive the compensation later. In the end, every case is different and therefore it depends on the nature of the losses.
On the other hand – it is strongly discouraged to pile up weak, poorly documented claims which are easy to undermine, over the main claim. Adding uncertain and unjustified costs with hopes of having them compensated results in weakening the lawsuit and heightens litigation risk. Unfortunately, this practice is commonly seen in Polish courts (and – in my private opinion – has a decidedly adverse influence on polish civil procedure).
Summary
The aforementioned thoughts have a rather expected conclusion – the losses which should be included in our lawsuit depend on individual factors. We have to take all of the variables into account and make a conscious decision after we diligently assess the actual state. When preparing a lawsuit, it is advised to consult the lawyer on the quality of our decisions. The best moment for that consultation typically occurs when we first take action regarding the costs of mitigating the consequences caused by the liable party. You can then consciously choose to risk additional costs or not, which can result in better-structured lawsuit.
