Breach of contract remedies: Compensate or indemnify?

There are a different breach of contract remedies and the most common remedy for a breach of contract is compensation for the losses arising out of the breach, or, to use the English term, “damages”. In most, if not all, jurisdictions, this remedy is available by law and it is not necessary to make express provision for it in the contract itself.

It is also possible for a contract to make provision for other remedies in the event of breach. An example of this is the right to terminate a contract for breach (see China Business Law Journal volume 2 issue 1, page 58: When a contract comes to an end).

Another contractual remedy that is recognised in many jurisdictions is an “indemnity”.

This article considers: (1) the rules governing compensation for breach of contract in common law jurisdictions and in China; (2) the treatment of an indemnity under English law; and (3) whether an indemnity is recognised under Chinese law.

Compensation for breach of contract

In both common law jurisdictions and in China, there are two important principles that govern compensation for loss arising out of a beach of contract: (1) the non-defaulting party has an obligation to mitigate its loss; and (2) the loss must not be too remote (i.e. the loss must be foreseeable).

Under English law, the classic statement in relation to the test of remoteness was made in a case called Hadley v Baxendale (1854):

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

A similar position appears in article 113 of the Contract Law. The first paragraph of article 113 provides as follows:

第一百一十三条

当事人一方不履行合同义务或者履行合同义务不符合约定，给对方造成损失的，损失赔偿额应当相当于因违约所造成的损失，包括合同履行后可以获得的利益，但不得超过违反合同一方订立合同时预见到或者应当预见到的因违反合同可能造成的损失。

Article 113

Where a party fails to perform contractual obligations, or the performance of contractual obligations does not comply with the agreement, causing loss to the other party, the amount of compensation for loss shall be equivalent to the loss resulting from the breach, including any benefit that may be obtained from performance of the contract, but must not exceed the loss that is likely to result from the breach of contract which was foreseen or should have been foreseen by the breaching party at the time the contract was entered into.

And article 119 imposes an obligation on the non-defaulting party to mitigate its loss:

第一百一十九条

当事人一方违约后，对方应当采取适当措施防止损失的扩大；没有采取适当措施致使损失扩大的，不得就扩大的损失要求赔偿。

当事人因防止损失扩大而支出的合理费用，由违约方承担。

Article 119

After a party breaches a contract, the other party shall take appropriate measures to prevent an increase in the loss; where the failure to take appropriate measures results in an increase in loss, the other party may not claim compensation for the increased loss.

Reasonable expenses paid by the other party in preventing an increase in the loss shall be borne by the breaching party.

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at law.asia.