The rapid development of the internet and information technology has given rise to a group of online broadcasters, or streamers, who make a profession out of online live streaming. As the core assets of live-streaming platforms, streamers are closely intertwined with the platform’s revenue. In order to ensure the fulfilment of contracts, many platforms often enter into exclusive agreements with streamers and stipulate substantial penalty clauses.
Streamers often have significant financial incentives to switch between live-streaming platforms, and arbitration cases in which platforms request the streamer to assume liability for breach of contract are increasing.
In practice, the platform would mostly request the streamer to assume the liability for breach of contract and pay the agreed liquidated damages. This article takes a dispute over a certain live-streaming contract as an example to showcase how the amount of penalties in such cases is determined in arbitration.
CASE SUMMARY
Party A, a live-streaming platform, entered into an “A-List Streamer Live Streaming Service Contract” with party B, a streamer, and party B’s agency. The contract stipulates an exclusive live-streaming collaboration among the three parties for a duration of three years. Without party A’s written consent, party B should not, in any form, collaborate with any third party for live-streaming activities that are identical or similar to those in the contract.
The contract contains the following liquidated damages clause regarding breach of contract: “All parties agree that in the event that party B violates the exclusive live-streaming provision of this contract, party B shall pay party A an amount equal to 10 times the highest monthly income Party B earned on the platform designated by party A, or RMB2 million (USD277,000), whichever is higher.”
Party B was discovered to be carrying out live-streaming activities on other platforms after nine months of live streaming on party A’s platform. Therefore, party A initiated arbitration pursuant to the arbitration clause and required party B to assume liability in accordance with the clause of liquidated damages agreed.
Party B contends that the breach provisions in the contract are invalid provisions on the following grounds: First, the liquidated damages clause is a pre-drafted standard clause used repeatedly by party A, as it is also used in contracts signed by party A with other streamers. Party A did not negotiate with party B, nor did it take reasonable measures to remind party B prior to the formation of the contract. Party A, using its dominant position in the contract, added clauses that are clearly unfavourable to party B.
Second, the amount of liquidated damages agreed is significantly excessive. The principle for liquidated damages should follow the rule of “compensatory damages taking precedence over punitive damages” in China. The income obtained by party B from live streaming during the term of contract amounted to only slightly above RMB100,000, far below the liquidated damages stipulated in the contract.
Party A argues that the breach clause does not violate the mandatory provisions of laws and administrative regulations, thus there is no statutory invalidity, and the liquidated damages claimed by party A have a contractual and legal basis.
It asserts the following points: First, party B is a dedicated professional engaged in live-streaming activities, and the exclusive streaming contract voluntarily signed represents the disposal agreement of party B’s rights as a commercial entity, reflecting party B’s true intention. As a commercial subject, party B is capable of foreseeing the consequence of breach of contract when entering into the contract and shall abide by the principle of good faith.
The expression of intent at the time of contract formation should be the primary basis for establishing the rights and obligations of both parties. Party B’s argument that the breach liability is too excessive pertains to the magnitude of the breach liability, not the validity of the clause.
Second, party B’s breach has rendered party A’s investments futile, including promotional efforts conducted by party A through platform resources and financial investments made for the normal operation of the live-streaming platform.
Party B’s breach of contract has resulted in the loss of users for party A, which negatively impacted party A’s platform popularity, software usage rate and anticipated profits. Due to the nature of the live-streaming industry, the losses incurred to party A due to the streamer’s breach are often difficult to calculate. Therefore, the contract includes provisions for determining the liability for a breach and the amount of the penalty.
TRIBUNAL’S VIEWPOINT
The focus of the dispute in the case revolves around the validity of the liquidated damages clause provided in the live-streaming contract, and the determination of the specific amount of liquidated damages.
The determination of the validity of the liquidated damages clause concerns the applicability of such clauses, whether the penalty is excessive and how to adjust it. The arbitral tribunal recognised its validity.
However, considering the unique nature of the internet live-streaming industry, the normal transaction order of online streaming, and taking into account factors such as the loss of expected profits for party A and party B’s earnings, the tribunal made adjustments to the amount of the penalty.
Based on the characteristics of online live streaming, it is a common business arrangement in the industry to include contractual provisions regarding breach liability and the amount of penalties in the contract. Online live-streaming platforms heavily rely on streamers and the industry is highly competitive.
Platforms need to invest a significant amount of funds and resources in promotion and maintenance of operations. Therefore, any breach of contract by a streamer would inevitably incur costs, expenses, costs, loss of expected profits and even market share loss for the platform.
The tribunal holds that party B, as a person with full civil capacity and experience in live streaming, has an in-depth understanding of the live-streaming industry. Party B is aware of and understands the contract signed and the legal relationship established, and voluntarily entered into the contract based on true intention. According to the principle of freedom of contract, when parties agree on penalties and other liabilities in the contract, all parties shall strictly adhere to them.
Party B’s unilateral cessation of live-streaming activities on party A’s platform and engaging in live streaming on other platforms constitutes a breach of the live-streaming contract. This behaviour not only directly leads to the loss of party A’s users, but also results in party A being unable to recover the costs invested in promotion and advertising efforts for party B.
As for the calculation of the specific penalty, considering that it is difficult to determine party A’s actual losses and quantify the investment in promotion and advertising, the tribunal used party B’s contract income as a benchmark.
In addition, the tribunal took into account various factors including party A’s initial investment in party B, the duration of the contract already fulfilled, the degree of party B’s fault and party B’s popularity. By comprehensively assessing the loss of expected profits caused to party A by party B, the tribunal made a reduction in the amount of the penalty.
THE ANALYSIS
The relationship between streamers and live-streaming platforms is governed by contractual legal obligations, and the liquidated damages clause is a manifestation of the autonomy of the parties.
Unlike the compensatory nature of penalty clauses in traditional industries, in the live-streaming industry, where streamers are the core resources for platforms’ operation, higher amounts of penalties are often agreed on.
These liquidated damages clauses are usually standardised and their validity can be determined by considering whether their content unfairly increases the liability of one party.
On the one hand, for the convenience of managing streamers, platforms often sign contracts with them that include indiscriminate liquidated damages clauses with the same maximum penalty amount. In situations where it is difficult to quantify the losses caused by streamers’ breaches, it is also impractical to expect the platform to provide evidence of the exact amount.
On the other hand, streamers, as individuals with full civil capacity, have considerable understanding of the online live-streaming industry, their own commercial value, and the market and positioning of the live-streaming platform. Thus, they should prudently review the terms of the agreement at the time of contract formation.
Therefore, the fact that the liquidated damages clause is in a standardised format and stipulates a high penalty amount should not be the sole basis for deeming it invalid.
When determining the amount of penalties, the arbitral tribunal takes into account various factors including: the duration of the contract performance by the streamer; the streamer’s earnings; the degree of their fault; the nature of the live-streaming industry; the platform’s initial investments; platform traffic; and the streamer’s commercial value and individual uniqueness. The tribunal will weigh these factors and balance the interests of all parties involved before deciding on the amount.
Feng Hui is an arbitrator at the BAC/BAIC and an associate professor at the School of Law of the University of International Business and Economics
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