On May 23, 2025, Company A (the Buyer) and Company B (the Seller) entered into a "Land Transport Market Coal Purchase Contract," agreeing that Company B would supply 10,000 tons of coal to a third-party Anhui power plant between May 23 and May 31, 2025. The contract stipulated that delivery would be made at the loading station, with freight borne by Company B, and ownership of the goods would transfer to Company A upon presentation of the original bill of lading at the loading station. It was also agreed that if the actual shipment volume by Company B was less than 90% of the contracted quantity, it would constitute a breach of contract, with liquidated damages calculated as (Contracted Quantity × 90% - Quantity Accepted at Plant) × 40 RMB/ton. The contract further provided for settlement, taxes, and other matters. After the contract was signed, Company A paid a prepayment of 500,000 RMB to Company B as agreed. Subsequently, a dispute arose between the parties regarding the burden of freight, leading Company B to fail to fulfill its delivery obligations as agreed, causing the contract performance to reach an impasse. Consequently, Company A filed a lawsuit with the court, requesting a judgment ordering Company B to: 1. Return the prepayment of 500,000 RMB and interest; 2. Compensate for the liquidated damages of 219,160.80 RMB paid to the third-party Anhui power plant due to the breach; and 3. Compensate for the loss of expected profits of 250,884.96 RMB.
This case primarily concerns the scope of damages for breach of a sales contract and the rules for their determination. There are two points of contentionentification of the breaching party; and second, whether direct losses and lost profits should be supported.Regarding the identification of the breaching party. The court held that the contractn explicitly stipulated that Party B was to bear the freight costs, and Party B's subsequent signing of a transportation agreement with the carrier further confirmed its status as the party responsible yment. Party B claimed that it had orally negotiated a change to the freight payment arrangement with Party A, but the contract stipulated that "amendments must be confirmed by both upplementary agreement bearing their official seals," and Party A denied this claim; therefore, the oral discussions did not constitute a valid amendment to the contract. Party B's failure to payght resulted in the inability to deliver the goods, constituting a material breach, for which it should bear corresponding liability.
Regarding the scope of damages. The court held that Company B should have known at the time of contract formation that Company A's purpose in entering into contract was to resell the coal to a power plant in Anhui; therefore, the losses caused by its breach of contract were within the scope of what it could reasonably The penalty of RMB 219,160.80 paid by Company A to a third party due to Company B's breach constitutes direct loss and has actualccurred, and thus should be supported. At the same time, had the contract been performed normally, Company A could have obtained profit from the resale price differential; therefore, this loss of expeofits should also be compensated. Taking into account cost factors such as taxes and fees, the court determined the loss of expected profits to be MB 183,680.22.In summary, the court of first instance ruled as follows: (1) Company B shall return to Company A the advance paymen500,000 yuan and corresponding interest; (2) Company B shall compensate Company A for direct economic losses of 219,160.80 yuan; (pany B shall compensate Company A for loss of expected profits of 183,680.22 yuan; (4) The other claims of Company A are dismissethe judgment of the first instance was announced, Company B appealed. Upon review, the court of second instance ruled to dismiss the appeal and uphold the original judgment.
Article 584 of the Civil Code of the People's Republic of China stipulates that where a party fails to perform its contractual obligations or performs them in a manner sistent with the agreement, causing loss to the other party, the amount of damages shall be equivalent to the loss caused by the breach of contract, including the benefits that could have been oned upon the performance of the contract; however, it shall not exceed the loss that the breaching party foresaw or should have foreseen at the time of entering into the contract likely to be caused by the breach. This provision establishes the principle of full compensation and the rule of foreseeability for damages arising from breach of contract. The judgment in this case is a typicalplication of the aforementioned rules.I. Determination of Direct Losses
Direct losses refer to the reduction in existing assets suffered by the non-breaching party due to the breach of contrIn this case, Company A paid a penalty of 219,160.80 yuan to a third party, a power plant in Anhui, due Company B's breach of contract. This amount constitutes an actual additional burden incurred by Company A in fulfilling the resale contract and is therefore classified as a direct loss. Since Company B should haveen aware of Company A's resale purpose at the time of entering into the contract, Therefore, the loss did not exceed the scope of what was foreseeable, and it is legally liable for compensation.II. Determination of Loss of Expected Profits
Loss of expected profits refers to future benefits that could have been obtained upon the performance of a cont, and in the context of chain sale contracts, it is primarily manifested as resale profits. In this case, if Company B had supplied the goods in accordance with the contract, Company A could he obtained a profit from the resale price differential. This profit is certain and falls within the category of expected profits. According to Article 60 of the Interpretation of the Suprople's Court on Several Issues Concerning the Application of the General Provisions of the Contract Chapter of the Civil Code of the People's Republic of China, expected profits may be calculated bassale profits. Taking into comprehensive consideration necessary costs such as value-added tax, surtaxes, and corporate income tax, the court finally determined the loss of expected profts to be 183,680.22 yuan, reflecting the principle of mitigation of damages.
III. Application of the Foreseeability Rule
The foreseeability rule is a crucial standard for limiting the scope of damages for breachof contract. The party required to foresee is the breaching party, the time of foreseeability is at the time of contract formation, and the content of foreseeability is the tyof loss (not the specific amount). In this case, Company B was fully aware that the ultimate recipient of the goods was a power plant in Anhui. It should have foreseen at Company A might incur liability for breach of the resale contract and suffer a loss of resale profits due to the breach. Therefore, it should bear liability for compensation within the scope of such foeeability.
This case is a typical example of damages for breach of contract in a chain sale scenario, clarifying the specific application of the "foreseeability rule" unde Article 584 of the Civil Code of the People's Republic of China in judicial practice. In commercial transactions, especially where chain supply relationships exist, both parties should clearly define their respective contractual p transactional objectives. For suppliers, if they are aware that the buyer's purpose in purchasing the goods is resale, the loss of resale profits caused to the buyer by the of contract falls within the scope of what they "should have foreseen" at the time of contract formation. In the event of a breach, they must not only compensate foryer's direct losses but may also face liability for substantial loss of expected profits. For enterprises, it is essential to prudently assess their own performance capabilities when signing contracts and clearly s the parties responsible for key terms such as freight and delivery. If changes to the contract content are required, a formal supplementary agreement must be signed to avoid legal risks associated with oral agrents. Only by performing contracts in good faith can one proceed steadily and go far; only through standardized management can potential risks be prevented.Article 584 of the Civil Code of the People's Republic of China: Where one party fails to perform its contractual obligations or performs them in a manner inconsistent with te agreement, causing loss to the other party, the amount of damages shall be equivalent to the loss caused by the breach of contract, including the benefits that could have been obtained upon the performance of the contract; however, it shall not exceed the loss that the breaching party foresaw or should have foreseen at the time of entering into the contract as likely be caused by the breach of contract.Article 60, Paragraph 1 of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the General Provisions of the Contt Section of the Civil Code of the People's Republic of China": When the people's courts determine the benefits that could have been obtained after the performance of the contract in accordance wth Article 584 of the Civil Code, they may calculate based on the production profits, operating profits, or resale profits that the non-breaching party could have obtained, after deductinonable costs such as expenses incurred by the non-breaching party for entering into and performing the contract.Article 63, Paragraph 1: When determining the "losses caused by the breach that the breaching party foresaw or should have foreseen at of entering into the contract" as stipulated in Article 584 of the Civil Code, the people's courts shall, based on the purpose of the parties in entering into he contract, take into comprehensive consideration factors such as the parties to the contract, the content of the contract, the type of transaction, trade practices, and the negotiation process,It shall be determined in accordance with the loss that a civil subject in the same or similar situation as the breaching party could have foreseen or should have for at the time of entering into the contract.Article 22 of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Cases Invoing Disputes over Sales Contracts" (2020 Revision): Where a breach of contract by one party to a sales contract causes loss to the other party, and the other party claims ensation for loss of expected profits, the people's court shall, when determining the scope of liability for breach of contract, Determination shall be made in accordance with the claims of the parties, based on Articles 584, 591d 592 of the Civil Code, Article 23 of this Interpretation, and other relevant provisions.This article is reprinted from the WeChat official account "Shandong High Court", and we express our gratitude!
