When one party to an international sales contract unilaterally refuses to perform its contractual obligations, the non-breaching party may suffer losses far beyond the amounts it has already paid. In addition to direct losses such as advance payments, transportation expenses, storage costs, inspection fees, and other transaction-related expenses, the non-breaching party may also lose profits that it reasonably expected to earn from the normal performance of the contract.
Such losses are generally referred to as loss of expected profits, loss of anticipated profits, or, in legal terminology, loss of expected benefits.
In international commercial disputes, claims for lost profits are common, particularly where a foreign buyer purchases goods from a Chinese supplier for resale, further processing, or use in an established production operation. However, a claim for expected profits will not automatically be awarded simply because the seller breached the contract. A central issue is whether the claimed loss falls within the losses that the breaching party foresaw or ought to have foreseen at the time the contract was concluded.
This article examines the legal principles governing claims for lost profits in international sales disputes, with particular reference to the United Nations Convention on Contracts for the International Sale of Goods (CISG) and Chinese contract law.
I. The Legal Nature of Lost Profits in International Sales
Lost profits are different from direct losses incurred as a result of a contractual breach.
For example, suppose a foreign buyer purchases 500 industrial machines from a Chinese manufacturer for USD 1 million. The buyer intends to use the machines to manufacture products for its customers. If the Chinese supplier refuses to deliver the machines after receiving the purchase price, the buyer may incur various losses, including:
- amounts already paid to the supplier;
- inspection and testing expenses;
- transportation and storage expenses;
- costs associated with finding replacement goods;
- additional costs of purchasing substitute equipment; and
- profits that the buyer would reasonably have earned from using or reselling the goods.
The first categories generally constitute direct or consequential financial losses. The final category concerns lost expected profits.
Under international sales law, the basic principle is that the injured party should be placed, so far as monetary compensation can achieve it, in the economic position it would have occupied had the contract been properly performed.
However, this principle does not mean that every commercial opportunity allegedly lost because of a breach is compensable. The claimant must establish that the claimed profit was sufficiently connected with the breach and that the loss satisfies the applicable foreseeability and certainty requirements.
II. The CISG and the Foreseeability Requirement
For international sales contracts governed by the CISG, the principal provision concerning damages is Article 74 of the CISG.
Article 74 provides, in substance, that damages for breach of contract consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. However, the damages may not exceed the loss which the breaching party foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters of which it then knew or ought to have known, as a possible consequence of the breach.
The provision therefore establishes two important principles.
First, loss of profit is in principle recoverable.
Second, recovery is subject to the foreseeability limitation.
This distinction is particularly important in international commerce because the buyer’s business model may not always be known to the seller. A Chinese manufacturer may know that a foreign buyer intends to purchase goods for commercial purposes, but that does not necessarily mean that the manufacturer can foresee every downstream transaction, resale agreement, production contract, or profit expectation of the buyer.
The relevant question is therefore not simply whether the buyer actually lost profits. The court or arbitral tribunal must consider whether that type and extent of loss was reasonably foreseeable to the seller when the contract was concluded.
III. Typical Dispute: A Chinese Supplier Fails to Deliver Goods
Consider a typical international trade dispute.
A foreign company enters into a contract with a Chinese manufacturer for the purchase of specialized production equipment. The buyer pays an advance payment and makes substantial preparations to introduce the equipment into its production line.
The seller subsequently refuses to deliver the equipment without a valid contractual justification.
As a result, the buyer cannot commence production as scheduled and claims compensation for the profits it expected to earn from selling the finished products.
The buyer may also seek:
- repayment of amounts already paid;
- costs associated with inspections and transportation;
- additional costs of purchasing substitute equipment;
- reasonable expenses incurred in mitigating the loss; and
- lost profits resulting from the seller’s failure to perform.
The dispute then becomes more complicated.
The buyer may argue that the seller knew that the equipment was intended for commercial production and therefore should have understood that failure to deliver would result in lost production profits.
The seller, however, may argue that the contract only concerned the sale of equipment and that the seller had no knowledge of the buyer’s specific customers, sales contracts, production margins, or anticipated profits.
The determination of whether the lost profits are recoverable will depend heavily on the evidence available concerning the parties’ knowledge at the time of contracting.
IV. When Can Lost Profits Be Recoverable?
Lost profits are more likely to be recoverable where the claimant can establish both foreseeability and reasonable certainty.
1. The Seller Knew the Commercial Purpose of the Goods
The foreseeability of lost profits becomes stronger where the contract or communications clearly establish the purpose for which the goods are being purchased.
For example, the seller may have been informed that:
- the equipment was being purchased for a specific production project;
- the goods were intended for resale to identified customers;
- the buyer had already entered into downstream purchase agreements;
- the buyer had a confirmed production schedule; or
- the goods were specially manufactured for a particular commercial project.
If such information was available to the seller when the contract was concluded, the seller may have been able to foresee that failure to perform would cause the buyer to lose profits associated with that particular project.
2. The Buyer Can Establish the Amount of Lost Profit
Foreseeability alone is not sufficient.
The claimant must also provide a reasonably reliable basis for calculating the amount of the alleged lost profit.
Useful evidence may include:
- downstream sales contracts;
- purchase orders from customers;
- historical sales records;
- production records;
- financial statements;
- invoices;
- market quotations;
- established profit margins;
- business plans;
- production capacity records; and
- evidence of comparable transactions.
A claim based solely on the buyer’s assertion that “we would have made USD 1 million in profit” is unlikely to be sufficient.
The claimant should demonstrate how the claimed profit was calculated and why the underlying commercial opportunity was sufficiently concrete rather than speculative.
V. When May a Claim for Lost Profits Be Rejected?
Courts and arbitral tribunals may reject or substantially reduce a claim where the alleged profits were too remote, speculative, or unforeseeable.
For example, suppose a Chinese supplier sells standard industrial components to a foreign trading company. The contract does not specify the buyer’s ultimate customers or intended resale transactions.
After the supplier breaches the contract, the buyer claims USD 2 million in lost profits based on a separate resale opportunity that the supplier was never informed about.
In such circumstances, the supplier may argue that:
The alleged downstream profits were not within the reasonable contemplation of the parties when the sales contract was concluded.
The buyer’s internal business plans, expected market expansion, or confidential arrangements with its customers may not automatically become losses for which the supplier is legally responsible.
The key issue is what the seller knew or ought to have known at the time of contracting, rather than what the buyer subsequently intended or what ultimately happened after the breach.
VI. The Importance of the Time of Contract Formation
One of the most important principles in international sales disputes is that foreseeability is generally assessed at the time the contract was concluded.
This is critical.
Suppose a buyer informs the seller only after the contract has been signed that the goods will be used for a highly profitable government project. The seller then fails to perform.
The buyer may have suffered substantial losses, but the later disclosure does not necessarily establish that those losses were foreseeable when the contract was concluded.
Conversely, if the buyer had already informed the seller before signing the contract that the goods were being purchased for a specific project and that timely delivery was essential, the seller’s exposure to foreseeable consequential losses may be significantly greater.
Accordingly, emails, WhatsApp messages, purchase orders, technical specifications, quotations, meeting records, and other pre-contract communications can become important evidence in international commercial litigation or arbitration.
VII. Chinese Law and Article 584 of the Civil Code
Where Chinese law governs the contract, Article 584 of the Civil Code of the People’s Republic of Hefei provides the principal statutory basis for damages arising from breach of contract.
The provision recognizes that damages may include benefits that the non-breaching party could have obtained after performance of the contract, while limiting damages to losses that the breaching party foresaw or ought to have foreseen at the time the contract was concluded.
The underlying concept is therefore broadly consistent with the foreseeability principle under CISG Article 74.
In a dispute involving a Chinese supplier, however, the applicable legal framework must first be determined. The contract may be governed by:
- the CISG;
- Chinese law;
- the law of another jurisdiction;
- a combination of mandatory rules and contractual provisions; or
- applicable arbitral rules where the dispute is submitted to arbitration.
Therefore, a claimant should not assume that a Chinese court or arbitral tribunal will apply exactly the same rules merely because the supplier is located in Hefei.
VIII. Evidence Is Particularly Important in International Trade Disputes
Claims for lost profits are often won or lost on evidence.
For a foreign buyer seeking compensation from a Chinese supplier, it is particularly important to preserve evidence showing the commercial purpose of the transaction and the seller’s knowledge of that purpose.
Relevant evidence may include:
Before the contract:
- emails and WhatsApp communications;
- quotations and negotiations;
- product specifications;
- statements concerning intended use;
- information concerning downstream customers; and
- communications concerning delivery deadlines.
During performance:
- production schedules;
- shipping documents;
- inspection reports;
- payment records;
- notices of breach;
- requests for delivery; and
- communications concerning replacement purchases.
After the breach:
- replacement purchase contracts;
- additional procurement costs;
- cancelled customer orders;
- customer claims;
- sales records;
- financial records; and
- calculations explaining the alleged lost profits.
In international disputes, electronic communications can be particularly important because negotiations are frequently conducted through email, WhatsApp, WeChat, Alibaba messaging systems, and other digital platforms.
IX. Practical Recommendations for International Buyers
Foreign buyers purchasing goods from Chinese suppliers should consider addressing the issue of potential consequential losses at the contract drafting stage.
Where the commercial purpose of the transaction is important, the buyer may consider clearly documenting:
- the intended use of the goods;
- the required delivery date;
- the importance of timely delivery;
- the buyer’s production or resale arrangements;
- any known downstream contracts;
- the consequences of delayed delivery; and
- the parties’ agreed allocation of risk.
The buyer should also preserve evidence demonstrating the seller’s knowledge of these circumstances.
This does not guarantee recovery of lost profits. Nevertheless, it can materially strengthen the argument that the claimed loss falls within the scope of losses that the seller could reasonably have foreseen.
X. Practical Recommendations for Chinese Suppliers
Chinese suppliers should also pay close attention to the buyer’s statements concerning the intended use of the goods.
If the buyer informs the supplier that the goods are being purchased for a specific project or resale contract, the supplier should understand that such information may become relevant to a subsequent damages claim.
Where appropriate, the supplier may consider contractual provisions addressing:
- limitations of liability;
- excluded categories of consequential loss;
- liability for delay;
- agreed damages;
- maximum liability amounts; and
- procedures for claiming damages.
However, the effectiveness and enforceability of such clauses depend on the governing law, mandatory legal rules, the wording of the contract, and the circumstances of the particular transaction.
XI. Conclusion
In international sale of goods disputes, lost profits are not inherently unrecoverable. Both CISG Article 74 and Chinese contract law recognize, in principle, that loss of profit may form part of recoverable damages.
The central question is whether the claimed loss falls within the reasonable scope of losses that the breaching party foresaw or ought to have foreseen when the contract was concluded.
For foreign buyers dealing with Chinese suppliers, this makes the documentation of the commercial purpose of the transaction particularly important. A buyer seeking to recover lost profits should be prepared to demonstrate not only that profits were actually lost, but also that the claimed profits were sufficiently certain, causally connected to the breach, and reasonably foreseeable to the supplier.
For Chinese suppliers, understanding the buyer’s intended use of the goods and the potential commercial consequences of non-performance can help identify and manage contractual risk before a dispute arises.
Ultimately, in international commercial litigation, the strength of a lost-profit claim often depends not merely on the amount of money the claimant says it lost, but on what the parties knew, or reasonably should have known, when they entered into the contract.
The information provided in this article is for general informational purposes only and does not constitute legal advice. Laws and legal procedures may vary depending on the specific facts and applicable jurisdiction. No lawyer-client relationship is created by reading this article or contacting us through this website. For advice regarding a specific matter, please consult a qualified lawyer after a formal engagement has been established.
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