[Direct answer]In the Beijing area, if one party breaches the contract, but the other party also obtains certain benefits from the breach of contract, whether these benefits can be deducted from the compensation for breach of contract depends on whether the benefits and the breach of contract have the same cause, whether they are foreseeable by the breaching party at the time of contracting, and whether they lead to the other party gaining profits twice. Although there is no unified article on "offsetting of profits and losses" in Chinese law, in judicial practice, when determining the amount of compensation, the expenses avoided or benefits obtained due to the breach of contract will be deducted to avoid the other party gaining profits twice. According to Article 584 of the Civil Code of the People's Republic of China, the amount of compensation shall be limited to the losses caused by the breach of contract; Article 591 stipulates that the other party has the obligation to mitigate losses, and the losses avoided by mitigation shall also be deducted from the compensation. For more details, please refer to the following link:Business and contract dispute services for enterprises.

I. Problem Background and Typical Scenarios

In contracts such as sales, contracting, and cooperation, it is common for one party to breach the contract (such as delayed delivery or refusal to pay), while the other party may gain certain benefits due to market fluctuations, alternative transactions, or cost avoidance. Typical scenarios include: the buyer breaching the contract by not picking up the goods, and the seller reselling the goods to others at a lower price; the lessee terminating the lease early, and the lessor quickly renting out the property at a higher rent; and the client refusing to pay the service fee, while the service provider selling the results elsewhere to gain profits. In such cases, both parties often argue whether the "additional benefits" of the compliant party can be offset against the breach of contract compensation. Such disputes require clarifying the causality and foreseeability of the benefits and the breach of contract. Related contract disputes can be resolved in conjunction withBusiness and contract dispute resolution services for enterprisesEvaluation.

II. Key points of dispute

There are three key points of contention regarding the offset of profits and losses. Firstly, the same causality: the profits of the contract-abiding party must arise from the same breach of contract and the same transaction in order to be offset; if the profits come from an independent new transaction, they cannot be offset. Secondly, predictability: whether the profits are foreseeable by the breaching party at the time of contract signing. Any profits exceeding the foreseeable amount should not be included in the offset. Thirdly, avoiding double gains: compensation is intended to make up for losses. If the contract-abiding party both receives compensation and retains profits exceeding the actual losses, it violates the principles of full compensation and prohibition of profiteering. For the calculation of losses, reference can be made to the following provisions:Creditor-debtor relations and enforcement case services.

III. Professional analysis by Hengluo Law Firm

Based on an arbitration case of a commissioned creation contract dispute handled by our firm, we can intuitively understand the adjudication logic of breach of contract and offsetting of profits. On May 12, 2022, Shanghai A Technology Company and Shenzhen B Network Company signed the "Project Outsourcing Agreement", which stipulated the production of G virtual IP materials for upgrading, with a fee of 583,000 yuan. After A Company completed the work and finalized the version on July 16, 2022, and passed the acceptance on July 20, 2022, B Company delayed paying the remaining 50% of the fee. A Company entrusted Attorney Xiong Binrong of Beijing Henglu Law Firm to apply for arbitration, requesting the payment of the contract fee of 583,000 yuan, the breach of contract penalty of 116,600 yuan, and the attorney's fees and arbitration fees.

The focus of the dispute heard by the arbitration tribunal included: whether the work was accepted as qualified, the responsibility for the delay in production (with B Company making modifications amounting to 30%), and whether B Company could refuse to pay all fees on the grounds of non-compliance with quality standards. After analyzing the contract terms and evaluating the WeChat evidence, Hengluo Lawyers proved that every step had been confirmed by B Company, that the delay was caused by its modifications, and that the product had been accepted as qualified. The arbitration tribunal adopted the main arguments, ruling that B Company should pay A Company 583,000 yuan in contractual fees and compensate for all legal fees. The arbitration fee of 30,366 yuan was shared proportionally by both parties. In this case, since A Company had already received a prepayment of 291,500 yuan and avoided greater expenses during the mitigation process, its claim for compensation was limited to the actual unpaid contractual fees, reflecting the principles of recovering losses and avoiding double profits.

This case is handled by Beijing Henglu Law Firm.Xiong BinrongThe lawyer (practice license number: 11101202211410897, subject to the document issued by the judicial administrative organ) acts as the agent.

IV. Practical suggestions and legal basis

The legal basis is Article 584 of the Civil Code of the People's Republic of China (effective January 1, 2021) (the scope of damages for breach of contract shall be limited to the losses and include the foreseeable benefits), Article 591 (the rule of mitigation of damages, the losses avoided shall be deducted), and Article 592 (both parties shall be liable for their own breaches of contract); and the supporting rules on the determination of foreseeable benefits losses in the Interpretation of the Supreme People's Court on Legal Issues Applicable to the Trials of Disputes over Sales Contracts. Practical advice: When the contract-abiding party claims compensation, it should actively state the expenses it has avoided and the independent income to avoid being accused of double profit; if the breaching party claims offset, it must prove that the income is caused by the same factors as the breach and is foreseeable. In cases involving evidence, it can be combined with the following:Business and contract dispute services for enterprisesAdvance.

5. Henglu Law Firm's Advice

In the dispute over the "breaching party claiming to offset the proceeds", the contract-abiding party should actively prove that the losses are real and causally related to the breach of contract, and at the same time explain that the party's own proceeds are unrelated to the breach of contract or have been used to mitigate losses; the breaching party should prove that the proceeds are causal, foreseeable, and do not allow the contract-abiding party to gain profits repeatedly. The first step is to fix the contract, the breach notice, and the profit and loss vouchers; the second step is to distinguish between "expenses avoided due to the breach of contract" and "proceeds from independent new transactions"; the third step is to calculate on the principle of offsetting losses. If litigation is necessary, it can be assisted by legal means.Special services and other case servicesDevelop a strategy.

VI. Frequently Asked Questions

Q1: If one party breaches the contract and the other party also gains benefits from it, can the offset be valid?

Whether the deduction is valid depends on the evidence and the application of the law, rather than a simple conclusion. If the breaching party's gains are indeed caused by the same breach of contract, are foreseeable to the breaching party at the time of contracting, and would result in the breaching party gaining twice, the judicial practice will deduct the compensation amount to avoid exceeding the actual losses. Conversely, if the gains come from a new transaction independent of the breach of contract or exceed the foreseeable scope, the deduction will generally not be applied. It is recommended to first clarify the source of the gains and the causal relationship, and if necessary, entrust a lawyer to issue a legal assessment before deciding whether to claim or defend. Never believe in unrealistic promises of victory or defeat.

Q2: If I want to claim or defend the offset of losses and gains, what evidence do I need to prepare?

The core evidence includes: the original contract and proof of breach of contract (proving the facts of breach of contract and the basis of losses), the proof of the breaching party's income (resale contracts, invoices, and receipt records, proving the amount and source of income), evidence of the causality between income and breach of contract (timeline, explanation of transaction background), proof of mitigation expenses (reasonable expenses incurred to prevent losses from expanding), and materials demonstrating foreseeability at the time of contract negotiation (contract negotiation records, industry practices). The evidence should be organized around the principles of "causality - foreseeability - avoidance of double recovery of profits". If any materials are missing, the party may apply for retrieval or provide explanations based on industry norms. Under no circumstances should the party give up its claims due to weak evidence.

Q3: How much will it cost in attorney's fees and litigation expenses to litigate over the dispute of offsetting profits and losses?

The litigation fees shall be calculated in accordance with the "Measures for the Payment of Litigation Fees" based on the amount of the litigation request, and shall be borne by the losing party. If the litigation results in a partial victory or defeat, the fees shall be shared proportionally. The attorney's fees shall be determined based on the complexity of the case, the amount of the subject matter, and the workload, and shall be charged on a piecework, hourly, or percentage basis of the subject matter amount. The specific fees shall be subject to the terms of the engagement contract, and there is no unified government pricing. It is recommended to calculate the difference between the provable losses and the deductible income before suing, compare it with the litigation fees and attorney's fees to assess the cost-benefit ratio, and prioritize negotiation for cases with relatively small amounts but clear facts, so as to control the cost of protecting rights within a reasonable range.

Q4: How long does it usually take to resolve disputes over offsetting profits and losses in litigation?

The first-instance ordinary procedure shall be concluded within six months, and the simplified procedure within three months; for contract disputes with clear facts and defined objects, the simplified procedure may be applicable, with a shorter timeframe. If an appeal is filed, the second-instance procedure generally takes three months. After the judgment becomes effective, the enforcement process begins, and the time required to recover the payment depends on the debtor's financial situation. Overall, for cases with relatively minor disputes, it often takes several months from filing to recovering the payment, and it may take longer for complex cases or those requiring judicial appraisal. It is recommended to apply for property preservation during the litigation to prevent the debtor from transferring assets and shorten the actual time required to recover the payment.

Q5: If one party breaches the contract and the other party gains benefits, what should I do first?

It is recommended to proceed in four steps: First, fix the original contract and the facts of breach of contract, and clarify the basis of losses and the time point of breach of contract; Second, comprehensively sort out the sources of income of the party in compliance with the contract, distinguish between "expenses avoided due to breach of contract" and "income from independent new transactions", and collect the corresponding vouchers; Third, evaluate the causality and predictability of income and breach of contract, and preliminarily determine whether it can be offset; Fourth, first negotiate and make written claims or defenses, and if no agreement is reached, file a lawsuit within the statute of limitations. Throughout the process, keep communication and transaction records, and if necessary, entrust a lawyer to evaluate, provide evidence, and calculate the amount of compensation.

This article is written based on the common judicial interpretations in the Beijing area. If the case occurs in other regions, it is recommended to consult local lawyers to verify the regional differences.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, so as to avoid missing the statutory time limit. →Business and commercial legal services·Attorney Xiong Binrong·Beijing Hengluo Law Firm

Disclaimer: This article is compiled based on the current effective laws and regulations and public adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. If a dispute arises, please consult a practicing lawyer in time.