Maximum compensation liability of the capital-receiving party under legal regulations

In investment contract practice, the maximum compensation liability of the capital-receiving party is an important issue that is often of particular concern to the parties in order to limit financial risks and ensure a balance of interests when breaches occur.

I. Current situation relating to the maximum compensation liability of the capital-receiving party

In practice, particularly in investment contracts such as capital contribution agreements, business cooperation contracts, or PPP projects, the issue of the maximum compensation liability of the capital-receiving party has received increasing attention due to the high-risk nature and large transaction value involved. Many disputes arise when one party breaches its obligations but the contract does not clearly stipulate the compensation limit, resulting in different interpretations regarding the scope of liability.

In addition, in some contracts, clauses relating to limitation of liability are included but are unclear, impractical, or inconsistent with legal regulations, causing difficulties in application and dispute resolution.

Accordingly, practice shows that the lack of specific and strict regulations regarding maximum compensation liability is a major cause of legal risks in investment relationships.

II. Concept of maximum compensation liability of the capital-receiving party

1. What is the maximum compensation liability of the capital-receiving party?

In practice, the maximum compensation liability of the capital-receiving party is the highest limit of value that such a receiving party must take when compensation obligations arise due to a contractual breach.

According to the principle set out in Article 3 of the Civil Code 2015, the parties have the right to freely agree on the contents of the contract, including:

• Determination of the compensation amount;
• Limitation of liability;
• Conditions for applying compensation liability.

Therefore, the maximum compensation amount is usually stipulated in the form of:

• A specific monetary amount;
• Or a percentage of the contract value or the amount of capital received.

Accordingly, it is a legal mechanism agreed upon by the parties to limit financial risks for the capital-receiving party when a breach occurs.

2. Why is it necessary to regulate the maximum compensation liability of the capital-receiving party?

The regulation of maximum compensation liability arises from various practical and legal reasons:

• Financial risk control: It helps the capital-receiving party avoid liability beyond its financial capacity, thereby preventing bankruptcy or insolvency.
• Creating a balance of interests between the parties: The capital-contributing party accepts a certain level of risk in exchange for the opportunity to gain profits from investment activities.
• Increasing predictability and transparency of the contract: The parties can assess in advance the maximum level of damages if a breach occurs.
• Facilitating dispute resolution: When there is a clear limitation, dispute resolution authorities can more easily determine the scope of liability.

Therefore, stipulating a maximum compensation amount is an important tool for preventing and limiting disputes in investment contracts.

3. Does the maximum compensation liability depend on the value of the capital already received?

In practice, maximum compensation liability is often closely related to the value of the capital already received by the capital-receiving party, but it is not always mandatory for it to depend entirely on such a factor.

The parties have the right to freely agree on the limitation of liability, and therefore may:

• Connect the maximum compensation amount to the value of the capital received;
• Or determine it based on the total contract value;
• Or establish another independent liability limit.

However, the law also requires that compensation must be based on actual and direct damages; therefore, if the agreed limitation is set too low, it may cause disadvantages for the damaged party.

In some cases, where there is serious misconduct or fraudulent behavior, the liability limitation clause may not be applicable or may be subject to reconsideration.

III. Legal regulations relating to the maximum compensation liability of the capital-receiving party

1. How does the law regulate the principle of compensation for damages under the Civil Code 2015?

Pursuant to Articles 360 and 419 of the Civil Code 2015, the principle of compensation for damages is determined as follows:

• The breaching party must fully compensate for all damages caused by its breach;
• Compensable damages include: Actual and direct damages; profits that the aggrieved party would have earned if the breach had not occurred;
• The damaged party has the obligation to prove the damages and the causal relationship;

Compensation must be timely, complete, and within the proper scope of damages.

Accordingly, the law establishes the principle of full compensation for damages, which serves as the basis for determining the compensation limit in each specific case.

2. Grounds for determining the maximum compensation liability of the capital-receiving party

• Contractual agreement: Pursuant to Articles 385 and 398 of the Civil Code 2015, the parties have the right to freely agree on rights and obligations, including limitation of liability;
• Value of the capital received or the contract value: It is often used as the basis for determining the compensation limit; 
• Actual damages incurred: Pursuant to Article 419 of the Civil Code 2015, compensation must not exceed actual damages unless otherwise agreed;
• Nature and seriousness of the breach: Serious breaches may result in higher compensation liability.

It can be seen that maximum compensation liability is determined based on the combination of contractual agreements and legal principles on compensation for damages.

3. In which cases is the maximum compensation liability of the capital-receiving party applied?

In practice, the maximum compensation liability limitation is commonly applied in the following cases:

• The contract contains a clear clause stipulating the compensation limit;
• There is a contractual breach but it does not fall within cases excluded from liability limitation (for example, no fraud or intentional misconduct causing damage);
• The parties have a specific agreement on the scope of application of the liability limitation;

In addition, in certain special cases, if there is intentional misconduct or fraud, the liability limitation clause may be invalidated under the principle of goodwill and honesty under Article 3 of the Civil Code 2015.

4. When multiple parties jointly cause damage, how is the maximum compensation amount allocated?

Pursuant to Article 587 of the Civil Code 2015, where multiple persons jointly cause damage:

• The parties must jointly and severally compensate the damaged party;
• The compensation amount of each party is determined based on:
• The degree of fault of each party;
• If the degree of fault cannot be determined, liability shall be equally shared;
• A party that has made compensation has the right to request the remaining parties to reimburse their corresponding obligations.

Where there is an agreement on the maximum compensation amount, the allocation of liability must also remain within the agreed limitation, unless otherwise provided by law.

Accordingly, when multiple parties jointly cause damage, compensation liability is allocated based on the principle of joint and several liability and the degree of fault, while also potentially being limited by the agreement on maximum compensation.

IV. Questions relating to the maximum compensation liability of the capital-receiving party

1. Is it mandatory to stipulate the maximum compensation liability of the capital-receiving party in the contract?

According to the principle of freedom of agreement under Articles 3 and 385 of the Civil Code 2015, the law does not require the parties to stipulate the maximum compensation amount in the contract.

However, if there is no such agreement, when a breach occurs, the party causing damage must fully compensate for all actual damages under Article 419 of the Civil Code 2015.

2. In which cases can the parties agree on exemption from maximum compensation liability?

Pursuant to Article 351 and Article 294 of the Civil Code 2015, the parties may agree on exemption from compensation liability in certain cases such as:

• Occurrence of force majeure;
• The breach is entirely caused by the fault of the other party;
• Other exemption cases agreed upon by the parties.

However, such exemption must not violate the principles of goodwill and honesty and must not be intended to evade legal obligations.

3. How is compensation liability resolved when the capital-receiving party becomes insolvent?

When the capital-receiving party becomes insolvent, the compensation obligation becomes a payable debt during bankruptcy proceedings. Creditors (including the capital-contributing party) shall be paid according to the order of priority prescribed by law.

In many cases, the damaged party may not be able to fully recover the compensation amount. Therefore, the risk of insolvency is an important reason why the parties should establish liability limitations and security mechanisms in the contract.

4. Does the maximum compensation liability of the capital-receiving party include indirect damages?

Pursuant to Article 419 of the Civil Code 2015, the scope of compensation includes: Actual and direct damages and lost profits.

Meanwhile, indirect damages are generally not compensable because the causal relationship cannot be proven; or there is no specific contractual agreement.

Therefore, whether indirect damages are included depends mainly on the agreement of the parties in the contract.

5. If the damage is caused by the fault of both parties, how is the maximum compensation liability determined?

Pursuant to Article 585 of the Civil Code 2015, where damage is caused by the fault of multiple parties:

• The compensation amount is determined according to the degree of fault of each party;
• If the degree of fault cannot be determined, liability shall be equally shared;
• The application of the maximum compensation amount must still comply with the contractual agreement (if any).

In this case, the maximum compensation liability will be allocated according to the degree of fault of the parties and will also be subject to the agreed liability limitation.

V. Why should you seek legal advice from NPLaw regarding issues of maximum compensation liability of the capital-receiving party

In disputes relating to the maximum compensation liability of the capital-receiving party, determining the scope of liability, the validity of limitation clauses, and the method of calculating damages is often highly complex.

NPLaw, with its team of lawyers specializing in contract and investment law, can assist in reviewing contractual clauses, assessing legal risks, developing dispute resolution strategies, and representing clients in protecting their rights before courts or arbitration tribunals. As a result, clients can minimize damages to the greatest extent possible and ensure their lawful interests throughout the investment process.

The above information is for reference purposes only. For detailed advice regarding specific cases, please contact NPLaw Law Firm for immediate consultation.