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85.22 million yuan sky-high liquidated damages: Legal analysis of the first case of live broadcast breach of contract

Time:2020-07-22 17:36:22Browse:

For online streamers (主播), job-hopping is a luxury thing.

Thecase of the “streamer Lian Wei job-hopping during the contract period” hasattracted much attention in the game live broadcasting industry. The HigherPeople's Court of Hubei Province (hereinafter referred to as "Hubei HighCourt") has ruled that Lian Wei (hereinafter referred to as "streamer")job-hopping from one platform to another during the contract period is adeliberate and fundamental breach of contract. According to the contract, theplaintiff, Wuhan Yuxing Tianxia(鱼行天下)Culture and Media Co., LTD. (hereinafter referred to as "YuxingTianxia" or "Platform") shall be paid a penalty of 85.22 millionyuan. The sentence was announced on December 30, 2019. Due to the epidemic, theHubei High Court sent the verdict to both parties only recently.

LianWei is a famous eSports player in China, known as "Wei God" by hisfans. Yuxing Tianxia is a wholly-owned subsidiary of Douyu. According to the2019 annual financial report released by Douyu, its adjusted net profit in 2019was 346 million yuan. This means that the penalty awarded by Lian Wei Case isequivalent to a quarter of Douyu's full-year net profit.

This is the first casein the history of live broadcasting in which the streamer's breach of contractwas tried by the High Court in the first instance, and it is also the case withthe highest amount of compensation awarded in similar cases.

Default packageComponents of sky-highliquidated damages

The high penalty of 85.22 million yuanconsists of three parts: the liquidated damages for material breach of contract, a one-time fixed amount ofliquidated damages, and liquidated damages for single breach of contract.

1. Liquidated damages for material breach of contract (about 50.8 millionyuan)

Both parties agreed that, had the streamerunilaterally terminated the agreement in advance and signed a similar commentaryor live contract with a third party on a third party platform within the termof the agreement, there would be a material breach of contract. The platformhas the right to require streamers to bear 36 times the maximum monthlyearnings of Party B during the contract performance period as liquidateddamages.

Party B herein means Shanghai Shuyin CulturalCommunication Center (hereinafter referred to as "Shuyin Culture").According to Wei’s argument, Shuyin Culture is a subject under the actualcontrol of Yuxing Tianxia, and it serves as an intermediate subject to pay the streamers.The platform would pay the money to Shuyin Culture, and the latter would paythe remuneration to the streamer. However, with the case at trial, Shuyin Culturewas cancelled.

At the end, the calculation base ofliquidated damages determined by Hubei High Court was 23 times the maximummonthly income during the contract period of Shuyin Culture (2.21 million), i.e.about 50.8 million.

2. A one-time fixed amount forliquidated damages (30 million yuan)

For a material breach of contract, bothparties also agreed on a fixed amount of one-time liquidated damages for 30million yuan, which is applicable to the aforementioned calculation.

The Hubei High Court believes that bothparties had accurate foresight in this regard. Considering that the streamerintentionally breached the contract shortly after the contract was performed,this part of liquidated damages shall not be reduced according to the law.

3. Liquidated damages for a single breach (about 4.42 million yuan)

The two parties also agreed that the streamermay not publish remarks against the platform through any channel. For eachbreach, Party B shall pay a penalty equal to twice the highest monthly incomeof Party B during the performance period of the contract.

The Hubei Higher People's Court believes thatpublishing comments that are not conducive to the platform is not necessarilyrelated to the breach of contract during the contract period and the behaviorof job-hopping. The two are different behaviors and a single breach cannot beevaluated by a material breach.

In other words, it is one kind of default andjob-hopping, and it is another one to be upset and shout about it in public. Thetwo things should be priced separately, and neither is cheap. In the end, thepenalty for a single breach was also supported by the court, for an amount if about4.42 million yuan.

Through a clever contract design, streamers'behavior is bundled into a variety of default packages. The slightest mistakewill trigger high claims.

Judgment logic:Considerations of courts

1. The meaning of setting liquidated damages

Contract penalties mainly have a compensatorynature, and punishment is a supplementary feature. The significance ofliquidated damages lies in the compensation for the benefits of contractperformance, but also does not exclude that the parties may agree on punitiveliquidated damages, under the guidance of the principles of fairness and goodfaith. If the contract only emphasizes compensation instead of punishment, therole of the penalty for breach of contract will be greatly reduced, and thepurpose of punishing the breach and protecting the interests of thenon-breaching party will not be achieved.

In the Lian Wei case, the Hubei High Court believedthat the main reason for the higher liquidated damages stipulated in thecontract is to hope that the contract can be fulfilled and prevent the partiesfrom breaching the contract. Therefore, the liquidated damages bear the heavyresponsibility of urging the contract subject to be honest and trustworthy andfulfill contractual obligations according to the contract, especially incommercial transactions.

On the other hand, the freedom of contractalso requires regulation, and it is impossible to completely indulge the party’sfree agreement. In case of judgment, the court will comprehensively considerthe actual loss, performance, degree of fault, expected benefits and otherfactors when determining whether the liquidated damages are too high, and makethe determination according to the principles of fairness and good faith.

2. Specific factors taken into consideration for the compensation

Considering the characteristics of gamebroadcast enterprises, which rely heavily on the traffic flow of top streamersand users’ traffic, it is often difficult to prove the actual loss caused bythe traffic loss and the bad influence due to the default of top streamers.

Therefore, the court will consider thefollowing factors to determine the liability for breach of contract and theamount of liquidated damages:

1. The performance period and fulfillment degree of the contract;

2. The degree of fame of the streamer;

3. Subjective faults of streamers;

4. The cultivation and popularity maintenance of streamers by the platform;

5. Loss of expected benefits arising from the performance of the platformbased on continuous contracts.

In the Case of Wei, the Hubei High Court consideredthat live broadcast, as a new industry, has strong industrial characteristics.Live broadcast platforms are highly dependent on streamers and the competitionamong industries is fierce. Platform operators need to invest a lot of manpower and material resourcesto promote and maintain the popularity of streamers. The number of viewers andthe number of fans in the broadcastroom(直播间)of top streamers have a significant relation to the interests of theplatform.

After the streamer breaks the contract, theplatform not only loses the expected benefits of the contract performance, butalso fails to realize the value-added cost of long-term cultivation of the streamer.As streamers move to the platforms of direct competitors, they lead to thetransfer of a large number of original users to the competition platform. Commercialcompetitive interests also suffer losses, so the court will take the abovefactors as an important basis for determining the rationality of the liquidateddamages amount.

According to the law, the breaching party whoclaims that the liquidated damages are too high shall bear the burden of prooffor whether the liquidated damages are too high. However, although Wei claimedthat the liquidated damages were too high and required reduction, he did notprovide evidence such as the signing status and income of the contract with thenew platform to prove whether the liquidated damages stipulated in the contractwere too high. In the end, it bears the consequences of failing to provideevidence.

It is worth noting that there are disputes onthe platform about the payment and promotion fee of streamers in arrears. The HubeiHigh Court believes that the payment obligation will be fulfilled upon thepayment made by the platform to Shuyin Culture. The cooperation expenses of Weishall be paid by Shuyin Culture, and the platform is not the subject to pay thecooperation expenses to streamers. Shuyin Culture failed to pay the designatedaccount successfully because the streamer provided a wrong account number, and thestreamer is at fault. However, the People's Court of Wuhan Donghu NewTechnology Development Zone (hereinafter referred to as "DonghuCourt") issued a judgment on December 11, 2019 on the dispute between thetwo parties. The Court held that although Shuyin Culture transferred the moneyto the streamer, it could not be deemed that the platform fulfilled its paymentobligation no matter what the reason.

Beyond the sky-highprice: the rationality of superimposing liquidated damages on the same breachof contract

By analyzing the components of liquidateddamages, it can be seen that the liquidated damages for material breach of contract and the one-timefixed amount of liquidated damages in Wei Zhen's case are superimposed, differentlyfrom single liquidated damages.According tothe “Interpretation Cooperation Agreement” signed by both parties, individualliquidated damages point to different forms of breach of contract. Andsignificant default penalty due to breach of contract and one-time fixed amountof the penalty due to breach of contract, points to the same default behavior.During the term of the agreement, streamers unilaterally terminate theagreement in advance and sign a similar commentator contract with a third partyor live broadcast on a third-party platform.

In the judgment, the court has given varyingdegrees of support to the aforementioned three types of liquidated damages. Forthe breach of contract due to the streamer's unilateral job-hopping during theterm of agreement, the Hubei High Court applied both a penalty for material breachof contract and a one-time fixed amount penalty. In its view, the parties havehad accurate foreseeability to this provision, and considering that the streamerintentionally breached the contract shortly after the performance of thecontract, the liquidated damages for this part shall not be reduced accordingto law.

It is reasonable to stipulate liquidateddamages separately for different forms of default. The adjustment object of the law isbehavior, and the construction of all legal relations is to bring the behaviorof participants into the view of legal evaluation. However, is it consistent withthe original intention of the system of liquidated damages and legal practiceto repeatedly agree on different, high amounts of breach of contract contentand finally superimpose the calculation?

As the Hubei High Court mentioned in theverdict: The nature of contract damages is mainly compensatory and punitive. Thereare different understandings about the nature of liquidated damages, thejudgment standard of excessive liquidated damages and how to adjust it. Sincethen, in the long-term practice of civil and commercial trials and under the guidanceof the Supreme People's Court work conference, the original intention of the systemof liquidated damages has gradually been clarified ---- The liquidated damages have the dualnature of "compensation and punishment", but they are mainly used tocompensate for the loss of the non-breaching party, rather than to severelypunish the breaching party.

Considering that liquidated damages aremainly reflected as a form of civil liability, the court can adjust the excessivelyhigh liquidated damages clauses according to the request of the parties, so asto maintain the principles of fairness and good faith in the civil law. If theparties agree on excessive liquidated damages, and do not intervene on thegrounds of autonomy, in some cases, this is tantamount to encouraging theparties to obtain excessive profits through improper means.

The characteristics of civil and commercialcases determine that this field is bound to face many new situations andproblems. Game live streaming isan emerging industry field. In the absenceof clear laws and regulations, the judgment of any case will have an impact onshaping the industry ecology, especially for the well-known and large-scalecases. This kind of cases notonly require to grasp the basic idea of civil judgment, but also require tohave a deep understanding of the economic rules and business characteristics ofthe emerging industry, and take it as a thinking guide in case judgment.

In the judgment of Wei’s case, perhaps thefocus should not be limited to strict compliance to the contract, and then superimposethe liquidated damages agreed by the parties, especially for the same breach ofcontract.

If the amount of liquidated damages is excessivelyhigher than the loss caused, priority should be given to the principle ofcompensation and punitive measures should just be used as a supplement,providing a reasonable adjustment of the scope of discretion while preventingthe autonomy of the parties on the grounds of autonomy. This is a reflection ofthe principle of equivalence in Commodity Exchange on legal liability, one ofthe contents of contract justice and one of the ideals pursued by contract law.

Besides, in addition to the settlement of thecase, it is also necessary to consider the long-term construction of theindustry norms patterns. The cross-platform flow of streamers in the long runis great to promote the interests of consumer groups, give full play to theindividual initiative of streamers and provide better entertainment results. Theentire industry will also be forced to constantly innovate its management andoperation due to the increasingly intensified competition and sufficient flowof talents. The focus should be on providing users with better live content andviewing experience, rather than just thinking of "binding" the top streamerswith strict terms and conditions and then running a business model based onliquidated damages. In this way, the industry will be more likely to developvigorously and gradually form a well-functioning industry structure.


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