Article 114 of the Contract Law stipulates that "when one party breaches the contract, the parties may agree to pay a certain amount of liquidated damages to the other party according to the situation of the breach, or agree on the calculation method of the amount of damages for breach of contract. If the agreed liquidated damages are lower than the losses caused, the parties may request the people's court or arbitration institution to increase them; If the agreed liquidated damages are excessively higher than the losses caused, the parties may request the people's court or arbitration institution to reduce them appropriately. If the parties delay the performance of the agreed liquidated damages, the breaching party shall also perform the debt after paying the liquidated damages. " Judging from the first paragraph of this article, liquidated damages belong to the terms agreed by the parties to the contract and should embody the principle of party autonomy, and the agreement of the parties should have legal effect; But from the second point of view, the penalty clause can be adjusted, which embodies the principle of judicial intervention; However, to what extent excessive liquidated damages should be adjusted, this article only stipulates the appropriate adjustment and what degree is "appropriate". The author understands that, first, the judge is authorized to exercise discretion according to the specific circumstances of the case in order to better realize contractual justice; Second, the adjustment of liquidated damages is based on respecting the autonomy of the parties, and can only be adjusted if the liquidated damages obviously hinder the fairness of the contract. It is precisely because there is no relatively clear scale for the adjustment of liquidated damages, especially when the liquidated damages are too high. Therefore, there are many adjustment standards for excess liquidated damages in judicial practice, some are actual losses, some are 1.30% of the actual losses of the observant party, some are twice the actual losses, and some are lower than the unrealized contract targets, and so on. Therefore, the author thinks it is necessary to adjust the reference standard, reference factors and adjustment limit of liquidated damages.

First, the nature of liquidated damages.

The so-called liquidated damages are determined by the parties in advance through consultation and paid independently of performance after breach of contract. Article 112 of the General Principles of Civil Law stipulates: "The liability of one party for breach of contract shall be equivalent to the loss suffered by the other party. The parties may stipulate in the contract that when one party breaches the contract, it shall pay a certain amount of liquidated damages to the other party; It is also possible to stipulate in the contract the calculation method of the compensation amount for losses caused by breach of contract. " This article stipulates that in terms of civil liability; The first paragraph of Article 114 of the Contract Law stipulates that "the parties may agree that one party shall pay a certain amount of liquidated damages to the other party according to the breach of contract, and may also agree on the calculation method of the amount of damages for breach of contract; If the agreed liquidated damages are lower than the losses caused, the parties may request the people's court or arbitration institution to increase them; If the agreed liquidated damages are excessively higher than the losses caused, the parties may request the people's court or arbitration institution to reduce them appropriately. " According to the above provisions, the liquidated damages first reflect the compensatory nature, and compensate the observant party when the breaching party breaches the contract; However, the payment condition of liquidated damages is the occurrence of breach of contract, not the actual loss of the observant party; Liquidated damages are not based on the occurrence and quantity of damages, which makes the payment of liquidated damages exempt the observant party from the burden of proof of actual losses; Because the liquidated damages are clear, simple and easy to operate, it has strong operability. Secondly, liquidated damages are punitive. When a breach of contract occurs and the observant party has no actual loss, the liquidated damages paid by the defaulting party are obviously punitive. Usually, the liquidated damages paid by the breaching party are higher than the actual losses of the observant party. It is precisely because of the punitive nature of liquidated damages that when the amount of liquidated damages is not enough to make up for the actual losses of the observant party, the observant party may also demand compensation for the losses. Re-liquidated damages have the nature of guarantee, which guarantees the full performance of the contract. Failing to fully perform, bear liquidated damages. In this sense, liquidated damages and contract deposits have similar functions. Therefore, Article 116 of the Contract Law stipulates that "if both parties agree on liquidated damages and deposit, when one party breaches the contract, the other party may choose to apply the terms of liquidated damages or deposit." Both cannot be applied at the same time.

Second, freedom of contract and justice of contract.

The so-called freedom of contract is the embodiment of the principle of autonomy of private law in contract law. Civil subjects can independently conduct civil legal acts without violating laws, public interests and social order, which has legal effect. Freedom of contract First of all, as far as the validity of a contract is concerned, the agreement of the parties takes precedence over the legal provisions, and the legal provisions can only be applied if the parties have no agreement or the agreement is unclear; In concrete form, the parties shall decide whether to conclude a contract, choose the other contracting party, determine the contents of the contract, and decide on the modification and termination of the contract according to law. Freedom of contract is the first principle of contract law. Without the implementation of the principle of freedom of contract, there will be no real contract. Without the implementation of the principle of freedom of contract, contractual justice will be difficult to exist, because contractual justice comes from the market of equal competition; At the same time, freedom of contract is the legal basis of building a market economy country, which is of great significance in the process of establishing a market economy and a legal economy. Therefore, the principle of freedom of contract should continue to be promoted, established and consolidated in China. The liquidated damages clause is the first contract clause agreed by the parties. In the absence of evidence to prove the observant party obviously unfair, the people's court should presume that the parties to the contract are equal and the rights and obligations of the contract are just, so it should be based on the principle of supporting the effectiveness of the liquidated damages clause. Contract justice means that the parties to a contract conclude and perform on the basis of equality and voluntariness, and ensure that the contents of the contract meet the requirements of fairness, mutual benefit, honesty and credit. The author believes that the key to contract justice is the balance of rights and obligations of the contract counterpart, mainly the fairness of the contract counterpart's consideration. Contract justice is mainly guaranteed by freedom of contract; At the same time, when the contract subjects are essentially unequal, we should intervene in the private rights of the contract with social public power, so that the rights and obligations of the parties can achieve substantive justice. Contract embodies the equal disposition of private rights by civil subjects, and the intervention of public power should be an exception and a supplement. The substantive inequality of the civil subject is the root of the substantive unfairness of the contract, so the author thinks that it is necessary for public power to intervene only when the substantive inequality of the contract subject is determined and the liquidated damages reflect the unfair rights and obligations of the parties to the contract. The non-effectiveness of the liquidated damages clause adopts the same standard as the invalidity of the contract; On the whole, we should adopt the determination of the "excessive" degree of liquidated damages: first, the standard of liquidated damages will seriously affect the fairness of the contract, and the rights and obligations of the parties to the contract are obviously unfair; Second, liquidated damages have lost its inherent meaning, and are no longer a tool to promote contract performance, but become the goal pursued by the parties to the contract.

Third, the application of liquidated damages and compensation for losses.

In the case that the agreed liquidated damages are too low, the observant party may claim compensation for the part where the actual loss is greater than the liquidated damages while claiming the liquidated damages. In this case, the observant party can also obtain relief by directly claiming damages instead of liquidated damages on the premise of proving that the actual loss is greater than the amount of liquidated damages. However, the author believes that since liquidated damages are stipulated in the contract, the observant party should make a claim according to the liquidated damages. When the liquidated damages are too low, it is more logical to claim that the liquidated damages should be adjusted to be equal to the actual losses when the actual losses are proved to be greater than the amount of liquidated damages, and only claim damages when there is no agreed liquidated damages. In fact, China's legal and judicial practice is more inclined to advocate that Article 16 of the Supreme People's Court's Interpretation on Several Issues Concerning the Application of Law in the Trial of Disputes over Commercial Housing Sales Contracts stipulates that "if the parties request an increase on the grounds that the agreed liquidated damages are lower than the losses caused, the amount of liquidated damages shall be determined according to the losses caused by the breach of contract." The adjustment standard of too low liquidated damages is the actual loss of the observant party, including direct loss and performance interest loss; According to Article 113 of the Contract Law, "If one party fails to perform its contractual obligations or fails to perform its contractual obligations as agreed, causing losses to the other party, the amount of damages shall be equivalent to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract, but shall not exceed the losses that the breaching party foresaw or should have foreseen when concluding the contract." The loss of performance benefit is the performance benefit reduced by the observant party due to the other party's breach of contract, and the specific amount is the difference between the benefit of full performance of the contract and the benefit of the current situation of breach of contract, that is, the net benefit after normal performance of the contract; Specifically: (1) The fulfillment of benefits is restricted by the loss principle that can be encountered when signing the contract. The breaching party should meet the loss according to the standard of social rational person, not only the type of loss, but also the amount of loss; The loss of the observant party is the normal loss within its normal business scope, and the unexpected loss outside its identity is not within the foreseeable scope. However, the breaching party knows that the losses that will happen to the observant party when it breaches the contract, whether it is within the business scope of the observant party or not, should be within the acceptable range. For example, if the lender borrows money from others, the standard of liquidated damages is within the standard of liquidated damages in the loan contract. (2) According to Article 119th of the Contract Law, after one party breaches the contract, the other party shall take appropriate measures to prevent the loss from expanding; If appropriate measures are not taken to expand the losses, no compensation shall be claimed for the expanded losses. The reasonable expenses incurred by the parties to prevent the loss from expanding shall be borne by the breaching party. "Therefore, the loss of the observant party's failure to perform its obligations according to the principle of good faith shall be deducted. (3) Due to the other party's breach of contract, the benefits of performance shall be deducted from the benefits of the observant party. (4) The performance of benefits shall also deduct the relevant expenses paid by the observant party for failing to perform the contract.

4. Adjustment when the liquidated damages are too high.

According to Article 1 14 of the Contract Law, the comparison standard of excess liquidated damages is the actual loss of the observant party. As mentioned above, the actual loss includes direct loss and loss of performance benefit. So how to determine that the liquidated damages are too high? I think we should refer to the following specific factors: (1) refer to the subject matter of the contract. If the subject matter of the contract belongs to special things, the standard of liquidated damages can be higher; If the subject matter of the contract belongs to species, the standard of liquidated damages may be lower; If the subject matter of the contract belongs to something of spiritual significance, the standard of liquidated damages can be more open. (2) refers to the substantive status of the subject of the contract. For public utilities, monopoly enterprises, enterprises that provide goods and services in short supply, etc. If it is difficult for other parties to negotiate, the standard of liquidated damages provided by one party to the dominant contract shall be adjusted to the extent equivalent to the actual loss. Refer to Article 16 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Disputes over Commercial Housing Sales Contracts. "If the parties request a reduction on the grounds that the agreed liquidated damages are too high, the losses caused by the liquidated damages exceeding 30% shall be appropriately reduced." (3) refer to the nature of the contract. A contract is a form of transaction. For contracts whose transaction contents are necessities of life and services provide services for the basic protection of life, health and body, the principle should be to respect basic human rights, and the punishment for socially disadvantaged groups should be compensatory, giving up punitive functions. An economic contract in which the parties are equal should respect the agreement of the parties and take no adjustment or less adjustment as the principle. (4) The adjustment of liquidated damages should be punitive. Liquidated damages are punitive, and its main significance lies in promoting the parties to the contract to fully perform the contract. Therefore, the standard of liquidated damages should be punitive and should be higher than the actual loss of the observant party to a certain extent. (5) Refer to the fault degree of the breaching party. According to the contract law, the contractual liability is strict. As long as there is a breach of contract, the breaching party will bear the liability for breach of contract. However, the author thinks that because the liability for breach of contract belongs to a kind of civil liability, when the people's court intervenes with public power, the penalty clause not only belongs to the private law nature of the contract terms, but also should consider the conditions for the people's court to intervene with public power, so the fault of the breaching party should be taken as an important reference factor for the adjustment of public power. Because the adjustment range of liquidated damages reflects the punishment for breach of contract, different faults should be punished in different degrees, which can be punished as mistakes and reflect the fairness of public power intervention. When judging the liability for breach of contract, we should examine the fault of both parties in breach of contract and the size of the fault. When the defaulting party violates the contract maliciously, it should be adjusted appropriately to keep the punishment for the defaulting party maliciously; When the breaching party breaches the contract due to the third party's reasons, it should give priority to compensation and reduce the penalty; When the observant party takes advantage of its dominant position to pursue the other party's liquidated damages, it shall adjust it to the standard equivalent to the actual loss. (six) the minimum and maximum amount of liquidated damages. The minimum amount of liquidated damages is the actual loss caused to the other party by the observant party's breach of contract, including direct loss and loss of performance interests; However, for the general contract, it should be adjusted to 130% of the actual loss according to the provisions of Article 16 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Laws in the Trial of Commercial Housing Sales Contract Disputes, so as to reflect the punitive nature of the liquidated damages. The law does not specify the maximum amount of liquidated damages. Article 121 of the Supreme People's Court's Interpretation on Several Issues Concerning the Application of the Guarantee Law of People's Republic of China (PRC) stipulates that "if the amount of deposit agreed by the parties exceeds 20% of the subject matter of the main contract, the people's court will not support it." Because both liquidated damages and deposit have the nature of ensuring the full performance of the contract and punishing the breach of contract, the author thinks that the maximum amount of liquidated damages can be implemented with reference to the maximum amount of deposit. If the breach of contract occurs from the date of performance of obligations and continues, the maximum amount of liquidated damages shall be subject to the target amount; In case of partial breach of contract, the unpaid amount shall be taken as the base.

Excerpt from: Law Education Network