Supreme People's Court: Core adjudication views on the adjustment of liquidated damages

Supreme People's Court

The core referee's views on the adjustment of liquidated damages

[Civil Code]:

The parties may agree that one party shall pay a certain amount of liquidated damages to the other party according to the circumstances of the breach of contract, and may also agree on the method of calculating the amount of compensation for losses arising from the breach.

If the agreed liquidated damages are lower than the losses caused, the people's court or arbitration institution may increase them at the request of the parties; Where the agreed liquidated damages are excessively higher than the losses caused, the people's court or arbitration institution may appropriately reduce them at the request of the parties.

If the parties agree on liquidated damages for delayed performance, the breaching party shall also perform the debt after paying the liquidated damages.

[Understanding and Application]:

1. Liquidated damages and compensation for agreed losses

There is controversy as to whether the "amount of compensation for losses arising from breach of contract" stipulated in this article is a liquidated damages clause. According to the general theory, the calculation method of the agreed liquidated damages and the agreed amount of damages are different forms of liability. From the perspective of historical interpretation, before the enactment of the Contract Law in mainland China, there were no two types of liquidated damages: "liquidated damages" and "calculation method of compensation for losses arising from breach of contract", nor did "calculation method of compensation for losses arising from breach of contract" as one of the types of liquidated damages.

Agreed compensation for losses is generally expressed in two forms: one is to agree on a specific amount of compensation, that is, compensation; The second is to agree on the specific ways or methods of compensation for losses. At the time of the conclusion of the contract, the parties agree on the calculation of the compensation for the loss caused by the breach of contract, which is essentially an independent contract clause with a cessation condition, which is more effective than the statutory compensation for damages. Agreed damages are similar in nature and function to liquidated damages. Article 28 of the Judicial Interpretation (II) of the Contract Law stipulates that: "Where a party requests the people's court to increase the liquidated damages in accordance with the provisions of Article 114, Paragraph 2 of the Contract Law, the amount of the increased liquidated damages shall not exceed the actual amount of losses." Where, after the liquidated damages have been increased, the parties request the other party to compensate for losses, the people's court will not support it. "From the interpretation of the text of this provision, if the non-breaching party has already proposed to increase the liquidated damages, it has no right to claim damages; If the non-breaching party does not claim an increase in liquidated damages, it may separately claim damages for the shortfall.

[We believe that] if the amount of liquidated damages is insufficient to cover the actual losses, it may not be appropriate to adjust the amount of liquidated damages. On the one hand, the adjustment of liquidated damages should be requested by the non-breaching party, and the court cannot directly adjust it; On the other hand, the adjustment of liquidated damages gives the judge too much discretion, and if the liquidated damages are used in conjunction with damages, it should be based on the non-breaching party proving its own damages, which requires a calculation of damages, and the results will be more accurate. Therefore, it is more appropriate to allow the combination of liquidated damages and damages in comparison. Of course, if the parties have expressly agreed in the contract that liquidated damages and damages cannot be claimed together, the agreement of the parties should be respected and the combined use of the two should be excluded.

2. Adjustment of liquidated damages

The discretionary penalty rule is a special rule that arises when the amount of liquidated damages is excessively high, giving the judge the discretion to intervene in the agreement reached by the parties, which is an exception to the freedom of contract, and is intended to restore the freedom of substance of the contract. In order to standardize the adjustment of liquidated damages and unify the adjudication standards, the Supreme People's Court has issued several replies and judicial interpretations. On the issue of the calculation standard of liquidated damages for late payment, provisions have been made in the form of approvals.

[We believe] that the essence of compensatory liquidated damages is the predetermined total amount of damages, while punitive liquidated damages are the real liquidated damages. Based on the normative purpose of the discretionary reduction rule for liquidated damages, it applies to punitive liquidated damages, but should not apply to compensatory liquidated damages. The determination of whether the liquidated damages are too high shall also be weighed in accordance with the principles of fairness and good faith in light of comprehensive factors such as the performance of the contract, the degree of fault of the parties, and the expected benefits.

First, the actual losses should be ascertained and the basic criteria should be determined.

Article 29 of the Judicial Interpretation (II) of the Contract Law stipulates that: "Where a party claims that the agreed liquidated damages are too high and requests an appropriate reduction, the people's court shall, on the basis of the actual losses, take into account the performance of the contract, the degree of fault of the parties and other comprehensive factors, and make a ruling in accordance with the principles of fairness and good faith." If the liquidated damages agreed upon by the parties exceed 30% of the losses caused, it can generally be found to be 'excessively higher than the losses caused' as provided for in paragraph 2 of Article 114 of the Contract Law. Article 16 of the Judicial Interpretation of the Contract for the Sale and Purchase of Commodity Housing stipulates that "if the parties request a reduction on the grounds that the agreed liquidated damages are too high, they shall appropriately reduce the liquidated damages by exceeding 30% of the losses caused,...... according to the provisions of the judicial interpretations, exceeding 30% of the actual losses is the basic standard for determining that the liquidated damages are too high.

Second, the performance of the contract should be considered.

There is a big difference between the consequences of breach of contract between a contract that is close to completion and a contract that has not yet been performed. For example, if the liquidated damages stipulated in the contract with a subject amount of 100 million yuan are 30 million yuan, if the breaching party breaches the contract after 95% of the contract, such as delaying the performance of the remaining 5% of the obligations, the result is not caused to the other party's loss or the loss is very slight, but it still has to pay 30 million yuan of liquidated damages, which is obviously unfair.

Third, the degree of fault of the parties should be considered.

Whether the breaching party breaches the contract in bad faith or negligently directly determines the compensatory and punitive functions of liquidated damages. In the case of excessively high liquidated damages, the purpose of punitive liquidated damages is to create psychological pressure on the debtor and urge it to actively perform its debts; In the case of non-performance of debts, it is manifested as punishment for fault, so the fault of the debtor should become an element of punitive liquidated damages.

Fourth, factors such as the foresight of the loss of obtainable benefits by the parties at the time of signing the contract, whether the negotiation ability between the parties is equal, whether the standard contract clauses are applicable, and whether there are rules for deducting faults and offsetting profits and losses, should be considered, and a comprehensive assessment should be made based on the principles of good faith and fairness, combined with the actual circumstances of the case.

Fifth, when adjusting the default amount, it should also be considered whether the parties are commercial entities and whether the transaction is a commercial transaction. If it is a commercial transaction engaged in by a commercial entity, it should be more cautious when determining that the liquidated damages are too high or too low.

3. Liquidated damages for delay in performance and actual performance

Paragraph 3 of this article sets out the relationship between liquidated damages for delay in performance and actual performance. The liability for liquidated damages exists to guarantee the performance of the debt, and its main purpose is to urge the parties to perform the debt and sanction the default. The payment of liquidated damages does not enable the non-breaching party to obtain the benefits that it expects based on the conclusion of the contract, nor can it be consistent with the expected benefits that it should receive under the contract.

Therefore, the payment of liquidated damages does not enable the non-breaching party to fully obtain all the benefits that it should obtain in the case of actual performance, and the payment of liquidated damages cannot completely replace the actual performance, especially when the liquidated damages are specifically set for delay, even if the non-breaching party can objectively compensate for the losses after the liquidated damages are paid, because the important function of such liquidated damages is to sanction the delay rather than compensate for the losses.

Therefore, the non-breaching party can still demand actual performance after obtaining liquidated damages, so as to fully protect the interests of the non-breaching party. However, if the non-breaching party is willing to request actual performance, the liquidated damages and the actual performance can coexist, otherwise the breaching party should only bear the liability for liquidated damages. Of course, it cannot be inferred from this that for other types of liquidated damages, except for liquidated damages specifically set for delay in performance, for other types of liquidated damages, the non-breaching party has no right to demand performance of the debt after the defaulting party has paid the liquidated damages. As long as the parties specifically stipulate in the contract that the liquidated damages are punitive or do not affect the actual performance, the non-breaching party still has the right to request actual action after the other party has paid the liquidated damages.

4. Allocation of the burden of proof for excessively high liquidated damages

When the breaching party requests a reduction of excessively high liquidated damages, the breaching party shall bear the burden of proof to prove that the liquidated damages are excessively high in accordance with the principle of "whoever asserts the claim shall provide evidence". However, in view of the fact that the most important criterion for assessing whether liquidated damages are too high is the loss caused by the breach of contract, the non-breaching party has a stronger ability to present evidence because it has a better understanding of the facts and relevant evidence of the loss caused by the breach. Therefore, the burden of proof on the breaching party cannot be absolute, and the non-breaching party must also provide corresponding evidence. In practice, if the breaching party often argues that the contract is not established, the contract has not taken effect, the contract is invalid or does not constitute a breach of contract, but does not file a request for adjustment of liquidated damages, can the people's court explain whether the parties need to claim that the liquidated damages are too high?

Article 8 of the Guiding Opinions on Civil and Commercial Contracts stipulates that, in order to alleviate the litigation burden of the parties and properly resolve the dispute over liquidated damages, if the breaching party makes a defense of exemption from liability on the grounds that the contract is not established, the contract has not taken effect, or the contract is invalid or does not constitute a breach of contract, but fails to file a request for adjustment of liquidated damages, the people's court may interpret the issue of whether the liquidated damages are too high, i.e., whether the liquidated damages are considered to be too high assuming that the breach of contract is established. Where an explanation has already been made to the breaching party but the breaching party insists on not submitting a request for adjustment of liquidated damages, the people's court shall follow the principle of autonomy of will in the Contract Law and generally will not take the initiative to make adjustments. However, if a judgment based on the agreed standard of liquidated damages will seriously violate the principles of public order and good customs, good faith and fairness, and cause a serious imbalance of interests, the people's court may make adjustments in accordance with the provisions of Article 585, Paragraph 2 of the Civil Code.

5. Whether the application of the rules for the adjustment of liquidated damages is affected if the commercial entity voluntarily issues a settlement agreement to the other party and promises high liquidated damages in the litigation and fails to perform the subsequent payment obligations in accordance with the agreement

Where a party requests an adjustment of a loss compensation clause reached on a voluntary basis, except in the case of invalidity or revocation, on the grounds that the amount of damages is too high or too low, the people's court shall distinguish between the parties and whether the parties are ordinary civil entities or commercial entities. There should be a distinction between commercial entities and civil entities on the issue of discretionary reduction of liquidated damages, where a commercial entity voluntarily issues a settlement agreement to the other party and promises high liquidated damages in litigation, but fails to perform the follow-up payment obligation in accordance with the settlement agreement without justifiable reasons, which is subjectively and seriously malicious, and the liquidated damages agreed upon in such circumstances shall be regarded as punitive liquidated damages and may not be reduced. The distinction between punitive liquidated damages and compensatory liquidated damages should be based on the compensation of losses.

6. If the parties did not explicitly request a reduction of liquidated damages in the first instance, and the appeal of the second instance proposed a reduction, should the court of second instance support it

Judging from the trial practice, the court of second instance should distinguish whether the court of first instance has interpreted the parties and handled them differently. In a first-instance litigation, if the court clearly explains to the parties whether it claims to adjust the liquidated damages, and the parties clearly state that they do not request the adjustment of the liquidated damages, and after the judgment of the first instance is pronounced, the party appeals on the grounds that the standard of liquidated damages agreed in the contract is too high, the court of second instance may not support it. If the court of first instance does not make a clear explanation to the parties, and the parties file an appeal requesting adjustment, the court of second instance may make an adjustment at its discretion in accordance with the principles of fairness and good faith, taking into account factors such as actual losses, the performance of the contract, and the degree of fault of the parties.

7. Whether the liability for liquidated damages requires the breaching party to be at fault

The Civil Code of the People's Republic of China adopts strict liability for breach of contract, which emphasizes compensation for damage caused by breach of contract, and does not need to be premised on the fault of the breaching party. However, the following exceptions apply:

First, if the parties agree that the establishment of liquidated damages is based on the fault of one party, the agreement shall prevail.

Second, when the sub-provisions of the Civil Code and the separate regulations specifically stipulate that the liability for breach of contract is the fault liability, the establishment of liquidated damages shall require the fault element.

Thirdly, in the case of punitive liquidated damages, the purpose is to create psychological pressure on the debtor and urge it to actively perform the debt. At the same time, in the case of non-performance of debts, the punishment for fault is expressed, and therefore the fault of the debtor is required to be used as an element for it to bear punitive liquidated damages.

8. If a party claims liquidated damages or compensation for losses, it is a defense or counterclaim in litigation

If the seller sues the buyer for payment of the price after performing the delivery obligation, and the buyer believes that the seller has breached the contract first, it may refuse to perform its obligations on the grounds that the other party has breached the contract, and may also require the other party to bear the liability for breach of contract. In this case, whether the buyer's conduct is a defense or a counterclaim should be judged according to the specific content of the buyer's claim and the corresponding purpose. If the buyer's claim only indicates that it does not agree to pay the price and is not willing to pay liquidated damages or compensate for losses, and its purpose is to deny the seller's right to pay the price and claim for liquidated damages, its claim is only a defense against the claim and should therefore be regarded as a defence. If the buyer asserts in the lawsuit that the seller is in breach of contract and should bear the liability for breach of contract, pay liquidated damages or compensate for losses, it can be seen that its purpose is not only to defend the seller's claim for payment of the price and liability for breach of contract, but also to assert positive rights outside the scope of the seller's claim, and in fact to raise a new claim. Since the seller's claim for liquidated damages or compensation for losses filed by the buyer and the seller's claim in the lawsuit for payment of the price are based on the same contract and are implicated, they can be tried together. Therefore, if the buyer files a claim for payment of liquidated damages and compensation for losses, it shall be required to file a counterclaim and pay the corresponding litigation costs.

9. The relationship between the right to claim liquidated damages and the right to claim damages

In the event of a breach of contract by the debtor, according to Article 585 of the Civil Code (Articles 107 and 114 of the Contract Law), the right to claim liquidated damages and the right to claim damages may arise at the same time. There are different views in the theoretical community:

The first view asserts that exclusive liquidated damages and damages are not in a position where the creditor can freely choose, but that the liquidated damages clause must be applied if there is a liquidated damages agreement. Main reasons:

First, the liquidated damages predetermined as damages are a special agreement of the parties and should be applied first. Second, the liquidated damages clause is an agreement between the parties, and it is a unilateral expression of the intention of the non-breaching party to claim damages for breach of contract instead of requesting the breaching party to bear the liability for breach of contract.

Third, the special agreement on liquidated damages also has the function of limiting liability for the parties, and if the creditor is allowed to choose arbitrarily, it will inevitably frustrate the purpose of the liquidated damages standard.

The second view is that the liquidated damages clause does not have a theoretical basis for taking precedence over the application of damages for breach of contract. Main reasons:

First, if the liquidated damages are agreed upon for defective performance or failure to perform, and the debtor refuses to perform or delays performance, there is no priority for the liquidated damages clause to apply.

Second, according to the contract of liquidated damages in Roman law and civil law systems, the liability for liquidated damages derives from the subordinate contract of the liquidated damages clause, which is only conditional on the debtor's breach of contract; The source of damages for breach of contract is an independent contract, which is also conditional on the debtor's breach of contract. If it is considered that the liability for liquidated damages has priority over the liability for damages for breach of contract, it means that the assertion that the subordinate contractual relationship takes precedence over the main contractual relationship, lacks legal and legal basis.

Third, in the case where the liquidated damages are predetermined for damages, the parties agree on liquidated damages in the contract for the purpose of resolving the dispute more quickly and simply, and there is no difference in legal status between liquidated damages and statutory damages. Paragraph 2 of Article 114 of the Contract Law allows for an adjustment of the agreed amount of liquidated damages by reference to the actual amount of losses suffered by the parties - the sum of the damage suffered and the lost benefits, which in fact means that liquidated damages and damages can be replaced with each other in individual cases.

In terms of doctrine, it is often advocated that different types of liquidated damages should be determined separately. In the case of compensatory liquidated damages, the creditor may not claim damages at the same time as the interests of the claim for damages; In the case of punitive liquidated damages, the creditor may claim both the right to claim liquidated damages and the right to claim damages.

We believe that the law allows the parties to freely agree on liquidated damages, but when agreeing on liquidated damages, the debtor is often overconfident or does not carefully consider the future performance, so in the event of a breach of contract, the law has to weigh the relationship between liquidated damages and damages, and take into account the protection of the debtor's interests. In principle, in the event of a breach of contract, the right to claim liquidated damages and the right to claim damages may take effect at the same time. Under this premise, it is judged whether the creditor can claim at the same time according to whether the interests of the two claims are the same: if the interests are not the same, the creditor can claim at the same time: if the interests are the same, they cannot claim at the same time. Where the two points to the same interest, the question arises as to whether the creditor is free to choose to exercise the two claims, which should be permitted in principle. However, if the creditor chooses the right to claim liquidated damages, based on the principle of unjust enrichment, liquidated damages shall be calculated as the minimum amount of damages. If the damage is less than the amount of liquidated damages, the right to claim liquidated damages cannot be reduced. The right to claim damages is not lost because the creditor chooses liquidated damages, and the creditor can still claim compensation for damages in excess of the liquidated damages, but it must prove the composition of the damages. On the contrary, if the amount of liquidated damages exceeds the amount of damages, the creditor may still claim the amount of liquidated damages in excess of the damages. Based on the freedom of contract, the parties may agree that liquidated damages only have the function of performance guarantee and are not included in the scope of the claim for damages as the minimum amount of damages, in which case the parties can claim both liquidated damages and damages, but the right to claim liquidated damages shall be subject to the discretionary reduction clause for liquidated damages. However, if the parties agree that liquidated damages completely replace the damages, it is transformed into a restrictive rule on the total amount of damages.

10. Whether the liquidated damages for a bilateral contract other than the loan contract are too high should also be determined in strict accordance with the provisions of the law and judicial interpretations

According to the literal expression of Article 585, Paragraph 2 of the Civil Code, "loss caused by breach of contract" is the clearest and most important standard for measuring the level of liquidated damages under the law, which is the basic standard for measuring whether the liquidated damages are excessive. According to Article 584 of the Civil Code, if one of the parties fails to perform its contractual obligations or the performance of its contractual obligations does not conform to the agreement, resulting in losses to the other party, the amount of compensation for losses 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; provided, however, that it shall not exceed the losses that may be caused by the breach of contract that the breaching party foresaw or should have foreseen at the time of entering into the contract. In trial practice, the court shall, in accordance with the above provisions, ascertain the losses caused by the breach of contract. For example, in a dispute over a steel sales contract, the total price of steel is 20 million yuan, and the contract stipulates that if the seller is late in delivery, it will bear the liability for breach of contract of 600,000 yuan for every 1 day overdue. After the seller is overdue for 10 days. The buyer sued and demanded that the seller bear the liability for breach of contract of 6 million yuan according to the contract. The seller asked the court to reduce the liquidated damages. According to the standard of 24% of the private loan interest rate, the court ruled that the seller should bear the liability for breach of contract of 4.8 million yuan. Although the court's judgment reduced the liquidated damages, it was obviously a bit simplistic in its handling. In fact, the buyer's losses caused by the seller's breach of contract should be ascertained, and on this basis, they should be determined in combination with comprehensive factors such as the performance of the contract, the degree of fault of the parties, and the expected benefits. Although simply determining the losses caused by default according to the standard of private lending interest rates reduces the difficulty of ascertaining losses, it often unduly expands the liability of the defaulting party.

Transferred from the same judgment rule for similar cases