Supreme People's Court: Main Adjudication Rules on the Adjustment of Liquidated Damages (I)

Supreme People's Court: Main Adjudication Rules on the Adjustment of Liquidated Damages (I)

01. Reference case: The breaching party may submit a request for adjustment of liquidated damages in the second instance - Chen v. Liu, a contract dispute case

[Summary of the trial]:

If the breaching party raises that the liquidated damages are too high in the second instance and requests a reduction of the liquidated damages, the court of second instance shall conduct a trial on whether to adjust the liquidated damages, and the court of second instance shall conduct a trial and make a judgment based on factors such as the standard of liquidated damages agreed in the contract, the degree of excesses of the parties, the expected benefits, the principle of fairness, and the principle of good faith. The breaching party's dishonesty litigation may be handled in accordance with the provisions of the Civil Procedure Law and relevant judicial interpretations.

The effective judgment of the court held that the focus of the dispute in this case was the determination of the standard of liquidated damages. 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 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 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 appropriately reduce them. In this case, although the two parties agreed on the standard of liquidated damages in the Cooperation Agreement, Liu appealed that the standard of liquidated damages agreed by the two parties was too high and requested the court to appropriately reduce it. The court of second instance held that it was appropriate to use 1.5 million yuan as the base amount and calculate it at an annual interest rate of 24%. Accordingly, the court of second instance reversed the judgment.

Case No.: :(2016) Jing 03 Min Zhong No. 13939

02. Second Circuit Court: Is the agreement of the parties to the contract to waive the right to request the court to adjust the amount of liquidated damages in advance valid?

[Different points of view]:

A said: Valid said

The parties have the right to dispose of their substantive rights, and the waiver of the right to request the court to adjust the amount of liquidated damages stipulated in the contract belongs to the scope of autonomy of will, and the court should not deny the validity of the agreement. At the same time, liquidated damages are essentially commercial interests in the scope of commercial transactions, and the agreement of a commercial transaction entity to waive the right to request the court to adjust liquidated damages should be deemed to have a clear understanding of the risks of the civil and commercial activities it participates in. The amount of liquidated damages is also one of the conditions for commercial entities to participate in market competition and make business decisions, and judicial intervention should be restrained. According to Article 585 of the Civil Code, the adjustment of liquidated damages can only be carried out at the request of the parties, which is a litigation matter that the parties can decide on their own, and the waiver of this right by the parties is not illegal or contrary to public order and good customs.

B said: Invalid said

The parties' request to the court to adjust the amount of liquidated damages is a legal right granted to civil subjects to request judicial protection under Article 585 of the Civil Code. Agreeing in advance to waive the right to claim for judicial adjustment of liquidated damages may deprive the parties of their statutory rights by the agreement. Article 585 of the Civil Code stipulates that the rules for the adjustment of liquidated damages are of a mandatory normative nature, and if the application of the rules for the adjustment of liquidated damages is allowed to be excluded in advance through autonomy of will, it is not conducive to the balanced protection of the legitimate rights and interests of the parties and is contrary to fairness and justice.

[Judges' Conference Opinion]: Cai Yi said

The autonomy of civil subjects should be based on the public order provided by public law, and the freedom of civil juristic acts should be limited to the extent that they do not harm the interests of the state, the public interest, or the legitimate rights and interests of others. The parties request the court to adjust the amount of liquidated damages, which is essentially a litigation right of a public law nature. The judicial adjustment system for liquidated damages provided for in Article 585, Paragraph 2 of the Civil Code is the result of appropriate restrictions on the freedom of contract in order to balance the interests of the parties. If the parties are allowed to waive the right to request the court to adjust liquidated damages through a prior agreement, it is easy to cause the impact of autonomy of will on public order, and the statutory rules for the adjustment of liquidated damages will be circumvented with a high probability, which will affect the security of market transactions and increase the risk of false litigation, and the legislative purpose of Article 585, Paragraph 2 of the Civil Code may be nullified. Therefore, if the parties agree in advance to waive the right to request judicial adjustment of liquidated damages, and the breaching party requests the court to adjust the amount of liquidated damages, the court shall, in principle, allow it and conduct a review and handling in accordance with law.

03. Reference case: The liquidated damages for delayed performance are generally no longer calculated to double the interest on part of the debt - a case of enforcement supervision of a contract dispute between Cai and a brewing company

[Summary of the trial]:

The liquidated damages determined by the award shall be calculated from the date of performance determined in the effective legal instrument and extend to the date of actual payment of the monetary debt determined in the legal document, which in essence has the nature of general interest and overlaps with the calculation period of the debt interest during the period of delayed performance, and there is no legal basis for calculating the interest on the doubled part of the debt during the period of delayed performance based on the liquidated damages.

Case No.: :(2022) SPC Zhijian No. 45

04. Reference case: whether the obligor's performance of the arbitration and mediation agreement constitutes a breach of contract and bears the liability for breach of contract should not be judged in the enforcement procedure - a case of supervision of the enforcement of the arbitration and mediation agreement between a real estate company in Guizhou and a distribution company in Guizhou

[Summary of the trial]:

After the obligor has fulfilled the payment obligation agreed by both parties, if the obligee applies to the court to enforce the liability for payment of liquidated damages under the circumstance of "breach of contract by the respondent" agreed in the arbitration and mediation agreement on the grounds of the obligor's delay in performance, it must first clarify whether the obligor has committed a breach of contract and whether it bears the liability for breach of contract before enforcement. In the event that the respondent argues that it has force majeure and only has defective performance rather than a fundamental breach of contract, whether the liability for breach of contract is established is different from a simple factual judgment, but is a new substantive dispute arising from the performance of the effective arbitration and mediation agreement between the parties, which should be resolved by the parties through re-arbitration or separate litigation, rather than directly making a judgment in the enforcement procedure.

Case Number: :(2021) Supreme Court Zhijian No. 84

05. Communiqué case: Shaoguan HSBC South China Innovation and Development Enterprise Co., Ltd. and Guangdong Environmental Engineering Equipment Corporation and Guangdong Environmental Protection Engineering Research and Design Institute

[Summary of the trial]:

Article 29 of the Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of the Contract Law of the People's Republic of China) stipulates: "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 actual losses, take into account comprehensive factors such as the performance of the contract, the degree of fault of the parties and the expected benefits, weigh them according to the principles of fairness and good faith, and make a ruling. 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. "When calculating the amount of actual losses, the calculation shall be based on the actual losses caused to the non-breaching party due to the breaching party's failure to perform the contract containing liquidated damages clauses disputed by the parties, and other losses other than the contract shall be excluded. For the losses suffered by one party due to other contracts, even if the contract has a certain implication relationship with the disputed contract, it cannot simply be used as the basis for determining the actual losses of the disputed contract.

II. The provision in the aforesaid judicial interpretation that "the liquidated damages agreed by the parties exceed 30% of the losses caused" should be fully and correctly understood. On the one hand, whether the liquidated damages agreement is too high should be based on the specific circumstances of the case, based on the actual losses, taking into account the performance of the contract, the degree of fault of the parties and the expected benefits, and other comprehensive factors, and comprehensively judging according to the principles of fairness and good faith, and "30%" is not an immutable fixed standard; On the other hand, the aforesaid provisions address the standard for determining whether the liquidated damages are excessive, not the standard for the people's court to appropriately reduce the liquidated damages. Therefore, in the trial of a case, it is not possible to mechanically determine that "the liquidated damages agreed by the parties exceed 30% of the losses caused" as "excessively higher than the losses caused" as provided for in the second paragraph of Article 114 of the Contract Law, nor can the amount of liquidated damages be mechanically reduced to 130% of the actual losses when the amount of liquidated damages is "appropriately reduced" in accordance with the law.

The Supreme People's Court held that:

I. On the issue of whether the people's court can adjust the amount of liquidated damages agreed in the Agreement involved in the case.

The second paragraph of Article 114 of the Contract Law of the People's Republic of China (hereinafter referred to as the Contract Law) stipulates: "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 appropriately reduce them. "In the absence of a clear standard in the Contract Law as to whether the amount of liquidated damages agreed in the contract is too high, and there is no corresponding judicial interpretation by the court of first instance during the trial, the judgment made by the court of first instance within the scope of the law based on the facts of the case is the discretion of the judge. Article 29 of the Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of the Contract Law (People's Republic of China) (hereinafter referred to as the Judicial Interpretation II of the Contract Law) came into force on May 13, 2009, and 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 actual losses, take into account the performance of the contract, the degree of fault of the parties and the expected benefits, and weigh them in accordance with the principles of fairness and good faith, and make a ruling." 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. According to the foregoing, liquidated damages are of a compensatory and punitive nature, and the parties to the contract may agree on liquidated damages that are higher than the actual losses. However, from the point of view that the agreed liquidated damages exceeding 30% of the losses caused can generally be deemed to be excessive, the nature of the liquidated damages is still mainly compensatory, with the main function of making up for the losses of the non-breaching party, rather than the purpose of severely punishing the breaching party. Excessively high liquidated damages may conflict with the principle of fairness, and in some cases, may induce moral hazard. Therefore, if a party claims that the agreed liquidated damages are too high and requests an appropriate reduction, the people's court shall adjust it in accordance with law.

II. On the issue of whether the amount of liquidated damages stipulated in the Agreement involved in the case is too high.

To confirm whether the agreed amount of liquidated damages is too high, the actual amount of losses shall be used as the basis for confirmation in accordance with the provisions of the Contract Law and the Judicial Interpretation II of the Contract Law. The term "actual loss" in the aforesaid provisions should be fully and correctly understood. When calculating the amount of actual losses, the calculation shall be based on the actual losses caused to the non-breaching party due to the breaching party's failure to perform the contract containing liquidated damages clauses disputed by the two parties, and other losses other than the contract shall be excluded. For the losses suffered by one party due to other contracts, even if the contract is implicated in the disputed contract, it cannot simply be used as the basis for determining the actual losses of this contract. HSBC asserted that although the Agreement involved in the case stipulated a clause of double liquidated damages, compared with the EPC General Contracting Cooperation Contract, the liquidated damages were only 3% of the total project price, which was not high. According to the facts ascertained in this case, although the EPC General Contracting Cooperation Contract and the Agreement involved in the case are implicated, they are two different contracts after all, and it is not appropriate to calculate the total project amount involved in the EPC General Contracting Cooperation Contract on the basis of determining the actual losses caused to HSBC by the environmental equipment company and the environmental protection design institute in violation of the Agreement involved in the case. In addition, according to the facts ascertained in this case, the Agreement involved in the case stipulated that the environmental equipment company and the environmental protection design institute should pay HSBC more than 1.56 million yuan because the EPC General Contracting Cooperation Contract failed to be actually performed. Judging from the content of the Agreement involved in the case, the aforesaid payment of more than 1.56 million yuan includes not only the compensation for the upfront expenses of HSBC by the environmental equipment company and the environmental protection design institute, but also the compensation to HSBC after the termination of the contract. Therefore, there is no legal basis for HSBC to confirm the claim that the liquidated damages are not high based on the total project amount involved in the EPC General Contracting Cooperation Contract.

III. On the issue of whether there is a mechanical case handling in this case.

The provision in the aforesaid judicial interpretation that "the liquidated damages agreed upon by the parties exceed 30% of the losses caused" should be fully and correctly understood. On the one hand, whether the liquidated damages agreement is too high should be based on the specific circumstances of the case, based on the actual losses, taking into account the performance of the contract, the degree of fault of the parties and the expected benefits, and other comprehensive factors, and comprehensively judging according to the principles of fairness and good faith, and "30%" is not an immutable fixed standard; On the other hand, the aforesaid provisions address the standard for determining whether the liquidated damages are excessive, not the standard for the people's court to appropriately reduce the liquidated damages. Therefore, in the trial of a case, it is not possible to mechanically determine that "the liquidated damages agreed by the parties exceed 30% of the losses caused" as "excessively higher than the losses caused" as provided for in the second paragraph of Article 114 of the Contract Law, nor can the amount of liquidated damages be mechanically reduced to 130% of the actual losses when the amount of liquidated damages is "appropriately reduced" in accordance with the law. The retrial judgment of this case upheld the first-instance judgment, and looking at the overall circumstances of the case, the first-instance judgment adjusted the amount of liquidated damages to 30% of the delayed payment of the environmental equipment company and the environmental protection design institute, and it was not a mechanical case. On the one hand, when the first-instance judgment came into effect, the second judicial interpretation of the Contract Law had not yet been promulgated, and the court of first instance adjusted the liquidated damages according to the specific circumstances of the case within the scope of discretion. On the other hand, although the environmental equipment company and the environmental protection design institute did delay payment, they fulfilled their payment obligations after delaying payment for more than one month. The amount of the delay in payment cannot be directly identified as the actual amount of HSBC's loss. Taking into account the fact that the environmental equipment company and the environmental protection design institute only delayed payment for more than one month, the first-instance judgment found that the agreed payment of double liquidated damages was too high, and calculated the contract fee according to 30% of the amount of delayed payment. Therefore, the retrial judgment was not improper.

Case No.: :(2011) Min Zai Shen Zi No. 84

Source of the case: Gazette of the Supreme People's Court, No. 09, 2011

06. Typical case: If the contract stipulates both interest and liquidated damages for capital occupation, can the court support it - Shanghai Huiwu Real Estate Co., Ltd., Shanghai Jiahong Real Estate Co., Ltd. and the respondent Shanghai Xinbi Real Estate Development Co., Ltd. and the third party, Shanghai Laixu Real Estate Co., Ltd. and Xu Chunhai, a joint venture and cooperative development real estate contract dispute

[Summary of the trial]:

The interest on the occupation of funds agreed in the contract is compensatory, while the nature of liquidated damages is mainly compensatory and contains moderate punitiveness, and the nature and function of the two are different. The law does not prohibit the contract from stipulating both the interest on the occupation of funds and liquidated damages, and the court of first instance ordered the defendant to pay liquidated damages at the same time as repaying the interest on the plaintiff's funds, which has a factual and legal basis, and has significantly reduced the amount of liquidated damages in accordance with the law, and the sum of the two does not significantly exceed the plaintiff's losses.

Case Number: :(2021) Supreme Law Min Shen No. 6765

07. Typical case: Determination of the agreed adjustment benchmark for punitive liquidated damages - a dispute over an online shopping contract between Zhou and Xiamen Fliport Gift E-commerce Co., Ltd

[Summary of the trial]:

When a consumer claims the agreed punitive liquidated damages based on the contract concluded by both parties or the merchant's commitment, if the punitive liquidated damages agreed by the two parties are too high, the merchant may request the people's court or arbitration institution to appropriately reduce them in accordance with article 114 of the People's Republic of China Contract Law. When determining the discretionary reduction standard, the people's court may, in accordance with <中华人民共和国合同法>the provisions of Article 29 of the Interpretation (II) of the Supreme People's Court on the Application of Several Issues on the adjustment of excessively high liquidated damages, and with reference to the provisions on the amount of statutory compensation in the Food Safety Law of the People's Republic of China and other relevant laws and regulations, reasonably adjust the amount of liquidated damages, and fairly resolve the issue of liability for breach of contract.

The Supreme People's Court held that article 114 of the Contract Law clearly stipulates that when the parties agree on liquidated damages, they may agree on a certain amount of liquidated damages and the calculation method of damages for breach of contract. If the parties agree on the method of calculating the amount of damages, it is a predetermined amount of expected losses by both parties, and the liquidated metal can be regarded as compensatory liquidated damages. However, if the amount of liquidated damages is agreed, the amount may be either a predetermined amount of expected damages or an amount including punitive liquidated damages. Just like the agreement of "one false penalty of 10,000" in this case. In addition, when Article 114 of the Contract Law stipulates the liquidated damages that can be adjusted, it adopts the expression "agreed liquidated damages", and does not distinguish between punitive and compensatory liquidated damages. In addition, although there is a clear definition of the two types of liquidated damages in theory, in practice, most contracts do not clearly distinguish between compensatory liquidated damages and punitive liquidated damages when agreeing on liquidated damages, and it is impossible for the people's court to divide the liquidated damages agreed upon by the parties and apply different adjustment or limitation rules to the two parts of liquidated damages. Therefore, the discretionary power of liquidated damages conferred on the court by article 114 of the Contract Law applies to all agreed liquidated damages, including compensatory liquidated damages and punitive damages.

Case No.: :(2019) Supreme Law Min Shen No. 3216

Transferred from the same judgment rule for similar cases