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The practical problems of the system of penalty for breach o
TIME：2021-12-13 PUBLISHER：ADMIN
On 2021, Xie Yuan, a trainee lawyer of Henan Changhao Law Firm, gave a thematic sharing on the practical issues of the system of liquidated damages.
This sharing mainly from the “Civil code”, “Interpretation of the sale contract”(2020 amendment) and other relevant legal provisions, combined with practical issues and so on.
With regard to liquidated damages, Article 585, paragraph 1, of the Civil Code provides that the parties may agree that when a party breaches a contract, it shall pay to the other party a certain amount of liquidated damages in accordance with the circumstances of the breach, it may also agree on a method for calculating the amount of compensation for losses arising from a breach of contract. According to this clause, the liquidated damages clause can not only stipulate an exact amount, but also stipulate a method of calculating the loss. This method of calculation may be referred to paragraph 4 of Article 18 of the interpretation of the contract of sale and purchase (2020 amendment) .
With regard to the deposit for breach of contract, Article 586, paragraph 1, of the Civil Code, the parties may agree that one party shall pay the deposit to the other party as security for the creditor’s right. A deposit contract is established when the deposit is actually paid. Article 587 of the Civil Code stipulates that where a debtor performs a debt, the deposit shall be set off against the price or recovered. If the party who has paid the deposit does not perform the obligation or the performance of the obligation is not in conformity with the agreement, so that the purpose of the contract can not be achieved, the party who has received the deposit does not perform the obligation or the performance of the obligation is not in conformity with the agreement, if the purpose of the contract can not be achieved, the deposit shall be refunded twice.
The difference between the liquidated damages and the liquidated damages is that the liquidated damages are paid prior to the occurrence of the default. Having the nature of a guarantee, as of a deposit. After the fact of breach of contract, the liquidated damages is the compensation paid by the Defaulting Party to the defaulting party, which has certain compensatory and punitive nature.
On the discretionary mechanism of liquidated damages, in court trials often encounter some contracts agreed to a high liquidated damages. In accordance with Article 585, paragraph 2, of the Civil Code, if the agreed penalty for breach of contract is less than the loss caused, the People’s Court or the arbitration institution May, at the request of the parties, increase it; If the liquidated damages agreed upon are excessively higher than the losses caused, the People’s Court or the arbitration institution May, at the request of the parties, appropriately reduce them. The specific ways to apply for mitigation are: counterclaim, defense and denial.
If the breaching Party does not defend the breach of contract is too high, but directly to the contract is not established, there is no breach of contract for the exception defense. According to Article 21 of the interpretation of the contract for sale and purchase (2020 amendment) , a party to a contract for sale claims payment of liquidated damages on the ground of breach of contract by the other party, if the other party, on the grounds that the contract is not established, the contract is not effective, the contract is null and void, or the contract does not constitute a breach of contract, does not claim an adjustment of the excessive penalty for breach of contract, the People’s Court shall, if the court does not support the plea of exemption, whether the parties need to claim to adjust the liquidated damages for interpretation. If the Court of First Instance considers that the plea of exemption is established and has not been explained, and the Court of Second Instance considers that the penalty for breach of contract should be awarded, it may directly explain and revise the judgment.
The above article only represents the author’s own views, does not represent any form of legal advice or recommendations issued by Henan Changhao Law Firm. If you are interested in further exchanges or discussions on related topics, please contact us.
This sharing mainly from the “Civil code”, “Interpretation of the sale contract”(2020 amendment) and other relevant legal provisions, combined with practical issues and so on.
With regard to liquidated damages, Article 585, paragraph 1, of the Civil Code provides that the parties may agree that when a party breaches a contract, it shall pay to the other party a certain amount of liquidated damages in accordance with the circumstances of the breach, it may also agree on a method for calculating the amount of compensation for losses arising from a breach of contract. According to this clause, the liquidated damages clause can not only stipulate an exact amount, but also stipulate a method of calculating the loss. This method of calculation may be referred to paragraph 4 of Article 18 of the interpretation of the contract of sale and purchase (2020 amendment) .
With regard to the deposit for breach of contract, Article 586, paragraph 1, of the Civil Code, the parties may agree that one party shall pay the deposit to the other party as security for the creditor’s right. A deposit contract is established when the deposit is actually paid. Article 587 of the Civil Code stipulates that where a debtor performs a debt, the deposit shall be set off against the price or recovered. If the party who has paid the deposit does not perform the obligation or the performance of the obligation is not in conformity with the agreement, so that the purpose of the contract can not be achieved, the party who has received the deposit does not perform the obligation or the performance of the obligation is not in conformity with the agreement, if the purpose of the contract can not be achieved, the deposit shall be refunded twice.
The difference between the liquidated damages and the liquidated damages is that the liquidated damages are paid prior to the occurrence of the default. Having the nature of a guarantee, as of a deposit. After the fact of breach of contract, the liquidated damages is the compensation paid by the Defaulting Party to the defaulting party, which has certain compensatory and punitive nature.
On the discretionary mechanism of liquidated damages, in court trials often encounter some contracts agreed to a high liquidated damages. In accordance with Article 585, paragraph 2, of the Civil Code, if the agreed penalty for breach of contract is less than the loss caused, the People’s Court or the arbitration institution May, at the request of the parties, increase it; If the liquidated damages agreed upon are excessively higher than the losses caused, the People’s Court or the arbitration institution May, at the request of the parties, appropriately reduce them. The specific ways to apply for mitigation are: counterclaim, defense and denial.
If the breaching Party does not defend the breach of contract is too high, but directly to the contract is not established, there is no breach of contract for the exception defense. According to Article 21 of the interpretation of the contract for sale and purchase (2020 amendment) , a party to a contract for sale claims payment of liquidated damages on the ground of breach of contract by the other party, if the other party, on the grounds that the contract is not established, the contract is not effective, the contract is null and void, or the contract does not constitute a breach of contract, does not claim an adjustment of the excessive penalty for breach of contract, the People’s Court shall, if the court does not support the plea of exemption, whether the parties need to claim to adjust the liquidated damages for interpretation. If the Court of First Instance considers that the plea of exemption is established and has not been explained, and the Court of Second Instance considers that the penalty for breach of contract should be awarded, it may directly explain and revise the judgment.
The above article only represents the author’s own views, does not represent any form of legal advice or recommendations issued by Henan Changhao Law Firm. If you are interested in further exchanges or discussions on related topics, please contact us.
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