The Research On The Adjustment Of Liquidated Damage System

Liquidated damage system, initially as a debt security method from the Roman system of Penalty, means that it is agreed in advance by the parties to determine the payment independent of the performance under the contract if one party breaches the contract. Because of its efficiency and security, it gradually becomes one of the most common remedies for breach of contract in civil and commercial transactions. Scholars have many theories on identification of the nature of liquidated damages, which focus on three views: punishment, compensation, and a combination of both between the two different views. Generally it is believed that it is the concrete manifestation of freedom of contract that the parties are free to agree on liquidated damages, but based on the nature and functions of liquidated damages, it is a necessary, reasonable and appropriate requirement for the legal intervention by liquidated damages, reflecting the principles of justice is appropriately binding the principle of freedom of contract, and interests of the parties of contract shall be balanced, while abuse of contractual rights shall be prohibited.Currently, countries in the world have different views on the understanding of the nature of liquidated damages, but two main legal systems both have established the legal regulations of the liquidated damage system with each unique feature. In China, the Contract Law, Article 114 establishes the system of the liquidated damages. However, Contract Law only provides general terms, and it does not specify the standard, condition and procedures of the application of the Liquidated damage system, leading to a confused and disunite judicial application. In April 2009 Article 27,28,29 of the Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law of the People's Republic of China"(hereinafter referred to as"interpretation of the Contract Law II ") makes detailed formulation on liquidated damages, which, to some extent, gives the settlement of the standard, condition and procedure of the application, but in judicial practice, some problems still exist such as there are different views on high or low of the assessment of the numbers in the application, the allocation of the burden of proof and conditions when the discretionary right is exercised by the court, which make the judgments varied. The author intends to make analysis in the aspects of the reasonable range of the adjustment numbers, the allocation of burden of proof and conditions of the discretionary right by the court, initially from these judicial problems. It suggests that in the case of breach of contract it is a prerequisite to correctly identify the validity of the contract and the satisfactory of the conditions of liquidated damages, and meanwhile the adjustment procedure of the number of the liquidated damages shall be initiated by the parties. It should account the loss of the observant party, the applicant's subjective conditions, the fulfillment of the contract, nature of the case, whether the liquidated damages clause is term of format, and debt payment capability of the defaulting party, etc. in the consolidated amount of the adjustment, so that it can provide references for standards of application when dealing with cases of breach of contract.