On The Default Payment Penalties

Earnest money for breach, as one important type of earnest money, is used by theparties of a contract to limit the possibility of breach. It has a close relationship withdamages. In China, however, we don't have any rules in force for the application ofearnest money for breach and damages, for which reason the knowledge of thecharacters and functions of earnest money for breach is in a state of confusion. Basedon the special definition of the penalty under the civil law system, I will begin withthe analysis of the penalty of earnest money for breach and then try to find out thereasonable application of earnest money for breach and damages. To research oneinstitution, we should begin with the basic character of which, so, first of all I willregard earnest money for breach as one kind of guarantee for the agreement of the twoparties. For the reason that it should obey the penalty provisions, the running of thisguarantee will show a character of penalty. Then, I will analyse the functions, basisand characters of this kind of penalty in detail. First, according to the definition ofpenalty in civil law ,we may decide that the functions and uses of earnest money forbreach mainly show the penalty;second , from the research of general principles ofthe effect of contract and the theories of punitive remedies for breach, we can justifythis kind of penalty for breach. Third, we can find out ,by deeper analysis of penaltyprovisions for earnest money, the characteristic of the penalty for breach, whichshows a limit both in amount and in objective: penalty of earnest money for breach isnot for all the kinds of breach, but breach that by which the damages are limited tocertain extent. Here "to certain extent" depends on the amount of earnest money forbreach. The characteristic of penalty of earnest money for breach decides the principleof application of damages and earnest money for breach: neither to be a simply sum,nor to be alternative, but to deduct the earnest money first, and then claim fordamages. Last, based on the analysis of penalty of earnest money for breach and ofthe application of damages and earnest money for breach, I will, combine togetherwith the situation today, give some suggestions to the legislation.