On The Adjustment Of Liquidated Damages

Today, penalty due to breach system is an indispensable part of the system fieldof contract law, it not only plays the role of secured debt to fulfill, but also is able tocompensate the damages caused by breach of contract. It is the method that theparties agree to solute dispute about contract independently. The existence of penaltydue to breach of contract system not only provides the contract with convenience butalso for the judicial organ to reduce pressure of litigation. It always attaches greatimportance to the penalty system in our country, and discusses from the law ofcontract to the subsequent releasing judicial explanation to made the provisions of therelevant penalty due to breach of contract. And the difficult problem like the amountof liquidated damages, the judicial intervention has been discussed.If you want to study the issue of breach of contract, the inevitable discussion isthe nature about penalty due to the breach of contract. Penalty due to breach ofcontract appears liquidated damages and punitive penalty. How to distinguishbetween them, there are two views: First, we could compare the amount penalty andthe amount of damages. If the amount penalty is high, its property belongs to thepunitive; another belongs to liquidated damages. Then, can or can not be used withthe damages, if the party have payed liquidated damages, the other party may requestdamages of breach at the same time, that is the punitive penalty; If the parties canonly choose penalty due to breach or compensation, it is liquidated damages. Thesecond view is more reasonable, because the goal of punitive penalty is to guaranteeperformance. The penalty punishes default behavior itself, and without direct relationto the damage compensation. so as long as there is a breach, the default party can berequired to pay penalty, but for the default, loss is also requested separately. Thecharacteristic of the liquidated damages is filled with the default loss, so it can not beapplied at the same time. However, what important is that judging the nature ofpenalty is based on the contract the parties agree. Because the application of thepunitive penalty may produce negative effects, we should identificate with caution. Except the partier’s positive promise or enough evidence proving, it is the punitivepenalty due to breach of contract. If there is no agreement or the agreement mostlyunknown, it still should be presumed as liquidated damages.The reason penalty due to breach of contract system can be widely used is that ithas irreplaceable functions: first, to promote the performance of the contract. With theexistence of the penalty, the party has mental stress and will consider the cost ofdefault. So he won’t break a contract easily. Second, to forecast transaction risk.People forecast contract risk what might happen through discussing liquidateddamages clauses in order to reduce the risk of the contract. Third, to gain sufficientcompensation. It is so difficult to calculate or to proof the default loss for the partiesthat they often cannot get enough compensation. But if there is penalty due to breachof contract terms, people can turn more possible loss into account, includingnon-pecuniary loss. Once the default happens, the parties can get full compensation.The function of liquidated damages embodies its value. But allowing the partiesto agree with penalty terms also can appear some disadvantages, such as unbalancedinterests of the contract and obstacling to the contract transaction. So, if penaltycannot be agreed appropriately, it is not only difficult to achieve its function, even forits counterproductive. What we need do is adjust it by judicial organs under fairprinciple, Respecting parties’ meaning and careful adjustment. As the "Contract law",the114th regulation, liquidated damages too much higher or lower than losing, courtor an arbitration institution should give adjustment. Here, we will need to determinethe standard of the amount of liquidated damages. The author thinks all of that shouldbe based on the actual loss, comprehensive consideration the degrees of mistakes,contract performance, expected benefits, and looking for alternative trading difficultor not. If after confirmed, it really need to be adjust. punitive penalty and liquidateddamages should be treated differently. The amount of it need to be judicialintervention while the problems are worth paying more attention are its the startupmode and the burden of proof. In order to respect the freedom the parties, the judgeshould not according to the functions and powers to adjust or hints it. Usually onlywhen the parties apply for, is there the possibility of intervention. And about theburden of proof, the author thinks that taking the way of " who claims that, who proof "which the civil lawsuit is required the method of taking responsibility.In our country, regulations about penalty of default are not detailed and specificprovisions. many of them are principled regulations, and judges are given widediscretion in judicial intervention. judges should be Careful comprehensiveconsideration and hold the wary attitude to determine the standard of the amount ofthe liquidated damages. That as much as possible to fulfill the function of penalty andensure Balancing interest of the parties is the pursuit of the ultimate goal of penaltydue to breach of contract adjustment system.