Study On The Reduction Regime Of Liquidated Damages

Reduction Regime of Liquidated Damages means to adjust the amount of liquidateddamages to appropriate amount based on the application of the parties concerned or the court’power at its own initiative when such amount agreed by the parties over-exceeds the actualdamages caused by such default. The legislation of PRC on such important legal regime isexcessively simple, and there are few theoretical researches. This paper focuses on “thereduction right of liquidated damages and its litigation mechanism”, provides specifictheoretical study on liquidated damages reduction regime and forms my own answers tocertain questions. The paper is divided into three parts:Part one: basic theory on reduction regime of liquidated damages, this part contains threeaspects: First, the specific nature of liquidated damages in China: Liquidated damage, in itsessence, is concrete form of liability for breach of contract. As for the functional attributes ofliquidated damages, punitive liquidated damages only have punishment attribute, andcompensatory liquidated damages may only possess compensatory attribute under certaincircumstances, or possess both the punitive and compensatory attributes under circumstances.Article114of the Contract Law of PRC provides the specific type of liquidated damages, thispaper adopts the research method of “holism”, sticks to the judgment standard of “damagespreset”, takes item1of this article as its research subject and items2,3as its referencesubjects, and further concludes its nature of compensatory liquidated damages. The contractlaw of China does not and shall not acknowledge the punitive liquidated damages. Thejudgment standard of “damages preset” shall be followed for the identification of the specifictypes of liquidated damages in contract and the specific nature of liquidated damages can bejudged according to parties’ declaration of intention and agreed purpose. Second, Legal basisfor liquidated damages reduction regime: liquidated damages reduction regime is not only thenecessity of the nature of liquidated damages, but also the practical needs of the principle ofcontract justice and the concrete reflection of the principle of honesty and credibility. Third,normative nature of liquidated damages reduction regime: the optional nature of liquidateddamages reduction norm shall be limited by its protection purpose, and parties concernedshall not waive its right to liquidated damages reduction before the occurrence of suchpayment.Part two: the entity structure of liquidated damages reduction regime. It is specifically divided into three aspects: First: the right to reduce liquidated damage, in its essence, is a rightof formation. Second, the constitutive requirement for liquidated damages reduction rightincludes “the excessively high amount of liquidated damages”. It is fact judgment thatwhether the liquidated damages are excessively high and such judgment can be divided intotwo steps:“the identification of damages caused” and “the judgment of excessively highamount”.“The damages caused” shall include the loss of prospect interest and thenonmonetary losses taking implementation conditions into consideration, besides that,limitation rules shall also be adopted. The judgment of “excessively high amount” shall bemade on the basis of the comparison between “amount of liquidated damages” and “damagesin due”(including prospect interests, nonmonetary losses and considering partialimplementation of contract and subtracting the amount according to limitation rules). Third,reference factors for liquidated damages reduction:“appropriate reduction” of liquidateddamages tends to be value judgment, which depends on the judges’ discretion to a large extent.Judges need to make reasonable judgments through considering the specific circumstances ofthe contract, the degree of mistakes and contractual capacity of parties concerned, and thedefault party’s payment capacity, the difficulty level of seeking substitute transaction andother factors.Part three: procedural operation of liquidated damages reduction regime, three issues aremainly discussed in this part. First, initiation of the procedure: the initiative right can only becarried out by parties. The court may present procedural elucidation under specificcircumstances, and shall not initiate such procedure on its own discretion. In case that oneparty clearly indicates not to file an application at the first trail, or refuse to file suchapplication after being explained, such right is deemed as being waived. In case that the partydoes not clearly indicate to waive the right to reduction, and the court at first trail does notmake procedural elucidation, and the reduction requirement proposed by such party at secondtrail may be mediated firstly, and should be sent to the first trial for retrial if the meditationfails. The right to reduce liquidated damage amount shall be realized through countercharge orcounterclaim, carrying out such right in demurrer way goes against the clarification oflitigation relations. The litigation convenience problem can be solved through judge’selucidation. Second, as for the burden of proof, the debtor requiring reduction shall assumethe burden of proof. And such burden of proof during litigation shall not be transferred. If it isevidenced that the observant party has relevant proof and refuses to provide without justified reasons, then, the claim for identifying the excessively high amount of liquidated damagesmay be directly accepted. Under the circumstances that default party and its legalrepresentative have trouble in collecting evidences, they may apply to the people’s court forinvestigation and collection. Third, elucidation in litigation: Viewing the elucidation as a legalobligation goes too far, and letting the judges get out completely backs too much, taking theeclecticism of the Guidance and viewing the elucidation as terms of reference and discretionof the judge may be the practical way. Section27(2) of the judicial interpretation of thecontract for sale, is suspected of deprivation of the interests of the parties to the trial level.Judges shall make necessary elucidation on the party’ claims, and its specific method,distribution of burden of proof, and proofing level, and the relevant legal interpretations to theparties for their appropriate actions.