On The Appropriate Reduction Of Penalty

Confronted with agreed extravagant liquidated damages, people are usually perplexed in judicial practice by the rationality and limitation of discretionary reduction. As the legal basis of the discretionary reduction of liquidated damages, Article 114 of the Contract Law and Article 29 of the Interpretation II of Contract Law still include some puzzlement in terms of legal application, with various kinds of manipulation in judicial practice. This article aims at providing a relatively certain standard for reduction under the present rules, in order to make judicial practice less confusing.The first part lays the foundation of the whole article. Proceeding from the comparative law and citing the Germany and French law for instance, it generally introduces the connotation, classification and the classifying standard of liquidated damages in the civil law system. Afterwards, it summarizes the developing venation and states the legislative tendency of classification of the liquidated damages under the context of Chinese law. Later on, the difference among legislation, theory and judicial practice is elaborated, namely, the present classification of liquidated damages overlooks the free will of parties. Therefore, on the basis of the above, together with full explanation on Article 29 of the Interpretation II of Contract Law and appropriate reference to the classification types of relevant scholars, the author reclassifies liquidated damages so as to enhance the qualification of suitable objects under Article 29 of the Interpretation II of Contract Law.The second part is based upon the accurate limitation of suitable objects in the first part. It clarifies the relationship between the liquidated damages system and other systems, including the contract-breaking deposit system, the compensation for damages system, the dissolution of contract system and the like, which justifies the application of the liquidated damages system. On that basis, the author tries to provide a solid theoretical foundation for the application of the rule of discretionary reduction of liquidated damages under Article 29 of the Interpretation II of Contract Law.The third part describes factors related to the rule of discretionary reduction of liquidated damages. It first explains "to agree extravagant liquidated damages" in Article 29 of the Interpretation Ⅱ of Contract Law, on the basis of which the concrete situation of each type of extravagant liquidated damages is respectively stated. Via illustrating Article 29 of the Interpretation Ⅱ of Contract Law and summarizing related judicial practical experience, the author then expounds factors need to be considered in the discretionary reduction of each type of liquidated damages.Proceeding from judicial practice, the forth part discusses problems usually encountered in the discretionary reduction of liquidated damages. In the respect of the initiator of the system, aside from the present legislation that related parties enjoy the right to apply for discretionary reduction, the article focuses on whether the judge shall have the power of initiation as well. In the respect of intercepting the time point of the discretionary reduction of liquidated damages, the article adheres to the principle that such interception shall take reasons for the discretionary reduction into consideration. Another vital issues is that whether the extravagant liquidated damages shall be paid without any discretionary reduction.