Research On The Function And Application Of The Liquidated Damages

Liquidated damages has a long history,it’s a common form of liability for breach of contract stipulated in the contract law.However,the definition and practice of liquidated damages in china are quite controversial,so it is necessary to clarify and explore.The nature of liquidated damages can be divided into punitive and compensatory,in the form of existence,it can be divided into statutory and contractual.Punitive liquidated damages is punishment for breaching of contract,which is an economic punishment to debtor.compensatory liquidated damages is preset total amount of damages resulting from the breach of contract,and its’ main purpose is to simplify the proof and calculation of damages.Punitive liquidated damages and compensatory liquidated damages have different advantages in the process of keeping the performance of contract,but they also have different defects.Punitive liquidated damages can suppress and punish the breach of contract vigorously,but it is kind of private sanction.It undermines the equality of two parties,which is easily evolved into the means of profiteering and squeezing.Compensatory liquidated damages maintains the equality between the parties,but it mainly pay attention to compensate for the loss,so it’s not enough to maintain the integrity and transaction order.As for the choice of these two kinds of liquidated damages,china and civil law countries experienced the process of changing from punishment to compensation.Inorder to keep the economy active and contract fair,our country should take the compensatory liquidated damages as the major legislative model.But considering the breach of contract is frequent,the market order is unstable,china should not exclude the punitive liquidated damages completely,and should allow the parties voluntarily write it into the contract agreement.As for the legal punitive liquidated damages,china should try to avoid such legislation,because it’s punitive and mandatory.While adhering to the basic principle of “compensatory liquidated damages is major,punitive liquidated damages is exceptional”,we must also distinguish liquidated damages from the similar concepts such as unilateral payment and limitation clause.In essence,“Tenfold penalty clause”,”late fees” and liquidated damages are same,but in view of legislative principle of separation of public and private,late fees can not be called liquidated damages anymore,which is classified in the field of administrative law.Although “tenfold penalty clause” is made by seller voluntarily,but sometimes it will be “too much higher” than the loss.The judge may make appropriate adjustment on the basis of the principle of good faith.Based on the main compensatory nature of liquidated damages,the main functions of liquidated damages in our market include compensation,prevention,protection and encouragement.However its’ punitive function shouldn’t applied too much,because punitive liquidated damages is an exception,we must be careful that liquidated damages may easily become a “profiteering fine”.Besides,there is a great difference between liquidated damages and the assurance of debt.Liquidated damages doesn’t break through the range of the responsible property and subjects,and also doesn’t have the priority of compensation,so it can’t be classified as the assurance of debt.The debt protection policies include the creditor’s right of rescission and the creditor’s right of subtrigation,due to liquidated damages doesn’t break the “relativity” debt principle,involving only the two parties of the contract,so it is fundamentally different with these two debt protection policies.Judging from the classification of the guaranteed ways of debt,liquidated damages should be treated as compulsory measures backed by the force of the state,and it is a form of liability with the mandatory ability of enforcement.Inorder to ensure a fair market and protect the interests of debtors.it is very necessary to adjust the liquidated damages.Considering there is excessive interference by jurisdiction frequently on the “private domain “ and legitimate rights of market subjects,our country should refer to the German legislation,just allows to start the adjustment of liquidated damages through application of the parties.Except the actual losses,the two sides’ ability to contract,the extend of debtor’s faulty and the performance of the contract shall also be taken as the reference factors for the adjustment of liquidated damages.Because of the merchants’ trading experience and information acquirement ability,the adjustment of liquidated damages should focus more on the protection of vulnerable groups in contracts made by businessmen and other groups such as consumers.When the breach of contract occurs only after partial performance of the contract,the scope of compensation shall not include the part of the interest which has been fulfilled.Although,the 114 th article of our contract law stipulated that “too much high “ liquidated damages means over 30% higher than the loss.But the standards to adjust should not be limited to this number,according to different situations,judge may choose different but appropriate regulations.The adjustment of liquidated damages can not be prohibited by two sides before the breach of contract,the reason is that such legislation will be greatly advantageous to debtor,and it does not accord with mandatory characteristic of the liquidated damages liability.Finally,the range of authorization of adjustment can not be too large,Otherwise,it will be convenient for debtor to evade punishment,and it will also cause a great deal of applications,which will occupy too much judicial resources and drag judicial efficiency.Actually,since the two types of liquidated damages are both often contracted by the two sides,the adjustment of them has the suspicion of over interfering with the freedom of contract.Further more,compensatory liquidated damages can function as a certain limitation of liability,once adjusted,its’ function will be eliminated.When the parties apply for adjustment,they need to proof,then the simplify and convenient function of compensatory liquidated damages will also be eliminated.So the adjustment of both two types must be strict and careful,judge can not interfere excessively.The form of breach of contract is a summary of all kinds of breach,and it makes a great influence on the construction of system of liability in continental contract law system.The form of breach of contract mainly includes refusal performance,delay of performance,incomplete performance and performance default.In the situation of pure refusal performance and performance default,it is simple to apply liquidated damages,and the more complicated are the delay of performance and incomplete performance.First of all,if the liquidated damages is targeted at performance default and refusal performance,when the debtor occurs delay,the creditor may require the debtor continue to perform,but he can also choose to refuse the following performance,after the reasonable remind,and ask for relief of performance default.At this time,the performance default is caused by creditor,there is no reason to apply for liquidated damages,because it is targeted at performance default which must be caused by debtor.Of course,after the delay,if the following performance has translated into insignificant to significant,the creditor can refuse and request payment of liquidated damages.When the debtor constitutes incomplete performance,if the performance can not be corrected,the application of liquidated damages is still inappropriate,because such kind of liquidated damages is aimed at fully incomplete.If the incomplete performance causes the whole performance has no meanings,creditor can naturally apply for liquidated damages.on the other side,if the liquidated damages is only aimed at delay performance or incomplete performance,when the debtor falls into delay and the following is insignificant.After refusing,the creditor could just require the relief of performance default,but not delay of performance.After performance default,the debtor has chance to correct a,but if he still falls into delay,application of liquidated damages is also appropriate.Compensatory liquidated damages is commonly targeted at contract interest,but not the delay damages,so it is often in conflict with other liabilities.Punitive liquidated damages is basically allowed to be applied together with other liabilities,but compensatory liquidated damages is different.The creditor can only choose one to exercise between compensatory liquidated damages and compensation for damages or tort liability.The state that liquidated damages is prior is flawed,because there isno strict law says contractual content is prior to statutory.Besides,such legislation could provide more approaches to save the side suffers losses,protect his interest better.Compensatory liquidated damages and mandatory performance tend to point to the same interests,they can not be required in the same contract.But if compensatory damages is aimed at delay damage,then it will not conflict with mandatory performance.Liquidated damages and default deposit are often contracted together,if their nature are the same,for example,if both of them are compensatory,then they can’t be applied in the same contract too.Release deposit is usually effective before the contract is started to be fulfilled,and such release comes from the voluntary of parties,default is not existed,so release deposit is not in conflict with liquidated damages.The dissolution of contract does not mean that all the legal relations between the parties will be terminated,because they still have many follow-up matter to solve.Due to the dissolution is usually decided by the parties themselves,so it can not provide other relief for the loss,which is resulted from the invalid contract.As one of the “clearing and settlement clauses” stipulated in the 98 th article of contract law,liquidated damages can remain effective an be applied as liability for performance default after the breach of contract.