On The Positioning And Judicial Discretionary Reduction Of Punitive Liquidated Damages

Although the liquidated damage is one of the popular topics in the field of contract law which attracts lots of attentions and in-depth study both from academic research and legal practice,there still remains issues that have not yet been reached in consensus and one of which is the judicial discretionary reduction of punitive liquidated damages.There are no qualitative or distinguishing standards for punitive liquidated damages,nor is there any specific standard tailored for punitive liquidated damages regarding the judicial discretionary reduction under Chinese legislation.In the trial,the court or arbitral tribunal enjoys a greater discretion on the reduction of liquidated damages pursuant to rules of judicial reduction of liquidated damages as stipulated in Article 114 of the Contract Law and Article 29 of the Second Interpretation of the Contract Law,which leads to various judgment in practice,and some of them ignore or weaken the punitive function of liquidated damages agreed by the parties,and directly reduce the amount of liquidated damages basing on the amount of compensatory liquidated damages,thus undermining the parties' autonomy of will,and further prevent the realization of the function of pressure of urging contract performance and the function of punishment for improper performance of contract.How punitive liquidated damages should be applied and reduced to effectively exert its functions of pressure and punishment involve the defining of punitive liquidated damages,the distinguish of the difference between punitive liquidated damages and compensable liquidated damages,and the regularization of the application of each factor regarding the reduction of liquidated damages by courts or arbitral tribunal.Punitive liquidated damages has not been uniformly defined,and the “parallel responsibility theory” and “loss comparison theory” are more accepted by the persons in academic research and legal practice respectively.Although there is no wording like “punitive penalty” in Chinese legislation,from the “Economic Contract Law” to the “Contract Law” era,punitive liquidated damages can be traced.Not like the compensable liquidated damages,the punitive liquidated damages emphasize the pressure function of urging the performance of the contract,and it is an agreed payment between parties in addition to the compensation for damage,thus the occurrence of losses and damages are not required,but it is necessary for the breaching party to have the intention to breach the contract;and the punitive liquidated damages can also be used in combination with other forms of breach liability,such as damages and mandatory performance.Although the above differences exist,they are not exactly opposite.The liquidated damages are a product of party's autonomy of will,when the agreed amount of liquidated damages is “too much higher than” the actual loss and undermining the substantive justice,the judicial reduction should intervene through judicial power,but for punitive liquidated damages,judicial intervention should be cautious,and it is not appropriate to either take the actual losses as the sole standard,or adopt a fixed amount ratio into the consideration of judicial reduction.Instead,the punitive nature should be followed,on the circumstance the parties applying to reduce the liquidated damages which are too much higher than the actual losses,the flexible modes should be taken to get a comprehensive judgment of each factor,such as parties' faults,contract performance,actual losses(including expected benefits),parties' financial status,commercial entities,contract types,and other factors.Where the defaulting party proves that the amount of liquidated damages has reached an “excessively high” standard,a comprehensive consideration of factors for judicial discretionary reduction shall be undertaken to ensure that the amount upon reduction reamians punitive,and not equals to the amount of actual loss.