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I.Liquidated damages provisions of Anglo-American countries distinguished from that in China
Liquidated damages provisions in Anglo-American countries are different from penalty clauses.However，Chinese law does not recognise liquidated damages in the same way as in Anglo-American countries.Commentators have disputed about the nature of liquidated damages and whether it is a penalty or compensatory clause.There are different opinions about liquidated damages in the Chinese theoretical circle. But the general view seems to be that liquidated damages has both penalty and compensatory nature. The rules of our Chinese Law states that when a party who suffers loss different from the specified amount of liquidated damages， the parties may seek to either reduce or increase the specified amount of liquidated damages.
II.The specific provisions relating to liquidated damages under the Chinese Law
Clause 114 under the Contract Law provides that the parties may agree that if one party breaches the contract， it shall pay a certain sum of liquidated damages to the other party in light of the circumstances of the breach， and may also agree on a method for the calculation of the amount of compensation for the damages incurred as a result of the breach.
Where the amount of liquidated damages agreed upon is lower than the damages incurred， a party may petition the People’s Court or an arbitration institution to make an increase. Where the amount of liquidated damages agreed upon are significantly higher than the damages incurred，a party may petition the People’s Court or an arbitration institution to make an appropriate reduction.Where the parties agree upon breach of contract damages in respect to the delay in performance， the party in breach shall perform the obligations after paying the breach of contract damages.
The difference in requirements for the increase or reduction of liquidated damages are in line with the combined compensatory and penalty nature of liquidated damages under Chinese law. For example， it is only when the liquidated damages is excessively higher than the actual loss the party can seek to reduce the amount of liquidated damages， and the amount will be appropriately reduced only， which implies that the liquidated damages after the reduction may still be higher than the actual loss. There is no similar“excessive” and “appropriate” requirements for an application to increase the liquidated damages when it is serving the compensatory function. In our country，Article 112 under The General Rules of Civil Law provides that：The party that breaches a contract shall be liable for compensation equal to the losses consequently suffered by the other party.The parties may specify in a contract that if one party breaches the contract it shall pay the other party a certain amount of breach of contract damages； they may also specify in the contract the method of assessing the compensation for any losses resulting from a breach of contract.
III.The judicial practice in our country of liquidated damages
Because of the imperfect of legislation in our country in the past，the courts usually hold that the contract damages and the liquidated damages can be substituted.In other words， if the parties agreed upon the specific amount of the contract compensation in advance， no matter which kind of compensation is clearly written in the contract， they will all regard it as contract damages. In practice， the first thing that a breaching party would likely challenge with respect to the above-stated liquidated damages clause in litigation is the option of the buyer to resort to it. While a few courts have ruled that sophisticated parties may agree to optional liquidated damages clauses， the majority rule is that such clauses are unenforceable. Were the rule otherwise， the clause would be“invoked only as a penalty when the liquidated damages exceeded the actual damages.”（optional liquidated damages provisions have been struck down as they do not involve a reasonable attempt definitively to estimate the loss）. As a general rule， therefore， avoid using optional liquidated damages clauses.
Although this practice seemed to increasingly prevent the abuse of contract performance，it will confuse the contract damages and liquidated damages to some extent.Hence，it is obviously inappropriate.And with the development of Chinese legislation，The Interpretation on Several Issues Concerning the Application of the Contract Law （II） （“Interpretation”）issued in April 2009 provides some guidance concerning the adjustment of liquidated damages clause.It provides that if a party applies for an increase to the liquidated damages in accordance with Clause 114 of the Contract Law， the increased liquidated damages shall not exceed the actual loss， and no additional damages will be awarded after the increase to the liquidated damages.For any application to reduce the liquidated damages for the reason that the liquidated damages is excessively higher than the actual loss， the court will generally deem the liquidated damages as excessive if it is 30% or more higher than the actual loss.When considering an application for the reduction of liquidated damages， the court will base the adjustment on the actual loss， but shall also take into consideration factors such as the performance of contract， degree of fault of the parties concerned， and expected benefit. IV.Conclusions
In China，Our Chinese scholar Mr Shi holds that：The legislative spirit of the Article 112 under The General Rules of Civil Law and the Article 114 under the Contract Law seem to be the same. To avoid difficulties of liquidated damages amount and litigation， the parties reserve a certain amount of damages in advance which would be benefit for both parties. It can be argued that the liquidated damages under Chinese law provides less certainty as the amount of damages may be subject to adjustment， largely depending on the amount of actual loss resulting from the breach. Therefore， when dealing with liquidated damages in contract involving Anglo-American and Chinese parties， it is important to notice the difference in the concept of liquidated damages in these two different legal systems， understand what kind of liquidated damages clause you are committing to， and assess your risk exposure accordingly.
References：
[1]Shi Shangkuan.The general debt method：China University of Political Science and Law Press.Beijing，2000.
[2]Wang Limin.The new contract law studies：China Social Sciences Press.Beijing，2003.
[3]Wang Limin，Cui Jianyuan.Contract Law New Conditions：China University of Political Science and Law Press.Beijing，2000.
Liquidated damages provisions in Anglo-American countries are different from penalty clauses.However，Chinese law does not recognise liquidated damages in the same way as in Anglo-American countries.Commentators have disputed about the nature of liquidated damages and whether it is a penalty or compensatory clause.There are different opinions about liquidated damages in the Chinese theoretical circle. But the general view seems to be that liquidated damages has both penalty and compensatory nature. The rules of our Chinese Law states that when a party who suffers loss different from the specified amount of liquidated damages， the parties may seek to either reduce or increase the specified amount of liquidated damages.
II.The specific provisions relating to liquidated damages under the Chinese Law
Clause 114 under the Contract Law provides that the parties may agree that if one party breaches the contract， it shall pay a certain sum of liquidated damages to the other party in light of the circumstances of the breach， and may also agree on a method for the calculation of the amount of compensation for the damages incurred as a result of the breach.
Where the amount of liquidated damages agreed upon is lower than the damages incurred， a party may petition the People’s Court or an arbitration institution to make an increase. Where the amount of liquidated damages agreed upon are significantly higher than the damages incurred，a party may petition the People’s Court or an arbitration institution to make an appropriate reduction.Where the parties agree upon breach of contract damages in respect to the delay in performance， the party in breach shall perform the obligations after paying the breach of contract damages.
The difference in requirements for the increase or reduction of liquidated damages are in line with the combined compensatory and penalty nature of liquidated damages under Chinese law. For example， it is only when the liquidated damages is excessively higher than the actual loss the party can seek to reduce the amount of liquidated damages， and the amount will be appropriately reduced only， which implies that the liquidated damages after the reduction may still be higher than the actual loss. There is no similar“excessive” and “appropriate” requirements for an application to increase the liquidated damages when it is serving the compensatory function. In our country，Article 112 under The General Rules of Civil Law provides that：The party that breaches a contract shall be liable for compensation equal to the losses consequently suffered by the other party.The parties may specify in a contract that if one party breaches the contract it shall pay the other party a certain amount of breach of contract damages； they may also specify in the contract the method of assessing the compensation for any losses resulting from a breach of contract.
III.The judicial practice in our country of liquidated damages
Because of the imperfect of legislation in our country in the past，the courts usually hold that the contract damages and the liquidated damages can be substituted.In other words， if the parties agreed upon the specific amount of the contract compensation in advance， no matter which kind of compensation is clearly written in the contract， they will all regard it as contract damages. In practice， the first thing that a breaching party would likely challenge with respect to the above-stated liquidated damages clause in litigation is the option of the buyer to resort to it. While a few courts have ruled that sophisticated parties may agree to optional liquidated damages clauses， the majority rule is that such clauses are unenforceable. Were the rule otherwise， the clause would be“invoked only as a penalty when the liquidated damages exceeded the actual damages.”（optional liquidated damages provisions have been struck down as they do not involve a reasonable attempt definitively to estimate the loss）. As a general rule， therefore， avoid using optional liquidated damages clauses.
Although this practice seemed to increasingly prevent the abuse of contract performance，it will confuse the contract damages and liquidated damages to some extent.Hence，it is obviously inappropriate.And with the development of Chinese legislation，The Interpretation on Several Issues Concerning the Application of the Contract Law （II） （“Interpretation”）issued in April 2009 provides some guidance concerning the adjustment of liquidated damages clause.It provides that if a party applies for an increase to the liquidated damages in accordance with Clause 114 of the Contract Law， the increased liquidated damages shall not exceed the actual loss， and no additional damages will be awarded after the increase to the liquidated damages.For any application to reduce the liquidated damages for the reason that the liquidated damages is excessively higher than the actual loss， the court will generally deem the liquidated damages as excessive if it is 30% or more higher than the actual loss.When considering an application for the reduction of liquidated damages， the court will base the adjustment on the actual loss， but shall also take into consideration factors such as the performance of contract， degree of fault of the parties concerned， and expected benefit. IV.Conclusions
In China，Our Chinese scholar Mr Shi holds that：The legislative spirit of the Article 112 under The General Rules of Civil Law and the Article 114 under the Contract Law seem to be the same. To avoid difficulties of liquidated damages amount and litigation， the parties reserve a certain amount of damages in advance which would be benefit for both parties. It can be argued that the liquidated damages under Chinese law provides less certainty as the amount of damages may be subject to adjustment， largely depending on the amount of actual loss resulting from the breach. Therefore， when dealing with liquidated damages in contract involving Anglo-American and Chinese parties， it is important to notice the difference in the concept of liquidated damages in these two different legal systems， understand what kind of liquidated damages clause you are committing to， and assess your risk exposure accordingly.
References：
[1]Shi Shangkuan.The general debt method：China University of Political Science and Law Press.Beijing，2000.
[2]Wang Limin.The new contract law studies：China Social Sciences Press.Beijing，2003.
[3]Wang Limin，Cui Jianyuan.Contract Law New Conditions：China University of Political Science and Law Press.Beijing，2000.