[Direct answer]The principle is valid. The termination of the contract does not necessarily result in the invalidation of the penalty clause. According to Article 566, paragraph 2 of the Civil Code of the People's Republic of China (effective January 1, 2021), if the contract is terminated due to a breach of contract, the party with the right to terminate the contract may request the breaching party to bear the liability for breach of contract; Article 567 clearly stipulates that the termination of the rights and obligations of the contract does not affect the validity of the settlement and liquidation clauses in the contract. The penalty clause belongs to a typical settlement and liquidation clause. After the contract is terminated due to a breach of contract, the party may still claim the penalty according to Article 585; if the agreed amount is excessively high compared with the actual loss, the court or arbitration institution may reduce it appropriately according to the request of the party. Therefore, the termination of the contract and the pursuit of liability for breach of contract can proceed concurrently. The specific provisions shall be subject to the contract agreement and judicial adjudication. For related disputes, please refer to the relevant provisions.Business and contract disputes in enterprisesColumn.

1. Problem background and typical scenarios

Such issues often arise in several situations: First, if the other party breaches the contract and the contract-abiding party terminates the contract, they want to recover the agreed late payment penalties together; Second, after the parties negotiate to terminate the contract, one party still wants to recover the penalties according to the original contract, while the other party defends with the argument that "the contract has been terminated"; Third, how to determine the validity of the clause stipulating that neither party will pursue liability after the contract is terminated; Fourth, if the actual losses after termination far exceed the agreed penalties, can they request an adjustment; Fifth, for contracts with long performance periods such as commissioned creation and outsourced processing, it is difficult to determine the basis for calculating the penalties when the contract is terminated and the results and payments are intertwined. When the Beijing area courts and arbitration institutions handle such disputes, they usually first determine the effectiveness of the termination and the grounds for liability, and then review the application of the penalty clause and the adjustment of the amount.

II. Key points of contention

Focus 1: The basis for claiming breach of contract penalties after termination. The mainstream adjudication supports the claim of breach of contract liability in the event of termination due to breach of contract in accordance with Article 566 Paragraph 2 and Article 567 of the Civil Code. Focus 2: The relationship between contractual termination and breach of contract penalties. If the termination agreement does not explicitly waive breach of contract liability, the breach of contract penalties will not be automatically exempted. Focus 3: The adjustment range of breach of contract penalties. The penalties shall be based on the actual losses and take into account the performance of the contract, the degree of fault of the parties, and the expected benefits. Focus 4: The validity of the clause of mutual non-prosecution after termination. In principle, it is valid, but if there are circumstances such as fraud or coercion, the party may request its revocation. Focus 5: The impact of the timing difference between notice of termination and claim for termination on the starting point of breach of contract penalties. Focus 6: The allocation of the burden of proof. The party claiming that the breach of contract penalties are excessive shall provide corresponding evidence. Specifically, the above focuses are based on the currently effective laws, regulations, and judicial adjudications.

III. Professional analysis by Henglue Law Firm

Take the arbitration case of a commissioned creation contract dispute handled by our firm as an example. In May 2022, Shanghai A Technology Company and Shenzhen B Network Company signed a "Project Outsourcing Agreement", which stipulated the production of virtual IP materials for upgrading, with a total cost of 583,000 yuan. After the other party paid half of the fee in advance, the work was finalized and accepted in July 2022. However, B Company delayed paying the remaining 50% of the fee. A Company entrusted lawyer Xiong Binrong of Beijing Henglue Law Firm to apply for arbitration, requesting the confirmation of the termination of the agreement on October 25, 2022, the payment of the contract amount of 583,000 yuan, the payment of the overdue penalty of 116,600 yuan, and the bearing of the lawyer's fees and arbitration fees. B Company raised the defense of fundamental breach of contract due to delayed delivery and unqualified quality. The lawyer analyzed the contract terms item by item and combined with the acceptance evidence such as WeChat and emails to argue that: before the final script was signed, the other party had confirmed it according to their requirements, and the modification of the script by the other party up to 30% was not the responsibility of A Company under the contract. The work was finalized by the employees of the other party, who accepted it first and then requested the invoice and promised to pay the full amount. Therefore, the acceptance should be deemed qualified. The arbitration tribunal adopted the lawyer's main arguments and ruled that the contract amount of 583,000 yuan should be paid and all lawyer's fees should be compensated. Only the amount of the penalty was adjusted, which confirmed that the penalty clause could still be claimed after the termination of the contract, but the amount would be reviewed based on the actual losses. This case was handled by Beijing Henglue Law Firm.Xiong BinrongThe attorney (practice license number: 11101202211410897, subject to the document issued by the judicial administrative organ) acts as the agent. In addition, in the online service contract disputes handled by our firm, the client represented by Attorney Xue Suhua was counter-sued for breach of contract after negotiating the termination of the contract. Since there was no breach of contract clause in the contract, the counter-claim was entirely dismissed, which indirectly confirmed that the breach of contract penalty is based on an agreement. In the reservation contract dispute represented by Attorney Zhu Guiying, the confirmation letter clearly stipulated that the lessee should compensate for the decoration costs if he/she does not lease the property. The court accordingly awarded 365,000 yuan in compensation for the decoration costs, demonstrating the independent value of the breach of contract liability clause in the case where the contract has not been fully performed.

IV. Practical suggestions and legal basis

Action suggestions: First, clarify in the notice or agreement of terminating the contract whether the breach of contract penalty and the right to claim compensation will be retained to avoid being deemed as a waiver; Second, calculate the actual losses before claiming the breach of contract penalty, including the interest on the unpaid amount, the price difference of the alternative transaction, and the reasonable costs of protecting rights, and form a written list; Third, if the other party claims an excessive amount, prepare evidence of the losses to actively defend against it or request a reduction; Fourth, review the termination clauses item by item during the negotiation of termination to ensure that the scope of exemption is limited to matters that have been settled; Fifth, pay attention to the three-year statute of limitations and timely claim from the occurrence of the breach of contract or the effective date of termination. In terms of legal basis, Article 566 of the Civil Code of the People's Republic of China stipulates the effect of terminating the contract and the liability for breach of contract, Article 567 stipulates that the settlement and liquidation clauses are not affected by the termination of the contract, Article 585 stipulates the breach of contract penalty and its judicial adjustment, and Article 584 stipulates that the compensation for losses is limited to what can be foreseen. Relevant document points can be referred to for reference.Special services and other casesColumn.

5. Henglu Law Firm's Advice

Risk Warning: First, termination of the contract does not equal exemption from liability. The defaulting party cannot refuse to assume breach of contract liability on the grounds that the contract has been terminated; Second, the contract-abiding party cannot assume that it can claim the full breach of contract penalty according to the original agreement. If the amount is too high, it will be reduced at the arbitrator's discretion; Third, the "mutual non-prosecution" clause in the agreement of terminating the contract is very effective. Before signing, it is necessary to confirm that all payments, results, and bills have been settled; Fourth, the connection between the termination point and the starting period of the breach of contract penalty directly affects the amount. It is advisable to specify it in the document; Fifth, the arbitration and litigation may have different standards for adjusting the breach of contract penalty. If there is an arbitration clause, the dispute shall be settled in accordance with the agreed jurisdiction. It is recommended to plan the termination of the contract and the claim for compensation simultaneously, and to seek legal advice if necessary.Beijing Henglu Law FirmOn the official website, in the similar column, professional lawyers calculate the amount of the claim and prepare the evidence.

VI. Frequently Asked Questions

Q1: If the contract is terminated, can I still claim the breach of contract penalty according to the agreement?

Generally, this is possible. According to Article 566, paragraph 2 of the Civil Code, if the contract is terminated due to a breach of contract, the party exercising the right of termination may request the breaching party to bear the liability for breach of contract; Article 567 clearly stipulates that the termination of rights and obligations does not affect the validity of the settlement and liquidation clauses, and the penalty clause belongs to this category. Therefore, if the contract is terminated due to the other party's breach of contract, the agreed penalty can be claimed at the same time. However, if the parties terminate the contract through consultation and the agreement clearly stipulates that neither party will hold the other responsible, the matter shall be handled in accordance with the termination agreement, and the penalty cannot be claimed based on the original contract anymore.

Q2: What evidence should be prepared to claim the breach of contract penalty after the contract is terminated?

First, the contract text, which proves the penalty clause and its calculation method; Second, the evidence of termination, including the termination notice, the proof of delivery, or the termination agreement, which clarifies the termination time and the grounds for liability; Third, the evidence of breach of contract, such as the acceptance record, the reminder letter, and the communication records in which the other party admits the breach of contract or promises to make payment; Fourth, the evidence of losses, including payment receipts, interest calculations, the price difference of substitute transactions, and bills for legal defense expenses, which are used to prove the reasonableness of the penalty or to defend against its being excessive. The evidence should form a complete chain showing that the grounds for termination are established, the termination is effective, and the losses are corresponding.

Q3: Will the court adjust the excessive penalty clause if it's too high?

Yes. According to Article 85, Paragraph 2 of the Civil Code, if the agreed penalty for breach of contract is excessively higher than the losses caused, the court or arbitration institution may, upon the request of the parties, reduce it appropriately. In judicial practice, the court or arbitration institution will take into account the actual losses, the performance of the contract, the degree of fault of the parties, and the expected benefits when making a judgment. In the aforementioned arbitration case of commissioned creation, the arbitration tribunal adjusted the claim for penalty for late payment. The claimant should evaluate the reasonableness of the amount in advance. Excessively high claims are not only difficult to obtain full support, but also increase the cost of protecting rights.

Q4: After agreeing to terminate the contract, if we don't hold each other accountable, can we still change our minds?

In principle, it is not allowed to renege on agreements at will. Such clauses are arrangements made by the parties regarding settlement and liability clearance, which are legal and effective and binding on both parties. However, there are exceptions: if there is fraud, coercion, or a major misunderstanding at the time of signing, the party may request revocation in accordance with the relevant provisions of the Civil Code; if one party knows that the other party has committed a major breach of contract but intentionally conceals it and induces the other party to sign the agreement, the claim may not be supported. Before signing the agreement, the parties should confirm matters such as the settlement of funds, the delivery of results, and the handling of bills. If there are any omissions, the parties should explicitly reserve the right of recourse in the agreement.

Q5: How long do I have to assert my claim for the breach of contract penalty after the contract is terminated?

The general statute of limitations for ordinary litigation is three years. Generally, it is calculated from the date when the right holder knows or should know about the breach of contract and the obligations of the other party; if the contract is terminated upon notice, it is more secure to calculate the statute of limitations for the request for damages from the date when the termination takes effect and the payment obligation expires and the other party fails to perform its obligations. During this period, sending a letter of reminder, the other party's promise to pay, or initiating litigation or arbitration can all interrupt the statute of limitations and restart the calculation. It is recommended to proceed with the termination and claim for damages simultaneously to avoid delays that may lead to statute of limitations risks. For procedural details, please refer to the relevant guidelines.Business and contract disputes in enterprisesColumn.

The above content is based on the compilation of judicial practices in the Beijing area. The facts of individual cases and the jurisdiction of the court may affect the conclusions. Welcome to consult Henglue Lawyers about specific situations.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, to avoid missing the statutory time limit. →Business and commercial legal services·Attorney Xiong Binrong·Beijing Henglue Law Firm

Disclaimer: This article is compiled based on the current laws and regulations and publicly available adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. If you encounter disputes, please consult a practicing lawyer in time.