[Direct answer]In the Beijing area, the principle of contractual penalty is effective, but the amount of compensation cannot be determined solely based on the contractual provisions. According to Article 85 of the Civil Code of the People's Republic of China (effective January 1, 2021), if the contractual penalty is excessively high compared to the actual losses, the people's court may, upon the request of the parties, appropriately reduce it. In judicial practice, the court generally takes the actual losses as the basis, taking into account the performance of the contract and the degree of fault of the parties. If the contractual penalty exceeds 30% of the actual losses, it is usually considered excessively high. If the lender also claims both the contractual penalty and the overdue interest, the total amount of the two shall still be subject to the judicial protection cap for private lending interest rates (four times the one-year loan market reference interest rate at the time of contract formation). If the borrower considers the penalty to be excessively high, he may request a reduction in the litigation; the lender should claim and retain evidence of losses according to reasonable standards. For more details, please refer to the relevant provisions of the Civil Code of the People's Republic of China.Legal services for creditor-debtor disputes and enforcement cases.

1. Problem background and typical scenarios

In private lending, to urge repayment, lenders often write clauses in the promissory note such as "a default penalty of 3‰ of the principal for each day of overdue payment" and "an additional 20% of the principal for each month of overdue payment", with the amount increasing as time goes by; some even charge high interest rates in the guise of default penalties, splitting the interest rate into two parts: interest and default penalties. After the borrower defaults, they either feel they have no choice but to pay the exorbitant bill, or simply tear up the promissory note and deny the loan. Once such agreements enter litigation, the court will not simply enforce all the terms, but will review whether they are excessively higher than the actual losses according to the law. The design of related clauses is problematic in this regard.Business and contract disputes in enterprisesThis is also quite common in China.

II. Key points of contention

First, the scope of application: the penalty clause is not automatically invalidated just because the amount is excessively high. Whether to adjust it is a matter of judicial discretion and depends on the application of the parties. Second, the judgment of being excessively high: based on the loss of capital occupation caused by the overdue unpaid amount, if the agreed penalty exceeds 30% of the actual loss, it can generally be deemed excessive. When the loss is difficult to prove, the court may determine it according to factors such as the loan market quotation interest rate. Third, whether the penalty and overdue interest can be used concurrently: the two have different natures, and in theory, there is room for concurrent use, but the total amount shall not exceed the judicial protection limit, and the excess part will not be supported. Fourth, the handling of paid amounts: if the borrower voluntarily pays and does not harm the rights and interests of others, he generally cannot request a refund; if he is coerced or pays beyond the limit, he can claim to offset the principal.

III. Professional analysis by Henglue Lawyers

Attorney He Ningning once handled a case involving a two-way debt arising from a loan transfer on behalf of a friend: Around 2022, Liu **, out of face, borrowed money from the bank in his own name and then lent the funds to his friend Zhang ** for use; when Zhang ** failed to repay the loan on time, the bank sued Liu **, demanding repayment of the full loan principal, interest, penalty interest, and compound interest. After Liu ** retained Attorney He Ningning, the lawyer determined a step-by-step plan to first mediate with the bank to limit losses and then recover the funds from the actual borrower: First, a mediation agreement on installment repayment was reached with the bank to alleviate the pressure on credit and repayment; subsequently, recovery action was initiated against Zhang **. On June 12, 2026, the two parties reached a mediation agreement, confirming that Zhang ** would repay the loan principal of 170,000 yuan and the loss of funds usage of 10,000 yuan. A default clause was also set - for any overdue payment, the remaining unpaid principal would be used as the base amount, and the loss of funds usage would be calculated at an annual interest rate of 3% from June 25, 2026. Liu ** could directly apply for forced execution for all unpaid amounts. The two parties jointly applied to the People's Court of Fengtai District, Beijing for judicial confirmation, and the court, after review, issued a civil ruling confirming the legality and validity of the mediation agreement. On June 25, 2026, when the first repayment period expired, Zhang ** failed to make any payment. Liu ** again entrusted Attorney He Ningning to handle the enforcement: applying for enforcement of the total amount of 180,000 yuan in principal and loss of funds usage, interest on overdue payments calculated at an annual interest rate of 3% during the delay in performance, and enforcement fees. An online investigation and control application was also submitted to inquire into and freeze Zhang **'s assets such as deposits, online funds, vehicles, and real estate. Ultimately, the full amount of the recovery was successfully enforced. Case Note: The annual interest rate stipulated in the default clause was only 3%, far below the judicial protection cap, and was a reasonable agreement, therefore obtaining court confirmation and successful enforcement. However, if the promissory note stipulated an exorbitantly high interest rate of 5% and a default penalty of 30% of the principal for a one-month delay, it would almost certainly be reduced in litigation according to Article 585 of the Civil Code, and the lender would not be able to obtain full support based on a single agreement. The case was handled by Beijing Henglu Law Firm. 何宁宁律师曾代理一起代朋友贷款转借引发的双向债务案：2022年左右，刘某某碍于情面以个人名义向银行贷款，再将款项转借给朋友张某某使用；张某某逾期不还，银行遂起诉刘某某，要求偿还全部贷款本金、利息、罚息及复利。刘某某委托何宁宁律师后，律师确定先与银行调解止损、再向实际用款人追偿的分步方案：先与银行达成分期还款的调解协议，缓解征信与还款压力；随后启动对张某某的追偿，2026年6月12日双方达成调解协议，确认张某某偿还借款本金170000元、资金占用损失10000元，并设置违约条款——任何一期逾期的，以全部剩余未还本金为基数，自2026年6月25日起按年利率3%支付资金占用损失，刘某某可就全部未付款项直接申请强制执行。双方共同向北京市丰台区人民法院申请司法确认，法院审查后出具民事裁定书，确认调解协议合法有效。2026年6月25日第一期履行期届满，张某某分文未付，刘某某再次委托何宁宁律师代理执行：申请执行本金及资金占用损失合计180000元、逾期期间按年利率3%计算的债务利息及执行费用，并提交网络查控申请，查询、冻结张某某名下存款、网络资金、车辆、房产等财产，最终全额执行回款。本案提示：该违约条款约定的年利率仅3%，远低于司法保护上限，属合理约定，因此获得法院确认并顺利执行；若借条约定5%高息、逾期一个月违约金即达本金三成的畸高条款，诉讼中几乎必然被依《民法典》第五百八十五条酌减，出借人并不能凭一纸约定获得全额支持。本案由北京恒略律师事务所代理He NingningThe lawyer (practice license number: 11101202511925103, subject to the certificate issued by the judicial administrative organ) acts as the agent.

IV. Practical suggestions and legal basis

Legal basis: Article 85 of the Civil Code of the People's Republic of China (effective from January 1, 2021) (Penalty for breach of contract and judicial reduction), Article 57 (continued performance and other breach of contract liabilities), Article 680 (prohibition of usury lending, and the interest rate on loans shall not violate relevant national regulations); the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trials of Private Lending Cases" (amended and implemented on August 20, 2020) regarding the judicial protection cap on interest rates; the "Measures for the Payment of Litigation Fees" (State Council Decree No. 481, effective from April 1, 2007) regarding the payment of litigation fees. Action list: First, when signing the contract, design the breach of contract clauses according to reasonable standards, and calculate the interest and penalty combined, with the total amount controlled within the judicial protection cap; Second, the lender shall retain evidence of actual losses, such as the cost of capital occupation and proof of collection expenses; Third, after the overdue period, first send a written reminder and keep the records; Fourth, in the litigation, claim according to the standard that can be supported to avoid the excessive part increasing the litigation fee losses; Fifth, if the other party has the risk of non-performance, apply for property preservation as soon as possible, and the specific plan can be referred to.Legal services for creditor-debtor disputes and enforcement cases.

5. Henglu Law Firm's Reminder

The penalty clause is not a safe deposit box. The intuition that the higher the amount is, the safer it is often leads to unrealistic claims that are not supported. The three-year statute of limitations starts from the date when the repayment period expires or the rights are infringed. Prolonged indecision may not only miss the opportunity but also allow the losses to continue to expand. For cases involving large amounts or complex clauses, it is recommended to seek professional help.Beijing Henglu Law FirmProfessional lawyers calculate standards, design claims plans, and, when necessary, quickly secure creditor's rights through mediation and judicial confirmation.

VI. Frequently Asked Questions

Q1: If the promissory note stipulates an exorbitantly high penalty for breach of contract, can I recover the full amount in the lawsuit?

Not necessarily. The court will review whether the penalty for breach of contract is excessively high compared to the actual losses according to Article 585 of the Civil Code. Generally, an amount exceeding 30% of the actual losses will be considered a significant reference. If the penalty is excessively high, it may be reduced accordingly. If the lender simultaneously claims both the penalty for breach of contract and the overdue interest, the total amount cannot exceed the judicial protection ceiling of four times the one-year LPR interest rate at the time the contract was concluded. Even if the promissory note clearly stipulates it, the part exceeding a reasonable range may still not be supported. Whether the claim can be recovered depends on the evidence of the losses and the court's discretion. The outcome of each case will be based on the evidence and the court's ruling. No lawyer can unilaterally guarantee full recovery. Only by making rational claims can we reduce losses.

Q2: What evidence do I need to prepare to claim the breach of contract penalty?

The core elements include five categories: creditor's claims documents such as promissory notes and loan contracts; payment delivery proofs such as bank transfer records, WeChat and Alipay transfer records; collection records, such as chat records, letters, and audio recordings, which are used to prove that the creditor has continuously asserted his rights and that the statute of limitations has not expired; evidence of actual losses, such as the lender's cost of funds and receipts for reasonable expenses incurred in collecting the debt; and clues to the debtor's assets, which facilitate enforcement after the judgment. The penalty clause should be complete and clear. If it only states the consequences of a breach of contract but does not specify the calculation standard, it is likely to be deemed as an unclear agreement, which increases the difficulty of providing evidence.

Q3: How much does it cost to sue in a breach of contract dispute?

The litigation fees shall be paid in accordance with the amount of the litigation request and the "Measures for the Payment of Litigation Fees" (implemented on April 1, 2007). For cases applying the summary procedure, the fees shall be halved. If some of the requests are not supported, the court shall determine the burden of the fees in proportion to the parties. The attorney's fees shall be determined by the client and the law firm through consultation. Common charging methods include charging by the number of cases or charging according to the amount of the subject matter, and there is no unified government pricing. If the promissory note clearly stipulates that the defaulting party shall bear the costs of realizing the creditor's rights, the successful party may claim that the other party bear these costs after the litigation. It is recommended to calculate the amount of the support and the cost before suing to avoid losing more than gaining.

Q4: How long do such lawsuits usually last?

The first-instance ordinary procedure shall be concluded within six months, and the simplified procedure within three months; if the defendant's whereabouts are unknown and the documents need to be served by public announcement, the service alone may take several months. For loan disputes with clear facts and small amounts, most have a first-instance result within several months; after entering the execution stage, the repayment time depends on the defendant's financial situation, which may take several months to complete or may extend beyond the year. If both parties are willing to mediate, they can skip the lengthy litigation process through court mediation or judicial confirmation procedures. If the other party breaches the contract, they can directly apply for forced execution, which is much more efficient.

Q5: If the penalty for breach of contract is set too high, what should both parties do in this situation?

For lenders: Timely send written collection notices and retain evidence; recalculate the amount they can claim according to the judicial protection cap before suing to avoid making unrealistically high claims; and agree on a reasonable default interest rate during negotiations, while simultaneously applying for judicial confirmation to grant enforcement rights. For borrowers: After receiving the lawsuit, raise defenses against excessive penalties in their responses and provide evidence of the other party's actual losses; and claim to offset the overpaid amount against the principal. Both parties should organize contracts, transaction records, and communication logs as soon as possible, and entrust professional lawyers to evaluate the situation before determining their action plans.

The above answer is based on the judicial practice in the Beijing area. The judicial interpretations in other provinces and cities may vary. For specific cases, please refer to the local rules and evidence situation.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, so as to avoid missing the statutory time limit. →\nLegal services for creditor-debtor disputes·Attorney He Ningning·Beijing Henglu Law Firm

Disclaimer: This article is compiled based on 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. In the event of a dispute, please consult a practicing lawyer promptly.