[Direct answer]When amending the provisions on breach of contract liability, there are four key points to focus on: First, the circumstances of breach of contract should be clearly listed, with different responsibilities corresponding to late payment, late delivery, and quality non-compliance; Second, the penalty for breach of contract should be set within a reasonable range. If the penalty is excessively high compared to the actual losses, the court may reduce it upon request according to Article 85 of the Civil Code, and setting an unrealistically high figure serves no practical purpose; Third, the scope of compensation should be fully covered, including direct losses and reasonable legal fees, preservation fees, etc., and it should be clearly stipulated that the breaching party shall bear the responsibility; Fourth, we should be vigilant against clauses exempting liability and granting the right of interpretation. Clauses exempting liability for personal injury and intentional or gross negligence causing property losses are invalid according to Article 506. After amending the provisions, we should simultaneously check the payment milestones and acceptance standards to ensure that the circumstances of breach of contract can be identified and evidenced, and the relevant services can be implemented accordingly.Legal services for corporate contract disputes.

I. Legal basis and interpretation of provisions

1. Article 577 of the Civil Code of the People's Republic of China (effective January 1, 2021)

If a party fails to perform its contractual obligations or performs them in a manner inconsistent with the contract, it shall bear contractual liabilities such as continuing to perform the contract, taking remedial measures, or compensating for losses. This is the ultimate basis for contractual liabilities: even if the contract does not stipulate a penalty for breach of contract, the party in compliance can still claim compensation for losses. The significance of reviewing the contract lies in the fact that the breach of contract clause is not the simpler the better, but it is necessary to clearly stipulate the scope of losses, the calculation method, and the triggering point, so as to avoid being passive when disputes arise and having to rely solely on general provisions or being at a disadvantage in proving losses.

2. Article 85 of the Civil Code of the People's Republic of China (effective January 1, 2021)

The parties may agree on a penalty for breach of contract or on the method of calculating the amount of compensation for losses; if the agreed penalty is lower than the actual losses caused, the court may increase it at the request of the parties; if it is excessively higher than the actual losses caused, the court may reduce it appropriately at the request of the parties; where the parties agree on a penalty for delay in performance, the party in breach shall still perform the obligation after paying the penalty. When amending the clauses, the following principles should be observed: set a proportion or amount based on foreseeable losses, and at the same time, reserve the arrangement for proving the losses that may occur, so that the clauses can stand up in litigation.

3. The interpretation of the case by the actual adjudicators

The court adjusts the liquidated damages based on the actual losses, taking into account the performance of the contract, the degree of the parties' fault, and the expected benefits. In practice, the court usually takes 30% of the losses as the reference line for "excessively high". However, in fields with higher habitual profits such as finance and commerce, there may be different standards. For legal fees and other protection costs, if there are clear provisions in the contract, they will be supported according to the contract; if there are no provisions, they will not be supported in principle. For the agreed penalty for late payment of 5‰ per day (about 18% annualized), most courts will respect it unless there are special circumstances. When reviewing the contract, these three standards can be used to predict the stability of the clauses and avoid signing clauses that seem intimidating but are weakened in litigation.

II. Henglue Law Firm's Real Cases (Detailed Review)

Review of the case:On May 12, 2022, Shanghai A Technology Company and Shenzhen B Network Company signed a "Project Outsourcing Agreement", stipulating that A Company would complete the production of the first episode of G Virtual IP materials upgrade, with a cost of 583,000 yuan (including tax). The production would commence after receiving the advance payment, with a completion period of approximately six weeks. After the contract was signed, B Company paid an advance of 291,500 yuan. A Company finalized the version on July 16, 2022, and passed the acceptance on July 20, but B Company delayed paying the remaining 50% of the payment. After unsuccessful negotiations, A Company entrusted Beijing Henglu Law Firm to handle the matter.Xiong BinrongThe lawyer applied for arbitration, requesting that the agreement be confirmed as unilaterally terminated by Company B on October 25, 2022, that Company B pay the contract amount of 583,000 yuan and the default penalty of 116,600 yuan for late payment, and that Company B bear the arbitration fees and attorney's fees.

The focus of the controversy:First, whether the work has been accepted and the quality meets the standards, and whether Company B can refuse to pay all the fees on this basis; Second, the responsibility for the delay caused by Company B's modification of 30% of the production process; Third, whether the claims for the breach of contract penalty and attorney's fees can be supported.

Our position and the position of the other party are as follows:Company A claims that the work has been created and modified according to the other party's requirements and has been accepted as qualified. Company B should pay the contract price, the breach of contract penalty, and the attorney's fees in accordance with the agreement. Company B, based on Article 6.3 of the agreement, which states that "whether the standard is met shall be determined by Party A's reference quality", argues that Company A's delayed delivery and non-compliance with quality standards constitute a fundamental breach of contract, and that it has the right to terminate the contract without paying any fees.

Attorney's Strategy and Legal Opinions:Attorney Xiong Binrong analyzed the contract clause by clause and studied the WeChat records, arguing that: According to Clauses 1.2 and 2.9, the final script had been determined in accordance with Company B's requirements before the contract was signed, and Company B was not allowed to arbitrarily change the confirmed requirements. The delay caused by its 30% modification should be borne by itself. Each step of the work was advanced only after being confirmed by Company B. Its employees proactively finalized the version, conducted acceptance before payment, promised to pay the full amount, and required the mailing of the final invoice. The WeChat and email confirmations satisfied the written acceptance conditions, so the acceptance should be deemed valid. Company B's refusal to accept the work and its hiring of a third party cannot exempt it from its payment obligation. Regarding the penalty clause, the attorney claimed 116,600 yuan in accordance with the contract and prepared a statement of losses for review and possible reduction.

The court's reasoning and case handling results:The arbitration tribunal adopted the lawyer's main arguments and determined that the work was accepted as qualified and the payment conditions were met, so B Company's unilateral termination was unfounded. The claim for the penalty for late payment was adjusted, and the final ruling required B Company to pay 583,000 yuan of the contract amount and compensate A Company for all its legal fees. The arbitration fee of 30,366 yuan was borne by B Company for 25,366 yuan and by A Company for only 5,000 yuan. This case precisely corresponds to the two key points of reviewing the breach of contract liability clauses: writing the acceptance standard as "based on Party A's reference quality" in a unilaterally interpreted clause may lead to hidden risks of refusal to pay; while the provision of compensation for legal fees allows the party in compliance to fully recover the cost of protecting its rights.

This case is handled by Beijing Henglu Law Firm.Xiong BinrongThe attorney (practice license number: 11101202211410897, subject to the document issued by the judicial administrative organ) acts as the agent.

III. Frequently Asked Questions

Q1: What percentage of the contractual penalty is more appropriate to stipulate?

Based on the actual losses that may be caused, the penalty is usually set at 10% to 20% of the contract amount, or at 3% to 5% of the daily amount as agreed for the liability for delay, and then the annualized level is calculated based on the performance period. Agreements that clearly exceed the loss cap are easily subject to reduction in litigation, and their deterrent significance is greater than their actual recovery significance. After setting the penalty, the party should assess its own ability to provide evidence. For contracts where the losses can be quantified, the party should dare to set a high penalty; for contracts where the losses are difficult to quantify, the party should combine it with a clause on the calculation method of compensation.

Q2: If the court reduces the penalty for breach of contract, can it still be recovered?

The reduction of the contractual penalty is subject to the request of the party concerned, and the court will not take the initiative to reduce it on its own authority. For the party fulfilling the contract, the key point is to provide evidence of the losses: the more sufficient the evidence of the difference in price of alternative purchases, financing costs, losses due to work stoppages, and profits from resales is, the smaller the room for reduction will be; if the other party does not request a reduction, the original agreement can be fully supported. Therefore, it is more effective to fix the evidence of losses during the performance of the contract than to strive for it afterwards.

Q3: Can we really recover the attorney's fees by including them in the breach of contract clause?

Yes. If the contract explicitly stipulates that the breaching party shall bear the attorney's fees and other expenses incurred in enforcing the creditor's rights, such claims are usually supported with the power of attorney and invoices, and in this case, the plaintiff was compensated for all the attorney's fees. If there is no such stipulation, each party shall bear its own expenses in principle. When drafting the contract, it should be clearly stated that "the reasonable expenses for safeguarding rights, such as attorney's fees, preservation fees, notarization fees, and travel expenses, shall be borne by the breaching party". The more specific the scope is described, the easier it will be to obtain support from the court.

Q4: What should I do if the other party's template states that the acceptance criteria are "subject to the unilateral determination of Party A"?

It should be changed to objective and verifiable standards, such as third-party inspection conclusions, written receipts from both parties, or specified national or industry standards; at the same time, add an objection period and a rule that the acceptance is deemed to have taken place if no objections are raised within the agreed timeframe. In this case, the clause "The reference quality shall prevail" was the source of the refusal to pay defense. It was only by leaving traces of performance that the situation was reversed. It's much more efficient to fix problems before they happen than to fix them afterwards.

Q5: Is it reasonable to charge a penalty of 0.05% of the total amount per day for late payments?

With an annualized rate of about 18%, most courts consider it an acceptable range and support it. When the other party claims it is too high, the court usually measures it based on the actual financial losses. Reviewing the clauses of one's own side can use this standard to assess the stability, so that it won't be adjusted to be too high, and it can also form substantive pressure. In bilateral contracts, it is also necessary to check whether the responsibilities of both parties for overdue payments are equal, so as to avoid only binding one's own side.

IV. Suggestions for Protecting Rights

  • When amending the breach of contract clauses, check the payment, acceptance, and delivery nodes simultaneously to ensure that the breach of contract situations can be identified and substantiated with evidence.
  • Refuse to accept the interpretation clause that "the other party's unilateral determination shall prevail", and instead, all clauses shall be based on objective standards and include a period for raising objections.
  • Include in the contract that the breaching party shall bear the costs of legal fees, preservation fees, notarization fees, and other rights protection expenses.
  • For each step in the performance of the contract (finalizing the contract, acceptance, and collecting payments), it is necessary to keep records, so as to provide evidence for claiming breach of contract in the future.
  • For major contracts, you can ask a lawyer to provide specific amendment suggestions for the breach of contract liability section before signing the contract. For related services, please refer to the following link:Legal services for corporate contract disputes.

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