[Direct answer]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 people's court or arbitration institution may, upon the request of the parties, reduce it appropriately; referring to Article 65 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the General Provisions of the Contract Chapter of the Civil Code (effective from December 5, 2023), if the penalty for breach of contract exceeds 30% of the losses caused, it can generally be deemed as "excessively high". The request for adjustment can be raised through a defense or a counterclaim. The party making the claim should provide preliminary evidence, and the court will base its judgment on the actual losses, taking into account the performance of the contract, the degree of fault, and the expected benefits. Beijing Henglu Law FirmContract Dispute TeamIt can assist in estimating and providing evidence. For more details, please refer to the following link:Beijing Henglu Law Firm.

I. Legal basis and interpretation of provisions

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

The parties may agree on the penalty to be paid in the event of a breach of contract, and they may also agree on the method of calculating the compensation for losses. If the agreed penalty is lower than the actual losses caused, the party may request an increase; if it is excessively higher than the actual losses caused, the party may request a reasonable reduction. This article establishes the positioning of the penalty for breach of contract as "primarily compensatory and also punitive": it is not about compensating as much as agreed upon, but rather adjusting the amount based on the actual losses. The prerequisite for applying this provision are that the parties make a request, and the court will not reduce the amount on its own initiative. The adjustment range will be determined by the judge or arbitrator based on the losses and the fault of the breaching party.

2. Article 65 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the General Provisions of the Contract Chapter of the Civil Code of the People's Republic of China (effective from December 5, 2023)

Where the party alleges that the penalty for breach of contract is excessive and requests a reduction, the court shall, based on the losses determined in Article 584 of the Civil Code, take into account factors such as the performance of the contract, the degree of fault of the parties, and the background of the performance, and measure it in accordance with the principles of fairness and good faith. Where the penalty for breach of contract exceeds 30% of the losses caused, it shall generally be deemed excessive. This article quantifies the basis for discretion and clarifies that the court may explain that the breaching party may request it by way of a counterclaim or defense, which provides a clear basis for practical operations.

3. The interpretation of the case by the court

In practice, the party claiming a reduction of the breach of contract penalty bears the initial burden of proof, and needs to explain the deviation between the agreed amount and the actual losses. The party fulfilling the contractual obligations, on the other hand, can provide evidence of the losses (including the lost profits) to contest the claim. Common scenarios in which the court supports a reduction include: the breach of contract penalty being significantly higher than the losses by more than 30%; the breach of contract being minor and remedied in a timely manner; or the standard contract terms stipulating an excessively high breach of contract penalty. Non-supporting scenarios include: malicious breach of contract; the breaching party being a commercial professional entity and the terms having been fully negotiated. It should be noted that it is normal for the agreed amount to be higher than the actual losses, and only when it is "excessively high" can a reduction be applied. The reduction should not be regarded as an automatic price reduction tool.

II. Henglue Lawyer's Real Case (Detailed Review)

Review of the case:On May 12, 2022, Shanghai A Technology Company and Shenzhen B Network Company signed a "Project Outsourcing Agreement", which stipulated that A Company would complete the production of the first episode of the G Virtual IP material upgrade, with a cost of 583,000 yuan (including tax). The production would commence after receiving the advance payment, and the cycle would be approximately six weeks. After signing the agreement, B Company paid an advance of 291,500 yuan; A Company finalized the version on July 16, 2022, and the version was approved by B Company 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 to confirm that the agreement was terminated on October 25, 2022, to pay the contract amount of 583,000 yuan, the late payment penalty of 116,600 yuan, and to bear the arbitration fees and attorney's fees.

The focus of the controversy:First, whether the work has passed the acceptance and meets the quality standards, and whether Company B can refuse to pay all the fees on this basis; second, who should bear the responsibility for the delay in delivering the work; third, whether the claims for the contract amount, the breach of contract penalty, and the attorney's fees are valid.

Our position and the other party's position are as follows:Company A claimed that the work had been created according to the other party's requirements and had been accepted as qualified, and that Company B should pay the full amount of 583,000 yuan plus the breach of contract penalty and legal fees as agreed in the contract. Company B argued that according to Article 6 of the agreement, "Whether the quality meets the standards shall be determined by Party A as a reference", and that Company A's delay in delivery and non-compliance with quality standards constituted a fundamental breach of contract, entitling Company B to terminate the contract without having to pay any fees.

Attorney's Strategy and Legal Opinions:Attorney Xiong Binrong analyzed the contract article by article and organized the evidence through WeChat and email records: Before signing the contract, the final script had been determined according to the requirements of Company B. According to Articles 1.2 and 2.9 of the agreement, Company B was not allowed to arbitrarily change the confirmed requirements. Any modification of more than 30% during the production process was attributable to Party A, and the responsibility for the delay should be borne by Company B. Moreover, Party A had informed Company B of the delay and obtained its consent. Every stage of the work had been gradually confirmed by Company B. Its employees actively finalized the version, conducted acceptance inspections before issuing invoices, promised to pay the full amount, and requested to mail the invoices for the balance. The acceptance inspections via WeChat and email also met the written acceptance conditions. Therefore, the acceptance should be deemed satisfactory, and the payment conditions have been fulfilled.

The court's reasoning and the outcome of the case:After hearing the case, the arbitral tribunal adopted the main arguments of the lawyer and determined that the work was accepted and qualified by the respondent, and the obligation to pay the money was established. The arbitral tribunal ruled that Company B should pay the contract amount of 583,000 yuan and compensate Company A for all its attorney's fees; the arbitral fees of 30,366 yuan should be borne by Company A for 5,000 yuan and by Company B for 25,366 yuan. Regarding the late payment penalty of 116,600 yuan claimed by Company A, the arbitral tribunal adjusted it based on the actual losses and the performance of the contract and did not fully support it. This case vividly demonstrates the adjudication logic that "agreed penalties shall be governed by the agreement, and discretionary penalties shall be governed by the arbitral tribunal". Both the claimant and the defendant focused their evidence on the actual losses in their arguments and defenses.

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

III. Frequently Asked Questions

Q1: Can the excessive penalty be completely waived?

No. The purpose of reducing the penalty is to "appropriately reduce" it so that the penalty is roughly equivalent to the actual losses, rather than to waive it entirely. The court will retain the portion compensating the party in breach for its reasonable losses. Only in circumstances such as the overall invalidity of the contract will the penalty clause become invalid. Therefore, the party claiming a high penalty should still prepare loss estimates and performance evidence to strive to reduce the amount to a reasonable range, rather than hoping to get no compensation at all.

Q2: Who should explain that the penalty for breach of contract is too high, and what evidence should be prepared for this?

The party claiming for a reduction of the penalty shall provide initial evidence, and common evidence includes: the contract and the penalty clause, records of actual performance, materials of the actual losses of the party in compliance with the contract (the difference in price of the alternative purchase, the cost of substitute transactions, and the interest on the occupied funds), and the profit level of similar transactions. The party in compliance with the contract may submit evidence of losses and evidence of foreseeable benefits to counter the other party's claims. It is much more effective to organize evidence around the "basis of losses + fault and performance factors" than simply shouting "it's too high".

Q3: Can the breach of contract penalty and the deposit be claimed at the same time?

It is not possible to choose both. According to Article 588 of the Civil Code, if both a penalty for breach of contract and a deposit have been agreed upon, the party in breach of contract can only choose to apply one of them; if the deposit is insufficient to compensate for the losses, the party can request compensation for the difference separately. When making the choice, the amount and the difficulty of providing evidence of the two should be compared: the deposit rule is simple to prove but the amount is fixed, while the penalty for breach of contract path is flexible but subject to reduction. After the party in breach of contract makes the choice, it generally cannot regret it. Therefore, it is advisable to calculate the amount in advance before making the claim.

Q4: At what stage should a request to reduce the penalty for breach of contract be submitted?

In principle, a defense or counterclaim should be raised before the conclusion of the debate in the first-instance court. If the claim is not raised after the court's explanation, and is only raised in the second-instance court, the court can generally only preside over mediation. If the mediation fails, a separate lawsuit will need to be filed, which will significantly increase the procedural costs. Similarly, in arbitration proceedings, the claim should also be raised at the stage of defense or counterclaim. Therefore, after receiving a claim for a high-amount breach of contract penalty, one should first evaluate the gap between the contract terms and the actual losses, and avoid absenting from the court hearing or hastily acknowledging the debt.

Q5: Who will bear the costs of legal fees and arbitration fees involved in protecting one's rights?

If the contract clearly stipulates that the attorney's fees shall be borne by the breaching party, the matter shall be handled in accordance with the contract; in arbitration cases, the losing party may also be required to bear the arbitration fees according to the arbitration rules, and the aforementioned case obtained full compensation for the attorney's fees. If there is no such stipulation, the court is more cautious in supporting the attorney's fees. It is recommended to include the attorney's fees, preservation fees, notarization fees, and other protection costs in the breach of contract liability clauses when signing the contract, so as to provide a good basis for future claims.

IV. Suggestions for Protecting Your Rights

  • When signing a contract, the penalty clause should match the scale of foreseeable losses. Excessively high penalties are likely to be reduced, which will also affect the credibility of the negotiation.
  • After the breach of contract occurs, first send a written notice to the other party and collect evidence of the losses, including the price difference, the cost of substitution, and the interest on the occupied funds, etc.
  • For those claiming high-amount breach of contract penalties, they may request to reduce the amount through a defense or a counterclaim before the conclusion of the debate in the first instance, and conduct a comparison and estimation of the losses involved.
  • Before asserting their rights, the parties bound by the contract should evaluate the actual losses and their ability to provide evidence, and reasonably determine the amount of the claim to avoid having it significantly reduced due to being set too high.
  • Including the lawyer's fees and arbitration fees in the contract's breach of contract clause allows the cost of protecting one's rights to be transferred to the other party in accordance with the agreement.

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. →Corporate commercial legal services·Attorney Xiong Binrong·Beijing Henglu Law Firm