[Direct answer]This cannot be claimed simultaneously. According to Article 588 of the Civil Code (effective January 1, 2021), if the parties have agreed on both a breach of contract penalty and a deposit, in the event of a breach of contract by one party, the other party may only choose to apply either the breach of contract penalty or the deposit clause; if the deposit is insufficient to compensate for the losses, the party may also request compensation for the excess amount, but the total amount of the deposit shall not exceed 20% of the subject matter of the main contract, and the excess amount shall not have the effect of a deposit. If the party claims a breach of contract penalty, the court or arbitration institution may, in accordance with Article 585, reduce the amount that is excessively higher than the actual losses. It is recommended to first calculate the actual losses and then choose the claim with a higher amount. You may consult for more information.Legal services for corporate commercial and contract disputesThe team andBeijing Henglu Law FirmEvaluate the plan.

I. Problem Background and Typical Scenarios

In contracts such as sales, processing contracts, and housing leases, parties often simultaneously stipulate deposits and breach of contract penalties: they agree to pay a deposit as a guarantee of performance, and also agree to pay breach of contract penalties on a daily or proportional basis for late payments and late deliveries. Once the other party breaches the contract, the party in compliance often believes that the two can be combined and claim them together in litigation, only to have some of their claims dismissed or reduced. There are also cases where parties find themselves in a passive position when sued for high breach of contract penalties far exceeding their actual losses. How to choose the claim path, how to design coexistent clauses in the contract, and how to organize evidence of losses directly affect the amount of money they can ultimately recover and their negotiating leverage.

II. Key points of contention

  • The strategic choice under the option of applying one of the two clauses: The penalty for the deposit can be refunded twice, but it is often lower than the actual loss. The penalty for breach of contract can be claimed according to the agreement, but it may be reduced at the discretion of the court. It is necessary to calculate the actual loss and choose the higher claim based on it.
  • The adjustment range of the penalty clause: According to Article 585 of the Civil Code and the judicial interpretation of the General Principles of the Contract, the part of the penalty clause exceeding 30% of the losses is generally considered excessive. The allocation of the burden of proof and the adjustment range are the key points of the courtroom debate.
  • The qualification of the excess portion of the deposit: The portion exceeding 20% of the subject matter does not generate the effect of the deposit. Whether it can be returned as paid funds or included in the damages, there are differences in practical handling. For reference onlyLegal services for corporate commercial and contract disputes.

III. Professional analysis by Henglue Law Firm

Review of the case:On May 12, 2022, Shanghai A Technology Company and Shenzhen B Network Company signed the "Project Outsourcing Agreement", which stipulated that A Company would complete the production of the first episode of G Virtual IP material upgrade, with a total cost of 583,000 yuan (including tax). The production would commence after receiving the advance payment and would take 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 B Company approved it on July 20, but B Company delayed paying the remaining 50% of the contract amount. A Company entrusted Attorney Xiong Binrong of Beijing Henglu Law Firm to apply for arbitration, requesting that the agreement be terminated on October 25, 2022, that B Company pay the contract amount of 583,000 yuan, the late payment penalty of 116,600 yuan, and bear the attorney fees and arbitration 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, the responsibility for the delay caused by the modification of 30% of the production; Third, whether the contract price, the breach of contract penalty, and the attorney's fees can be supported together.

Attorney's Strategy and Legal Opinion:Attorney Xiong Binrong analyzed the contract item by item and sorted out the evidence such as WeChat messages and emails, and argued that: the script had been confirmed by Company B before signing the contract. According to Articles 1.2 and 2.9 of the agreement, Company B was not allowed to arbitrarily change the confirmed requirements, and the responsibility for the delay caused by the modification lay with Company B; each production step was only proceeded after being confirmed by Company B. Its employees actively set the final version, accepted the work first and then checked the invoices, promised to pay the full amount and required the postal delivery of the final invoice. The WeChat and email confirmations satisfied the written acceptance conditions, so the acceptance should be deemed as qualified; Company B's refusal to accept the work and its hiring of a third party to redo the work could not exempt it from its payment obligations.

The reasoning of the arbitration tribunal and the outcome of the case:After establishing the above facts, the arbitration tribunal adopted the main opinions of Henglue Law Firm and only adjusted the claim for the penalty for late payment. It ruled that Company B should pay the contract amount of 583,000 yuan and compensate the applicant for all attorney's fees. The arbitration fee of 30,366 yuan shall be borne by Company A for 5,000 yuan and by Company B for 25,366 yuan. This case demonstrates that the claim for the penalty is not the higher the better. The part that clearly deviates from the actual loss will be adjusted. And the attorney's fees and other costs of safeguarding rights can be fully claimed if there are contractual provisions or rules to support them. The handling path of similar disputes can be referred to for reference.Legal services for corporate commercial and contract disputes.

IV. Practical suggestions and legal basis

Legal basis: Article 586 of the Civil Code (effective January 1, 2021) stipulates that the deposit contract is established upon the actual delivery of the deposit, and the amount thereof shall not exceed 20% of the subject matter of the main contract. The excess portion shall not produce the effect of a deposit; Article 587 establishes the penalty for a deposit. If the party paying the deposit breaches the contract, it shall not be entitled to request the return of the deposit. If the party receiving the deposit breaches the contract, it shall return double the amount of the deposit; Article 585 stipulates that if the agreed penalty for breach of contract is excessively high in relation to the loss caused, the party may request an appropriate reduction. In the case of a delay in performance of the agreed penalty for breach of contract, the party in breach shall pay the penalty for breach of contract and still perform the obligation; Article 588 clearly stipulates that either the deposit or the penalty for breach of contract may be applied, and if the deposit is insufficient to compensate for the loss, the party may request compensation for the loss exceeding the amount of the deposit. 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 December 5, 2023) stipulates that if the agreed penalty for breach of contract exceeds 30% of the loss caused, it may generally be deemed excessively high in relation to the loss. Practical suggestions: Where the contract stipulates both the deposit and the penalty for breach of contract, the parties may add a clause stating that "the party in breach of the contract has the right to choose the applicable remedy" and agree on the manner of bearing the litigation costs; fix the evidence of the loss (order profits, resale price difference, and loss of production, etc.) before making a claim, and then make a request according to the rule of choosing one of the two remedies.

5. Henglue Law Firm's Reminder

The legislative intent of the deposit and penalty system is to compensate for losses rather than to benefit the party who fulfills the contract. The litigation strategy should be to "calculate the losses first and then decide on the side to support": if the evidence of the losses is sufficient and the penalty is obviously too low, choose the penalty and make up for the insufficient part; if the agreed penalty is high but the losses are difficult to prove, the threshold for proving the deposit penalty is often lower and the result is more certain. At the same time, do not make unrealistic demands. Exaggerated requests will not only be reduced but also result in higher litigation costs. 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. The arbitral tribunal ruled that the defendant should pay the contract amount of 583,000 yuan and compensate for all the attorney's fees. If you are currently struggling with the claim for breach of contract, it is recommended that you bring the contract and the proof of losses for an early assessment.

Q1: Which is more cost-effective, the deposit or the breach of contract penalty?

First, let's do some calculations: According to Article 587 of the Civil Code, if the party receiving the deposit breaches the contract, it shall return the deposit in double; if the party paying the deposit breaches the contract, it has no right to request the return of the deposit. The amount to be obtained is twice the deposit, but the total amount of the deposit is subject to a cap of 20% of the subject matter of the main contract; the breach of contract penalty shall be claimed in accordance with the amount or calculation method agreed in the contract, and the full amount may be supported if it is generally equivalent to the actual loss. According to paragraph 3 of Article 585, it can be used in conjunction with the performance of the contract. The rule of thumb is: if the evidence of the loss is sufficient and the breach of contract penalty is reasonable, priority should be given to claiming the breach of contract penalty and compensation for the insufficient part; if it is difficult to provide evidence of the loss or the proportion of the deposit is high, the burden of proof for the deposit penalty is lower and the result is more certain. The two cannot be combined. After calculation, you can choose the higher claim.

Q2: Is the part of the deposit exceeding 20% still considered a deposit?

No. According to Article 586 Paragraph 2 of the Civil Code, if the amount of the deposit exceeds 20% of the subject matter of the main contract, the excess portion shall not produce the effect of a deposit. For the party that has paid an excessive deposit: If the receiving party breaches the contract, only the portion within 20% of the deposit shall be subject to double refund; the excess portion shall generally be refunded according to the amount paid and shall not be doubled. If the paying party breaches the contract, the portion within 20% of the deposit shall be retained, and the excess portion may be requested to be refunded. If the parties have disputes over the nature of the excess portion, the court will generally handle it in accordance with the nature of the payment and the performance of the contract. When signing the contract, it is better to control the deposit ratio within 20%. The excess portion can be converted into a prepayment or a performance guarantee and separately stipulate the handling rules, so that the rights and responsibilities are clearer and there will be fewer disputes.

Q3: If the agreed penalty for breach of contract is too high, how will the court adjust it?

According to Article 585 Paragraph 2 of the Civil Code, if the agreed penalty for breach of contract is excessively higher than the actual losses caused, the court or arbitration institution may, upon the request of the parties, reduce it appropriately. Regarding the standard for determining whether the penalty is excessive, according to Article 65 of the Judicial Interpretation of the General Provisions of the Contract Chapter (effective as of December 5, 2023), if the agreed penalty exceeds 30% of the actual losses caused, it can generally be considered excessively higher than the losses. When reducing the penalty, the court will also comprehensively consider factors such as the performance of the contract, the degree of the parties' fault, and the expected benefits, etc. It will be more difficult for the party who breached the contract maliciously to obtain a significant reduction. Note two points: the reduction is based on the claim of the parties, and the court will not adjust it on its own initiative. The party claiming the penalty should raise the issue and provide evidence in court in a timely manner; the party claiming the penalty should also prepare evidence of the losses to support the reasonableness of the requested amount.

Q4: If the other party breaches the contract, can I demand both the deposit and require them to continue to perform the contract?

It depends on whether the contract can still be performed. If the contract still has a basis for performance and the other party is only delaying performance, you can require continued performance and, in accordance with Article 585, Paragraph 3 of the Civil Code, demand its performance after obtaining the penalty for delayed performance. In this case, the penalty for the deposit generally does not apply—the penalty for the deposit is based on the failure to perform the obligation resulting in the inability to achieve the contractual purpose. If the contractual purpose has failed and the decision is to terminate the contract, then in accordance with Article 588, one of the two can be applied between the deposit and the penalty for breach of contract. If the deposit is insufficient to compensate for the losses, you can also claim the difference separately. In short: continue performance through the penalty for breach of contract, and then choose between the deposit and the penalty for breach of contract when terminating the contract. Before suing, you should first determine whether to terminate the contract to avoid having conflicting request paths that are rejected.

Q5: What evidence do I need to prepare if I want to claim a deposit or a breach of contract penalty?

There are four types of evidence that are indispensable: 1. Contract text and delivery receipts to prove the existence and calculation method of the deposit or penalty clause. Note that the deposit must be actually delivered, and transfer records, receipts, and clauses are all essential. 2. Evidence of the breach of contract, such as records of delayed delivery, certificates of unqualified acceptance, demand letters, and the other party's responses. 3. Evidence of losses, including orders, resale contracts, profit statements, price differences of alternative purchases, and losses from work stoppages. The proof of losses directly determines whether the full amount of the penalty can be supported. 4. Evidence of litigation costs, such as attorney fees, arbitration fees, or litigation expenses. When supported by contract provisions or rules, these costs can also be claimed. It is recommended to organize the evidence chronologically, ensuring that the claimed amount corresponds to the evidence to avoid having the claim reduced due to vague pricing.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the necessary evidence, to avoid missing the statutory time limits.Corporate commercial legal services·Attorney Xiong Binrong·Beijing Henglu Law Firm