[Direct answer]In the Beijing area, if the contractually agreed penalty for breach of contract is obviously too high, the party concerned has the right to request the people's court or arbitration institution to reduce it appropriately, but it is not automatically exempted. According to Article 585 Paragraph 2 of the Civil Code of the People's Republic of China, if the agreed penalty for breach of contract is lower than the losses caused, the party may request an increase; if the agreed penalty for breach of contract is excessively high compared with the losses caused, the party may request a reasonable reduction. The judgment shall be based on the actual losses, taking into account the performance of the contract, the degree of fault of the parties and the expected benefits. An amount exceeding 30% of the actual losses is generally regarded as "excessively high". The party claiming a reduction shall bear the burden of proof for the abnormally high amount agreed upon. It is recommended to first fix the evidence of losses and then file a request. For reference, please refer to the following:Business and contract dispute services for enterprises.

1. Problem background and typical scenarios

It is very common for the agreed penalty clauses to be excessively high in commercial contracts: sales contracts, service outsourcing contracts, and lease contracts often stipulate high penalties for late payment; some standard contracts even set the penalty at several dozen percent of the contract amount. Typical cases include: Party B being charged high penalties for late payment; the client delaying acceptance and claiming that the other party has breached the contract and deducting fees; and one party using the argument that "the penalty can be set arbitrarily" to gain negotiating leverage. Many parties mistakenly believe that "once it's signed in black and white, they have to pay the penalty," or conversely, that "if the penalty is too high, they don't have to pay it." In fact, courts and arbitration institutions will reduce the penalty upon the request of the parties, and the key lies in proving the actual losses and determining a reasonable range. For cases involving the recovery of contract prices, the parties may refer to the following factors for consideration:Creditor-debtor relations and enforcement case servicesAdvance.

II. Key points of contention

There are three main points of contention regarding the reduction of the penalty clause. Firstly, whether the penalty is "excessively high": based on the actual losses, a reduction of the penalty clause is usually triggered when the amount exceeds 30% of the actual losses, but the losses themselves need to be substantiated. Secondly, the allocation of the burden of proof: the party claiming the reduction should prove that the agreed penalty is disproportionately high, while the party complying with the contract should prove that the actual losses are roughly equivalent. Thirdly, the nature of the penalty clause: it should primarily serve as a compensatory measure and secondarily as a punitive measure. The court will not tolerate obviously unreasonable penalty clauses. For cases involving construction projects and real estate transactions, reference can be made to the relevant provisions of the Civil Code of the People's Republic of China.Real estate sales and construction project servicesDetermine industry practices.

III. Professional analysis by Henglue Lawyers

Based on practical cases of handling disputes over commissioned creative contracts, reducing the amount of the penalty for breach of contract is not just a theoretical concept. In May 2022, Shanghai A Technology Company and Shenzhen B Network Company signed a "Project Outsourcing Agreement", which stipulated that they would produce G virtual IP materials for upgrading, with a cost of 583,000 yuan. After the work was accepted and qualified in July 2022, the respondent delayed making the payment. The applicant entrusted Beijing Henglu Law Firm to handle the case.Xiong BinrongThe lawyer applied for arbitration, requesting the payment of the contract amount of 583,000 yuan, the breach of contract penalty of 116,600 yuan, and the attorney's fees and arbitration fees. The arbitration tribunal adopted the lawyer's main opinions and ruled to pay the contract amount of 583,000 yuan and compensate for all the attorney's fees, but only adjusted the claim for the breach of contract penalty for late payment. This case was handled by Beijing Henglu Law Firm.Xiong BinrongThe attorney (practice license number: 11101202211410897, subject to the document issued by the judicial administrative organ) acted as the agent. This result reflects the arbitration tribunal's judgment orientation of taking actual losses as the anchor and actively reducing the exorbitantly high contractual penalties.

IV. Practical suggestions and legal basis

The legal basis is Article 85 of the Civil Code of the People's Republic of China (effective January 1, 2021) (Regulations on the Agreement on Penalty Clauses and the Rules for Reducing Penalty Clauses) and Article 57 (Liability for Breach of Contract); the supporting provisions of the Interpretation of the Supreme People's Court on Legal Issues Applicable to the Trials of Disputes over Sales Contracts regarding the adjustment of penalty clauses, as well as the Interpretation of the Supreme People's Court on Several Issues Concerning the General Provisions of the Contract Chapter of the Civil Code of the People's Republic of China regarding the standard for determining "excessively high" penalty clauses. Practical advice: When signing a contract, stipulate a penalty clause equivalent to the actual losses to avoid having excessively high clauses being reduced; in the event of a dispute, the party claiming damages should collect evidence of actual losses (such as interest on funds occupied, costs of alternative transactions, and agreed attorney's fees), while the party against whom the claim is made should provide counter-evidence regarding the excessive highness of the penalty clause; if necessary, raise a claim on the grounds that the penalty clause is excessively high compared to the actual losses.

5. Henglue Law Firm's Advice

The agreed penalty for breach of contract should not only be binding, but also avoid "self-harm" — excessively high clauses may be reduced when one party breaches the contract, weakening the bargaining power. It is recommended to distinguish between compensatory and punitive penalties in the contract, and to stipulate a reasonable base and cap for the calculation of the penalty. Once a dispute arises, do not passively accept high claims, but take the initiative to request a reduction based on actual losses and fix the evidence. For contracts involving intellectual property and service outsourcing, you can seek help from a professional agency or lawyer to handle the dispute.Intellectual property protection and corporate legal servicesDesign default clauses in advance to reduce risks at the source.

VI. Frequently Asked Questions

Q1: The penalty for breach of contract is set very high. Will the court definitely help me reduce it?

It will not be automatically reduced. The party concerned must actively request it. Courts and arbitration institutions follow the principle of non-action without notification. Only when the party requests a reduction on the grounds that the amount is "excessively higher than the actual loss" will the court review it; if no one claims it, it will usually be handled in accordance with the agreement. Moreover, the reduction is based on the actual loss, not a simple halving. It is necessary to prove that the agreed amount is unreasonably high. Therefore, do not expect the court to intervene actively. You should explicitly request a reduction in your defense or arbitration request and attach evidence of the loss. Otherwise, the high-amount agreement may still be enforced.

Q2: I want to request a reduction in the penalty fee. What evidence do I need to prepare?

The key is to prove that "the agreed penalty exceeds the actual losses". The following materials should be prepared: the contract and the penalty clause, the proof of the actual losses of the party in breach (such as the interest on the occupied funds, the price difference of the alternative transaction, and the reasonable defense costs), the materials showing the party's performance of the contract and the degree of its fault, the penalty clauses in the same industry, and the evidence showing that the other party has not suffered significant losses. The party claiming a reduction of the penalty should bear the burden of proof. The more solid the materials are, the greater the room for reduction. It is crucial to avoid making unsubstantiated claims and to form a clear chain of evidence showing the comparison of losses.

Q3: How much does it generally cost to hire a lawyer to handle a dispute over a breach of contract penalty?

The litigation fees shall be calculated in accordance with the "Measures for the Payment of Litigation Fees" based on the amount of the litigation subject and shall be borne by the losing party; the reduction of the penalty shall be calculated based on the amount of the dispute. The attorney's fees shall be charged on a per-case basis or based on a percentage of the litigation subject, depending on the complexity of the case, the amount of the litigation subject, and the workload. The specific fees shall be subject to the contract of engagement and there is no nationwide standard pricing. It is recommended to request the law firm to provide a detailed fee breakdown before entrusting the case, clarify whether it includes travel expenses and third-party fees, and evaluate the cost-benefit ratio based on the amount of the reduction that can be obtained, so as to avoid paying disproportionately high fees for minor disputes.

Q4: How long does it usually take to get a response to a request for a reduction in the penalty for breach of contract?

The timeframe depends on the procedure. For the first-instance ordinary procedure, the case is concluded within six months; for the simplified procedure, it is concluded within three months. For arbitration cases, the decision is usually issued within several months according to the arbitration rules. If the party is not satisfied with the result and appeals or applies for the revocation of the arbitration award, the timeframe will be further extended. In practice, requests for reduction of claims with clear facts and sufficient evidence of losses are handled faster. It is recommended to apply for property preservation simultaneously during the litigation to prevent the other party from transferring assets, and to shorten the actual recovery or enforcement time to avoid expanding losses due to delays.

Q5: If the other party demands a high penalty for breach of contract, what should I do specifically?

Here's the translation of the Chinese (Simplified) sentence into English, with a detailed explanation: Suggested four steps: First, immediately verify the contract terms and the actual performance to confirm whether there are breaches of contract on your side and the extent of such breaches. Second, collect evidence of the actual losses suffered by the party in compliance with the contract to prove that the agreed upon penalty is unreasonably high. Third, explicitly state in your defense, counterclaim, or arbitration request that "the penalty is excessively high compared to the losses and request a reasonable reduction," and attach a calculation comparison. Fourth, during the negotiation stage, actively propose a compromise solution based on the actual losses, and during the litigation stage, have a lawyer organize the argumentation around the anchor point of losses. Throughout the process, keep records of communication and, if necessary, engage a lawyer to conduct an evaluation.

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 on specific situations.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the relevant 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 effective 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 case of disputes, please consult a practicing lawyer in time.