[Direct answer]In the Beijing area, if the penalty for breach of contract is set too high, the party concerned may request the court or arbitration institution to reduce it appropriately. According to Article 85, Paragraph 2 of the Civil Code of the People's Republic of China (effective from January 1, 2021), if the penalty for breach of contract agreed upon is excessively high compared to the losses caused, the people's court or arbitration institution may, upon the request of the party concerned, reduce it appropriately. In judicial practice, the amount of compensation is usually based on the actual losses, taking into account the performance of the contract, the degree of fault of the parties, and the expected benefits. Those who claim to reduce the penalty should clearly put forward their request in litigation or arbitration and submit evidence comparing the amount of the penalty with the actual losses. For those who are sued for high-amount penalty for breach of contract, it is recommended to consult a lawyer as soon as possible to formulate a defense plan. For more details, please refer to the following link:Business and contract dispute resolution services for enterprises.

I. Problem background and typical scenarios

Contracts for sales, leases, construction projects, and commissioned creative works generally stipulate penalty clauses, with common higher standards such as "20% of the total contract price" and "3% of the daily contract price". Once a breach of contract occurs, the party in compliance may claim a large penalty according to the terms, while the breaching party may consider it far exceeding the actual losses, leading to intense disputes. Typical scenarios include: being charged a high penalty for late payment, being fined daily for construction delays, being claimed for damages for delayed delivery of outsourced creative works, and being demanded high compensation for the termination of a cooperation agreement. There are also cases where enterprises fail to calculate the breach costs in detail when signing contracts and only realize the imbalance of the terms afterwards. The number of penalty reduction cases accepted by Beijing courts and arbitration institutions is considerable, and the adjudication standards are relatively mature. For cases involving breaches of construction projects, reference can be made to the relevant provisions.Real estate sales and construction project services.

II. Key points of contention

There are three key points of contention. First, whether the penalty for breach of contract is "excessively high" compared to the actual losses: In judicial practice, the actual losses are usually taken as a reference and a certain percentage is added to them as a measurement standard. There is a large room for adjustment beyond the benchmark, and the specific standards should be subject to the currently effective judicial interpretations and judicial rulings. Second, the allocation of the burden of proof: The party claiming for adjustment needs to provide preliminary evidence that the agreed penalty is too high, and the party in compliance needs to prove the actual losses and expected benefits. Insufficient evidence will directly affect the outcome. Third, the discretionary adjustment of the amount: The court determines the adjustment amount based on factors such as the degree of contract performance, the fault of both parties, and the contractual status, leaving room for discretionary adjustment. The principles of good faith and fairness run through the entire process of adjudication, making it difficult for malicious breachers to evade responsibility by taking advantage of the adjustment rules.

III. Professional analysis by Henglue Lawyers

Take the arbitration case of a commissioned creation contract dispute handled by Henglue Law Firm as an example: In May 2022, a Shanghai-based technology company and a Shenzhen-based online company signed a "Project Outsourcing Agreement", agreeing to produce virtual IP material upgrade projects with a total cost of 583,000 yuan, with the other party paying a down payment of 291,500 yuan. After the work was finalized and passed the acceptance test in July 2022, the respondent delayed paying the remaining 50% of the contract amount. The applicant entrusted Henglue Law Firm to apply for arbitration, requesting the confirmation of the contract termination, payment of the contract amount of 583,000 yuan, and claiming a default penalty of 116,600 yuan (20% of the contract amount) for late payment, as well as legal fees and arbitration fees. The respondent argued that the delay in delivery and the unsatisfactory quality of the work constituted a fundamental breach of contract, entitling it to terminate the contract without paying the remaining amount. The lawyer demonstrated the validity of the contract terms and the acceptance records through WeChat and emails: The script was confirmed by the other party, and the modifications made during the production amounted to 30% of the contract amount, which exempted the applicant from liability. The respondent's employees actively finalized the project, accepted the work before verification, and requested the mailing of the final payment invoice, indicating that the acceptance should be deemed satisfactory and the payment conditions met. The arbitration tribunal adopted the lawyer's main arguments and adjusted the claim for default penalty, ultimately ruling that the respondent should pay the contract amount of 583,000 yuan, compensate for all legal fees, and bear 253,66 yuan of the arbitration fees. This case demonstrates that the amount of the default penalty is not necessarily supported by the contract terms, and excessive claims exceeding the actual losses will be adjusted accordingly. The case was handled by Beijing Henglue Law Firm.Xiong BinrongThe attorney (practice license number: 11101202211410897, subject to the document issued by the judicial administrative organ) acts as the agent.

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) (Liquidated Damages and Their Judicial Adjustment) and Article 57 (General Provisions on Breach of Contract Liability); 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 (FAS [2023] No. 13, effective December 5, 2023) specifies the evidentiary and discretionary factors for reducing liquidated damages. The specific application shall be subject to the currently effective laws, regulations, and judicial rulings. Practical suggestions: The breaching party should explicitly request a reduction of the liquidated damages within the defense or arbitration defense period, and submit evidence of performance records, comparison of losses, and the degree of fault; the non-breaching party should preserve evidence of losses and records of reminders in advance; when signing the contract, set the liquidated damages within a reasonable range to avoid clause imbalance leading to disputes over reduction. For enterprises engaged in high-frequency transactions, they may refer to the above-mentioned provisions for reference.Business and contract dispute resolution services for enterprisesImprove the contract template.

5. Henglue Law Firm's Advice

The reduction of the penalty for breach of contract is a right rather than an automatic result. It must be actively claimed by the parties in litigation or arbitration. The adjudicating institutions will not reduce it on their own initiative. Silence or absence may result in the full support of the agreed amount. The claimant must provide sufficient evidence to demonstrate that the agreed amount is too high and have a basis for comparing the losses. The party in breach of contract should keep evidence of the losses and records of reminders to safeguard the request for a penalty. If the other party refuses to perform after the effective judgment, the claimant can proceed with further legal actions.Creditor-debtor relations and enforcement case servicesPromote payment collection. There are significant differences in individual cases. It is recommended to consult a professional lawyer before responding to or initiating a claim to assess the potential for adjustments and determine the optimal strategy.

VI. Frequently Asked Questions

Q1: If a party requests to reduce the penalty for breach of contract, will the court generally support this request?

There is a higher chance of getting support for a request for reduction based on facts and evidence. In judicial practice, the court will consider the actual losses, the performance of the contract, the degree of the parties' fault, and the expected benefits to make a comprehensive assessment. If the agreed amount is excessively higher than the losses, the excess part will usually be reduced, but it won't necessarily be reduced to the same amount as the losses. A certain punitive function will still be retained. The key is that the breaching party must put forward a clear request and complete the preliminary evidence collection. Otherwise, the court may support the claim based on the agreed amount. It is recommended to hire a lawyer to assess the possibility of reduction before suing or defending, and then determine the strategy accordingly.

Q2: What evidence do I need to prepare if I claim that the breach of contract penalty is too high?

The breaching party should prepare the following: the contract text (specifying the calculation standard for the breach of contract penalty), evidence of actual performance (payment, delivery, and rectification records), clues to the comparison of losses (preliminary evidence such as the prices of similar market transactions and the records of the other party's resale and disposal), records of reminders and communication, and a description of the degree of fault. The contract-abiding party, on the other hand, needs to prepare evidence of losses, such as procurement costs, resale price differences, losses due to work stoppages, and the costs of alternative transactions. Both parties' evidence jointly determines the adjustment amount, and the more thorough the evidence preparation is, the more predictable the outcome will be.

Q3: How much does it cost to litigate for a reduction in the penalty clause?

The litigation fees are accumulated in stages according to the amount of the dispute and are borne by the losing party or shared proportionally; the disputed subject of the penalty for breach of contract is usually less than the total contract price, and the fees are relatively controllable. Lawyer's fees can be charged on a per-case basis, by the hour, or negotiated according to the subject matter, subject to the entrustment contract. In arbitration cases, the arbitration fees also need to be borne. The lawyer's fees and arbitration fees stipulated in the contract to be borne by the breaching party can be claimed together. It is recommended to first estimate the amount that can be saved through adjustment and the cost of protecting rights, and then decide on the procedural strategy to avoid losing more than gaining.

Q4: How long will it take to settle a dispute over a penalty clause?

The first-instance litigation in ordinary procedures is generally concluded within six months, and in summary procedures, it is concluded within three months; arbitration cases are usually adjudicated within a few months after the formation of the arbitration tribunal. For cases involving the reduction of the penalty for breach of contract, the period may be slightly longer than that of simple payment cases, as it requires calculating the losses and organizing evidence. If a party appeals or applies for the revocation of the arbitration award, the time will be extended accordingly. It is recommended to fix the evidence and clarify the claims as soon as possible to avoid delaying the process and increasing the cost.

Q5: If you're being sued for a high breach of contract penalty, what should you do first?

The first step is to check the contract's penalty clause and calculation method, and estimate the gap between the total amount of the claim and the actual loss. The second step is to organize the performance records and clues about the other party's actual losses, and preliminarily assess the room for adjustment. The third step is to raise a defense against the excessive penalty in writing during the reply period. It is essential not to be absent or remain silent, otherwise, the court may rule according to the agreed amount. The fourth step is to simultaneously assess whether there are counterclaims such as the other party's breach of contract and offset of losses. Throughout the process, it is recommended to entrust a lawyer to formulate offensive and defensive strategies and grasp the time limit for providing evidence to prevent the loss of procedural rights.

This article is written based on the common judicial interpretations in the Beijing area. If the case occurs in other regions, it is recommended to consult local lawyers to verify the regional differences.

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

Disclaimer: This article is compiled based on the current effective laws and regulations and public 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 in a timely manner.