Summary: What is liquidated damages? If one of the parties fails to perform its contractual obligations or the performance of its contractual obligations does not conform to the agreement, causing losses to the other party, how to determine the amount of compensation for losses? What are the types of liquidated damages? Is there a limit to the amount of liquidated damages? Let's take a look at the analysis of Article 584 of Chapter 8 of Chapter 8 "Liability for Breach of Contract" in Part III of the Civil Code of the People's Republic of China, Subpart 1 of "Contract", "General Principles"!
Provisions: Article 584 of the Civil Code: Where one of the parties fails to perform its contractual obligations or the performance of its contractual obligations does not conform to the agreement, causing losses to the other party, the amount of compensation for the losses shall be equivalent to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract; provided, however, that it shall not exceed the losses that may be caused by the breach of contract that the breaching party foresaw or should have foreseen at the time of entering into the contract.
1. Damages for breach of contract refers to the fact that when the actor violates the contract and causes losses to the other party, the actor pays a certain amount of money to the victim to make up for the losses, which is the most widely used form of liability. Liquidated damages are the transformation of contractual debts and are identical to contractual debts. Liquidated damages include statutory liquidated damages losses and agreed liquidated damages losses.
According to this article, "if one of the parties fails to perform its contractual obligations or the performance of its contractual obligations does not conform to the agreement, resulting in losses to the other party, the amount of compensation for losses shall be equivalent to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract; However, it shall not exceed the losses that may be caused by the breach of contract that the breaching party foresaw or should have foreseen at the time of entering into the contract".
First, the principle of full compensation has been clarified. That is, the amount of damages should be equivalent to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract.
The second is to clarify the types of compensation. In accordance with the principle of full compensation, the amount of compensation for losses should be equivalent to the losses caused by the breach, including compensation for actual losses and profits gained. Actual loss, i.e., damage suffered, refers to the reduction of existing benefits due to breach of contract, which is a reduction of actual benefits, also known as positive losses. Gainable benefits, i.e., lost benefits, benefits that the victim could have obtained after the performance of the contract, but could not have obtained due to breach of contract, are the loss of future and expected benefits, also known as negative losses.
Third, the limit on the amount of liquidated damages is clarified. That is, the amount of damages shall not exceed the losses that may be caused by the breach of contract that the breaching party foresaw or should have foreseen at the time of entering into the contract. This provision further clarifies the rule of foreseeability of the limitation of the amount of liquidated damages. Articles 591, paragraph 1, and 592, paragraph 2, of the Civil Code also specify rules other than the rule of foreseeability. The formula for calculating the statutory loss of the obtainable benefit is as follows: the statutory loss of the obtainable benefit = the total amount of the loss of the obtainable benefit - the unforeseeable loss - the enlarged loss - the loss caused by the fault of the injured party - the benefit obtained by the injured party due to the breach of contract - the necessary costs.
2. In practice, there are five main methods for determining the amount of loss of available benefits:
The first is the difference method. The difference method, also known as the comparative method, is to determine the compensable loss of obtainable benefits according to the usual method by comparing the benefits obtained by the victim under the same conditions. The principle of difference is based on the situation after the performance of the contract as a reference, which is a hypothetical property situation, which is more convenient to calculate in the sales contract. For example, in a dispute over a house sale contract, if one party is in breach of contract and the non-breaching party terminates the contract, the difference between the purchase at the time of signing the house sale contract and the appreciation part at the time of litigation is the available benefit, which can be used as the basis for calculating compensation. However, in other types of loss of available benefits, this calculation method will also be affected by factors such as time and place. Therefore, when applying the principle of difference, it is often necessary to use other methods to comprehensively measure the principle of difference.
The second is the law of agreement. As the name suggests, the law of agreement refers to the method by which the parties directly agree on the calculation of the amount of damages in the contract. Paragraph 1 of Article 585 of the Civil Code stipulates that the parties may agree that when one party breaches the contract, it shall pay a certain amount of liquidated damages to the other party according to the circumstances of the breach, and may also agree on the method of calculating the amount of compensation for losses arising from the breach. The agreement law is an agreement between the parties on the calculation of the amount of compensation for obtainable benefits in advance, which provides a basis for the determination of the amount of compensation for the loss of obtainable benefits, and is also the embodiment of the autonomy of the parties. In practice, it should be noted that where there is a large gap between the losses calculated by the agreement method and the difference method, there is also room for adjustment based on actual losses. For example, Article 26 of the Judicial Interpretation of the Sales Contract stipulates that: "If the non-breaching party claims to continue to apply the liquidated damages clause after the sales contract is terminated due to breach of contract, the people's court shall uphold it; However, if the agreed liquidated damages are excessively higher than the losses caused, the people's court may refer to the provisions of paragraph 2 of article 114 of the Contract Law to handle it. This provision embodies the method of calculating compensation based on the principle of actual loss.
The third is the method of analogy. The analogy method refers to the determination of the amount of compensation for the benefits that can be obtained by reference to the benefits that can be obtained by other units of the same or similar party under similar conditions in the non-breaching party. By using the analogy method, the profits obtained by the non-breaching party in the same period in the past can be used as the reference object, and the profits obtained by the performance of similar contracts in the same period can be used as the reference object, and the production profits obtained by other people from the same equipment put into production and operation can also be used as the reference object. The premise of using this method is that the non-breaching party is usually able to obtain a relatively stable property income. The analogy method is a commonly used calculation method in judicial practice. For example, in a construction contract dispute between a construction company in Wuhan and a real estate company in Wuhan, the court adopted this method to calculate the loss of profits.
Fourth, the estimation method. The estimation method refers to the method by which the people's court determines the amount of compensation according to the actual circumstances of the case when it is difficult for the people's court to determine the amount of loss. In some cases, the specific amount may also be determined on the basis of the amount of compensation claimed by the victim and in combination with the evidence on which the breaching party relied to raise a defense, and in accordance with the principle of equitable liability. Since the obtainable benefits belong to the future benefits that can only be obtained after the performance of the contract, it is difficult to calculate the specific amount in many cases, and the court cannot refuse to adjudicate, therefore, it will often combine the specific circumstances of the case and determine an amount of compensation for the loss of obtainable benefits according to the actual performance of the contract, the size of the party's fault, and the profits of the industry. For example, in a dispute over a sales contract between a hydropower company in Qinghai and a power generation company in Guangdong, the focus of the dispute was the determination of the amount of loss of profits. The court held that the determination of the amount of loss of obtainable benefits is based on the estimation method, and the specific amount can be determined on the basis of the amount requested by the injured party, combined with the evidence on which the breaching party raises a defense, and in accordance with the principle of fairness.
Fifth, comprehensive measurement. The comprehensive measurement method is a method that is widely used in practice, that is, it is comprehensively judged according to factors such as profits, the fault of the parties and the economic situation at the time of the performance of the contract. For the application of the comprehensive discretionary method, it is necessary to combine the above-mentioned methods, based on the principle of difference, and consider the actual losses suffered or likely to be suffered by the non-breaching party due to the breaching party's breach of contract. It should also be noted that the comprehensive discretionary method should be a supplementary calculation method, which is adopted when the loss of available benefits cannot be calculated according to the difference method, the analogy method, the agreement method, the estimation method, etc. This method is often the calculation method applied by the judge based on his inner conviction when the non-breaching party has been able to prove that the breaching party has constituted a fundamental breach, but is unable to prove the amount of loss of available benefits suffered by it according to the above methods.
To sum up, the principle of determining liability for damages for breach of contract is mainly the rule of compensation for actual losses and the rule of compensation for predictable losses, the former means that the amount of compensation for losses should be equivalent to the losses caused by the breach of contract, and the latter refers to the maximum limit that shall not exceed the losses that may be caused by the breach of contract that the breaching party foresaw or should have foreseen at the time of entering into the contract. In practice, it is often difficult to calculate the actual loss, and it is more reasonable to calculate the actual loss in accordance with the local standard for the same period. However, sometimes there are certain particularities in the subject matter of the case, which makes it unreasonable to use the local contemporaneous standard as the calculation standard. At this time, the court can weigh each other based on the evidence provided by the parties and the results of the active investigation to arrive at a reasonable calculation standard.