Damage Provision
Statutory mechanisms within Chinese contract law permit contracting parties to agree on a pre-determined sum to be paid in the event of a breach. Under the prc civil code article 585, these liquidated damages are designed to simplify the recovery process by avoiding the difficult task of proving actual financial losses. This clause is common in textile supply agreements, where it specifies a daily penalty for delayed shipments of raw flax or finished linen.
This contractually agreed amount provides both parties with financial predictability from the moment the agreement is executed.
Judicial Adjustment
Enforcing these pre-determined sums is subject to judicial review if the agreed amount is excessively higher or lower than the actual losses sustained. The code empowers Chinese courts and arbitration tribunals to adjust the penalty upon the request of either party. If the liquidated damages for a delayed linen shipment are deemed disproportionate to the buyer’s actual commercial harm, the tribunal can reduce the penalty to a more reasonable level.
Conversely, if the actual damages far exceed the agreed sum, the court can increase the award to cover the difference.
Contractual Balance
Balancing this provision prevents punitive clauses from creating an unfair financial burden while ensuring that the non-breaching party is adequately compensated. In the export of linen fabric, this adjustment mechanism encourages realistic penalty structures in commercial contracts and prevents speculative or punitive financial demands.
