Very often, Chinese lawyers get frustrated in courts, when judges decide to lower the pre-set amount of liquidated damages in a contract in dispute at the request of the defendant made in accordance with the second paragraph of Article 114 of PRC Contract Law, which says “in the case that the amount of liquidated damages is lower than the losses caused, the parties to the contract may request the court or arbitration institution to increase that amount; in the case that the amount of liquidated damages is excessively greater than the losses caused, the parties to the contract may request the court or arbitration institution to appropriately decrease that amount”. I have personally undergone such frustrations in real estate disputes in Shanghai courts, where the courts simply refused to respect the agreement of parties on the liquidated damages.

In response to such courts’ practice, some lawyers have come up with the idea that the agreed amount of liquidated damages may be recognized and enforced by courts if the breaching party has waived its right to request court or arbitration institutions to decrease the amount of liquidated damages. At least, such waiver should be able to enhance the chances of upholding such amounts by the non-breaching party.

However, here comes the question: will such clause be held valid by courts? The answer is not unequivocal.

Lawyers tend to hold that such clause should be valid and enforceable. Under PRC Contract Law, Article 52 is cited when analyzing the validity of a contract clause. When examining the clause thereunder, we see no violation thereof by such agreement on such waiver.

However, judges are more inclined to hold that such clause is invalid. Theoretically, it is the courts’ opinion that such right is in nature a right for judicial remedy, which right is a fundamental and constitutional right, an un-deprivable and un-waivable right. Practically, it is a historical momentum of Chinese courts to intervene the self-autonomy of private parties. Such stance of the courts may be just another embodiment of that propensity in Chinese judiciary system.

Unclear though it is about the validity of such waiver or about whether a waiver clause can bar the court from exerting the power to review the liquidated damages, we found that courts may still look directly at the liquidated damages clause in spite of such a waiver.

On April 24, 2009, the second piece of judicial interpretation of PRC Contract Law (the “Interpretation”) by the Supreme People’s Court of China was promulgated, casting light on the apprehension of Article 114. While it is silent in regard of validity of such waiver, according to the Interpretation, upon a party claiming that the amount of the liquidated damages is too high, the people’s courts shall, based on the principles of equity and good faith, make decision by taking into consideration of the overall factors such as real losses, performance of contract, fault of parties and expected benefits. Literally, it says that upon request by a party, the courts will generally look at whether or not the agreed liquidated damages are fair and made in good faith.

However, we noticed that in a judgment ([2004]MinErZhongZi No.125) delivered by the Supreme People’s Court, it was held that “liquidated damages are mainly intended to compensate the losses of a party, not to severely punish the defaulting party; in our contract law, liquidated damages are used principally as a form of civil liabilities, therefore, such clause cannot be left at the absolute discretion of the parties, esp, those clauses involving unduly excessive amount of liquidated damages. Otherwise, it will virtually mean encouraging people to rip off huge profits through inappropriate methods”. From these lines, it seems quite apparent that courts can go straight to review clauses concerning liquidated damages no matter there is a waiver clause or not.

Further, during the making of the Interpretation, there was once a draft setting forth that “in the case of intentional breach of contract, the people’s courts shall not support the request made by breaching party to lower the amount of liquidated damages”. But in the end, this sentence was taken out, further indicating that the Supreme People’s Court will even adjust the amount of liquidated damages in the case that a party has intentionally committed breaches.