What is the upper limit of the liquidated damages?
Publish Time：
2025-05-14
Article 114, Paragraph 1 of the Contract Law stipulates: The parties may agree that one party shall pay a certain amount of liquidated damages to the other party in the event of a breach of contract, depending on the circumstances of the breach; they may also agree on a method for calculating the amount of damages caused by the breach. Therefore, liquidated damages have a punitive nature and are not premised on the non-breaching party suffering losses.
Generally, the upper limit of liquidated damages for breach of contract does not exceed 30% of the losses incurred. However, if it is too high or too low, the court may be requested to reduce or increase it.
Article 114, Paragraph 2 of the Contract Law stipulates: If the agreed liquidated damages are lower than the losses incurred, the party may request the court to increase them; if the agreed liquidated damages are excessively higher than the losses incurred, the party may request the court to reduce them appropriately. However, liquidated damages are a pre-estimated amount of potential losses caused by a breach of contract by one party at the time of contract signing, and it is impossible for them to perfectly match the actual losses of the non-breaching party after the breach; therefore, this can be left to the judge's discretion. The law stipulates predetermined liquidated damages, which not only puts psychological pressure on the parties but also avoids the trouble of calculating losses after a breach and the trouble of proving the extent of losses, allowing the parties to quickly determine their specific responsibilities. Therefore, if a party needs the court to increase the amount of liquidated damages, or if the liquidated damages are excessively higher than the losses, they must bear the responsibility of proving the extent of the losses.
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