On The Relationship Between Liquidated Damages And Damage Compensation

Our law does not have a corresponding rule on the relationship between liquidated damages and damage compensation, also no conclusion on the doctrine. This led to confusion in the judicial practice. Different courts have made an entirely different verdict on the same issue. The reason for pursuing controversy is that parties have not yet form a clear and accurate awareness on liquidated damages. Different natures of liquidated damages have different relationship with damage compensation. This paper is divided into two parts. The first part focuses on the nature of liquidated damages. The second part combs the relationship between liquidated damages and damage compensation.The first part studies on the nature of liquidated damages about two legal national legislation. Liquidated damages originated in Roman law. France and Germany enrich the connotation of liquidated damages in the course of development. They divide liquidated damages into punitive liquidated damages and compensatory liquidated damages. Common law only recognize its compensatory and not punitive. But as punitive damages extend trends in contemporary British and American contract law. Two legal national legislations show a "convergence". Penalty system in our country is on the system of civil law. Our "Contract Law" has made special provision in liquidated damages. Paragraphs 1 and 2 of the article 114 shall be compensatory liquidated damages. Whether the liquidated damages are punitive liquidated damages on paragraph 3 of the article 114 is in dispute. From changes in the drafting of the liquidated damages clause, Contract Law highlights compensation liquidated damages but does not exclude punitive liquidated damages. If the parties expressly agree upon between the punitive liquidated damages, the clause is in force.The second part of the article is to explore the relationship between liquidated damages and damage compensation. The relationship between different natures of liquidated damages and damage compensation is different. We have to take the function and the purpose of the contract into consideration. For punitive liquidated damages, its main function is to punish default of contract. The establishment of punitive liquidated damages is not based on the existence of actual losses. If there are punitive liquidated damages agreed, the debtor needs to compensate for losses expect to pay liquidated damages. In the case of liquidated damages with compensatory, the liquidated damages is considered as scheduled losses and the creditor can’t demand compensation for losses. For different forms of default, the content of liquidated damages and damage compensation are not necessarily consistent. While the content is not consistent, the creditor can demand both liquidated damages and compensation. The relationship between compensatory liquidated damages is more complex than punitive liquidated damages. Damages scheduled by compensatory liquidated damages are in different from losses caused by breach of contract. We should take it seriously.