Study On The Appropriate Reduction Of Penalty

The appropriate reduction of penalty rules ar e stipulated in Artic le 114(2)of the Contract Law of the People’s RepublicofChina.This article allows the parties to submit to the court or the arbitration institution an appropriate reduction in the amount of the penalty when the agreed penaltyis excessively higher than the loss caused by default.Since the reduction of the penalty is interfering with the parties’ autonomy essentially and will have a greater impact on the interests of both parties,so it is necessary to take this issueseriously.However,aboutthe appropriate reduction of penalty,China’s current law is too sim ple and abstract,and the relevant theoretical research is also relatively weak.This leads to the judges often confused on the amount of the reduction.This article will di scuss the appropriate reduction of penalty by combining with relevant legal provisions and judicial practice,in order to reduce the confusion in the judicial operation.Besides the introduction,this article consists of four parts:The first p art,the th eoretical analysis of the appropriate reduction of penalty.The legitimacy of the appr opriate reduction is to achieve substantial fairness by re stricting the contractual freedom of the partie s.In spite of the need to preserve substantive justice,it is necessary to give the judge th e right to reduce the penalty.The adjustment of penalty should be controlled within a reasonab le limit.On the contrary,it will constitute excessive interference of the freedom of contract.In the current judici al practice in our country,due to the lack of awareness of the function of performance supervision,the frequency of reduction of penalty by the court is very high.It form s bad demonstration effect.In the actual operation of the appropriate reduction of penalty,the judge should establish the concept of “taking the principle of refusing to reduce penalty,taking the reduction of penalty as an exception”.Do not easily reduce the penalty.The extent of the reduction of penalty should not be too large.The second part,the discussion on the stan dard of the appropriate reduction of penalty.According to the provisions of Article 114 of the Contract Law,the basis of reduction is that“the agreed pen alty is exces sively higher than th e losses caus ed”.Article 29 of the Judicial Interpretation of Contract Law provides two criteria for judges to determine whether the penalty is excessively high,one is a com prehensive measure and the other is a 30% rigid standard.The comprehensive measure emphasize that the judge need to com bine with the specific circumstances of the case and consider a series of related factors to d etermine whether the penalty is excessively high.According to the 30%standard,penalty more than 30% of the loss can be identified as excessively hi gher than the loss.Judges should not stick to the 30%standard and ignore the specific differences between cases.This practice is likely to cause substantial injustice.The third part,factors of consideration of the appropriate reduction of penalty.The loss caused by the breach o f contract is the m ost important consideration of the red uction of penalty.The loss caused by default is also th e benchmark to judge whether the penalty is excessively high.In determ ining the loss cause d by default,we should pay attention to two aspects:First,the loss ca used by d efault should include the loss of profit;Second,the loss caused by default should be determ ined by th e performance of the contract.W hen judges reduces the penalty,they also need to refer t o other relevant factors.Other considerations that are clearly set out in the Judici al Interpretation of Contract Law and the Guiding Opinions on the Trial of Civil and Commercial Contracts are the loss of profit,the performance of th e contract,the degree of the fa ult of the pa rties,the contracting status and the standard terms.Among them,the loss of profit and the pe rformance of the contract belong to the category of the loss caused by the breach of contract.In addition to the degree of the fault of the parties and the contracting status,the debtor ’s benefit,the economic capacity of the debtor to take responsibility and changes in the social and econom ic situation and other factors also should be taken into account.Thefourthpart,the procedural operationof the appropriate reduction of penalty.According to China’s current law,the appropriate reduction of penalty can only be applied by the debtor to start,the court m ay not take the initiativ e to reduce the am ount of penalty.The debtor’s application for reduction of pena lty may be made either in a counterclaim or in a defensive manner.When the debtor conducts a disclaim er and the judge considers that the defense can not be established,the judge shall interpret the debtor in respect of the appropriate reduction of penalty.The interpretation of the appropriate reduction is justified,but the judge’ s interpretation should be m oderated.The judge can not repeatedly ask th e debtor whether the penalty is excessively high.The judge can not express his own judg ment on the amount of penalty.The judge shall rem ain neutral in th e judicial decision.The burden of proof for excessively high penalty is on the debtor,and shall not be transferred in the proceedings.