Introduction

Article 585 of China’s Civil Code addresses agreed liquidated damages and the court’s power to adjust them. The article provides that if the agreed liquidated damages are lower than actual losses, the aggrieved party may petition the court or arbitration institution for an appropriate increase. This article examines the application of this provision in practice.

I. Statutory Framework

Article 585 of the Civil Code establishes:

1. Agreed liquidated damages: Parties may agree in advance on a specific amount of liquidated damages for breach.

2. Increase application: If the agreed amount is clearly lower than actual losses, the aggrieved party may petition for increase.

3. Reduction application: If the agreed amount is clearly higher than actual losses, the breaching party may petition for appropriate reduction.

4. Judicial discretion: Courts have discretion to adjust amounts based on actual circumstances.

II. Key Issues in Application

1. “Clearly Lower” or “Clearly Higher” Standard

Courts apply an objective standard to determine whether damages are clearly disproportionate. Mere disagreement on amount does not trigger adjustment—circumstances must make the disparity clear.

2. Burden of Proof

• For increase requests: Aggrieved party must prove actual losses and that agreed damages are clearly insufficient
• For reduction requests: Breaching party must prove the agreed amount exceeds foreseeable losses

3. Foreseeability Limitation

Damage calculations are subject to foreseeability principles—the breaching party is only liable for damages foreseeable at contract formation.

III. Malicious Breach Considerations

1. Punitive Damages in Contract Disputes

Chinese law does not generally provide for punitive damages in contract disputes. However, in cases of malicious breach:

• Courts may apply higher liquidated damages
• Behavioral corrections may factor into judicial discretion
• Specific statutes (e.g., consumer protection law) may provide punitive damages

2. Effect of Good Faith on Damages

The breaching party’s good faith or malice affects judicial assessment:

• Malicious breach may support higher damage awards
• Good faith breach may support reduction if amount clearly exceeds losses
• Courts balance deterrence with party autonomy

IV. Practical Strategies

1. For Aggrieved Parties

• Document actual losses comprehensively
• Provide detailed calculation basis
• Argue malicious conduct supports higher damages
• Consider alternative claims (e.g., tort liability)

2. For Breaching Parties

• Challenge causation between breach and claimed losses
• Argue damage amount exceeds foreseeability
• Negotiate settlement before litigation
• Present financial hardship evidence where relevant

V. Conclusion

Article 585 provides important flexibility in damage calculations. Parties should carefully consider potential adjustments when drafting liquidated damages provisions, and should present comprehensive evidence to support their positions on damage amounts.