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Traditionally, an obvious difference to implement penalty clause between civil law countries and common law countries has been detected by legal scholars. Many academic literatures think that “under civil law system, there is no reason to distinguish penalty clauses from liquidated damage, since they are both enforceable. However, when a penalty clause is excessive, courts have retained the discretion to reduce it to a reasonable amount, but only if the promisor asks for it” while “common law judges are quite reluctant to enforce liquidated damages, especially if they believe they include penalty clauses which are not enforceable” .
Bearing a doubt of this argument into mind, the following parts will try to investigate the interaction between the different exercises concerning the concept of penalty clause in two jurisdictions, China and England, by a comparative study and accordingly reconsider the above traditional perception.
II. Penalty Clause in My Home Jurisdiction: China
My home jurisdiction, China has established a civil-law tradition since it imported German civil law and translated into its first civil law in 1911. Nearly a century later, China adopted its latest contract law, which was, to a great extent, translated from United Nations Convention on Contracts for the International Sale Of Goods [1980] (CISG). Inheriting practices of continental European countries concerning penalty clauses, Chinese contract law does not really differentiate liquidated damages from penalty clause and therefore neither contains a notion of penalty clause within its provisions.
The relevant provision, Article 114 of Chinese contract law, prescribes that “[T]he parties may prescribe that if one party breaches the contract, it will pay a certain sum of liquidated damages to the other party in light of the degree of breach, or prescribe a method for calculation of damages for the loss resulting from a party’s breach … where the amount of liquidated damages prescribed excessively exceeds the loss resulting from the breach, a party may petition the People’s Court or an arbitration institution to decrease the amount as appropriate.”
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