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First, extremely high penalties can be allowed neither by China nor by England. The slightly practical difference is that English judges would invalidate penalty clause while Chinese judges would reasonably reduce the excessive sum. Yet the benchmark either for adjusting of the excessive sum in China, or for assessing the validity in England, still hinges on the actual loss of breach of contract. Therefore, there is little doubt that compensatory damage is the highest value in both legal systems for liquidated damages of breach of contract.
The only difference may be simplified as a matter how excessive the liquidated damages can be. Assuming the indicator of excessiveness as X, in England X can only be equal to or less than Zero whereas in China X could be slightly more than Zero and up to 30% of the amount of the actual loss of breach of contract.
In a sense, penalty clause is dealt with in different ways with (and) the same goal in the two jurisdictions.
3. Comparative Study: Underlying reasons
The difference of penalty clause in China and England discloses a trade-off in contract law regime. Such trade-off comes from a tension between freedom of contract and the protection of public order, in particular the principle of equality. Since both of the principles are the fundamental tenets in contract law framework, a trade-off can be hard to be reached when the two tenets confront each other. It is impossible to take the two tenets even.
Nevertheless, taking one principle superior to the other, different or even adverse approaches come out. Making it clearer, on the one hand, penalty clause should have been valid under the principle of freedom of contract; on the other hand, there must be some kind of control because excessively high amount of penalty clause may infringe public policy, or raise abusive or unfair or unconscionable activities. Accordingly, both approaches have good grounds to be supported. Nevertheless, in order to solve an issue of penalty clause, every jurisdiction has to make a choice, either preferring the freedom of contract or the protection of public order, and not both. Consequently, China and England goes their own ways at this point.
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