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Subsequently, we have to probe the underlying reasons for the formation of different approaches in England and China. In England, the calculation of damage was traditionally thought of an exclusive duty of the court. The court was reluctant to share its exclusive power with the folk. Therefore penalty clause was constructed based on the protection of public order rather than the principle of freedom of contract. On the one hand, according to English contract law, liquidated damage is allowed only when it would be very difficult or impossible to determine the actual loss. As we can see, applying this exemption can certainly lower down the difficulty for the judge to calculate the damage concerned. On the other hand, since English judge takes the calculation of damage as its exclusive power, she cannot tolerate a penalty clause by fearing its exclusive power would be taken away in a disguised form by private contracts. Therefore, it is understandable that the judge would presume any liquidated damage as a void penalty clause from the outset.
In contrast with English framework, freedom of contract is a favourite tenet under Chinese contract law regime. Being an ancient legal tenet in Roman law and repeatedly underlined in the modern civil law reform, freedom of contract is dominant in civil law countries, including Chinese contract law regime. Consequently, penalty clause is dealt with mainly under the freedom of contract. If penalty clause is concluded by the genuine consent of the two parties, the judge will not invalidate such clause but enforce it. However, considering individual justice the court was retained the power to reduce an excessive penalty to a reasonable degree. Pursuant to such bifurcated approach, Chinese contract law draws a delicate balance between the two principles.
Here again, the conclusion can be reached that penalty clause is dealt with in different ways with the same goal in China and England. However, once putting the difference between China and England regarding penalty clause to an extreme extent, the practice of Chinese contract law, in my view, weighs a better balance than that of English system. The approach of English courts is too rigid. First, if both parties conclude a penalty clause by genuine consent and based on such insurance they can perform their own consideration with confidence, then it seems no reason for the court to intervene. Second, if assessing cases involving penalty clause individually, it will waste considerable litigation costs. From my perspective, they are the underlying reasons why Lord Woolf called for the English judges to take commercial factors into consideration and then to be slow to find a penalty clause. Compared with the inflexibility of English approach, Chinese approach works better. First, it provides a level playing ground for contractual players. Under such legal framework, contractual players enjoy more freedom to paint their contracts. Second, it will save litigation cost in any way. It is unnecessary for courts to review every case concerning penalty clause, if cooperation has taken place. Only when one party argues with the validity of penalty clause, the referee then blows his whistle.
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