Social Sciences in China (Chinese Edition)

No.5, 2020

Prediction Research on the Discretionary Reduction of Liquidated Damages

(Abstract)

Qu Maohui

There has been a good deal of normative research on the discretionary reduction of liquidated damages, but little on result prediction derived from an econometric analysis model. Prediction research can solve the problems of the single judgment basis of the excessiveness of liquidated damages in current law and of the lack of a unified standard in judicial practice. Structured interviews with some judges have allowed us to clarify the rules of sample selection and variable setting before undertaking the prediction study. Taking as a sample the relevant judgments released by China Judgments Online, we conducted a quantitative analysis which showed that it is indeed reasonable to take 30 percent higher than the actual loss as the standard for judging the excessiveness of liquidated damages. However, it is also necessary to increase two more standards, i.e., 20 per cent of the contract amount and the degree of contract performance. On the question of whether reduction of the liquidated damages should be discretionary or total, the greater the subjective malice of the defaulting party or the greater the consideration given to the industry’s transaction customs and objective circumstances, the less chance there is of reducing liquidated damages and of totally reducing the liquidated damages on account of actual loss, and also the less chance of subtracting the total liquidated damages in consideration of the actual loss. Among factors to be taken into account, the ratio of the agreed penalty to the total contract price and the expected benefits has a significant impact on the discretionary reduction of liquidated damages, while with regard to the different nature and types of contract, the different considerations affecting liquidated damages have a significant impact upon the result of discretionary reduction. There is no conflict between prediction research in which quantitative analysis is the guiding method and the study of legal dogmatism; the latter lays the foundation for the former, while the former provides arguments and ideas for the latter.