The concurrence of the liabilities for breach of contract regarding the same behavior

In order to effectively constrain the counterparty’s behavior and reduce the risk of breach of contract, a contract may prescribe more than one liability for breach of contract regarding the same behavior. For example, if a party failed to pay on due date, it shall bear the interest for overdue payment, in addition, it shall also bear the liquidated damages for overdue payment. When a contract prescribes different liabilities for breach of contract regarding the same behavior, whether the non-defaulting party could claim for all? It shall be determined case by case.

Regarding lending contracts, the current judicial interpretation has stipulated that the non-defaulting party could claim selectively or together, with a maximum limitation. Specifically, according to Article 29 of the ” Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Laws in the Hearing of Private Lending Cases”, “If the lender and the borrower have agreed on overdue interest rate, liquidated damages for breach of contract or other expenses, the lender may choose to claim for overdue interest, liquidated damages for breach of contract or other expenses, or claim all of them, but the part that exceeds four times the market interest rate for one-year loan at the time of the conclusion of the contract shall not be supported by the People’s Court.”

Regarding the rest contracts, the current laws, regulations and judicial interpretations have not stipulated any provision. In judicial practice, there are two main viewpoints.

The first viewpoint is that the liabilities for breach of contract regarding the same behavior shall be claimed selectively, because the root for different liabilities is the same behavior, and the main loss is the interest, which means the interest paid by the defaulting party could cover the non-defaulting party’s loss. For example, in the case (2020) Zui Gao Fa Min Shen No.1964, the Supreme People’s Court held that, both the fund occupation fee and the liquidated damages for termination of the contract are based on the same behavior of company X’s overdue payment, and the loss of overdue payment is mainly the interest loss. Therefore, the first and second instance judgments support company T’s claim to calculate the liquidated damages for delayed performance at an annual interest rate of 24%, which is sufficient to compensate company T’s loss, so the judgments reject company T’s claim for the liquidated damages for termination of the contract is correct.

The second viewpoint is that the liabilities for breach of contract regarding the same behavior shall be claimed together, because the nature of overdue payment interest and liquidated damages is different. For example, in the case (2020) Zui Gao Fa Min Zhong No.1310, the Supreme People’s Court held that, although both overdue payment interest and liquidated damages are arising from the overdue payment behavior, the nature of the two liabilities is different; the overdue payment interest is a kind of statutory fruits, however, the liquidated damages agreed by the parties has both the compensatory and punitive effects, which could urge the parties to voluntarily perform its own responsibilities, protect the reasonable expectations of the parties, and guarantee the safety of the transaction.

The above two viewpoints are generated from the two typical cases held by the Supreme People’s Court. But in judicial practice, more courts held a third viewpoints, which is the court would support the non-defaulting party to claim for all liabilities for breach of contract arising from the same behavior, in addition, the court could adjust the summation of all liabilities based on the principles of balance of interests, good faith, fairness, and the various factors of individual case. For example, in the case (2017) Zui Gao Fa Min Zhong No.820, the Supreme People’s Court held that, according to the contract, company Z shall refund company J the remaining advance payment of, and compensate 93.2 million CNY to company J for the liquidated damages; however, the polycrystalline silicon market had a sharp decline, the whole industry had a decline as well, the relevant business operators would adopt measures such as restricting production and sales to prevent losses, so company Z refused to sale the product is practical and reasonable. Finally, the Supreme People’s Court adjusted the summation of overdue payment interest and liquidated damages, ordered company Z to refund the advance payment and pay the interest during the period of fund occupation according to the benchmark interest rate of similar loans of the People’s Bank of China for the same period.

In order to reduce the risk of breach of contract, a contract still could prescribe several provisions regarding the liabilities for breach of contract regarding the same behavior. However, the non-defaulting party should not set a high expectation regarding the punitive liabilities. In a lawsuit, it is recommended for the defaulting party to collect more evidence from the perspective of the principles of balance of interests, good faith and fairness, by which it could persuade the court to reduce the summation of liabilities for breach of contract.