LIQUIDATED DAMAGES AND PENALTY CLAUSES : A COMPARISON BETWEEN SINGAPORE AND CHINA

Abstract

Singapore is a common law country which has inherited its legal tradition from English common law while China is a country that follows the civil law tradition based on the German Civil Code. Both countries follow different judicial traditions and have different provisions for the law of contracts. Such differences may lead to conflicts between contractual parties with international relationships. One main area of concern is the provision of liquidated damages as both countries have different concepts of liquidated damages and penalty clauses.

Liquidated damages clauses are commonly included in construction contracts to deal with construction delays. In Singapore and in other common law jurisdictions, liquidated damages are clearly defined as a genuine pre-estimate of likely losses suffered in the event of a breach of contract. Liquidated damages and penalties are clearly differentiated and penalty clauses are unenforceable. In contrast, the Chinese courts do not differentiate liquidated damages and penalties. Penalties are generally acceptable and encouraged to ensure compliance with contractual obligations, however adjustments to the stipulated quantum of liquidated damages can be made by Chinese courts. Liquidated damages will be regarded as excessively high when it exceeds actual losses by 30 per cent as provided in judicial interpretations.

Thus, the law applicable to liquidated damages and penalties appear to be different in Singapore and China. As such, differences and areas of linkage between both systems are addressed in a comparative analysis in this dissertation. Further, interviews have been conducted with professionals from Singapore and China, to gather expert opinions and more in-depth information,

This dissertation shows that although Singapore and China have adopted different approaches in dealing with liquidated damages and penalty clauses, the two different paths lead to the same goal. Liquidated damages clauses are essentially compensatory in nature and fair have to be fair to contracting parties.