Liquidated damages and deposits in a Chinese contract (违约金, 定金)

A Chinese court or arbitral tribunal enforces a liquidated damages clause (违约金) but, on request, can cut or raise it. Since December 2023 a figure over 30% above the proven loss can generally be cut, except for a breach in bad faith. A deposit (定金) is capped at 20% and can cost its recipient double.

Your Chinese distributor’s contract says late payment costs 0.05% a day, and the first deposit has arrived marked 定金. Both look like protection. The agreed figure is a starting point, though, and a Chinese court can reduce it if the distributor shows it is well above your loss, and it can raise a figure that is too low. The deposit works the other way: if you are the side that fails, you pay it back twice over. This page sets out what each term is worth if the contract is ever enforced.

Will a Chinese court enforce our liquidated damages clause?

Yes, but not necessarily at the agreed figure. The parties may fix a sum payable on breach, or a formula for calculating the loss. A court or an arbitral tribunal may then increase a sum that is lower than the loss, or appropriately reduce one that is excessively higher. It does either only when a party asks (Civil Code, Article 585).^⁠[1] Paying damages for delay does not end the duty to perform: the late party still owes the goods or the money.^⁠[1]

The party asking for a cut may do it by counterclaim or simply as a defence, and it carries the burden of proving the figure is too high. The party defending the figure is expected to bring evidence that it is reasonable.^⁠[2] A party asking for an increase needs evidence of a loss above the figure, since that is the condition Article 585 sets.^⁠[1] A clause stating that the sum may not be adjusted does not, on its own, stop a court adjusting it.^⁠[2]

How far above the loss can the figure go?

About 30%, as a general guide rather than a cap. Since 5 December 2023 the Supreme People’s Court’s interpretation of the Contract Book has said that a figure more than 30% above the loss caused can generally be found excessively high (Article 65).^⁠[2] The loss is measured as for ordinary damages: what the breach cost, including profit the contract would have earned, limited to what the party in breach foresaw or should have foreseen when it signed.^⁠[1]

Question	What the interpretation says
Starting point	The loss as defined in Civil Code Article 584
Other factors	Who the parties are, the type of transaction, how far the contract was performed, each side’s degree of fault, and the background to performance
When is it “excessive”?	More than 30% above the loss can generally be found excessive
Who proves it?	The party in breach that asks for the reduction
A clause saying “no adjustment”	Not, by itself, a reason to refuse one
Breach in bad faith	A request for a reduction will generally not be supported

Our distributor paid 120 days late. What is the clause worth?

Say a Dutch coffee-equipment brand sells RMB 1 million of machines to its distributor in Ningbo, and the distributor pays 120 days late. If the contract says nothing about late payment, a court can calculate a seller’s late-payment loss at the one-year loan prime rate (LPR) plus 30% to 50% (Sales Contract Interpretation, Article 18).^⁠[3] At the 3.0% rate announced on 20 September 2026, that comes to RMB 12,822 to RMB 14,795.^⁠[4]

Now suppose the contract charges 0.05% a day, which produces RMB 60,000. If the distributor asks for a cut and the only loss the brand can prove is the interest at the upper figure, 30% above RMB 14,795 is RMB 19,233. Anything beyond that is the kind of excess a court can generally reduce.^⁠[2] If the brand can prove more, such as a resale it lost because the money was late, the line moves up. If the distributor held back the money in bad faith, a court will generally not cut the figure at all.^⁠[2]

The worked figures change every month, because the LPR is announced again on the 20th. What does not change is the shape: the clause sets the ceiling, and the loss you can prove decides how much of it survives a request to cut. Where the distributor relationship itself is still being set up, distributor or agent in China without a company covers the terms that come before this one.

When will a court refuse to cut the figure?

When the party in breach acted in bad faith. Guiding Case 166 is the Supreme People’s Court’s own example.^⁠[5] In 2016 Beijing Chengjian Heavy Industry owed a trading company about RMB 5.28 million under a judgment, and the two settled while the appeal was pending. The debtor would pay RMB 3 million by 14 October and RMB 2.77 million by 31 December. The creditor would ask the court to lift its freeze on the debtor’s assets, and missing a payment would cost RMB 800,000.

The creditor lifted the freeze; the debtor paid the first instalment and stopped. It then argued that RMB 800,000 was too high and ignored the creditor’s actual loss. The Fengtai District court in Beijing awarded the full sum, and the Beijing No. 2 Intermediate court upheld it in 2017. A commercial party that promised a high figure, then broke the settlement once its accounts were free, had acted in bad faith.^⁠[5] The 2023 interpretation now states the rule in general terms.^⁠[2]

定金, 订金 or 押金: which deposit carries the double-return rule?

Only 定金 (dìngjīn), and only once it has been paid. It may not exceed 20% of the value of the main contract, and anything above that has no effect as a deposit. If the payer fails to perform so that the contract’s purpose cannot be achieved, it loses the deposit. If the recipient does, it returns double.^⁠[1] A payment called 订金, 押金, 保证金 or 订约金 is not a 定金 unless the contract gives it that character.^⁠[2]

Take the same brand accepting RMB 150,000 marked 定金 on a RMB 500,000 first order. Only RMB 100,000 is a deposit, because of the 20% cap.^⁠[1] If the distributor walks away from the order, the brand keeps RMB 100,000; if the brand fails to ship, it repays RMB 200,000 on that part. A seller that takes a 定金 is the side exposed to the double return. The limits where both sides are in breach, or part of the order was delivered, are in the contract checklist.

Can we keep the deposit and claim the liquidated damages too?

No. Where a contract has both, the party not in breach chooses one of them (Civil Code, Article 588).^⁠[1] If it chooses the deposit and the deposit falls short of the loss, it may claim the loss above the deposit.^⁠[1] Which choice is worth more depends on the figures in that contract, so the two terms are worth reading side by side before signing rather than after a breach.

Does any of this apply if our contract is under English law?

Only if Chinese law governs the contract. Parties to a contract with a foreign element may choose the law that governs it (Choice of Law Act, Article 41).^⁠[6] English law treats an excessive clause differently: it does not adjust the figure, it asks whether the clause is a penalty.^⁠[7]

	Chinese law	English law
The test	Is the figure lower than the loss, or excessively higher than it (generally, more than 30% above)?	Does the clause impose a detriment out of all proportion to the innocent party’s legitimate interest in performance?
If it fails the test	The court or tribunal reduces it, or raises it, on a party’s request	The clause is an unenforceable penalty
What counts beyond the loss	The parties, the type of deal, how far it was performed, each side’s fault and the background	A legitimate interest may go beyond compensation, as for the £85 parking charge upheld in ParkingEye v Beavis

The governing law and the forum are separate choices, and the cost and enforcement of each forum are set out in arbitration or a Chinese court. A contract commercial review sets the 违约金, the deposit and the governing law beside the payment terms they would enforce. The value of each is then known before anyone signs.

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