Deposit clause and liquidated damages clause in civil code

In the civil code, deposit clause and penalty clause are two different ways of contract guarantee, which play different roles in the contract.

The deposit clause is agreed by both parties when signing the contract, and one party pays a certain amount of money to the other party in advance as a guarantee to ensure the performance of the contract. The function of deposit is to increase the commitment and sense of responsibility of both parties to the contract by paying a certain amount in advance. If the contract is successfully performed, the deposit will usually be deducted as part or all of the contract price; If one party breaches the contract, the deposit can be deducted by the other party as liquidated damages.

The penalty clause is agreed by both parties in the contract. When one party breaches the contract, the breaching party shall pay a certain amount of compensation to the observant party. The function of liquidated damages is to impose economic sanctions on the breaching party to make up for the losses suffered by the observant party due to breach of contract. The amount of liquidated damages can be agreed by both parties to the contract, but it should be reasonable and not too high or too low.

It should be noted that the nature of deposit and liquidated damages is different. The deposit is the guarantee paid in advance, and its nature is more inclined to a guarantee method; Liquidated damages is a kind of sanction for breach of contract, and its nature is more inclined to a way of compensation. Therefore, when the deposit clause and the penalty clause are agreed in the contract at the same time, their respective applicable conditions and effects should be clarified to avoid ambiguity and controversy.

In addition, according to the relevant provisions of the Civil Code, when the parties agree on the deposit and liquidated damages, they should follow the principle of fairness and reasonably determine the amount of the deposit and liquidated damages. If the amount of deposit or liquidated damages is too high or too low, it may be considered unreasonable, resulting in the invalidity of relevant provisions.

To sum up:

The deposit clause and liquidated damages clause in the civil code are two different ways of contract guarantee. The deposit clause is guaranteed by paying a certain amount in advance, while the penalty clause is to pay a certain amount as compensation when one party breaches the contract. The parties should follow the principle of fairness when agreeing on the deposit and liquidated damages to ensure the rationality and effectiveness of the terms.

Legal basis:

People's Republic of China (PRC) Civil Code

Article five hundred and eighty-six stipulates:

The parties may agree that one party shall pay a deposit to the other party as a guarantee for the creditor's rights. The deposit contract is established when the deposit is actually paid.

The amount of the deposit shall be agreed by the parties; However, it shall not exceed 20% of the subject matter of the main contract, and the excess shall not have the effect of deposit. If the actual amount of deposit paid is more than or less than the agreed amount, it shall be deemed as a change of the agreed amount of deposit.

People's Republic of China (PRC) Civil Code

Article five hundred and eighty-seven stipulates:

If the debtor performs the debt, the deposit shall be used as the price or recovered. If the party paying the deposit fails to perform the debt or the performance of the debt is not in conformity with the agreement, thus the purpose of the contract cannot be achieved, it has no right to request the return of the deposit; If the party receiving the deposit fails to perform the debt or the performance of the debt does not conform to the agreement, so that the purpose of the contract cannot be achieved, the deposit shall be returned twice.

People's Republic of China (PRC) Civil Code

Article 585 stipulates that:

The parties may agree that when one party breaches the contract, it shall pay a certain amount of liquidated damages to the other party according to the situation of breach of contract, and may also agree on the calculation method of the amount of compensation for breach of contract.

If the agreed liquidated damages are lower than the losses caused, the people's court or arbitration institution may increase the liquidated damages at the request of the parties; If the agreed liquidated damages are excessively higher than the losses caused, the people's court or arbitration institution may appropriately reduce them at the request of the parties.

If the parties concerned pay liquidated damages for delayed performance, the breaching party shall also perform the debt after paying the liquidated damages.