Article 114    The parties may stipulate that in case of breach of contract by either party a certain amount of penalty shall be paid to the other party according to the seriousness of the breach, and may also stipulate the method for calculating the sum of compensation for losses caused by the breach of contract.
If the stipulated penalty for breach of contract is lower than the loss caused by the breach, the party concerned may apply to a people's court or an arbitration institution for an increase. If the stipulated penalty for breach of contract is excessively higher than the loss caused by the breach, the party concerned may apply to a people's court or an arbitration institution for an appropriate reduction.

2.       Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of the Contract Law  of the PRC (Fa Shi [2009] No. 5)(Ⅱ)（最高人民法院关于适用《中华人民共和国合同法》若干问题的解释（二））

 Article 29    Where a party alleges that the agreed amount of liquidated damages is excessively high and requests an appropriate reduction thereof, the people's court shall, according to the principles of equity and good faith, take a measurement and render a decision on the basis of actual losses and by taking into consideration such comprehensive factors as the performance of contract, fault of the parties concerned and anticipated profits.

Where the amount of the liquidated damages agreed upon by the parties concerned exceeds 30 percent of the losses incurred, it may be generally deemed as "excessively higher than the loss caused by the breach" specified in Paragraph 2 of Article 114 of the Contract Law.

3.       Notice of the Supreme People's Court on Printing and Circulating the Guiding Opinions on the Trial of the Cases Involving Disputes Arising from Civil and Commercial Contracts in the Current Situations (Fa Fa [2009] No. 40) (最高人民法院关于当前形势下审理民商事合同纠纷案件若干问题的指导意见)

Article 8   In order to alleviate judicial proceeding of the parties concerned and resolve disputes over liquidated damages properly, if the breaching party carries out the exceptio liberatoria rather than requests the adjustment of liquidated damages on the grounds that the contract is not established, ineffective or invalid or no breach occurs, the people's courts shall interpret whether the parties concerned desire to assert that liquidated damages are excessively high. The people's courts shall allocate the burden of proof properly, the breaching party shall assume the burden of proof for the assertion that the liquidated damages are overcharged, and the non-breaching party which asserts that the liquidated damages are reasonable shall provide the related evidence as well. ……