| As one of the forms of liability for breach of contract, liquidated damages is widely used in civil and commercial affairs, where the penalty is one of the core contents of Continental law system. Article 114 paragraph 2 of PRC Contract Law also specifies the liquidated damages reduction rules, but due to the imperfect of legislation makes the rule was abuse in judicial practice. The purpose of this paper is to through the introduction of the related theory of liquidated damages, analysis of the rules in our country's legislation and judicial exists many problems, put forward in the process of civil code revision for liquidated damages reduction rules of legislative proposals. First of all, it is necessary to distinguish the nature of liquidated damages, and the penalty is generally not deductible. Secondly, we should integrate the existing discretionary factors. Finally, it is clear that the main consideration in the process of compensation penalty is all losses caused by default. |