138 Front.Law China(2006)1:121-152 which aims to fix in advance the damages payable in the event of default.The later may be claimed together with performance or damages.Art.114 of CCL is mainly on compensatory penalty.But as a deduction of the freedom of contract,punitive penalty is also permitted by CCL.So it can be said that CCL takes compensatory penalty as a general rule and punitive penalty as an exception.It also should be noted that compensatory penalty in CCL,not like art.340 par.2 of BGB,40 is not as a minimum sum of damages,but somewhat as the upper limit of recovery except it is increased by a court or an arbitration institution. When may a penalty clause be applied? First,there should be a principal obligation.The obligation raised by a penalty clause is accessory to the obligation to perform the principal obligation.As an accessory obligation,it premises the existence of a principal obligation. Second,there should be a breach that the penalty clause aimed. Third,should there be a"fault"on the part of a debtor?Now it has become a point in dispute in China.On one hand,so far as the "Strict Liability Principle"is adopted,it seems ratiocination that there should be no requirement of fault on the part of the debtor for the application of a penalty clause.On the other hand,it is suggested that there still should be a requirement of fault on the part of the debtor for the application of a penalty clause even CCL adopted Strict Liability Principle.As to my viewpoint,different kinds of situations should be distinguished.If the parties agreed that there should be a"fault"on the part of the debtor, the agreement should be followed.If it is in a situation of fault liability as laid down in the Special Part of CCL or other special laws,a "fault"on the part of the debtor should be required.If it is in a case of punitive penalty,as its purposes is to provide a means of pressure on the debtor so as to coerce him into performing his principal undertaking,and it also represents a punishment on the fault of debtor if there is a failure of performance,so it is reasonable to require a fault on the side of debtor.In a situation of compensatory penalty,so long as there are no exceptions as stated above,a"fault"on the part of the debtor should not be required.Because its nature is a kind of preliminary damages,and its purpose is to compensate for the loss caused by the debtor's breach of contract.42 Fourth,should there be a requirement to prove the existence of a loss?In a case of punitive penalty,as its nature is not a kind of preliminary damages,so for its application there is no need for a requirement of the occurrence of loss.3 But when it comes to a case of compensatory penalty,there are some conflicts of viewpoints.Since compensatory penalty is a kind of preliminary damages,so it is naturally thought that there should be a loss,even it is not required to prove the amounts of the loss,at least it should be required to prove its existence.But since one of the main purposes of a penalty clause is to avoid the trouble to prove the existence of loss,so it is generally accepted in China that there is no requirement for the plaintiff to prove the existence of loss while applying a penalty clause. 40 BGB art.340 par.2 states that where the creditor claims compensation for non-performance,he is entitled to the penalty as a minimum sum,and that a claim for further damages is not excluded. 4 See Jianyuan Cui ed.Law of contract,(2000,2nd ed.),p.320. 42 See Shiyuan Han,Some theoretic issues about the penal clause,in CASS Journal of Law,No.4 of 2003,p.20. 4See Shangkuan Shi,Law ofobligations:general provisions,(1954).Taiwan,p.499.which aims to fix in advance the damages payable in the event of default. The later may be claimed together with performance or damages. Art. 114 of CCL is mainly on compensatory penalty. But as a deduction of the freedom of contract, punitive penalty is also permitted by CCL. So it can be said that CCL takes compensatory penalty as a general rule and punitive penalty as an exception. It also should be noted that compensatory penalty in CCL, not like art. 340 par. 2 of BGB,40 is not as a minimum sum of damages, but somewhat as the upper limit of recovery except it is increased by a court or an arbitration institution. When may a penalty clause be applied? First, there should be a principal obligation. The obligation raised by a penalty clause is accessory to the obligation to perform the principal obligation. As an accessory obligation, it premises the existence of a principal obligation. Second, there should be a breach that the penalty clause aimed. Third, should there be a “fault” on the part of a debtor? Now it has become a point in dispute in China. On one hand, so far as the “Strict Liability Principle” is adopted, it seems ratiocination that there should be no requirement of fault on the part of the debtor for the application of a penalty clause. On the other hand, it is suggested that there still should be a requirement of fault on the part of the debtor for the application of a penalty clause even CCL adopted Strict Liability Principle.41 As to my viewpoint, different kinds of situations should be distinguished. If the parties agreed that there should be a “fault” on the part of the debtor, the agreement should be followed. If it is in a situation of fault liability as laid down in the Special Part of CCL or other special laws, a “fault” on the part of the debtor should be required. If it is in a case of punitive penalty, as its purposes is to provide a means of pressure on the debtor so as to coerce him into performing his principal undertaking, and it also represents a punishment on the fault of debtor if there is a failure of performance, so it is reasonable to require a fault on the side of debtor. In a situation of compensatory penalty, so long as there are no exceptions as stated above, a “fault” on the part of the debtor should not be required. Because its nature is a kind of preliminary damages, and its purpose is to compensate for the loss caused by the debtor’s breach of contract.42 Fourth, should there be a requirement to prove the existence of a loss? In a case of punitive penalty, as its nature is not a kind of preliminary damages, so for its application there is no need for a requirement of the occurrence of loss.43 But when it comes to a case of compensatory penalty, there are some conflicts of viewpoints. Since compensatory penalty is a kind of preliminary damages, so it is naturally thought that there should be a loss, even it is not required to prove the amounts of the loss, at least it should be required to prove its existence. But since one of the main purposes of a penalty clause is to avoid the trouble to prove the existence of loss, so it is generally accepted in China that there is no requirement for the plaintiff to prove the existence of loss while applying a penalty clause. 40 BGB art.340 par.2 states that where the creditor claims compensation for non-performance, he is entitled to the penalty as a minimum sum, and that a claim for further damages is not excluded. 41 See Jianyuan Cui ed. Law of contract, (2000, 2nd ed.), p.320. 42 See Shiyuan Han, Some theoretic issues about the penal clause, in CASS Journal of Law, No. 4 of 2003, p.20. 43 See Shangkuan Shi, Law of obligations: general provisions, (1954), Taiwan, p.499. 138 Front. Law China (2006) 1: 121–152