PRC Supreme Court Gives Effect to Agreement on Attorney’s Fees
By Patrick Zheng | Charles Qin
In Chinese litigation, the default approach is that each party is responsible for its own attorney’s fees regardless of the outcome. In this regard, the approach adopted by Chinese courts is more like the so-called “American rule”, which requires each party to pay its own legal costs, win or lose. Arbitrators in China-seated arbitrations often adopt the “costs follow the event” approach where the loser pays the winner’s legal costs (the so-called “English rule”).
The default approach taken by Chinese courts (“Chinese rule”) is, like the “American rule”, subject to a number of exceptions, under which the winning party can be awarded the attorney’s fees.
These exceptions include costs arising from:
(i) malicious, vexatious or sham proceedings or cases where a party abuses procedural rights or uses delaying tactics, resulting in direct losses to the counterparty or third party;[1]
(ii) tort claims where the party suffering from personal injury is to be compensated with reasonable legal costs incurred;[2]
(iii) intellectual property infringements where reasonable costs are incurred by the intellectual property holder whilst preventing the infringement;[3]
(iv) environmental public interest actions where the plaintiff requests the defendant to bear reasonable legal fees and other reasonable expenses for litigation;[4] and
(v) agreements by the parties on the allocation of attorney’s fees.
Under the exception (v) mentioned above, Chinese courts will enforce the “costs follow the event” rule if this approach is clearly agreed upon in the contract.
Nonetheless, when applying this contractually agreed “costs follow the event” exception, Chinese courts have tended to take a strict approach in assessing the amount of costs payable by the losing party. Chinese courts are inclined only to award the attorney’s fees that have already been paid to the attorney, and traditionally will not award the attorney’s fees that are agreed to be paid after the conclusion of the proceedings.
Where there is a contingency fee arrangement which is normal in Chinese litigation, the winning party[5] will not be able to present evidence such as invoices for the attorney’s fees to be awarded at the time that the Chinese courts are assessing costs.
A recent Chinese Supreme People’s Court (“Supreme Court”) judgment, discussed below, strengthens the scope for Chinese courts to give effect to a contractual agreement between parties on how legal costs are to be dealt with.
In this case, the Supreme Court ordered the losing party to pay the winning party the latter’s attorney’s fees including the fees which had not yet been paid.[6] This case is a useful illustration of recent developments in the regime for attorney’s fees under Chinese law.
Background
Qiang Li, Juan Yang (collectively “Borrowers”) and Xiaoguang Wu (“Lender”) entered into a Loan Agreement (“Loan Agreement”) in which the Lender agreed to lend money to the Borrowers.
The parties further agreed that in the event of breach of the Loan Agreement, the breaching party was to reimburse the non-breaching party the latter’s expenses incurred in taking legal actions, including but not limited to investigation fees, legal costs, and attorney’s fees.
Subsequently, the Borrowers failed to repay the loan due, so the Lender filed a lawsuit against the Borrowers, requesting for full payment of the loan.
The Lender engaged Jiangxi Zhongchu Law Firm in its legal representation. Under the Engagement Letter (“Engagement Letter”), the attorney’s fees for the first instance court proceedings were agreed at RMB 200,000. Half of the attorney’s fees had been paid prior to the court proceeding while the remaining half was to be paid after the conclusion of the proceeding.
Court Decisions
The trial court held that the attorney’s fees for the first instance proceeding were set under a valid Engagement Letter and that the Borrowers should pay the Lender 200,000 RMB for the attorney’s fees pursuant to the Loan Agreement—including the remaining part yet to be paid.
In the appeal, Qiang Li, one of the Borrowers, argued that the Lender should bear his own attorney’s fees as there is no legal basis that the breaching party shall bear the legal costs under Chinese law. In addition, the remaining unpaid fees under the Engagement Letter should be overruled since the costs have not yet been incurred.
The Supreme Court held that the core issue in this case was who should bear the attorney’s fees. The Supreme Court held that the attorney-client fee arrangement under the Engagement Letter was valid and enforceable as it complied with party autonomy and did not violate any mandatory law or offend public policy. In light of these general considerations, the Supreme Court dismissed the appeal and gave effect to the attorney-client fee arrangement when assessing the amount of legal costs the losing party should pay the winner.
Comment
The assessment of the amount of costs recoverable is usually carried out by the Chinese courts at the same time as, or very soon after, the substantive decision is made about who has won or lost the case. There is no equivalent of the common law “taxing” system, where a separate judicial officer assesses the amount of costs recoverable several months after the substantive judgment. This means that clients that pay their lawyers after the end of the case—whether by agreement or because of late payment—may end up being penalized by not being able to recover all of their attorney’s fees.
The Supreme Court’s decision is therefore a welcome clarification, but it still remains to be seen how lower courts follow this approach in practice.
【Endnote】
[1] Article 22, Several Opinions on Further Promoting the Simplified and Diversion of Cases and Optimizing the Allocation of Judicial Resources, Fa Fa [2016] No. 21.
[2] Article 17(3), Interpretation of the Applicable Law for the Trial of Personal Tort Claims, Fa Shi [2003] No. 20.
[3] Article 49, Copyright Law of the People’s Republic of China (2010 Amendment).
[4] Article 22, Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Environmental Civil Public Interest Litigation Cases, Fa Shi [2015] No. 1.
[5] As is the case in other countries, it may be difficult to determine which party has substantially succeeded when the plaintiff has been partly successful in his claim. In these circumstances, the court may have to apportion the costs.
[6] Xiaoguang Wu v Qiang Li, Juan Yang, Supreme People’s Court, (2016)最高法民终613号.
[7] Xiaoguang Wu v Qiang Li, Juan Yang, Jiang Xi High People’s Court, (2015)赣民一初字第12号.
[8] The present case is not recorded in the Supreme People’s Court Guiding Cases Series published every year, and therefore has no binding force over the lower courts.
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