People’s Republic of China
We are generally experiencing a higher volume of disputes, though the average amount in dispute is lower. Credit default, often due to a party’s financial disruption, is a significant cause of disputes. The number of disputes where parties contest contractual obligation to perform has decreased, with more parties seeking judicial relief to enforce contractual obligations the parties acknowledge are due.
We are experiencing an increase in the number of cases that proceed to court proceedings in the People’s Republic of China (“PRC”) and judicial resources remain limited meaning the time taken to obtain judicial relief has increased. Local governments and courts are taking steps to increase the availability and improve the efficiency of alternative dispute resolution mechanisms, such as arbitration and mediation, to help address the shortage of judicial resources.
1. Is third party funding permissible for disputes?
The law of the People’s Republic of China (“PRC”) does not expressly define, prohibit, or address the legality of third party funding in Mainland China. Current practice indicates general acceptance of third party funding in PRC arbitration proceedings, while its use in PRC court proceedings is approached with greater caution.
Against a backdrop where generally only institutional arbitration is permitted in Mainland China (with some exceptions), major PRC arbitration institutions have incorporated third party funding disclosure requirements in their commercial arbitration or investment arbitration rules. The inclusion of these provisions suggests that third party funding is permitted in PRC arbitration proceedings, provided the applicable arbitration rules are followed.
There are at least two PRC court decisions from courts in Wuxi and Beijing that support this position and in both cases, the courts upheld the awards.
The permissibility of third party funding in PRC court proceedings is less clear. Unlike arbitration rules, there are no court rules that suggest third party funding is permitted in PRC court proceedings. Additionally, we are aware of at least one case in which courts in Shanghai determined that a third party funding arrangement was invalid. The circumstances of that arrangement involved a funding arrangement that, among other things, restricted the funded party’s right to make decisions about its case and its right to appoint counsel.
There are several permissible alternatives for parties to obtain financial support in PRC court and arbitration proceedings. These include statutory subrogation to insurers; the complete assignment of rights and obligations, including litigation rights, to asset management companies; and full-risk contingency fee arrangements provided by lawyers. Of these, contingency fee arrangements are the most common and allow lawyers to advance court costs, attorney fees, and other legal costs upfront and receive outcome-based compensation to cover these costs.
2. Are lawyers able to work on a contingent basis in the jurisdiction and are there any restrictions?
Contingency fee arrangements are permitted in Mainland China. The PRC Lawyers Law permits lawyers to waive their fees upfront and receive outcome-based compensation to cover their fees. It also permits lawyers to advance court costs on behalf of clients. In contracts for debt recovery by the four major state-owned asset management companies in Mainland China, lawyers commonly cover court costs, attorney fees, and all other legal costs upfront and recover these costs from the judgement or award proceeds.
Contingency fee arrangements are regulated and are not permitted in all cases. The PRC Lawyer’s Law prohibits contingency fee arrangements in cases involving marriage and inheritance; claims for social insurance or minimum living standard benefits, alimony, maintenance, pensions, bereavement compensation, relief funds, and work-related injury compensation; labour remuneration; criminal and administrative litigation; state compensation; and class actions.
Compensation through contingency fees is also limited. According to the Opinions on Further Regulating Lawyers’ Service Charges issued by the PRC Ministry of Justice, the National Development and Reform Commission, and the State Administration for Market Regulation, limits are now nationally standardized and capped proportionally based on the amount in dispute.
The maximum recoverable compensation is 6% of the amount in dispute for disputes exceeding RMB 50 million (approximately USD 7 million). Where the amount in dispute is RMB 50 million or less, the maximum amount of recoverable compensation ranges from 18% for disputes less than RMB 1 million to 9% for disputes exceeding RMB 5 million but not exceeding RMB 50 million.
These caps are substantially lower than the 30% cap that previously existed, which has led to a decline in full-risk contingency fee arrangements. This has also led to an increased interest in third party funding arrangements, which is not subject to these caps, as PRC law does not currently regulate or limit third party funding arrangements.
3. Can the court or tribunal order one party to pay the other’s legal costs?
PRC courts and arbitral tribunals may order or award costs, though the basis for these orders or awards differs in PRC court and arbitration proceedings.
In PRC court proceedings, a court may order a party to cover the other party’s legal costs, including court costs, attorney fees, and other legal costs, if the underlying contract or instrument contains a clear agreement on cost allocation. In the absence of such agreement, according to the Measures on the Payment of Litigation Costs issued by the PRC State Council, a court may allocate court costs based on the parties’ proportionate successes. Additionally, according to the Opinions of the Supreme People’s Court on Further Promoting the Diversion of Cases to Optimize the Allocation of Judicial Resources, if a party pursues false claims or malicious litigation, the court may order it to pay the other party’s attorney fees.
In PRC arbitration proceedings, the arbitration rules generally determine the tribunal’s authority to allocate legal costs, including arbitration fees and attorney fees. Most major PRC institutional arbitration rules include provisions permitting the tribunal to allocate costs and allowing the tribunal to consider the parties’ success when doing so (see, e.g., CIETAC Rules, Article 55; BAC Rules, Article 52; SHIAC Rules, Article 63; SCIA Rules, Article 64). Tribunals may allocate costs in the absence of an agreement on cost allocation in the underlying contract.
4. Is insurance available to protect against adverse outcomes for funded litigation?
We are not aware of insurance products in Mainland China that cover or guarantee compensation to protect against adverse outcomes in third party funded cases. Nor does PRC law incorporate a general cost allocation rule.
Currently, the primary insurance available in litigation covers losses incurred in preservation actions before PRC courts, such as applications to preserve (freeze) assets or evidence or to restrain conduct. Litigation preservation insurance, purchased by the applicant, covers compensation that may be payable for loss incurred by the opposing party resulting from an error in a preservation action. Although litigation preservation insurance is common, compensable loss due to preservation errors is rare. Courts apply stringent criteria when determining these losses and require proof of the applicant’s malicious intent and the opposing party’s actual economic loss, among other requirements. An applicant losing the case alone does not result in compensable loss to the opposing party.
An unsuccessful party may also have coverage for legal costs or other economic losses through export credit insurance or in the context of cross-border trade and product liability, if the insurer covers legal costs associated with the insured event. This coverage does not however require the involvement of third party funding.
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