what we think

By Fabian Knopf

Understanding who bears legal costs in China is essential for foreign businesses navigating the PRC dispute-resolution landscape. China combines elements of "loser pays" and "each bears its own costs," depending on the category of fees and the legal forum. Companies should not assume alignment with Western practice. Instead, they should proactively address cost allocation in their contracts and internal risk controls.

1. Civil Litigation
   
   In civil litigation, Chinese courts generally shift court fees to the losing party. This includes case acceptance fees, application fees (e.g., for preservation measures), and enforcement-related fees. The allocation is proportional to the outcome: if a plaintiff wins 60% of its claim, the defendant may bear 60% of the court fees.
   
   By contrast, attorney fees are rarely shifted to the losing party. Courts will only award legal fees if a statute allows it—most commonly in IP infringement cases—or if the contract includes a valid fee-shifting clause. Even then, courts scrutinize amounts for "reasonableness" and often reduce claims significantly. This divergence from standard international practice frequently surprises foreign companies and should be factored into budgeting and settlement strategies.
   
   
2. Labor Arbitration and Litigation
   
   Employment disputes operate under a fundamentally different philosophy. China prioritizes employee access to justice, which means each party must bear its own legal fees regardless of who prevails. Labor arbitration – which is the mandatory first-instance venue for labor disputes – does not award attorney fees to employers even when the employee's claims are unfounded. Only ancillary costs such as appraisal fees or preservation measures may shift depending on outcome.
   
   The practical consequence is that employers must assume they will absorb their own legal spend in every employment dispute. This puts a premium on well-drafted employment contracts, proper evidence management, and early case assessment to limit the scope and duration of proceedings. The comparatively higher cost of labor arbitration and legal proceedings may also increase the negotiated settlement amount acceptable to the employer.
   
   
3. Enforcement and Ancillary Proceedings
   
   Enforcement proceedings can generate additional costs, especially when property preservation, asset tracing, or notarization are involved. Courts may require the applicant to advance these costs, which are then allocated according to statutory rules once enforcement is completed. Yet, as in earlier stages, attorney fees remain largely non-recoverable absent a contract clause or specific statutory basis.
   
   Evidence preservation, notarization, and translation costs—frequent in cross-border disputes—are treated similarly. While courts may allocate these expenses based on outcome, they rarely include legal fees connected to coordinating such work, which leaves parties bearing most of their professional costs.
   
   
4. Contract Drafting: Proactive Cost Control
   
   Given the restrictive regime around attorney-fee recovery, contract drafting is the most effective tool for managing exposure. Businesses should embed fee-shifting provisions into their commercial contracts and structure dispute-resolution clauses with enforcement in mind.
   
   Key drafting considerations:
   • Express attorney-fee shifting clauses that require the breaching party to compensate the prevailing party for reasonable legal fees, arbitration fees, notarization costs, investigation costs, and evidence expenses. The clause should clearly define what can be recovered and reference invoices from licensed counsel to support the claim.
   • Clear allocation of administrative and compliance costs, such as translation, notarization, legalization, and tax-related compliance fees. These costs often become negotiation points during disputes and are easiest to address pre-contract.
   • Arbitration for dispute resolution, especially for high-value or cross-border deals. Arbitration tribunals in China and abroad are more likely to award full legal fees based on documentation. This should only be considered if it aligns with broader legal strategy.
     
     
5. Internal Preparation and Evidence Management
   
   Since companies cannot rely on recovering legal fees through litigation, controlling the duration and complexity of disputes becomes the primary cost driver. This requires disciplined evidence management and internal workflows that reduce reliance on external counsel.
   
   Effective preparation includes:
   • Robust document protocols ensuring that agreements, approvals, and key communications (including WeChat) are archived systematically and can be produced quickly.
   • Standardized bilingual templates that avoid inconsistencies and reduce litigation arguments around interpretation.
   • Training for commercial, HR, and compliance teams on evidence preservation, disciplinary procedures, and contract enforcement requirements.
   • Early assessment of disputes to identify opportunities for negotiated solutions before costs escalate unnecessarily.
     
     
6. Practical Recommendations for Foreign Companies
   
   Businesses operating in China can stabilize their cost exposure by following a few core principles:
   • Assume attorney fees will not be recoverable in PRC litigation without a specific contractual basis.
   • Budget independently for labor disputes, as fee recovery is structurally unavailable.
   • Consider arbitration for transactions when it meets other legal requirments and legal spend may be significant.
   • Maintain strong internal evidence systems to shorten proceedings and reduce reliance on reconstructions.
   • Review and update contract templates to ensure fee-shifting clauses are enforceable and aligned with PRC practice.
     

R&P China Lawyers advises clients across the full lifecycle of commercial relationships, from contract structuring to effective dispute preparation and representation before PRC courts and arbitration institutions. Our commercial, employment, and dispute resolution teams work as an integrated unit, ensuring that agreements are enforceable in practice and that litigation and arbitration strategies are aligned with business objectives. For more information about how we can support your operations in China, contact Mr. Fabian Knopf ([email protected]) or your regular R&P contact.