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In 2006, however, the Nanjing Intermediate People's Court heard the patent infringement case of Yuan Lizhong v. Yangzhou City Tongfa Air-Raise Actuator Factory & Yangzhong City Tongfa Industry Co. Ltd. This case was the first counter-suit for damages action brought as a reaction to malicious litigation. In March, 2009, the Supreme People's Court promulgated the Opinions of the Supreme People's Court on Several Issues Regarding the Implementation of the National Intellectual Property Rights Strategy ( Fafa [2009] No. 16) ("Opinion") which provides that: "The courts shall accept where appropriate and adjudicate cases that seek declaratory judgments of non-infringement and litigations that seek counter-suit for damages in claim of malicious litigations.”

The Opinion provides practical guidance to the people's courts in counter-suit for damages actions if in the face of malicious litigation.

Definition of Malicious Litigation and How to Determine "Malice"
When a party initiates litigation in the PRC, it must adhere to the "Honest and Credit" principle. Otherwise, the party will be considered to be abusing its right to litigate under the Chinese law. Based on this principle and general understandings described in academic research papers, we believe the definition for malicious litigation refers to "a groundless civil action filed without a violation of substantive rights or without factual basis and other justifiable reasons to pursue litigation and which will result in damages to the interests of the alleged parties". Among the elements referred to above, the key element is to determine if the party that initiated the groundless civil litigation is acting with "malice" towards the other party.

Counter-Suit for Damages Actions
Although the Opinion issued by the Supreme People's Court allows counter-suits for damages, it did not specify details on the application of such a practice. Since the counter-suit for a damages action is a type of litigation where a plaintiff prays for compensation for damages suffered from a malicious litigation, the proceeding at its core is a civil suit regarding infringement of rights and with the corresponding remedy for compensation.

Legal Trends for Counter-Suit for Damages Actions
Though there are not yet explicit provisions regarding malicious litigation in Chinese law, a basic legal mechanism for preventing malicious litigation is now being formed, particularly in the field of intellectual property. It is foreseeable that the people's courts will set stricter criteria for accepting such cases and impose tighter controls over granting interim injunctive measures.

1. Judicial Authority

On Feb12th, 1999 the Supreme People's Court promulgated the “ damages”clause  (J.E [1999] No.8), which stated:

 

When contracting parties have not reached an agreement on calculating late payment damages, People’s Courts may use the past-due loan interest charge set by the People’s Bank of China (PBC) as the standard for calculating late payment damages.

Based on the above judicial explanation, when contractual parties fail to reach an agreement on calculating late payment damages; courts will adopt financial institutions’ past due loan interest charge as the standard for calculating damages.  Multiple courts have affirmed this principle.

Since past due interest charges are frequently adjusted by the PBC, parties should expect to use the current rate at the time of bringing a claim to calculate late payment damages.

At present, according to “The Announcement on relevant RMB Loan Rate issues”, promulgated by the PBC on Dec 10th, 2003:

 

…the overdue loan interest rate will change from a fixed 2.1% per day to a floating 30%-50% per day of the current loan interest set by the PBC.

In other words, parties calculating late payment damages during litigation or arbitration; should apply the new floating standard of 30%-50% of the current benchmark loan rate per day, rather than the previous fixed 4% or 2.1% per day rates. The benchmark loan rate is adjusted frequently by the PBC for financial institutions.  

Contracting parties may contractually stipulate any method of calculating damages. However, a court may use its own discretion to adjust the parties’ agreed method. The breaching party may also move for a reduction of damages based on the non-breaching party’s actual losses.  Only a court or arbitration commission may decide whether to grant such a motion.


2. Keeping a Contract Airtight

In conclusion, after the transition from a fixed rate to floating rate for damages, conflicts may still arise during litigation or arbitration.

Therefore, it is important to not only clearly state in the contract that a breaching party will pay damages on a late payment, but also the method for calculating those damages.  For instance, “a breaching party will pay damages equal to a certain percentage of a late payment.” Parties may avoid the uncertainties of a floating rate with a well drafted agreement.

Since a breaching party may ask to reduce damages for late payment, we suggest parties clarify in the agreement that there is assent and understanding to the said calculating method even if the non-breaching party incurs no actual loss.  In the event of a dispute it is also important to state there will be no reduction of damages.  A solid agreement should state the non-breaching party, in addition to late payment damages, may also claim other damages.  In other words a non-breaching party may also claim a “delay in performance” which could give rise to other damages. Furthermore, a non-breaching party may also pursue other remedies such as continued performance, compensation for losses, etc.