Unveiling the Challenges in Recovering Design Fees in China

作者：刘榕

International design firms often encounter difficulties recovering design fees from Chinese clients, which can be quite frustrating. We have researched and analyzed hundreds of court judgments to gain insights into the reasons behind clients or principals refusing to pay design fees. We list the most common 8 excuses for non-payment of design fees and outline effective strategies that design firms can adopt to address these risks.

1. Design firms have not presented adequate evidence of delivering design deliverables.

What design firms should do:

Ensure meticulous documentation and robust evidence of design deliverables, including written confirmations, and timestamps for submission of design deliverables whether online or by email. Design firms should maintain open lines of communication with clients, promptly address delivery concerns, and provide compelling evidence to validate payment claims.

2. Design firms have failed to submit physical design documents, hindering contract fulfillment.

What design firms should do:

Explicitly define submission formats and requirements for design deliverables in the contract. Prudent preservation of evidence for submitted design documents is vital. Ensuring timely submission of design documents as per the contract or negotiating viable alternatives with clients to add credibility of their claims.

3. Additional design fees are not agreed between the client and the design firm and there are no clear contractual provisions.

In some cases, clients argue that contracts only specify a fixed price for design fees, and that any increase in area does not warrant an adjustment to the total contract price. As a result, these clients refuse to pay the additional design fees requested by design firms.

In other scenarios, discrepancies arise between the estimated and actual area, or additional costs are incurred due to revisions and improvements made to the bid proposal. Clients often cite the prior agreement and refuse to pay for the additional expenses.

What design firms should do:

i. Ensure clear contractual provisions. Design firms should carefully draft contracts that clearly address the scope of work, pricing structure, and any conditions for adjustments to design fees.

ii. Maintain documentation. Design firms should maintain detailed records of discussions, negotiations, and any amendments related to design fees. This documentation can serve as evidence to support the design firm's entitlement to additional fees.

iii. Open communication and agreement on changes. Design firms should maintain open and transparent communication with clients throughout the project, particularly when changes occur that may affect the design fees. It is essential to seek mutual agreement and document any changes to avoid disputes.

4. Request for payment exceeds the statute of limitations.

In some cases, clients may refuse to pay design fees by claiming that the design firm's request for payment exceeds the statute of limitations. In case (2019) Gan 1130 Min Chu 1299, the court held that as the plaintiff who is a design firm failed to provide evidence of the defendant's consent to fulfill the remaining debt, therefore the claim rights against the defendant for the remaining debt have exceeded the statute of limitations and should not be supported.

What design firms should do:

i. Be aware of the Statute of Limitations in China. According to the provisions of the Civil Code of the People’s Republic of China, the general statute of limitations is 3(three) years. Understand when the limitation period starts and ensure that any necessary legal actions or claims are initiated within the specified timeframe. The calculation of the statute of limitations starts from the date when the right holder becomes aware or should have become aware of the infringement of their rights and the date of the obligor’s action.

ii. Timely Exercise of Rights: Once the design firm becomes aware of potential harm to its rights, the design firm shall promptly exercise those rights and take necessary legal actions to protect its interests. Delayed action may result in the expiration of the statute of limitations and the loss of the ability to enforce claims.

iii. Documented Communication: Maintain thorough documentation of all communication and interactions related to design fee payments which include invoices, payment requests, correspondence, and any other evidence that can support the design firm's position in the event of a dispute regarding the statute of limitations.

iv. Consult Legal Professionals: Seek advice from legal professionals who specialize in contract law to ensure a clear understanding of the statute of limitations and to navigate any legal complexities that may arise. Legal counsel can provide guidance on how to protect the design firm's rights and handle disputes effectively.

5. The project is not feasible or it has been suspended.

What design firms should do:

Ensure that contract terms explicitly outline payment conditions, timelines, and compensation mechanisms for suspension or termination of design contracts in advance.

6. Design firms have failed to meet agreed deadlines for delivering design deliverables.

What design firms should do:

Establish clear contractual provisions regarding delivery timelines and strict quality requirements for design deliverables. Timely communication, quick issue resolution, and careful record-keeping of design deliveries are crucial in supporting claims for payment.

7. The design deliverables provided by design firms do not meet clients' requirements or have not been adopted.

What design firms should do:

Establish stringent quality standards and comprehensive approval procedures for design deliverables within the contract. Proactive engagement with client feedback and requirements, meticulous record-keeping of communication, design modifications, and other pertinent evidence empower design firms to assert their right to receive design fees.

8. The invoice amount is insufficient and the invoices do not meet requirements, or the design firm fails to provide proper tax invoices.

What design firms should do:

i. Clearly define the invoicing requirements and procedures in the contract. Design firms should ensure that the contract specifies the format, content, and timing of invoicing, as well as any tax-related obligations.

ii. Properly document the invoicing process. Design firms should maintain accurate records of all invoices issued, including copies of invoices, delivery receipts, and any supporting documentation.

iii. Comply with tax regulations: Design firms should ensure that all tax obligations are met and tax invoices as required by the relevant tax authorities are properly provided.

iv. Maintain open communication: Design firms should proactively communicate with the client regarding any invoice issues or discrepancies, promptly address concerns, and provide clarifications or additional documentation if necessary.

In summary, when entering into design contracts with Chinese clients, design firms must prioritize the establishment of comprehensive and well-defined contractual terms, particularly concerning design fees. Don’t be afraid to bargain with Chinese clients and write a clause in the design contract that states design works will remain the design firm’s intellectual property until full payment is received. Proactive contract management, effective communication, and diligent documentation are pivotal for design firms to protect their interests and mitigate the risks associated with non-payment of design fees.