Construction Arbitration: China

1. Is your jurisdiction primarily a common law, civil law, customary law or theocratic law jurisdiction? Are the laws substantially derived from the laws of another jurisdiction and, if so, which? What instruments have legal force and effect? Who are the lawmaking bodies? How and where are new laws published? Can laws be passed with retrospective effect?

China

China is primarily a civil law jurisdiction.

Chinese laws are historically heavily influenced by the laws of Germany, Japan and Russia.

In the field of construction, the instruments that have legal force and effect include: the Civil Code, Construction Law, Bidding Law, Regulations on Quality Management of Construction Projects, Judicial Interpretation of Construction Contracts for Construction Projects (I), and etc.

The lawmaking bodies are the National People's Congress, Standing Committees of the National People's Congress and the State Council.

New laws should be first passed by the National People's Congress or its Standing Committees, then be promulgated by presidential decrees, and in the end be signed by the President. New laws are published on the National People's Congress website. The administrative regulations formulated by the State Council shall be submitted to the Prime Minister for signing the State Council Decree for promulgation and implementation. These regulations are published through the State Council Communique and the Chinese government's Legal Information website.

Typically, the laws of China have no retroactive effect but there are exceptional situations. 

2. What are the requirements for a construction contract to be formed? When is a "letter of intent" from an employer to a contractor given contractual effect?

China

As per articles 789 and 490 of the Civil Code, a construction contract shall be formed when both parties have affixed their signatures, seals or fingerprints thereto.

Whether a ‘letter of intent’ is effective or not depends on its specific contents. With different contents, a ‘letter of intent’ may be a consultative document, a preliminary contract or a valid contract. When a ‘letter of intent’ constitutes a preliminary contract or a valid contract, it shall have contractual effect.

3. Are parties free to choose: (a) the governing law of their contract; (b) the law of the arbitration agreement; (c) the seat of the arbitration; (d) any arbitral rules; (e) anyone to act as arbitrator; and (f) the language of the contract and the arbitration? If not, what are the limitations on choice and what happens if the parties act contrary to them?

China

For (a) and (b): in China, the parties to a not foreign-related contract cannot choose foreign law as the governing law and the law of the arbitration agreement. The parties to a foreign-related contract may freely choose foreign law as the governing law of the contract and arbitration agreement.

For (c) and (d): parties cannot agree that contract disputes without foreign-related contents shall be submitted to an overseas arbitration institution, but parties can do so if there are foreign-related elements.

For (e) and (f): parties are free to agree on the ones to be arbitrators, the language of arbitration and the language of the contract.

If the agreement and acts of parties are contrary to the above restrictions, the agreement and acts will be deemed as ineffective.

4. How might terms be implied into construction contracts? What terms might be implied?

China

Terms might be implied into construction contracts by express agreement (written).

Typically, there are three types of implied terms in construction contracts:

• non-performance of contractors. For example, if the contractor fails to reply after receiving the employer's claim report, it shall be deemed as approval from the contractor.
• non-performance of employers. For example, if the employer fails to complete the review or the employer raises no objection within the time limit after receiving a completion settlement agreement submitted by the contractor, it shall be deemed as approval from the employer.
• non-performance of supervisors. For example, if the supervisor fails to complete the review of the bill of quantities submitted by the contractor, it shall be deemed as approval from the supervisor.

5. When must a certifier under a construction contract act impartially, fairly and honestly? To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)? Can the contractor bring proceedings directly against the certifier?

China

In China, the ‘certifier’ is similar to the ‘supervisor’ under a construction contract.

When parties cannot reach an agreement on the disputed matters (such as the adjustment of the contract price or the construction period caused by changes of laws) through negotiation, in practice, parties would agree that the supervisor can decide the matter with discretion. The supervisor shall prudently make a fair judgment in accordance with the terms of the contract. However, because the supervisor is usually appointed by the employer, it is difficult for the supervisor to make an impartial, fair and honest decision under a construction contract in China.

If parties to the contract do not raise any objection to the supervisor’s decision, the decision shall be implemented. If any party to the contract has an objection, it shall be dealt in accordance with the dispute resolution provision of the contract. Before the dispute is resolved, parties to the contract shall temporarily implement it as decided by the supervisor. After the dispute is settled, if the result of the dispute settlement is inconsistent with the supervisor’s decision, the dispute settlement shall prevail.

The contractor cannot bring proceedings directly against the supervisor. Based on the doctrine of ‘privity of contract’, which is confirmed by the Contract Law, a contractor can only bring proceedings against the employer and claim losses caused by the implementation of the supervisor’s wrong decision.

6. If an employer would cause (eg, by variation) a two-week critical delay to the completion of the works (which by itself would justify an extension of time under the construction contract) but, independently, culpable delay by the contractor (eg, defective work) would cause the same delay, is the contractor entitled to an extension?

China

In practice, there are two situations：

• the contractor is entitled to an extension of time but is also liable for delay to the completion of the works. This situation is generally agreed in a construction contract in practice. It is difficult to determine the reasons independently caused by any party because the reasons for delay are always so complex. If both the construction contract and laws have no stipulation on liabilities for a delay, parties shall be liable for losses according to the principle of fairness under the Contract Law.
• the contractor is entitled to an extension of time if the contractor can prove that the reason for the delay is caused by the employer, for example, the construction period is delayed for two weeks due to changes of the work made by the employer.

7. How does the law view "disruption" to the contractor (as distinct from delay or prolongation to the completion of the works) caused by the employer’s breaches of contract and acts of prevention? What must the contractor show for a disruption claim to succeed? If an entitlement in principle can be shown (eg, that a loss has been caused by a breach of contract) must the court or arbitral tribunal do its best to quantify that loss (even if proof of the quantum is lacking or uncertain)?

China

There is no concept of ‘disruption’ under Chinese laws, but, in practice, some acts of employers in breaching contracts will constitute ‘disruption’ to the contractors. Under these situations, the employer shall be held liable, for example: (i) the employer does not pay the price as agreed, (ii) the main materials, components and equipment provided by the employer do not meet mandatory standards and (iii) the employer does not perform assistance obligations.

When ‘disruption’ transpires, the contractor shall fix evidence and make claims in accordance with procedures agreed in the contract to succeed claims. In practice, the contractor shall submit a notice of intention to claim, a claim report, a notice of continuation of the claim at reasonable intervals (if any), a report on the actual situation and records of continuous impacts (if any).

In general, if an entitlement can be shown in principle but the contractor cannot prove the actual loss, the contractor's claim will typically be rejected by the court. The court or the arbitral tribunal will not have to do its best to quantify losses. However, in practice, there are also cases where the court or the arbitral tribunal will decide losses based on the facts even if there is a lack of evidence.

8. How does the law view "constructive acceleration" (where the contractor incurs costs accelerating its works because an extension of time has not been granted that should have been)? What must the contractor show for such a claim to succeed? Does your answer differ if the employer acted unreasonably or in bad faith?

China

There is no concept of ‘constructive acceleration’ under Chinese laws, but in practice, there are circumstances where the contractor incurs costs by accelerating its works because an extension of time has not been granted but should have been. In accordance with business practice in construction, the employer shall pay the costs.

In practice, the contractor must report the acceleration plan to the employer, carry out the acceleration after being approved by the employer or the supervisor, and then claim costs incurred by the acceleration plan, etc, to succeed claims.

If the employer acted unreasonably or in bad faith, the contractor may claim costs by bringing a suit or apply for arbitration. Meanwhile, the contractor shall collect and fix relevant evidence, such as the acceleration plan signed or approved by the supervisor or the employer, and the paid costs caused by the plan.

9. What events of force majeure give rise to relief? Must they be unforeseeable and to whom? How far does the express or implied allocation of risk under the contract affect whether an event qualifies? Must the event have a permanent effect? Is impossibility in performing required or does a degree of difficulty suffice? Is relief available where only some obligations (eg, to make a single payment or carry out one aspect of the works) are affected or is a greater impact required? What relief is available and does it apply automatically? Can the rules be excluded by agreement?

China

In accordance with business practice, the following force majeure events will give rise to relief: natural disasters and social emergencies that are inevitable and insurmountable in the performance of the contract, such as earthquakes, tsunamis, plagues, riots, martial law, riots, wars, etc.

Under Chinese laws, force majeure events must be unforeseeable. In principle, ‘unforeseeable' is for common people (ie, objective criteria). However, if there is evidence to prove that the parties to the contract are able to foresee the event, then the subjective criteria will be adopted exceptionally. In this situation, “unforeseeable” is for the parties to the contract.

Under Chinese laws, force majeure events shall be unforeseeable, unavoidable and insurmountable. This is an objective criterion, ie, it only requires a common person not able to foresee, avoid and overcome the event. Therefore, the risk allocation clause usually does not affect the qualification of force majeure events.

Force majeure events do not require permanent effects.

Impossibility in performing or a degree of difficulty is a necessary condition for exclusion of liability caused by force majeure, but not a necessary condition for a force majeure event itself.

Relief is available where only some obligations are affected.

As per article 590 of the Civil Code, if the contract cannot be performed due to force majeure, the contractor shall be partially or completely entitled to exclusion of liability due to the influence of force majeure. For example, the contractor can claim extensions of time to be excluded from liability for breach of the 'time' agreed in the contract. In practice, when (i) the permanent work is damaged, (ii) the equipment, materials and components are lost or damaged and (iii) the contractor has to pay the wages and acceleration costs during the period, the contractor can claim part of the costs. As per article 563 of the Civil Code, when the purpose of the contract cannot be realised due to force majeure events, parties to the contract may request to terminate the contract.

Relief cannot be applied automatically, and the parties affected by force majeure shall immediately notify the other party and bring claims within the agreed time limit.

Questions concerning whether these rules can be excluded by agreement is a subject of dispute, but it is generally believed that these rules cannot be excluded.

10. When is a contractor entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform and what relief is available? Can the rules be excluded by agreement?

China

The contractor is entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform when a ‘change of situation’ occurs under Chinese laws. As per article 533 of the Civil Code, where a major change that is unforeseeable and is not a business risk occurs after the formation of a contract, if the continuous performance of the contract is obviously unfair to the other party, the party is entitled to relief.

As to the relief, the contractor may renegotiate with the other party; and if an agreement cannot be reached within a reasonable period of time, the parties may request a people’s court or an arbitration institution to amend or rescind the contract.

There are controversies on this issue, but it is generally believed that relief for such rules ('change of situation') cannot be excluded through agreement.

11. When is a contractor entitled to relief if after the contract is concluded it transpires (but not due to external events) that it is impossible for the contractor to achieve a particular aspect of the contractual specification? What relief is available?

China

As per article 580 of the Civil Code where (i) the contractor is unable to perform its contractual obligations in laws or in fact, (ii) the subject matter of the obligation is unfit for compulsory performance or the performance expenses are excessively high, the contractor is entitled to be released from performance.

As per article 563 of the Civil Code, if the contractor’s main obligation stipulated in the contract is not performed or the purpose of the contract cannot be realised due to its non-performance, parties can rescind the contract or request the court to do so.

12. How effective are contractual provisions that seek to pass risks to the contractor for matters it cannot foresee or control, for example, making the contractor liable for: (a) a specified event of force majeure; (b) ground conditions that no reasonably diligent contractor could have foreseen; or (c) errors in documents provided by the employer, such as employer's requirements in design and build forms?

China

Under Chinese laws, it is hard to say whether such contractual provisions are effective.

There are disputes over the provisions such as (a) and (b), which are ineffective in principle. Provisions such as (c) are generally effective, because there is no violation of compulsory provisions on the effect of any law or administrative regulation under this situation.

13. When must the contractor warn the employer of an error in a design provided by the employer?

China

As per article 28 of the Regulation on the Quality Management of Construction Projects, if the contractor finds, during the process of construction, that there is any error in the design documents, it shall put forward its opinions and proposal in a timely manner. In practice, based on the judgments of some courts, if the contractor finds the error in the design provided by the employer but fails to warn the employer, the contractor shall be held liabilities.

14. Is there a general duty of good faith? If so, how does it impact upon the following (where they are otherwise permitted under the construction contract): (a) the level of intervention in the works that is allowed by the employer; (b) a party’s discretion whether to terminate or suspend the contract; or (c) the employer’s discretion to claim pre-agreed sums under the contract, such as liquidated damages for delay?

China

As per article 7 of the Civil Code, there is a general duty of good faith on parties to the contract, which is the basic principle of civil law.

For (a): it requires that the employer cannot intervene excessively with the work, nor can the contractor prevent the employer from reasonable intervention;

For (b): it does not affect a party’s discretion whether to terminate or suspend the contract;

For (c): the employer can claim the liquidated damages agreed under the contract, but based on the duty of good faith, article 585 of the Civil Code, if the agreed liquidated damages are excessively higher than the actual losses borne by the employer, the contractor may request the court or the arbitration institution to make a proper reduction.

15. How do contractual provisions that bar claims if they are not validly notified within a certain period operate (including limitation or prescription laws that cannot be contracted out of, interpretation rules, any good faith principles and laws on unfair contract terms)? What is the scope for bringing claims outside the written terms of the contract under provisions such as sub-clause 20.1 of the FIDIC Red Book 1999 ("otherwise in connection with the contract")? Is there any difference in approach to claims based on matters that the employer caused and matters it did not, such as weather or ground conditions? Is there any difference in approach to claims for (a) extensions of time and relief from liquidated damages for delay and (b) monetary sums?

China

The contractual provisions that bar claims if they are not validly notified within a certain period may be deemed as ineffective due to violation of the limitation and prescription laws. However, as per the article 10 of Judicial Interpretation of Construction Contract (I), the provisions that bar claims if they are not validly notified within a certain period shall be effective, unless the employer agrees an extension of time after the agreed period or the contractor puts forward reasonable defenses. Whether the contractual provisions that bar costs claims if they are not validly notified within a certain period are effective is still a subject of dispute. The good faith principle and laws on unfair contract terms do not affect application of such claims.

In addition to the written terms of the contract, the parties can claim directly if there is any situation stipulated by laws where claims can be brought. As per article 798, article 803 and article 804 of the Civil Code, where the employer fails to inspect the concealed works in time, if the employer fails to provide relevant materials within the agreed time and in conformity with requirements and the works are suspended or postponed due to the employer's reasons, the contractor shall claim for an extension of time and incurred costs.

There is no difference in approach between the claims caused by the employer and those not.

There is no practical difference in approach to claims for (i) extensions of time and relief from liquidated damages for delay and (ii) monetary sums.

16. What rights does the employer have to suspend paying the contractor or performing other duties under the contract due to the contractor’s (non-)performance, or the contractor have to suspend carrying out the works (or part of the works) due to the employer’s (non-) performance?

China

As per articles 525-527 of the Civil Code, where both parties have obligations in a contract, parties are entitled to sequence rights of defence, which are (i) defence right of first performance, (ii) defense right of orderly performance and (iii) defence right of simultaneous performance. In practice, construction contracts usually stipulate the sequence of obligations. If the employer or the contractor fails to perform the prior obligations or the performance of the prior performance does not conform to the agreement, the other party can exercise the right of defence and refuse to perform the subsequent obligations. In addition, if there is definite evidence to prove that the following situations exist: (i) one's business conditions are deteriorating, (ii) one has transferred property and withdrawn funds to avoid debts, and (iii) one's business reputation has been lost, the other party will be entitled to the rights mentioned above.

17. May the employer exercise an express power to omit work, or terminate the contract at will or for convenience, so as to give work to another contractor or to carry out the work itself?

China

 The employer may exercise an express power to omit work but should follow the duty of good faith. In principle, the employer cannot omit most of work that will lead that the purpose of the contract cannot be realised.

The employer may exercise an express power to terminate the contract at will or for convenience.

18. What termination rights exist? Can a construction contract be terminated in part? What are the practical and financial consequences?

China

Under Chinese laws, parties shall have legal rights to rescind a contract with the effect of termination. As per article 563 of the Civil Code, the legal circumstances for rescission of contract include:

1. • the purpose of the contract cannot be realised due to force majeure;
   • any party expressly or impliedly indicates that it will not perform its main obligations under the contract;
   • the contractor fails to complete the work within either the time limit agreed in the contract or the extra time limit reasonably requested by the employer;
   • the work is unqualified due to the contractor's reasons and the contractor refuses to make remedies;
   • the contractor assigns or subcontracts the work illegally;
   • the employer cannot pay the price under the contract and still refuse to pay within the reasonable time limit requested by the contractor.

The construction contract may be partially terminated.

On the practical side, as per article 566 of the Civil Code, the part of the work that is still not yet commenced would be terminated forever.

On the financial side, as per article 566 of the Civil Code and based on business practice:

1. • if the contract is terminated due to the employer's reasons, the employer shall pay the corresponding price and compensate the contractor for the losses, such as the purchase price, evacuation costs and demobilisation costs already paid by the contractor.
   • If the contract is terminated due to the contractor's reasons, the employer shall pay the price of the completed work, the materials, engineering equipment, construction equipment and temporary works but the contractor shall compensate the employer for losses caused.

19. If the construction contract provides for the circumstances in which each party may terminate the contract but does not expressly or impliedly state that those rights are exhaustive, are other rights to terminate available? If so, what are they and what are the practical and financial consequences?

China

Parties are entitled to rescind a contract with the effect of termination under circumstances stipulated under relevant laws even though parties do not agree such circumstances in the contract.

The legal circumstances of recession of contract and the consequences have been mentioned in question 18.

20. What limits apply to exercising termination rights?

China

When parties exercise rights to rescind a contract with the effect of termination, there may be following limits:

• If there is a prescription for exercising the right of termination stipulated by laws or agreed by parties, parties shall not exercise such rights after prescription expires; where the law does not provide for or the parties have not agreed upon a prescription period for the exercise of the right to rescind a contract, such right shall be extinguished if it is not exercised by the party with the right within one year after the party knew or ought to have known of the cause for rescission or within a reasonable period after being urged by the other party (see article 564 of the Civil Code.)
• If one party would like to terminate a contract, he or she shall notify the other party (see article 565 of the Civil Code).
• Where laws and administrative regulations stipulate that the termination of a contract shall go through administrative formalities of approval and registration, parties shall terminate a contract after those procedures (see article 502 of the Civil Code).

21. Does the law of your jurisdiction deem the works to be completed (irrespective of what the contract says) if, say, the employer takes beneficial possession of the works and starts using them?

China

As per article 799 of the Civil Code, after the completion of the work the employer shall conduct the ‘acceptance’ as soon as possible. If the ‘acceptance’ is qualified, the employer shall pay the price and accept the work based on the contract. If there is no ‘acceptance’ or the ‘acceptance’ is not qualified, the work shall not be delivered for use. As per article 9 of the Judicial Interpretation of Construction Contract (I), where the employer takes beneficial possession of the work without authorisation, the date of transfer of possession of the works shall be deemed the completion date, and the works shall be deemed as completed at this time unless otherwise specifically agreed by parties.

22. Does approval or acceptance of work by or on behalf of the employer bar a subsequent complaint? What constitutes acceptance? Does taking over the work by the employer constitute acceptance? Does this bar subsequent complaint?

China

After the “approval” or “acceptance” of the work, the employer is not entitled to subsequently complain that the work is unqualified, but the employer still has the right to require the contractor to (i) perform its obligations pertaining to maintenance or (ii) be liable for quality defects (see articles 4 and 8 of Measures for Quality Warranty of Housing Construction Projects).

In practice, “acceptance” refers to the act and process of the employer, the surveyor, the designer, the constructor and the supervisor to approve the quality of the work after the inspection of the work is passed.

As per article 9 of the Judicial Interpretation of Construction Contract (I), it does not constitute an acceptance if the employer just takes over the work and this would not bar subsequent complaints; if the employer takes over the work and uses it without authorisation, it will constitute an acceptance of the parts of the work (except the parts of foundation and the main structure). Subsequently, if the employer bring a complaint on the grounds that the used parts (except the foundation engineering and the main structure) are unqualified, it will not be supported by the court or the arbitration institution but the employer is still entitled to bring a complaint on the grounds that the unused parts, foundation and the main structure are unqualified.

23. To what extent are liquidated damages for delay to the completion of the works treated as an exhaustive remedy for all of the employer’s losses due to (a) delay to the completion of the works by the contractual completion date; and (b) delays prior to the contractual completion date (in the absence of, say, interim milestone dates with liquidated damages for delay attaching to them)? What difference does it make if any critical delay is caused by the contractor’s fraud, wilful misconduct, recklessness or gross negligence? If so, what constitutes such behaviour and can it be excluded by agreement?

China

The employer can claim liquidated damages for delay to the completion of the works under situation (a). As per article 585 of the Civil Code and based on judicial practice, where the employer has evidence to prove that the agreed liquidated damages are lower than the losses caused, the employer may request the court or arbitration institution to make a proper increase that shall not exceed the actual losses. If the employer cannot prove that the liquidated damages agreed upon are lower than the losses caused, the liquidated damages agreed upon in the contract will be regarded as an exhaustive remedy.

The situation (b) cannot be considered as a delay to the completion of the works in China. Thus, the employer cannot claim liquidated damages for delay to the completion of the works. However, if the constructor causes a delay to the milestone date, the employer is entitled to claim the actual loss caused independently. Under this situation, liquidated damages for delay to the completion of the works will not be treated as an exhaustive remedy for all of the employer’s losses.

24. If the employer causes critical delay to the completion of the works and the construction contract does not provide for an extension of time to the contractual completion date (there being no "sweep up" provision such as that in sub-clause 8.4(c) of the FIDIC Silver Book 1999) is the employer still entitled to liquidated damages due to the late completion of works provided for under the contract?

China

As per article 803 and 804 of the Civil Code, where the employer fails to provide raw materials, equipment, site, funds, or technical information at the prescribed time and in accordance with the contractual requirements, the contractor may request extensions of time and is entitled to claim damages for work stoppage or slowdown, etc. As per article 284 of the Contract Law, if an ongoing project is stopped or delayed due to any reason attributable to the employer, the employer shall take the appropriate measures to make up or mitigate the loss, and shall indemnify the contractor for its loss and out-of-pocket expenses arising from resulting work stoppage, slowdown, reshipment, re-dispatch of mechanical equipment, and excess inventory of materials and assemblies, etc.

Therefore, even if the construction contract does not allow an extension of time, the employer cannot claim liquidated damages for the delay to the completion for the work. On the contrary, the owner shall compensate the contractor for the losses caused.

25. When might a court or arbitral tribunal award less than the liquidated damages specified in the contract for delay or other matters (eg, substandard work)? What factors are taken into account?

China

As per article 585 of the Civil Code and based on judicial practice, if the liquidated damages agreed by parties exceed 30 per cent of the losses caused and one party explicitly proposes to adjust the amount of liquidated damages, a court or an arbitration institution tends to decide that the amount of liquidated damages should be adjusted to a lower amount because the liquidated damages are excessively higher than the losses actually caused.

As per article 29 of Judicial Interpretation of Contract Law (II), the factors include the actual loss, the performance of the contract, parties’ degree of fault, the anticipated benefits, and the principles of fairness and good faith.

26. When might a court or arbitral tribunal award more than the liquidated damages specified in the contract for delay or other matters (eg, work that does not achieve a specified standard)? What factors are taken into account?

China

As per article 585 of the Civil Code and based on judicial practice, if one party has evidence to prove that the agreed liquidated damages are lower than the losses caused and clearly proposes to adjust the amount of liquidated damages, a court or an arbitration institution tends to decide that the amount of liquidated damages should be increased to a higher amount but the increased amount shall not exceed the actual losses.

Based on judicial practice, the factors include the actual loss and etc.

27. How is monetary compensation for breach of contract assessed? For instance, if the contractor is liable for a defect in its works is the employer entitled to its lost profits? What if the lost profits are exceptionally high?

China

As per article 584 of the Civil Code, if the employer or the contractor fails to perform the contractual obligations or the performance of the contractual obligations does not conform to the agreement, causing losses to the other party, the other party shall have the right to require the breaching party to compensate for the loss of anticipated profits.

As per article 584 of the Civil Code, if the anticipated loss of profits is so high that it exceeds the losses that the breaching party foresaw or should have foreseen when signing the contract, the excessive loss of profits will not be supported.

28. If the contractor’s work is technically non-compliant, is the contractor liable for remedying it if the rectification cost is disproportionate to the benefit of the remedy? Can the parties agree on a regime that is stricter for the contractor than under the law of your jurisdiction?

China

According to article 577 of the Civil Code, the contractor is still liable for remedying the work. However, in judicial practice, there are cases where the costs of performance exceeds the benefits obtained by all parties, which is considered as "too high cost of performance" in the second paragraph of 580 of the Civil Code, allowing the breaching party to terminate the contract and replace continued performance with compensation for losses.

According to article 5 of the Civil Code, both parties to the contract can reach a consensus and require the contractor to carry out the work under stricter standards or requirements than those stipulated by law.

29. If there is a defects notification period (DNP) during which the contractor must or may remedy any defect in its works that appears during a certain period after their completion, if the construction contract is otherwise silent, does it affect the employer’s rights to claim for any defects appearing after the DNP expires?

China

Defects notification period (DNP) corresponds to the Defects Liability Period under Chinese laws. Except for the defects intentionally caused by the contractor and the defects that are still within the quality warranty period, the employer cannot claim for the defects occurring if the Defects Liability Period expires.

30. What is the effect of a construction contract excluding liability for “indirect or consequential loss”?

China

As per article 53 of the Contract Law, construction contracts (provisions) that exclude the liability for indirect or consequential loss are effective, but if such contracts (provisions) violate mandatory provisions of laws and administrative regulations or exclude liabilities for personal injury to the other party or property damages to the other party as result of deliberate intent or gross negligence, they will be deemed ineffective.

31. Are contractually agreed limits on – or exclusions of – liability effective and how readily do claims in tort or delict avoid them? Do they not apply if there is fraud, wilful misconduct, recklessness or gross negligence: (a) if the contract is silent as to such behaviour; or (b) if the contract states that they apply notwithstanding such behaviour? If so, what causation is required between the behaviour and the loss?

China

In practice, contractually agreed limits on or exclusion of liability stipulated in the contract are effective.

No matter whether the contract is agreed or not, contractually agreed limits or exclusion of liability cannot exclude the liability of one party for causing property losses to the other party through fraud, intentional misconduct, reckless behaviour or gross negligence, nor the liability for causing personal injuries to the other party.

A causal link shall be made between behaviour and loss.

32. What right does a contractor have to claim a lien (or similar) in the works it has carried out? If so, what are the limits of the right if, for example, the employer has no interest in the site for the permanent works? How is the right recognised and enforced?

China

The contractor cannot claim a lien on the work, but as per article 286 of the Contract Law, the contractor is entitled to priority of compensation for the discount or auction of the work.

As per articles 35, 38 and 41 of the Judicial Interpretation of Construction Contracts (II) and the Reply of the Supreme People's Court on the Priority of Compensation for the Project Price, the restrictions on the priority of compensation include: (i) the quality of a construction project is acceptable; (ii) the claimant is limited to contractors who sign the contract with the employer; (iii) the claim is limited to the price in arrears; (iv) the period for a contractor's exercise shall be six months commencing from the date when the employer pays the price; (v) such priority is inferior to rights of consumers who have paid all or most of the purchase price of housing.

The contractor may agree with the employer to discount the project or apply to the court to auction the project. Under normal circumstances, the contractor must first confirm the priority of compensation through litigation or arbitration procedures, and then realise the priority of compensation through enforcement and other procedures.

33. How do conditional payment (such as pay-when-paid) provisions operate under the law of your jurisdiction (including interpretation rules, any good faith principles and laws on unfair contract terms)?

China

Under normal circumstances, if the contract is valid, the conditional payment terms are therefore effective. Both parties shall pay in accordance with the terms of the agreement.

In judicial practice, although most courts recognise that the pay-when-paid provisions can be used as one of the preconditions for the contractor to pay the price to subcontractors, as per article 159 of the Civil Code, the contractor who intentionally delays settlement or delays in exercising due creditor's rights shall not refuse to pay according to the pay-when-paid provisions.

34. May a subcontractor claim against the employer for sums due to the subcontractor from the contractor? How are difficulties with the merits and proof of the subcontractor’s claim addressed, including any rights the contractor has to withhold payment? What if aspects of the project suggest that the law of your jurisdiction should not apply (eg, the parties to both the main contract and the subcontract have chosen a foreign law as the governing law)?

China

A subcontractor may claim against the employer for sums due to the subcontractor from the contractor. As per article 535 of the Civil Code and article 44 of the Judicial Interpretation of Construction Contract (II), when the contractor fails to exercise its due creditor's rights, the subcontractor or the actual constructor may exercise the right of subrogation and require the employer to pay the unpaid price. As per article 24 of the Judicial Interpretation of Construction Contract (II), actual constructors can also break the doctrine of 'privity of contract' and directly require the employer to pay the outstanding price.

In terms of difficulty in adducing evidence, the court will usually add the contractor, subcontractor or illegal subcontractor as the third party to sort out the facts such as the amount of price owed by the employer.

If the agreement is not governed by Chinese laws, the rights and obligations of both parties shall be determined according to the agreed applicable law.

35. May an employer hold its contractor to their arbitration agreement if their dispute concerns a subcontractor (there being no arbitration agreement between the contractor and the subcontractor or no scope for joining two sets of arbitral proceedings) or can the contractor, for example, require litigation between itself, the employer and the subcontractor? Does it matter if the arbitration agreement does not have its seat in your jurisdiction?

China

The employer may require the contractor to abide by the arbitration agreement, because (i) there is no arbitration agreement between the contractor and the subcontractor as mentioned; (ii) there is no room to join two sets of arbitration procedures; and (iii) three parties cannot jointly arbitrate. The contractor cannot require litigation between itself, the employer and the subcontractor because only arbitration can be conducted between the contractor and the employer and only litigation can be conducted between the contractor and the subcontractor.

The precondition for arbitration between the parties pursuant to the arbitration agreement is that the arbitration agreement is valid. If the arbitration agreement is not governed by Chinese laws, the effect of the arbitration agreement shall be reviewed according to the law applicable to the arbitration agreement or the law of the seat of arbitration or the place where the arbitral tribunal is located as per article 18 of the Arbitration Law. If the arbitration agreement is valid, only arbitration can be conducted between the contractor and the employer, and only litigation can be conducted between the contractor and the subcontractor. If the arbitration agreement is invalid, the contractor may require a lawsuit between itself, the employer and the sub-contractor.

36. May third parties obtain rights under construction contracts? How readily can those connected with the employer (such as future or ultimate owners) bring claims against the contractor in respect of (a) delays and (b) defects? To what extent are exclusions and limitations of liability in the construction contract relevant?

China

Except for the circumstances that the contract cannot be transferred according to the nature of the contract, the agreement, and relevant laws, the third party can obtain the rights under the construction contract through the creditor’s rights transfer system stipulated in article 545 of the Civil Code.

The third party can successfully claim for delays or defects based on the contract after obtaining the employer's position in the construction contract but cannot bring claims only based on a connected relationship.

Provisions on exclusions and limitations of liability are highly relevant to whether the third party can successfully claim for delays or defects. These provisions are the important basis for the claim.

37. How readily (absent fraud, wilful misconduct, recklessness or gross negligence) can those connected with the contractor (such as affiliates, directors or employees) face claims in respect of (a) delays (b) defects and (c) payment? To what extent are exclusions and limitations of liability in the construction contract relevant?

China

Those connected with the contractor (such as affiliates, directors or employees) will not be held liable under the construction contract, and there is no need to face the claims.

Exclusions and limitations of liability in the construction contract are not relevant.

38. What are the key limitation or prescription rules for claims for money and defects (and insofar as you have a mandatory decennial liability (or similar) regime, what is its scope)? What stops time running for the purposes of these rules (assuming the arbitral rules are silent)? Are the rules substantive or procedural law? May parties agree different limitation or prescription rules?

China

As per article 188 of the Civil Code, the prescribed period for litigation is three years in China. In practice, parties will agree in the contact that claims shall be brought within 28 days when knowing the event.

The reasons for stopping time running of those rules include objective events, such as force majeure, and the right holder explicitly making claims to the other party, etc.

These rules are usually substantive.

Parties may freely agree on the time limit for issuing the notice of claim and may stipulate the procedures and rules, but the prescribed period for litigation shall not be ruled out by rules or agreements.

39. What laws apply that cannot be excluded or modified by agreement where the law of your jurisdiction is the governing law of a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

China

If the governing law is Chinese laws, the mandatory rules of the laws and regulations cannot be excluded, such as the Construction Law and Regulations on Quality Management of Construction Projects.

Taking the 1999 FIDIC Silver Book as an example: there are conflicts with Chinese laws and regulations in terms of the responsibility for site data, the acquisition of right of way, the employment of engineers or supervision engineers, the handling of permits, licences or approvals, etc, which shall not be applied.

40. What laws of your jurisdiction apply anyway where a foreign law governs a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

China

According to the Law on the Choice of Law for Foreign-related Civil Relationships, the agreed governing law cannot be applied when it damages the public interests of and violates mandatory provisions of laws and regulations, such as the Construction Law and the Regulations on Quality Management of Construction Projects.

Compared with the 1999 FIDIC Silver Book Regulations, these mandatory regulations are reflected in the following aspects: responsibility regulations on site data, acquisition of right of way, employment of engineers or supervisors, handling of permits, licences or approvals, etc.

41. For a DAB decision awarding a sum to a contractor under, say, sub-clause 20.4 of the FIDIC Red Book 1999 for which the employer has given a timely notice of dissatisfaction, in an arbitration with its seat in your jurisdiction, might the contractor obtain: a partial or interim award requiring payment of the sum awarded by the DAB pending any final award that would be enforceable in your jurisdiction (assuming the arbitral rules are silent); or interim relief from a court in your jurisdiction requiring payment of the sum awarded by the DAB pending any award?

China

The contractor may demand payment of the sum awarded by the DAB but whether the claim can be supported and enforced shall be determined by the arbitral tribunal after hearing.

Chinese courts generally will not issue interim relief requiring payment of the sum awarded by the DAB.

42. Does your jurisdiction have courts or judges specialising in construction and arbitration?

China

In China, there is no court specialising in construction, but there are judges who are mainly engaged in construction trials.

Special courts are set up to confirm the effect of arbitration agreements and enforce arbitration awards to resolve situations where parties apply for revocations or enforcement of arbitral awards. However, these courts also have jurisdiction over other types of cases. There is no judge specialising in handling arbitration cases in China.

43. What are the relevant levels of court for construction and arbitration matters? Are their decisions published? Is there a doctrine of binding precedent?

China

In China, courts are divided into four levels: basic courts, intermediate courts, high courts and the Supreme Court. Arbitration is not subject to levels of jurisdiction.

In China, most of decisions shall be published to the public but there are exceptions stipulated by relevant laws where the cases involving state secrets, commercial secrets and personal privacy should not be published. Arbitration awards shall not be published.

Precedents are not binding on third parties other than the parties concerned. But all levels of court should refer to guiding cases issued by the Supreme Court when dealing with similar cases.

44. In your jurisdiction, if a judge or arbitrator (specialist or otherwise) has views on the issues as they see them that are not put to them by the parties, can they raise them with the parties? Is the court or arbitral tribunal permitted or expected to give preliminary indications as to how it views the merits of the dispute?

China

In China, there are matters that should be clarified and matters that are prohibited from being clarified by the court. Matters that should be clarified include: if the court, as per article 30 of the Provisions of the Supreme People's Court on Evidence in Civil Procedures, believes that the facts to be proved need to be identified through expert opinions, those should be clarified. Matters that are prohibited from being clarified include: as per article 3 of the Provisions of the Supreme People's Court on Several Issues concerning the Application of Statute of limitations during the Trial of Civil Cases, courts shall not voluntarily clarify the issue of statute of limitations.

Whether the arbitral tribunal can take the initiative to explain is determined according to the arbitration rules. For example, as per article 16 of the Arbitration Rules of the Shanghai Arbitration Commission, where the nature of the legal relationship claimed by parties in the arbitration process or the effectiveness of civil acts is inconsistent with the arbitral tribunal's determination based on the facts of the case, the arbitral tribunal may inform the parties of their right to change the claim.

Under the condition of not violating laws, the court and the arbitration institution may give preliminary indications as to how they view the merits of the dispute to promote the judicial process.

45. If a contractor, say, wishes to arbitrate pursuant to an arbitration agreement, what parallel proceedings might the employer bring in your jurisdiction? Does it make any difference if the dispute has yet to pass through preconditions to arbitration (such as those in clause 20 of the FIDIC Red Book 1999) or if one of the parties shows no regard for the preconditions (such as a DAB or amicable settlement process)?

China

As per article 5 of Arbitration Law, if parties to the contract reach a valid arbitration agreement, the employer shall not bring a suit to the court. If the suit is filed, the court will not accept it, but the employer may bring a suit to the court to confirm the effect of the arbitration agreement.

Chinese laws do not stipulate the preconditions for arbitration, but if the contract stipulates that arbitration shall be submitted to the DAB before arbitration, it shall be carried out in accordance with the contract. If one party applies for arbitration, the arbitration institution shall not accept it. However, if the appointment of DAB expires or there is no working DAB for other reasons, both parties may submit the dispute directly to the arbitration institution.

46. If the seat of the arbitration is in your jurisdiction, might a contractor lose its right to arbitrate if it applied to a foreign court for interim or provisional relief?

China

If the seat of the arbitration is in China, a contractor will not lose rights to arbitrate if it applied to a foreign court for interim or provisional relief.

47. In your jurisdiction, are tribunal- or party-appointed experts used? To whom do party-appointed experts owe their duties?

China

As per article 44 of Arbitration Law, the arbitration institution may authorise experts to carry out authentication on specialist issues. Many arbitration rules also have relevant expert systems for arbitration institutions. For example, article 34 of the Arbitration Rules of the Shanghai Arbitration Commission stipulates that the arbitration institution may consult experts or appoint experts to carry out authentication on specialist issues in the case.

As to the experts appointed by parties, there are no relevant laws and regulations in China, but some arbitration rules include, for example, the parties may appoint experts to for opinions or professional issues as stipulated in article 43 of the Arbitration Rules of Guangzhou Arbitration Commission of China, but whether to agree or not is up to the arbitration institution.

In China, there are no relevant laws on to whom the party-appointed experts should owe their duties in arbitration. However, in civil proceedings, as per article 122 of Interpretation of the Application of the Civil Procedure, opinions proposed by the party-appointed experts in court on the specialised issues shall be deemed as statements of the parties.

48. Summarise any specific limitations or requirements that apply when the employer is a state entity or public authority (including, for example, public procurement rules, limits on rights to suspend or terminate, excluded lien rights and arbitrating – as well as enforcing an award – against such an employer).

China

When the employer is a state entity or public authority, the project would be the 'project wholly or partly invested or financed by state-owned funds' under Chinese laws. According to relevant laws, the project contractor must be selected through bidding, otherwise the signed construction contract will be deemed ineffective. There is no other limitation or requirement.

49. If the seat of the arbitration is in your jurisdiction, on what basis can a party make a settlement offer that may not be put before the arbitral tribunal until costs fall to be decided?

China

As per article 76 of Arbitration Law and article 6 of the Arbitration Commission's Arbitration Fee Rules, parties applying for arbitration need to pay the arbitration costs in advance. If parties do not pay the costs in advance within the prescribed time limit and do not apply for an extension of time, the application for arbitration shall be deemed as withdrawn by the claimant. Therefore, if costs are not yet decided, the parties cannot pay the arbitration costs; the arbitral procedure are not officially started, and a party definitely cannot submit a settlement offer to the arbitration institution.

50. Does the law of your jurisdiction recognise "without prejudice" privilege (such that "without privilege" communications are privileged from disclosure)? If not, may it be agreed that a sum is payable if communications to try to achieve a settlement are disclosed to a court or arbitral tribunal?

China

Chinese laws recognise ‘without prejudice’ privilege. As per article 107 of the Judicial Interpretation of Civil Procedure Law, facts accepted by the parties by compromise for the purpose of reaching a reconciliation agreement or a settlement agreement shall not be regarded as basis adverse thereto in the subsequent lawsuits, except as otherwise specified by laws or agreed by the parties.

51. Is the advice of in-house counsel privileged from disclosure under the law of your jurisdiction? Is the relevant law characterised as substantive or procedural law?

China

Chinese laws do not stipulate this issue specifically. As per the Arbitration Law, the Civil Procedure Law and other mandatory procedural laws, the court or the arbitral tribunal will not require in-house counsel to disclose their advice, therefore the advice of in-house counsel is privileged from disclosure.

52. What are the requirements for a guarantee under the law of your jurisdiction? Are oral guarantees effective?

China

As per article 685 of the Civil Code, a guarantee contract may concluded separately in writing or a guarantee clause incorporated in a principal claim-obligation contract. A guarantee contract may also be formed when a third person unilaterally offers a written guarantee to the creditor and the creditor accepts it without objection.

Oral guarantees are not effective in principle. However, as per article 490 of the Civil Code, if the oral guarantor has fulfilled the obligation to pay the deposit and the other party accepts it, the guarantee contract shall be deemed as formed. If the guarantees are formed and there is no circumstance stipulated by laws that will make the guarantees ineffective, oral guarantees are effective.

53. Under the law of your jurisdiction, will the guarantor’s liability be limited to that of the party to the underlying construction contract, if the guarantee is silent? Can the guarantee’s wording affect the position?

China

Based on judicial practice, if not agreed in the guarantee, the guarantor’s liability is limited to that of the party to the underlying construction contract.

Even though the guarantee’s wording will affect the scope of the guarantor's liability, the guarantee’s wording will not affect the position. As per article 691 of the Civil Code, the guarantor may stipulate the scope of guarantee in the contract. However, as per article 388 of the Civil Code, the guarantee is subordinate to the underlying contract. Its wording cannot break through the scope of liabilities of the party to the underlying contract.

54. Under the law of your jurisdiction, in what circumstances will a guarantor be released from liability under a guarantee, if the guarantee is silent? Can the guarantee’s wording affect the position?

China

In the following circumstances, a guarantor would be released from liability:

• the guarantee contract is confirmed to be void and the guarantor is not at fault (see article 682 of the Civil Code).
• the creditor to the guarantee fails to bring a suit or apply for arbitration against the debtor during the guarantee term (see article 693 of the Civil Code).
• where the creditor and the debtor, without the written consent of the guarantor, alter by agreement, the content of the principal contract, the guarantor shall be released from guarantee liability for the increased portion (see article 695 of the Civil Code).
• where the assignment of a claim guaranteed is prohibited as agreed between the guarantor and the creditor, if the creditor assigns the claim without the guarantor’s written consent, the guarantor shall be released from guarantee liability to the assignee (see article 696 of the Civil Code).
• where the creditor allows the debtor to transfer the debt, but without the consent of the guarantor, the guarantor shall be released from liability for the transferred part (see article 697 of the Civil Code).
• if, upon the expiry of the term of performance of the principal obligation, the guarantor to a general guarantee discloses to the creditor information about the property of the debtor that is available for enforcement, but the creditor waives or neglects to exercise his right and thereby causes the property to become unenforceable, the guarantor shall be released from liability to the extent of the value of that property available for enforcement disclosed by the guarantor (see article 698 of the Civil Code.)

Without violating mandatory legal provisions, the parties to a contract may agree on an exclusion of liability provision on specific circumstances.

55. If an on-demand bond is governed by the law of your jurisdiction on what basis might a call be challenged in your courts as a matter of jurisdiction as well as substantive law? Assume the underlying contract is silent on when calls may be made.

China

A call of the on-demand bond might be challenged on the following basis: (i) the on-demand bond is already terminated; and (ii) the beneficiary's call constitutes a fraud (see articles 11 and 12 of the Provisions of the Supreme People's Court on Several Issues concerning the Trial of Independent Guarantee Dispute Cases).

56. If an on-demand bond is governed by the law of your jurisdiction and the underlying contract restrains calls except for amounts that the employer is entitled to (such as sub-clause 4.2 of the FIDIC Red Book 1999), when would a court or arbitral tribunal applying your jurisdiction’s law restrain a call if the contractor contended that: (i) the employer does not have an entitlement in principle; or (ii) the employer has an entitlement in principle but not for the amount of the call?

China

A call will be restrained if the contractor claims that the employer has an entitlement in principle but not for the amount of the call. As per articles 1 and 6 of Provisions of the Supreme People's Court on Several Issues concerning the Trial of Independent Guarantee Dispute Cases, on-demand bonds shall be paid upon demand, which means that as long as the ‘conformity of documents’ is met, the beneficiary can request payment for the amount specified in the bond. Therefore, if the contractor only claims that the employer does not have an entitlement in principle to request payment, it will not restrain the call. However, if the documents requested by the employer for payment are inconsistent with the terms of the on-demand bond (ie, the amount stated in the demand for payment reminder is higher than the amount under the terms of the bond, the payment conditions of the issuer will not be met, and the employer's call will be restrained).

57. Are there any other material aspects of the law of your jurisdiction concerning construction projects not covered above?

China

No.