Issues Concerning the Application of the Law to the Trial of Construction Project Contract Disputes Interpretation

(Promulgated by the Supreme People's Court on October 25 2004 and effective as of January 1 2005.)

SPC Interpretation [2004] No.14

The Interpretation has been formulated pursuant to such laws as the PRC Civil Law General Principles, the PRC Contract Law, the PRC Invitation and Submission of Bids Law, the PRC Civil Procedure Law (2nd Revision), etc. while taking into consideration the realities of civil trials, in order to address the issue of the application of the law in the trial of construction project contract disputes.

Article 1: A construction project contract shall be ruled invalid pursuant to Item (5) of Article 52 of the Contract Law if:

(1) the contractor has failed to obtain construction enterprise qualifications or is undertaking a project that exceeds its qualification grade;

(2) the unqualified actual builder has borrowed the name of a qualified construction enterprise; or

(3) the construction project required an invitation for bids but no such invitation was carried out or the winning bid was invalid.

Article 2: If the contractor of a construction project, the contract of which is invalid but which passed the acceptance check upon completion, requests that the project monies be paid with reference to the provisions of the contract, its request shall be upheld.

Article 3: If a construction project contract is invalid and the project failed to pass the acceptance check upon completion, matters shall be handled as follows:

(1) if, after repairs, the construction project passes the acceptance check and the employer requests that the contractor bear the repair expenses, its request shall be upheld; or

(2) if, after repairs, the construction project fails to pass the acceptance check and the contractor requests payment of the project monies, its request shall be rejected.

The employer shall, if it is at fault, bear commensurate civil liability for the loss incurred due to the construction project not being compliant.

Article 4: If a contractor illegally transfers the entire construction project contracted by it to a third party, subcontracts the construction project in violation of the law or if the unqualified actual builder borrows the name of a qualified construction enterprise to execute a construction project contract with another, such act shall be invalid. The people's court may confiscate the illegal income obtained by the concerned party pursuant to Article 134 of the Civil Law General Principles.

Article 5: Where a contractor executes a contract for a construction project that exceeds the scope of business permitted by its qualification grade but obtains the appropriate qualification grade before the construction project is completed, and a party requests that the matter be handled as an invalid contract, its request shall be rejected.

Article 6: If the parties have provided for an advance and interest on such advance and the contractor requests the return of such advance and the interest thereon in accordance with such provisions, its request shall be upheld, with the exception of any part of such interest the agreed upon rate for calculation of which is higher than the interest rate on the same type of loan of the same duration posted by the People's Bank of China.

If the parties have not provided for an advance, such advance shall be treated as project money owed.

If the parties have not provided for interest on an advance and the contractor requests payment of interest, its request shall be rejected.

Article 7: If a party requests that a labour service subcontract executed between a contractor with the statutory qualifications to offer labour services and the general contractor and/or the subcontractors be confirmed as invalid on the grounds that a whole project contracted for was transferred in violation of the law, its request shall be rejected.

Article 8: An employer's request to terminate a construction project contract shall be upheld if:

(1) the contractor has expressly indicated or through its actions indicated that it will not perform its main contractual obligations;

(2) the contractor has failed to complete construction within the time limit specified in the contract and still fails to complete construction within the reasonable period of time given to it in a reminder from the employer;

(3) the quality of those parts of the construction project that are completed is non-compliant and the contractor refuses to effect repairs; or

(4) the contractor illegally transfers the entire construction project contracted by it to a third party or subcontracts it in violation of the law.

Article 9: The contractor's request to terminate a construction project contract shall be upheld if it is unable to carry out work because the employer is characterized by any of the circumstances set forth below, and still fails to perform its corresponding obligations within the reasonable period of time given to it in a reminder from the contractor:

(1) it fails to pay the project monies in accordance with the provisions of the contract;

(2) the main construction materials, structural members, fittings or equipment it provides fail to comply with mandatory standards; or

(3) it fails to perform its obligation of providing assistance as specified in the contract.

Article 10: If the quality of the completed portions of a construction project whose contract has been terminated is compliant, the employer shall pay the corresponding project monies as specified in the contract. If the quality of the completed portions of the construction project is not compliant, matters shall be handled with reference to Article 3 hereof.

If a contract is terminated due to a breach of contract by either party, the party in breach shall compensate for the losses incurred therefrom by the other party.

Article 11: If the quality of a construction project fails to comply with the provisions of the contract due to the fault of the contractor and the contractor refuses to effect repairs, redo the work or make alterations and the employer requests a reduction of the project monies to be paid, its request shall be upheld.

Article 12: An employer shall bear tort liability if it causes quality defects in a construction project because:

(1) the designs it provided contain defects;

(2) the construction materials, structural members, fittings or equipment it provided or instructed be purchased do not comply with mandatory standards; or

(3) it directly designated a subcontractor to subcontract specialized works.

If the contractor is also at fault, it shall bear commensurate tort liability.

Article 13: If, after it uses a construction project that has not undergone an acceptance check after completion, the employer asserts rights on the grounds that the quality of the portions it uses do not comply with the provisions of the contract, its claim shall be rejected. However, the contractor shall bear civil liability in respect of the quality of the foundation works and the main structure for the reasonable life of the construction project.

Article 14: In the event of a dispute between the parties concerning the actual date of completion of a construction project, matters shall be handled as follows:

(1) if the construction project passes the acceptance check upon completion, the date on which it passes the acceptance check shall be deemed the completion date;

(2) if the contractor has submitted the report for acceptance upon completion but the employer delays the acceptance check, the date on which the contractor submitted the acceptance report shall be deemed the completion date; or

(3) if the employer uses the construction project without its having undergone the acceptance check upon completion, the date on which possession of the construction project was transferred shall be deemed the completion date.

Article 15: In the event of a dispute between the parties concerning the quality of a construction project before the completion of such project, and, after expert evaluation, is found to be compliant, the construction period shall be extended for a period of time equivalent to the evaluation period.

Article 16: If the parties have provided for the pricing rates or pricing method for a construction project, the project monies shall be settled in accordance with such provisions.

If the quantity of work or quality standards of a construction project change due to a design modification and the parties fail to reach a consensus on the project monies for such part, the project monies may be settled with reference to the pricing method or pricing rates issued by the competent local construction department at the time of execution of the construction project contract.

If a construction project contract is valid but the project fails to pass the acceptance check upon completion, settlement of the project monies shall be handled with reference to Article 3 hereof.

Article 17: If the parties have provided for the rate for the payment of interest on overdue project monies, matters shall be handled in accordance with such provisions. If no such provisions were agreed upon, interest shall be calculated at the interest rate for the same type of loan of the same duration posted by the People's Bank of China.

Article 18: Interest shall accrue from the date on which the project monies became payable. If the parties did not provide for the payment date or did not explicitly provide therefor, the following times shall be deemed the date on which the monies became payable:

(1) if the construction project has actually been delivered, the date of delivery;

(2) if the construction project has not been delivered, the date on which the completion settlement documents were submitted; or

(3) if the construction project has not been delivered and the project monies have not been settled, the date on which the concerned party instituted legal proceedings.

Article 19: In the event of a dispute between the parties concerning the quantity of work, the same shall be confirmed on the basis of such written documents as certificates, etc. generated in the course of construction. If the contractor is able to establish that the employer has consented to its carrying out construction, but is unable to provide certificates substantiating the quantity of work, the actual quantity of work may be confirmed using other evidence provided by the parties.

Article 20: If the parties have provided that where the employer has not given a response within the agreed upon period of time after receipt of the completion settlement documents, it will be deemed to have approved such documents, matters shall be handled in accordance with such provisions. If the contractor requests that the project monies be settled in accordance with the completion settlement documents, its request shall be upheld.

Article 21: In the event of a discrepancy in the substantive provisions of the construction project contract separately concluded by the parties and the winning bid contract placed on the record for the same project, the winning bid contract placed on the record shall serve as the basis for settlement of the project monies.

Article 22: If the parties have provided that the project monies are to be settled on the basis of a fixed price and either party requests that the pricing of the construction project be assessed by an expert, its request shall be rejected.

Article 23: In the event of a dispute between the parties concerning certain facts of their case, only those facts in dispute shall be assessed, unless the scope of the disputed facts cannot be determined or the parties request that all the facts be assessed.

Article 24: In construction project contract disputes, the place where the construction is carried out shall be deemed the place of performance.

Article 25: In disputes over the quality of a construction project, the employer may name the general contractor, the subcontractors and the actual builder as co-defendants when instituting legal proceedings.

Article 26: If the actual builder names the transferor of the whole project contracted for or an illegal subcontractor as defendant when instituting legal proceedings, the people's court shall accept the case in accordance with the law.

If the actual builder names the employer as defendant when asserting a right, the people's court may add the transferor of the whole project contracted for and/or illegal subcontractors as parties to the case. The employer shall be liable to the actual builder only to the extent of the project monies owed.

Article 27: If the warranty provider fails to perform its warranty obligations on time, causing damage to the building or causing personal injury or property damage, it shall be liable for damages.

If both the warranty provider and the owner of the building or the employer are at fault for damage to a building, they shall each bear their corresponding liability.

Article 28: The Interpretation shall be implemented as of January 1 2005.

The Interpretation shall apply to cases at first instance accepted after the implementation hereof.

In the event of a conflict between the Interpretation and judicial interpretations issued by the Supreme People's Court prior to the implementation hereof, the Interpretation shall prevail.