2 Supervising Construction Contracts
2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third party (e.g. an engineer)? Does any such third party have a duty to act impartially between the contractor and the employer? If so, what is the nature of such duty (e.g. is it absolute or qualified)? What (if any) recourse does a party to a construction contract have in the event that the third party breaches such duty?
The PRC Construction Law requires that, for projects prescribed by the State Council (mainly projects concerned with the public interest), a Supervisor (“监理”, a qualified company) shall be appointed by the employer for supervision, acting impartially and on behalf of the employer, over the construction quality, the progress of works and the use of construction funds. In practice, however, sometimes the role of the Supervisor is limited to quality supervision without the role of management. Since the Supervisor is contracted with the employer with limited duty, its independence and impartiality have been questioned for many years. If a Supervisor breaches its duty to act impartially, a party may resort to general contract or tort remedies, and administrative remedies provided by laws or regulations for investigation and imposing penalties. Further, if the consequences arising from such breaches are serious, criminal charges may apply.
The following experimental practices are developed to supplement the practice of Supervisor:
(a) Facilitate the whole process of engineering consulting, covering the consulting services of bidding agent, survey, design, quality supervision, engineering cost, project management, etc., as reflected in Guiding Opinions of the National Development and Reform Commission and the Ministry of Housing and Urban-Rural Development on Promoting the Development of Whole Process Engineering Consulting Services (2019).
(b) Introduce the role of “Engineer” into a construction contract, whose duties are similar to the duties provided in the FIDIC Yellow Book, and the Supervisor’s duties are borne by the Engineer, as reflected in Model Contract for EPC Project (GF-2020-0216).
(c) Purchase Quality Insurance to have the insurance company take the major responsibility of the quality risk control, as promoted by some local authorities, such as Beijing, Xiong’an New District and Guangzhou.


2.2 Are employers free to provide in the contract that they will pay the contractor when they, the employer, have themselves been paid; i.e. can the employer include in the contract what is known as a “pay when paid” clause?
Parties are free to conclude a “pay when paid” clause in a construction contract, since the law is silent on this matter. Court cases generally recognise “pay when paid” as a conditional clause and no parties shall, its own interest, prevent the condition from being fulfilled, otherwise the condition is deemed to have been fulfilled according to Article 158 of the PRC Civil Code. In legal practice, the party who refuses to pay by relying on a “pay when paid” clause bears the heavy and strict burden of proof that it has not been paid.
The “pay when paid” clause can often be found in subcontract relationships. In a subcontract case, the contractor who withholds the payment by relying on the “pay when paid” clause is obliged to demand the payment from the employer in the ordinary course.


2.3 Are the parties free to agree in advance a fixed sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are there any restrictions on what can be agreed? E.g. does the sum to be paid have to be a genuine pre-estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of financial loss likely to be suffered by the employer? Will the courts in your jurisdiction ever look to revise an agreed rate of liquidated damages; and, if so, in what circumstances?
Liquidated damages are codified as one of the contractual remedies in the PRC Civil Code, and it is common to have such agreement in a construction contract. Clauses of liquidated damages usually provide a fixed sum or formula as damages for the employer when the project is delayed in completion or the project fails to meet the agreed performance parameters, and as damages for the contractor when the employer’s payment is delayed.
Liquidated damages function primarily as compensatory damages to recover the non-breaching party’s actual loss suffered, and secondarily as the penalty to compel parties’ performance. If the agreed liquidated damages are significantly higher or lower than the actual loss suffered, the court or arbitrator may reduce or increase the sum upon a party’s request (it is worth noting that a recent case ruled by the PRC Supreme Court held that the court respects the parties’ agreement in advance to waive the adjustment to the liquidated damages). Prior to the effectiveness of the PRC Civil Code, liquidated damages that were 30% higher than the actual loss suffered were considered significantly higher according to the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the “Contract Law of the People’s Republic of China” (II) (abolished). Now it is left to the judge’s discretion whether the adjustment to liquidated damages should be applied, with the overall consideration of related factors including the performance situation of the contract, the extent of parties’ fault, the anticipatory interest, etc.

3 Common Issues on Construction Contracts
3.1 Is the employer entitled to vary the works to be performed under the contract? Is there any limit on that right?
Yes, a variation clause providing the employer’s right to vary can often be found in a construction contract. The variation instruction should not, in general terms, cause an impact on the safety of works and be detrimental to workers’ health and environment.
In addition to the existence of a contractual claim against the variation, Article 805 (for design and survey work) or Article 777 (potentially applicable to construction work) of the PRC Civil Code provide the contractor’s right to claim against the employer if there are losses suffered arising from a variation.
In terms of a bidding project, the parties are prohibited from varying the works by any agreement that constitutes a change of the substantial content and thereby deviates from the bidding invitation documents and the proposal.


3.2 Can work be omitted from the contract? If it is omitted, can the employer carry out the omitted work himself or procure a third party to perform it?
It mainly depends on what the contract says. In general, the works can be omitted within a certain scope through a variation clause in a construction contract. Meanwhile, a variation clause may be agreed to exclude the situation of omitting the work and having a third party or the employer carry out the omitted part of the work, e.g., the Model Contract for EPC Project (GF-2020-0216).
In the situation of the work omitted amounting to a breach, the contractor may claim the cost (mainly the overhead cost) and profit for the omitted part of the work.
In terms of a bidding project, the work omitted by agreement shall not constitute a change of the substantial content that deviates from the bidding invitation documents and the proposal.


3.3 Are there terms which will/can be implied into a construction contract (e.g. a fitness for purpose obligation, or duty to act in good faith)?
Under PRC law, in addition to contractual obligations, the parties of a construction contract are generally required to:
1. observe the principle of fairness and reasonably allocate parties’ rights and obligations;
2. observe the principle of good faith, be honest and fulfil their commitments;
3. not violate laws or the public order and good morals;
4. perform obligations including notification, assistance, confidentiality and others based on the nature and purpose of the contract as well as the course of dealing; and
5. avoid wasting resources, polluting the environment, and damaging the ecology.


3.4 If the contractor is delayed by two concurrent events, one the fault of the contractor and one the fault or risk of the employer, is the contractor entitled to: (a) an extension of time; and/or (b) the costs arising from that concurrent delay?
The contract may provide the arrangement for the contractor’s entitlement in the situation of concurrent delay, since the law is silent on this matter. However, it is not common to find such agreement in a construction contract.
In court cases, parties often, in the first place, fail to present to the court, in a scientific way, the causation and influence of the concurrent events to sustain their claims for delay damages. Hence, it is not clear what rules the court will adopt to allocate the risk of concurrent delay.


3.5 Is there a statutory time limit beyond which the parties to a construction contract may no longer bring claims against each other? How long is that period and when does time start to run?
The statutory limitation period for a party to seek civil right (including the rights under contract, tort, and others) protection from the court is three years. The general rule for determining the starting time is the date when the aggrieved party knows or should have known that his or her rights have been violated and who the violator is. In terms of a construction contract, the period starts to run from the date on which a party’s obligation to perform is due.
Parties’ agreement is invalid in respect of the period of the statutory time limit, its calculation method, and reasons for its suspension and interruption.


3.6 What is the general approach of the courts in your jurisdiction to contractual time limits to bringing claims under a construction contract and requirements as to the form and substance of notices? Are such provisions generally upheld?
The judicial interpretation (which judges are bound to follow) takes a conservative approach to recognise parties’ contractual time limit to bring a claim of extension of time, reserving the possibility for the parties to agree to extend the time later or for the contractor to raise a reasonable defence (not specified). As for the contractual time limit of a claim concerning costs, the courts would be unlikely to uphold such agreement, since it would be deemed the parties’ agreement on the statutory time limit (please see the answer to question 3.5).
At the level of law, a valid claim notice with the intent of requesting the other party to perform certain obligations could be made in writing or orally, or by filing a lawsuit or applying for arbitration. However, parties shall be bound to where the contract provides the specific requirements of the claim notice.


3.7 Which party usually bears the risk of unforeseen ground conditions under construction contracts in your jurisdiction?
A risk allocation clause of unforeseen ground conditions is usually included in a construction contract as one type of “the unforeseen physical conditions” where the employer bears the additional costs and time arising therefrom; as can be reflected, for example, in the Model Contract for EPC Project (GF-2020-0216) and in the Model Contract for Construction Works (GF-2017-0201).
When a contract does not provide the risk allocation of unforeseen ground conditions, the rule of “Change of Circumstances” pursuant to Article 533 of the PRC Civil Code potentially applies: where the basic conditions of a contract have undergone significant changes, which are not commercial risks and were unforeseeable when the parties concluded the contract, if continuing to perform the contract is obviously unfair to one party, the adversely affected party may renegotiate with the other party; if the negotiation fails within a reasonable period, the party/parties may apply to the court or arbitration institution for amendment or rescission of the contract.