3.8 Which party usually bears the risk of a change in law affecting the completion of the works under construction contracts in your jurisdiction?
The Model Contract for EPC Project (GF-2020-0216) and Model Contract for Construction Works (GF-2017-0201) provide that the contract price shall be increased or decreased if the change in law takes place after the contract base date (28 days prior to the bid deadline or the conclusion of the contract) and influences the contractor’s costs for performance. If a change in law causes delays to the work after the contract base date, the time for completion shall be extended accordingly. However, if such change in law occurs in the period of delay caused by the contractor, the contractor is responsible for the additional costs and time for completion.
Similarly, when the risk allocation of a change in law is in absence of a construction contract, the rule of “Change of Circumstances” potentially applies (please see the answer to question 3.7).

3.9 Which party usually owns the intellectual property in relation to the design and operation of the property?
In general, the intellectual property of works belongs to the party who creates the works, and parties are free to agree on the ownership of the intellectual property. The Model Design Contract for Municipal Housing Construction Projects (GF-2015-0209) and Model Design Contract for Professional Construction Projects (GF-2015-0210) provide that, unless otherwise agreed in Special Conditions, the designer owns the copyright for the documents prepared by the designer.

3.10 Is the contractor ever entitled to suspend works?
Yes, a construction contract commonly provides the contractor’s right to suspend works for reasons of employer’s delay in payment and employer’s failure to meet certain obligations that shall be performed first, which cause the contractor’s inability to continue the performance.
In absence of the contractor’s right to suspend works in the contract, Article 526 of the PRC Civil Code potentially provides for the contractor’s right to suspend if the contractor’s continuance of works is subject to certain obligations on the employer to be performed first.

3.11 Are there any grounds which automatically or usually entitle a party to terminate the contract? Are there any legal requirements as to how the terminating party’s grounds for termination must be set out (e.g. in a termination notice)?
The parties are free to terminate a contract by agreement and to agree on the grounds of termination, according to Article 562 of the PRC Civil Code. The contractual termination grounds in a construction contract are usually, to some extent, detailed extensions from the termination grounds stipulated by law.
According to Article 563 of the PRC Civil Code, a contract can be terminated by the party/parties under any of the following circumstances:
(1) force majeure renders the purpose of the contract impossible to achieve;
(2) a party expressly states, or indicates by its conduct, that it will not perform the major obligations prior to the expiry of the performance time limit;
(3) a party delays in performing its major obligation and fails to perform within a reasonable period after being urged so to perform;
(4) a party delays in performing its obligation or commits other breaches, rendering the purpose of the contract impossible to achieve; or
(5) other circumstances stipulated by law.
Article 806 of the PRC Civil Code further provides the grounds for termination of a construction contract:
• Employer’s right to terminate: the contractor assigns the works or illegally subcontracts the works.
• Contractor’s right to terminate: where the major building materials, the components and accessories for the building and the equipment provided by the employer fail to meet the mandatory standard, or where the employer fails to perform its assistance obligations, causing the contractor’s failure to perform the works, the contractor may terminate the contract if the employer still fails to perform within a reasonable period after he/she has been urged so to perform.
According to Article 565 of the PRC Civil Code, a party intending to terminate the contract shall issue a notice to the other party, and the contract is terminated when such notice reaches the other party. If a termination notice includes the time condition for the other party to perform, the contract is terminated automatically when the other party fails to perform within the time required. Alternatively, a party may, without notice, directly file a lawsuit or apply to arbitration claiming for termination, and the contract is terminated upon the service of a copy of the statement of claim or application for arbitration on the other party.

3.12 Do construction contracts in your jurisdiction commonly provide that the employer can terminate at any time and for any reason? If so, would an employer exercising that right need to pay the contractor’s profit on the part of the works that remains unperformed as at termination?
The employer’s right to terminate for convenience in a construction contract is not common in practice. Parties are free to conclude such clause, but its validity may be questioned if the employer’s purpose of termination is for assigning the works or for other purposes that are in contradiction with the principle of good faith.
At the level of law, an employer may terminate a construction contract at any time prior to the completion of the works according to Article 787 of the PRC Civil Code, but the employer is liable for any contractor’s losses arising from the termination.

3.13 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give the affected party? Is it usual/possible to argue successfully that a contract which has become uneconomic is grounds for a claim for force majeure?
Force majeure is codified in the PRC Civil Code as an objective circumstance that is unforeseeable, unavoidable and insurmountable, whereby a party who is unable to perform its obligations due to force majeure can be exempted from civil liability.
It is unlikely to be argued that a contract which becomes uneconomic is force majeure. In this situation, the rule of “Change of Circumstances” potentially applies (please see the answer to question 3.7).

3.14 Is there any legislation or court ruling that has been specifically enacted or handed down to provide relief to parties to a construction contract for delay, disruption and/or financial loss caused by the COVID-19 pandemic? If so, what remedies are available under such legislation/court ruling and are they subject to any conditions? Are there any other remedies (statutory or otherwise) that may be available to parties whose construction contracts have been affected by the COVID-19 pandemic?
During the outbreak of COVID-19, the PRC Supreme People’s Court issued three Guiding Opinions on Several Issues Concerning the Lawful and Proper Trial of Civil Cases Involving COVID-19 (“Guiding Opinions”), which provide guidance on legal applications for various matters that are possibly influenced by COVID-19.
As far as construction contracts are concerned, paragraph 7 of the second Guiding Opinion applies the rules of force majeure and change in circumstances respectively for different situations:
(1) if a contractor fails to complete the construction within the agreed time limit due to the epidemic or the epidemic prevention and control measures, the People’s Court will not uphold the employer’s claim against the contractor for breaches. If the contractor requests to extend time for completion, the People’s Court shall uphold such request giving consideration to the degree of impact of the epidemic situation or the epidemic prevention and control measures on the performance of the contract.
(2) where the epidemic situation or epidemic prevention and control measures cause a sharp rise in the costs of labour and construction materials, etc., or cause contractor’s losses such as labour costs and equipment rental fees, etc., and the continued performance of the contract is obviously unfair to the contractor, if the contractor requests an adjustment of the contract price, the People’s Court shall, in consideration of the actual circumstances of the case, make adjustments in accordance with the principle of fairness.

3.15 Are parties, who are not parties to the contract, entitled to claim the benefit of any contractual right which is made for their benefit? E.g. is the second or subsequent owner of a building able to claim against the contractor pursuant to the original construction contracts in relation to defects in the building?
Under PRC law, a third party’s benefit to a contract can be created by law or by agreement, by which the third party is able to claim such benefit against the contractual party in default.
PRC law and regulation stipulate that the defect liability rests on the contractor. A second or subsequent owner of a building may request the contractor to perform its warranty obligations or claim against the contractor for any losses caused by defects, but may not directly claim against the contractor pursuant to the original construction contract if such contract does not confer such right.

3.16 On construction and engineering projects in your jurisdiction, how common is the use of direct agreements or collateral warranties (i.e. agreements between the contractor and parties other than the employer with an interest in the project, e.g. funders, other stakeholders, and forward purchasers)?
The use of collateral warranties in the form of a quality warranty certificate issued by the contractor, in which the scope of the time limit and responsibilities for the warranty of the project are specified, is required by law. Under PRC law, the contractor assumes the defect liability of a project to any party with an interest therein. In the event of a contractor’s failure to perform its warranty obligations causing personal injuries or property losses, any aggrieved party may bring a tortious claim against the contractor, and the employer may have the right to claim against the contractor for breaches.

3.17 Can one party (P1) to a construction contract, who owes money to the other (P2), set off against the sums due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off?
Under PRC law, there is statutory right of set-off, and the contractual right of set-off is permissible.
The statutory right of set-off requires that the subjects under the obligation to set off are of the same kind and quality, and such right is not otherwise precluded by parties’ agreement or prohibited by law. A notice to set off (with no condition and time requirement) is also required to exercise such right.
As for the case in the question, it is possible for P1 to set off, by notice, the sums which P2 owes to P1 from sums which P1 owes to P2.

3.18 Do parties to construction contracts owe a duty of care to each other either in contract or under any other legal doctrine? If the duty of care is extra-contractual, can such duty exist concurrently with any contractual obligations and liabilities?
The duty of care is not a term of art under the PRC Civil Code and is rarely agreed in a construction contract, but its concept can be reflected in the principle of good faith. According to Article 509 of the PRC Civil Code, the party/parties shall comply with the principle of good faith and perform its/their obligations including notification, assistance, confidentiality, and others based on the nature and purpose of the contract as well as the course of dealing. Good faith is the principle embedded in civil activities and its obligations and duties are coexistent with parties’ contractual obligations.

3.19 Where the terms of a construction contract are ambiguous, are there rules which will settle how that ambiguity is interpreted?
According to Article 142 of the PRC Civil Code, the meaning of ambiguous terms can be determined by reference to related terms, the nature and purpose of the terms, the course of dealing, and the principle of good faith.