Three Types of Liabilities in Construction Contract Disputes
Lin Xiaolu*

Case:

Case Brief:
On May 18, 2005, the respondent and applicant entered into a sub-contract (hereinafter referred to as the Contract) for dry-fasten stone decoration and other works for the exterior walls of residential houses. According to the Contract, the respondent shall undertake the dry-fasten stone engineering of exterior walls and other works of the five villas developed by the applicant. As agreed in the Contract, the engineering quality shall meet the Standards for Construction and Acceptance of Construction Engineering, Standards for Construction and Acceptance of Decoration Engineering, as well as other state criteria for construction and acceptance. The quality shall meet an excellence standard. After signing the Contract, the respondent commenced the work. Subsequently, the two parties signed a supplementary agreement to adjust the scope of the contract on Sept. 23, 2005. All decoration works were completed and accepted on June 2006, and were delivered to owners for use. After the applicant delivered the villas to the buyers, the applicant found that dry-fasten stones and culture stones used for the exterior walls and the rock wool used for the surface walls were falling off. On several occasions, the applicant requested the respondent to repair the walls but the respondent refused. The applicant claimed that he took remedial measures both by himself and also by engaging others. He also compensated the villa-buyers who suffered economic losses. Based on the facts mentioned above, the applicant applied for arbitration on Sept. 2008, making two claims: 1) For all dry-fasten stone decoration for the exterior walls, the respondent shall rework in accordance with state standards of construction and bear all costs incurred (estimated cost being RMB 800,000 Yuan); and 2) the respondent shall pay a sum of RMB 100,000 Yuan to the applicant for the loss suffered.

The respondent argued that after signing the Contract, he carried out the decoration in accordance with the Contract. However, upon the notice by the applicant, the parties negotiated and modified the contract on April 24, 2005, thereby changing the techniques of the dry-fasten stone decoration engineering. All decoration works were completed and accepted on June 2006 and delivered to the owners for use. According to Article 7 of Codes for the Quality Warranty of Housing Construction Projects enacted by the Ministry of Constructionand Article 9.1 of the Contract, the respondent argued that the warranty period for the project was two years. The applicant claimed that he sent a notice of repair to the respondent on July 25, 2008. At that time, however, the warranty period had expired and the respondent had no duty to repair free of charge. In short, the respondent argued that there was no legal basis for the applicant’s claims demanding the respondent to repair, bear the cost thereof, and compensate for applicant’s loss. Respondent therefore argued that the applicant’s claim shall be rejected, and the applicant should bear the costs of the arbitration fee.

Arbitration decision (abstract)
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The applicant's first request is that the respondent shall rework all the dry-fasten stone decoration of exterior walls in accordance with relevant state construction standards. The respondent neither accepts the applicant’s claim nor agrees to rework. The arbitration tribunal decides that, having considered the concrete facts of the case, it does not support the applicant’s request. The reasoning is as follows:

Firstly, the dispute aroused after the expiration of the warranty period.Therefore, the claim is invalid due to the expiration of warranty periods. The claim was submitted for arbitration during the damage compensation liability period. The applicant stated in the application that “the applicant, on several occasions, required the respondent to rework, but the respondent refused.” During the arbitral hearing, the respondent expressly noted that he did not accept the applicant’s first claim. In this circumstance, the arbitration court did not decide that the respondent should rework based on the contract. Secondly, according to the applicant’s statement, the applicant had taken remedial measures either through his own construction, or had engaged others to rework when the respondent refused. Hence, with the exception of requiring the respondent to rework, it appears that the applicant was carrying out other remedial measures. Thirdly, the essence of the dispute on quality is the liability for relevant cost. According to the Article 13 of Standards for the Quality Warranty of Housing Construction Project, the cost incurred from resolving the quality problem either by the applicant or by others engaged by the applicant shall be borne by the parties responsible for the quality problem with the amount being proportionate to the facts and the seriousness of the liability. Whereas the respondent did not accept the request to rework and the applicant took remedial measures, the applicant can request the defaulting party to bear the cost rather than request to rework. In order to expedite the solution of the quality problem, the arbitral tribunal does not accept the applicant’s first claim.
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The applicant’s second request is that the respondent should pay a sum of RMB 100,000 Yuan as compensation for loss incurred to the applicant. The respondent rejected the request by arguing that the applicant had no relevant proof. The applicant admitted that he could not provide an accurate figure to support his request for compensation of RMB 100,000 Yuan, and he indeed failed to submit any relevant proof. The applicant argued that he cannot accurately calculate the damages until the rework is completed. The arbitration court determined that the applicant is responsible for submitting proof that supports his claim. Because the applicant has failed to provide proof that supports his claim for a sum of RMB 100,000 Yuan as compensation, he shall accordingly bear the adverse consequences. Therefore, the tribunal does not support the applicant’s second request.

Comments:
In practice, litigants commonly hold two mistaken ideas. One is that the constructor should be responsible for repairs whenever the construction project is found in poor quality. The second is that the constructor will be relieved from the quality liability upon the expiration of the warranty period. These mistaken ideas are actually due to confusion about the definition of the liability to rework, liability to repair, and quality liability.

As for the liability to rework, PRC Contract Law (hereinafter referred to as the Contract Law) specifies in Article 281 that where the construction project fails to meet the prescribed quality requirements due to any reason attributable to the constructor, the developer is entitled to require the constructor to repair, re-construct or make alteration free of charge within a reasonable time .Where delivery of the project is delayed due to such repair, re-construction or alteration, the constructor shall be liable for breach of contract. This article stipulates that the construction party’s liability to repair, reconstruct, and, make alteration arises before project delivery. Article 32 of the Regulation on the Quality Management of Construction Projects enacted by the State Council in 2000 makes it clear that the constructor shall be liable for reworking a construction project with quality problems or if the construction project does not meet an acceptance standard. According to Article 32, this liabitlity to rework starts from the day the construction begins and lasts until the date of acceptance. Reconstruction refers to rebuild those aspects (non-conformity) that do not meet the quality standards and can not be repaired， repair refers to the work needed to make non-conformity projects meet the quality standard; and making alteration refers to the work necessary to make non-conformity projects meet the quality standard by modifying the appearance, design, or function while maintaining the original structure. Constructors shall be liable for reworking the construction project either found with quality problems during the construction process or during acceptance inspection upon completion. The project in the instant case was completed and accepted in June 2006, and then delivered by the applicant to owners for use. Accordingly, the liability period for reworking had expired.

As for the liability to repair, Article 62 of the Construction Law of the People’s Republic of China enacted in 1997 has general rules on quality-related repair. This article specifies that scope of the warranty and the minimum warranty period shall be subject to specific regulations of the State Council. Article 40 of the Regulation on the Quality Management of Construction Projects enacted by the State Council in 2000 includes specific regulations on warranty periods for different types of projects and makes it clear that the warranty period of construction projects shall commence on the date of project acceptance. Article 41 of the regulation specifies that constructors shall be liable for repairing construction projects with quality problems within the warranty scope and warranty period, and shall compensate for loss incurred therein. The liability for repair commences on the date of acceptance and lasts until the expiration of warranty period. The constructor shall repair and modify the part with quality problems and give corresponding compensation. This case involves a decoration project. According to the Regulation on the Quality Management of Construction Projects and the Contract, the warranty period is two years. The warranty period had expired when the applicant applied for arbitration. Therefore, there is no legal basis to hold the respondent liable for repairs.

Where construction projects result in an injury or reasonably property damages in the reasonable period of use of the property, Article 282 of the PRC Contract Law requires the contractor to compensate for damages. The time limit of quality liability coincides with “reasonable period of use”, not limited to the warranty period. The quality liability is to compensate for damages. It should be emphasized that the constructor is only responsible for the quality problem resulting from his fault. Therefore, if quality problems are not the result of the constructor, then he will not be held liable for the quality and for compensation even if he bears the obligation to repair.

In summary, as for construction projects quality， there are three types of liabilities specified under China’s laws: 1) reworking liability; 2) repair liability; 3) and quality liability. The biggest distinction among the three types of liabilities is that the reworking liability is subject to construction period, repair liability is subject to warranty period, and the quality liability is valid for a reasonable period without being subject to warranty period. As the arbitral tribunal specified above, the constructor shall be liable for compensation for property damages incurred to the developer if the quality does not meet the requisite standard. This shall be determined within a reasonable period of use of the project even if the warranty period has expired. Generally speaking, quality liability does not include reworking. Therefore, upon the expiration of the warranty period, the developer may only request compensation for damages instead of reworking even if construction project is found to have quality problems.

In this case, the applicant is not clear about the three types of liabilities. The applicant should have based his claim on the quality liabitlity rather than liability for reworking. Moreover, the applicant's claim against the respondent for quality liability has no evidentiary support. This is why the applicant lost the case.

* The author is a case manager of Beijing Arbitration Commission

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