Statute of limitations: A common topic in construction contract disputes

The General Principles of the Civil Law of the People’s Republic of China took effect on 1 October 2017. One of the most noteworthy revisions concerning dispute settlement, compared with the superseded version, appears in article 188, which extends the statute of limitations from two to three years. However, for each case involving a claim of statute of limitations, the focus lies on when the statute of limitations starts.

For example, determining the statute of limitations is a common challenge for cases involving contracts for construction work, because of the various deadlines for project payments. In addition to the above-mentioned general principles, the laws, regulations and judicial interpretations that prescribe statutes of limitations for disputes involving contracts for construction works include, among others, the Regulations on the Quality Management of Construction Projects and the Interpretations on Application of Laws in Hearing Disputes Arising from Contracts for Construction Works of the Supreme People’s Court.

Payment obligations that an employer has under a contract for construction work include the obligation to make project payments (including project payments specified in the contract, and any additional project payments) and the obligation to pay a performance bond. Can the two payment obligations be deemed relating to the one and same debt, paid in instalments? And how do we determine the expiration dates for performing the respective payment obligations?

PAYMENT OBLIGATION

According to article 5 of the Provisions on Several Issues Concerning the Application of the Statute of Limitations System in Hearing Civil Cases issued by the Supreme People’s Court, “if it is mutually agreed that a debt is paid in instalments, the statute of limitations shall commence on the expiration date for paying the last instalment”. Therefore, if the obligation to make project payments and the obligation to pay the performance bond are deemed relating to the one and same debt paid in instalments, the statute of limitations should commence on the expiration date for paying the performance bond.

However, pursuant to paragraph 1, article 2 of the Measures for the Administration of Performance Bond for Construction Works, a performance bond for construction work is defined as a sum which, as specified by the employer and the contractor in the construction work contracting agreement, is reserved from monies payable for a project, to be used for ensuring that the contractor will repair defects in the construction work during the defects liability period.

According to these measures, the reserved performance bond is a surety guaranteeing the quality of contracted construction work. The payment and the percentage of a performance bond will depend on whether there are any defects in the work completed. Therefore, a performance bond is part of the total sum due and payable for a project that plays the role as a surety.

The project payments are required to be paid as per the specified project milestones through methods agreed in the construction work contracting agreement. Settled based on completed works, they are not intended as sureties. Based on the above, performance bond and project payments cannot be deemed instalments of the same debt, due to their different nature.

CONTRACTUAL AGREEMENTS

Project payments under a construction contract are required to be paid according to the payment terms and methods specified in the contract. Even if a contract specifies two or more payment obligations subject to different deadlines, the statute of limitations shall commence on the expiration date of the obligation for making the last project payment, because project payments throughout the process of construction are deemed instalments
of the same debt.

As for any additional project payment that is not covered in the original construction contract, or with a supplemental agreement that specifies its payment deadline, it must become due and payable upon request by the contractor at any time, because the commencement date of the statute of limitations for the additional project payment cannot be determined. Of course, contractors’ right to claim additional project payments are still subject to the 20-year statute of repose prescribed by the general principles.

DEFECTS LIABILITY PERIOD

According to the Measures for the Administration of Performance Bond for Construction Works, the defects liability period is generally one year, and in no event exceeding two years, usually from the date of final acceptance procedure of the works. If the final acceptance procedure cannot be performed on the works as scheduled due to any reasons on the part of the contractor, the defects liability period must commerce on the date when the work actually passes the final acceptance procedure.

If the final acceptance procedure cannot be performed on the work as scheduled due to any reasons on the part of the employer, the defects liability period for the work automatically begins 90 days after the contractor submits the final acceptance report. Accordingly, the statute of limitations on the performance bond claim should begin on the expiration date of the defects liability period as described above.

Alex Hsin is a senior partner and Craig Zhou is an associate at MHP Law Firm