On 26 December 2009, the PRC Tort Liability Law (the “Tort Law”) was promulgated following a seven-year period of discussions and debate. The law will enter into effect on 1 July 2010.

The Tort Law marks a milestone in PRC legislative history, and will have myriad implications for diverse areas of private and commercial activity.

As a construction lawyer, I am particularly interested in Article 86 of the Tort Law concerning liability for loss and damage caused by collapse of construction works.

Although the Tort Law has been in planning for some time, it seems to have been influenced by some very recent events. Much attention has been focused on the recent milk scandals as a catalyst for the product liability aspects of the legislation. But it is also widely speculated that Article 86 was driven by the recent case of a building collapse in Shanghai in June 2009. The collapse of a 13-floor building at Shanghai’s “Lotus Riverside” apartment complex was perhaps one of the top 10 local news events of 2009 in Shanghai. The accident killed one worker on site and left 489 home buyers without their expected homes (in many cases, costing all of their life savings). The collapse has been blamed on improper construction methods.

Quality problems have long plagued the construction industry in China. “Tofu Building” is the cheeky term used by the local press to describe such shoddy construction projects. Clearly, to some extent, this situation reflects a failure of the current legal and regulatory regime. Hence, there is little humor in this situation for Chinese policymakers.

Although there are administrative sanctions and contractual remedies for poor construction quality, tort legislation has been less than robust. Tort protections are especially important in addressing harm to innocent third parties who would not be entitled to compensation as a matter of contract.

No doubt in recognition of this, the Tort Law has clearly placed liability for collapse of construction works on the contractors and developers who are best able to avoid them in the first place.

Since 1987, Article 126 of General Principles of Civil Law (“GPCL”) has provided that:

“If a building or any other installation or an object placed or hung on a structure collapses, detaches or drops down and causes damages to others, its owner or manager shall bear civil liability, unless he can prove himself not a fault.”

GPCL Article 126 creates a rebuttable presumption that the current property owner or manager is liable in these cases. But these are quite disparate cases – there is a potentially immense difference between the types of causation involved in items falling from a building and in a building itself collapsing. In cases where the building itself collapses, the current owners or managers would have very little opportunity to prevent the harm. Hence, there seems to be little reason to hold them primarily liable. On the other hand, the original contractor and developer, the parties best situated to prevent catastrophic building collapse, are not included (even secondarily) as potentially liable persons here.

To remedy this and other issues in relation to personal injury liability under the GPCL, in 2003 the Supreme People’s Court issued an interpretation (“Interpretation”) that, among other things, clarified the application of GPCL Article 126. Specifically, Article 16 of the Interpretation clarified that, if the collapse is caused by design or construction defects, the responsible designer and contractor can also be held directly liable to injured parties.

Article 86 of the Tort Law deals only with collapse, providing:

”Where any building, structure or facility collapses, causing any harm to another person, the construction employer and contractor shall be liable jointly and severally. After making compensation, the construction employer or contractor shall be entitled to be reimbursed by other liable persons if any.

Where the collapse of any building, structure or facility, which causes any harm to another person, is attributed to any other liable person, the other liable person shall assume the tort liability.”

With this new Article 86, we have a new bright-line rule for primary liability in the case of construction collapse. Article 86 rests primary liability for building collapse squarely with the employer and contractor. In place of the previous rebuttable presumption of fault for current owners / managers, there is now strict liability for employers and contractors. We also have a broader and more objective rule of reason in relation to secondary or contributory liability, insofar as any other person contributing to the collapse, whether contemporaneous, upstream or downstream to the original employer/contractor, can also be held liable.

Although the Tort Law has changed the formal statutory liability rules in relation to collapse of construction works in China, in the final analysis, the formal and practical significance of this change may not be very great.

Formally, the Supreme People’s Court has long since clarified that the original employers and contractors could be liable in building collapse. Practically, those parties are the most obvious targets for liability in the event of building collapse, and under current practice the employer and contractor are already joined whenever possible, even without the new rule. But, since most developers in practice usually use special purpose vehicles (SPVs) to carry out their projects, dissolving the SPVs on completion, recourse to the original developing parties may be less available than the Tort Law seems to assume. It therefore appears that the contractors may well end up being the easiest targets at the end of the day.

Hence, while Article 86 represents a rationalization and refinement of the liability rules in this area, it will no doubt take much more than this marginal formal change to begin to reverse the deeply entrenched incentives causing the proliferation of Tofu Buildings in China.

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