Introduction:The WeChat public account of the Civil Division One of the Supreme People’s Court and “Guidance and Reference for Civil Trials” provide adjudicative opinions or tendencies on related disputes regarding construction contract disputes, which are worth noting. The following is organized for reference.
Compilation of Judicial Conference Minutes on Construction Contract Disputes by the Civil Division One of the Supreme Court
1. Article 43 of the Construction Interpretation (I) states that the actual contractor does not include those in borrowing qualifications and multilayer subcontracting and illegal subcontracting relationships.
The judges’ conference of the Civil Division One of the Supreme Court discussed that: According to Article 43 of the Construction Interpretation (I), the actual contractor who can request the employer to bear responsibility within the range of unpaid project funds does not include those in borrowing qualifications and multilayer subcontracting and illegal subcontracting relationships, that is, the actual contractor defined in Article 43 of the Construction Interpretation (I) does not include those in borrowing qualifications and multilayer subcontracting and illegal subcontracting relationships.
The main reason is: This explanation involves two legal relationships among three parties. One is the construction contract relationship between the employer and the contractor; the other is the subcontracting or illegal subcontracting relationship between the contractor and the actual contractor. In principle, parties should request their respective debtors to bear responsibility based on their legal relationships.
This explanation is to protect the interests of migrant workers and other construction workers, breaking the principle of contractual relativity, allowing the actual contractor to request the employer to bear responsibility within the range of unpaid project funds. The application of this explanation should be strictly controlled.
This explanation only regulates subcontracting and illegal subcontracting relationships and does not stipulate that actual contractors in borrowing qualifications and multilayer subcontracting and illegal subcontracting relationships have the right to request the employer to bear responsibility within the range of unpaid project funds.
Therefore, the actual contractor who can request the employer to bear responsibility within the range of unpaid project funds according to Article 43 of the Construction Interpretation (I) does not include those in borrowing qualifications and multilayer subcontracting and illegal subcontracting relationships.
2. Actual contractors borrowing qualifications and forming a de facto construction contract relationship with the employer and passing project acceptance can request the employer for compensation based on contract agreements.
The judges’ conference of the Civil Division One of the Supreme Court discussed that: Actual contractors without qualifications who borrow the name of a qualified construction enterprise to sign a construction contract with the employer, when the employer knows or should know that it is the actual contractor borrowing qualifications conducting construction, a de facto construction contract relationship is formed between the employer and the actual contractor borrowing qualifications. This construction contract is invalid due to violating mandatory legal provisions.
Article 793, Paragraph 1 of the Civil Code of the People’s Republic of China states: “A construction contract is invalid, but if the construction project passes acceptance, the contractor can request compensation based on the agreed price in the contract.” Therefore, when a de facto construction contract relationship is formed between the actual contractor borrowing qualifications and the employer and the construction project passes acceptance, the actual contractor borrowing qualifications has the right to request the employer for compensation based on the agreed price in the contract.
3. The priority right of construction project payment does not extinguish due to the completion of the house and signing of the online contract.
The Civil Division One of the Supreme Court tends to believe: The priority right of construction project payment does not extinguish due to the completion of the house and signing of the commodity housing pre-sale contract online. If the conditions for the establishment of the priority right of construction project payment are met, the contractor still has the right to priority payment for the project price or auction price.
The main reason is: Article 807 of the Civil Code states: “If the employer fails to pay the price as agreed, the contractor can urge the employer to pay within a reasonable period. If the employer fails to pay within the due date, unless it is not suitable to discount or auction based on the nature of the construction project, the contractor can agree with the employer to discount the project or request the people’s court to auction the project according to law. The payment for the construction project has priority over the discounted or auctioned price of the project.” Articles 35 to 42 of the Supreme Court’s interpretation on the application of laws in the trial of construction contract dispute cases further clarify the conditions for exercising the priority right of construction project payment. It can be seen that the priority right of construction project payment is a statutory right of the contractor, and when the conditions specified by law and judicial interpretation are met, the priority right of construction project payment has been established.
The online signing of the commodity housing pre-sale contract is an administrative management measure adopted to standardize commodity housing pre-sales and does not constitute a public notice method for the establishment, change, transfer, and extinguishment of real estate property rights as stipulated by law, which cannot produce the effect of property right changes, nor does it lead to the original priority right of construction project payment enjoyed by the contractor becoming invalid or extinguished.
If a conflict of rights arises between the contractor exercising the priority right of construction project payment and the house buyer, it is a priority issue that can be resolved separately.
4. Actual contractors do not enjoy the priority right of construction project payment.
The judges’ conference of the Civil Division One of the Supreme Court in 2021 discussed that: Actual contractors do not enjoy the priority right of construction project payment.
The priority right of construction project payment refers to the right of the contractor to discount the project or request the people’s court to auction the project and to receive priority payment for the discounted or auctioned price when the employer fails to pay the project price within a reasonable period after being urged by the contractor.
According to Article 807 of the Civil Code and Article 35 of the Supreme Court’s interpretation on the application of laws in the trial of construction contract dispute cases, only contractors who have signed construction contracts with the employer enjoy the priority right of construction project payment. Actual contractors do not belong to “contractors who have signed construction contracts with the employer” and do not enjoy the priority right of construction project payment.
5. Contractors do not enjoy the priority right of construction project payment for illegal buildings.
The judges’ conference of the Civil Division One of the Supreme Court in 2021 discussed that: Contractors do not enjoy the priority right of construction project payment for illegal buildings.
The system of priority right of construction project payment is based on the priority repayment of the contractor’s construction project payment debt for the discounted or auctioned price of the construction project, thus the premise for the contractor to enjoy the priority right of construction project payment is that the completed construction project can be legally transferred.
According to Article 807 of the Civil Code, the conditions for the contractor to enjoy the priority right of construction project payment are that the construction project is suitable for discounting and auctioning. Since illegal buildings are not suitable for discounting and auctioning, contractors do not enjoy the priority right of construction project payment for illegal buildings.
6. If the contract is invalid, the contractor’s request for the actual contractor to pay management fees according to the contract is not supported.
The judges’ conference of the Civil Division One of the Supreme Court in 2021 discussed that: If the contract is invalid, the contractor’s request for the actual contractor to pay management fees according to the contract is not supported.
Subcontracting contracts, illegal subcontracting contracts, and borrowing qualification contracts all violate mandatory legal provisions and are thus invalid contracts. The agreements in the aforementioned contracts regarding the actual contractor paying management fees to the contractor or the enterprise providing borrowed qualifications should be deemed invalid. In practice, some contractors and enterprises providing borrowed qualifications may send financial personnel or other individual staff to collect project funds from the employer and pay the actual contractor, but do not actually participate in the construction, invest funds, or bear risks. The actual contractor organizes construction independently, bears profits and losses, and assumes risks. Contractors and enterprises providing borrowed qualifications only collect a certain percentage of management fees. This management fee is essentially not a consideration for the management of construction but a behavior of illegally profiting through subcontracting, illegal subcontracting, and borrowing qualifications. Such management fees belong to illegal gains and are not protected by judicial means. Therefore, if the contract is invalid, the contractor or the enterprise providing borrowed qualifications requesting the actual contractor to pay management fees according to the contract is not supported.
Note:The minutes of the judges’ conference of the Second Circuit Court of the Supreme People’s Court in 2020 state: “When a construction contract is invalid due to illegal subcontracting, illegal subcontracting, or borrowing behavior, the handling of the management fees agreed upon in that contract should be judged based on specific circumstances according to the contract’s purpose. If the ‘management fee’ is part of the project payment and the subcontractor also actually participated in the construction organization and management coordination, it can be handled according to the contract agreement; for subcontractors who purely profit from subcontracting and do not actually participate in construction organization and management coordination, claims for ‘management fees’ after the contract is invalid should not be supported. Claims for adjustment of project payments based on the grounds of ‘management fees’ as part of the contract price should not be supported. Based on the principle of contractual relativity, non-contracting parties cannot claim adjustment of project payments based on the agreements regarding ‘management fees’ between the subcontractor and the main contractor.” This minute distinguishes whether the subcontractor undertook actual work or simply profited from subcontracting.
7. If the contractor has sued the employer for payment of project funds, the actual contractor can apply to participate in the litigation as a third party before the end of the first-instance debate, and its separate request for the employer to bear responsibility within the range of unpaid project funds should not be accepted.
The judges’ conference of the Civil Division One of the Supreme Court in 2021 discussed that: If the contractor has sued the employer for payment of project funds, the actual contractor can apply to participate in the litigation as a third party before the end of the first-instance debate, and its separate request for the employer to bear responsibility within the range of unpaid project funds should not be accepted.
Subcontracting and illegal subcontracting involve two legal relationships among three parties. One is the construction contract relationship between the employer and the contractor; the other is the subcontracting or illegal subcontracting relationship between the contractor and the actual contractor. The contractor has the right to request the employer to pay the project funds based on the construction contract relationship with the employer. The actual contractor has the right to request the contractor to bear civil liability based on the facts of subcontracting or illegal subcontracting. Article 43, Paragraph 2 of the Supreme Court’s interpretation on the application of laws in the trial of construction contract dispute cases states: “If the actual contractor claims rights against the employer, the people’s court should add the subcontractor or illegal subcontractor as a third party in this case, and after clarifying the amount owed by the employer to the subcontractor or illegal subcontractor, the court should rule that the employer bears responsibility for the actual contractor within the range of unpaid construction project funds.” This provision is a special provision made to protect the interests of migrant workers and other construction workers.
In practice, there are cases where contractors and actual contractors separately sue the employer for civil liability. To prevent different effective judgments ordering the employer to pay the same debt separately to the contractor and the actual contractor, coordination of the lawsuits must be done. When the contractor has already sued the employer for payment of project funds, the actual contractor can apply to participate in the litigation as a third party before the end of the first-instance debate, and its separate request for the employer to bear responsibility within the range of unpaid project funds should not be accepted. After participating in the litigation as a third party, if the actual contractor requests the employer to bear responsibility within the range of unpaid project funds, the requests of the contractor and the actual contractor should be consolidated for trial.
Lawyer Cheng Yuwei Profile
Cheng Yuwei, Senior Equity Partner at Beijing Yingke (Hefei) Law Firm,Member of the Project Investment and Construction Committee of the Anhui Provincial Bar Association,Invited Rights Protection Lawyer for the “Rule of Law Time” program of Anhui TV (2017-2020), awarded the top ten public interest lawyers by the Anqing Municipal Justice Bureau and the Anqing Bar Association (2009-2011), Member of the Anhui Provincial “Belt and Road” Legal Service Team appointed by the Anhui Provincial “Belt and Road” Leading Group, Provincial Department of Justice, and Provincial Foreign Affairs Office, with a solid theoretical foundation in law and rich practical experience, proficient in various financial regulations and policies of the state, currently serving as a long-term legal advisor for more than 30 well-known enterprises and institutions, having published over 500 various works, including “Lawyers Speak Law”, “One-stop Solution for Legal Disputes Series” (9 volumes), “Managing Risks – Solutions to 365 Legal Pain Points in Business Operations”, “Comprehensive Manual for New Third Board Operations”, with classic cases reported by CCTV, “Legal Daily”, and other media, and included in books such as “Chinese Lawyer Style Record”, “Classic Cases of Contemporary Chinese Lawyers”, “Great Criminal Defense Lawyers in China”, “Excellent Defense Records of Chinese Lawyers”, and “Gathering Positive Energy to Create New Glory”.
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