Supreme People's Court: Selected Views on the Applicable Law of Construction Contract Disputes (Volume 08)

Supreme People's Court

Selected Views on the Applicable Law of Construction Contract Disputes

Volume 08

48. The actual constructor does not enjoy the priority right to be compensated for the price of the construction project.

【Legal Issues】:

Does the actual constructor have the priority right to be compensated for the price of the construction project?

[Judges' Conference Opinions]:

The right of priority to be compensated for the price of a construction project refers to the right of the contractor to agree with the employer to discount the price of the project or request the people's court to auction the project according to law, and to receive priority compensation for the price of the project if the employer fails to pay the project price within a reasonable period of time after being urged by the contractor to pay the project price. Article 807 of the Civil Code of the People's Republic of China stipulates: "If the contractor fails to pay the price as agreed, the contractor may urge the contractor to pay the price within a reasonable period of time." If the employer fails to pay within the time limit, the contractor may agree with the employer to discount the price of the project, or may request the people's court to auction the project in accordance with law, except that it is not appropriate to discount or auction the project according to the nature of the construction project. The price of the construction project shall be compensated in priority with respect to the price of the project at a discount or auction. Article 35 of the Interpretation (I) of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Construction Contracts stipulates that: "Where a contractor who has entered into a construction contract with the employer requests that the price of the construction project contracted by it be compensated in priority in accordance with the provisions of Article 807 of the Civil Code, the people's court shall support it." According to the above provisions, only the contractor who has entered into a construction contract with the employer has the priority right to be compensated for the price of the construction project. The actual constructor does not belong to the "contractor who has entered into a construction contract with the employer" and does not enjoy the priority right to be compensated for the price of the construction project.

[Source of opinion]: Minutes of the 21st Professional Judges Conference of the First Civil Division of the Supreme People's Court in 2021

49. How is the prior judgment applied in construction contract disputes? In the case where the parties' intentions are not clear, how should the people's court adjudicate?

A said: In the application of the advance judgment, the judge's obligation to interpret should be fully utilized, and it should be clarified whether the party's application is to change the litigation claim or the advance judgment.

In accordance with article 153 of the Civil Procedure Law, a preliminary judgment is only an interlocutory judgment, and if the people's court finds that it is possible to make an advance judgment on the basis of a party's application or after trial, it shall continue the trial of the remaining part after the judgment is rendered, and shall not reject other litigation claims asserted by the parties. Where a party submits an application to explicitly request an advance judgment and other parts of the claim is separately asserted, the people's court shall explain to the party whether the application is a request for a preliminary judgment or a modification of the litigation claim, and then make a judgment on the clear expression of intent.

B said: If the application submitted by the party has already made it clear that other parts will be asserted separately, it should be understood that it clearly has an expression of intent to change the litigation claim, and the preliminary judgment may not be applied, and the judgment on the clarified part may be directly adjudicated.

Although the final judgment of the court of first instance is flawed, it can be corrected, that is, the part that rejected the other claims of A and B can be revoked, and the reasons should be stated in the reasoning part, so as to retain the parties' right to sue. The parties may apply for enforcement on the basis of the effective judgment and file a separate lawsuit for the remaining amount, which is also conducive to solving the financial difficulties of the parties.

Judges' Conference Opinion: Zhu Jia said

The advance judgment is not a final judgment, and the conditions for its application are already provided for in article 153 of the Civil Procedure Law, and the people's court shall determine whether to apply it based on the actual circumstances of the case. In the case where the application submitted by the parties in litigation is unclear or conflicts with the provisions of the law due to factors such as professional knowledge and education level, the people's court shall inquire about the application submitted by the parties, and make an explanation of the corresponding legal effect after clarifying the true meaning, so as to avoid making a judgment based on the vague meaning of the word, and where the judgment result is inconsistent with the parties' expression of intent to dispose of their rights. According to the theory of the Civil Procedure Law, a judgment res judicata may be applied to a judgment rejecting a claim, and the parties may not file a lawsuit again on the claim, and the practice of the court of first instance making a judgment and rejecting the party's other claims makes it impossible for the parties to sue separately for that part of the claim, which is obviously wrong.

[Source]: Minutes of the 41st Judges' Conference of the Fifth Circuit Court of the Supreme People's Court in 2019

50. How to understand and grasp the provisions of Article 1, Paragraph 1, Item 3 of the Judicial Interpretation on Construction Engineering (I) that if a construction project must be tendered but the bidding is not carried out or the bid is invalid, the construction contract of the construction project shall be deemed invalid?

【Q&A】:

According to Article 1, Paragraph 1, Item 3 of the Judicial Interpretation on Construction Engineering (I), if a construction project must be tendered but no bidding is carried out or the bid is invalid, the construction contract of the construction project shall be deemed invalid. To accurately grasp the meaning of this provision, two situations should be distinguished: first, it is necessary to conduct bidding but not bidding; Second, the winning bid is invalid. With regard to the projects that must be tendered, the relevant state ministries and commissions have successively made relevant normative provisions, and the relevant provisions shall prevail to determine the scope of the projects that must be tendered. The Provisions on Projects Subject to Tendering, which came into effect on 1 June 2018, and the Provisions on the Scope of Infrastructure and Public Utilities Projects that must be tendered, which came into effect on 6 June 2018, stipulate that commercial residential projects are no longer within the scope of projects subject to tendering. If the construction contract is a project that should be tendered at the time of signing the contract, but it is no longer a project that should be tendered in accordance with the new provisions in the lawsuit, the contract shall not be deemed invalid on the ground that it is necessary to conduct bidding but the bidding is not tendered.

With regard to the certainty of the invalidity of the winning bid, even if the disputed construction project is not required to be tendered, if the employer chooses to adopt the bidding method on its own initiative, then it should comply with the Tendering and Bidding Law and other legal provisions. If there are acts such as first awarding and then bidding, collusion, bid-rigging, bribery, and illegal means to prevent or interfere with other bidders from participating in bidding activities, the bid-winning behavior violates the mandatory provisions of the "Bidding and Bidding Law" and other laws, and undermines the social and public order of fair competition market order, so it should also be found invalid.

Source: Rules of the Sixth Circuit Court of the Supreme People's Court, November 2022, People's Court Press.

51. How to settle the project price of a construction contract that is invalid without obtaining a construction project planning permit?

【Viewpoint Analysis】:

With regard to the settlement of the price of an invalid construction contract, Articles 2 and 3 of the 2004 Interpretation stipulate that if the construction project passes the completion acceptance, the project price shall be settled with reference to the contract. If the construction project fails to pass the completion acceptance, the repaired construction project shall pass the completion acceptance, and the employer may request the contractor to bear the repair costs; If the repaired construction project fails to pass the completion acceptance, the contractor has no right to request payment of the project price. Article 793 of the Civil Code clearly states: "If the construction contract of a construction project is invalid, but the construction experience is qualified, the contractor may be compensated with reference to the agreed discount of the project price in the contract." Therefore, it is a general provision to deal with this situation by referring to the agreed discount compensation of the project price in the contract. For projects that have not obtained planning approval procedures such as construction project planning permits, should the project price be settled in accordance with the above general provisions?

In this regard, there are different views in trial practice:

The first view is that the settlement of a construction contract that is invalid due to the failure to obtain the approval procedures for construction planning shall be handled in accordance with the provisions of Article 793 of the Civil Code on discount compensation for invalid construction contracts, and if the construction project has been accepted or repaired and accepted, the discount compensation shall be made with reference to the contract, and if it is still unqualified after repair, the employer and the contractor shall bear the actual losses according to the proportion of fault between the two parties.

The second opinion holds that a construction contract signed without approval procedures for construction planning is an invalid contract, and the subject matter of the contract is an illegal building, regardless of whether the quality is up to standard or not, it is not available at the legal level, and the principle of discount compensation in Articles 2 and 3 of the 2004 Interpretation cannot be applied, and the principle of negligence in contracting should be applied to compensate the interests of the constructor.

Objectively speaking, the above views have a certain degree of truth and practical feasibility. In view of the particularity of such cases and the actual situation of the project, [we tend to believe] that:

First of all, the principle of compensation for the agreed discount of the project price in the reference contract for invalid construction contracts stipulated in Article 793 of the Civil Code is a general principle for handling such cases, and should be applied by reference in the absence of special circumstances, such as the building being demolished by the administrative competent authority in accordance with the law, or the project quality is unqualified. In practice, there are objectively some government departments, state-owned enterprises and institutions, military and other buildings that have not obtained planning permits for construction projects, but have actually been put into use. At this time, if the project price is not settled with reference to the contract, it is easy to lead to an imbalance in the rights and obligations of both parties.

Second, if the building is demolished by the administrative authority in accordance with the law during the construction process or after completion, the building has no legal or de facto usable value, and it is more appropriate to apply the principle of contractual fault to compensate the contractor in this case. Since the employer has the obligation to go through the formalities for the approval of the construction project plan, it bears the main responsibility for the invalidity of the construction contract and shall bear all or a greater responsibility.

In addition, it should be noted that, according to Article 21 of the Minutes of the Eighth National Conference on Civil and Commercial Trial of Courts (Civil Part) on "Handling Disputes Related to Illegal Construction", the identification and handling of illegal buildings that have not obtained a construction project planning permit or have not been constructed in accordance with the provisions of the construction project planning permit are within the scope of the authority of the relevant state administrative organs, and the confirmation of the rights of illegal buildings in disguised form through civil trials should be avoided. If the litigation request of the parties requires confirmation of the ownership and content of the illegal building rights, the people's court shall not accept it; where it has already been accepted, a ruling is made to reject the lawsuit.

[Source of opinion]: The First Division of the Civil Trial of the Supreme People's Court, "Judicial Interpretation of New Construction Project Construction Contracts (1) Understanding and Application", People's Court Press, April 2021, first edition.

52. How to deal with the construction contract signed beyond the qualification level?

【Viewpoint Analysis】:

How to determine the validity of the contractor if the contractor exceeds the business scope permitted by the qualification level when signing the construction project contract, but later obtains the corresponding qualification level?

There has been controversy in the drafting of the Judicial Interpretation.

The first view is that the intervention of the state public power in the contract is mainly reflected in the state intervention in the determination of the validity of the contract, and the determination of the validity of the contract is a "lever" stipulated by laws and administrative regulations, and there can be no breakthrough, otherwise it will be a breakthrough in the law. The main feature of an invalid contract is its invalidity ab initio, which does not allow the parties to make the contract valid through subsequent correction or actual performance, otherwise the parties will be encouraged to sign the invalid contract, which is contrary to the legislative purpose of the invalid contract. Therefore, the time for a construction enterprise to obtain a qualification level suitable for its construction project should not be relaxed, and a contract that should have been invalid should be deemed valid accordingly.

The second point of view is that China's construction industry market has just started, and should allow the judicial trial to give appropriate tolerance to the civil acts of the parties, and allow the parties to take remedial measures, which is conducive to the development of the market economy, is conducive to the maintenance of contracts, and the legitimate rights and interests of the parties, and has a good social effect.

The third opinion holds that the parties should be allowed to supplement the validity of the contract by going through the formalities after the fact, but in order to strictly grasp it, the time for correction must be strictly limited, otherwise it will cause an imbalance in the rights and obligations of the parties. At the time of drafting the Interpretation, it was generally believed that the contractor had complied with the provisions of the law in other conditions when signing the construction contract, but had only exceeded the scope of business permitted by the qualification level, but had obtained the corresponding qualification level after the contract was signed, so it would be beneficial to determine the validity of the contract. The Ministry of Construction supports this view. There are different opinions on how long it will take for the contractor to obtain the qualification level appropriate to the contracted project:

One view was that the period of first-instance proceedings should be extended. The rationale is that this would be consistent with the purpose of this article.

The second view is that the acquisition time should be strictly limited and limited to before the completion of the construction project, otherwise it will encourage the occurrence of the phenomenon of contracting projects beyond the qualification level, affect the quality of construction projects, and run counter to the legislative purpose of the Construction Law.

The third view was that the time limit for re-application should be limited to before the indictment.

The reason is that the principle established by the Supreme People's Court's Ruoqian Provisions on Evidence in Civil Proceedings is that after the parties have brought a lawsuit to the court on the legal relationship disputed by the parties, the litigation legal relationship formed must be in a stable state, and if it is still allowed to be in an uncertain state, and the court's characterization of the legal relationship in the litigation will also be affected by the will of the parties, which obviously challenges the authority of the judiciary, poses a threat, and is extremely unserious. In addition, the basic theory of litigation relationship in the Civil Procedure Law also requires that after a people's court accepts a civil lawsuit, the lawsuit shall be in a state of constant jurisdiction, constant parties, constant litigation relationship, and constant litigation claims, and it is prohibited to repeat litigation and arbitrarily change litigation claims. Therefore, the time for the parties to complete the formalities should be limited to before the litigation.

[Source of opinion]: The First Division of the Civil Trial of the Supreme People's Court, "Judicial Interpretation of New Construction Project Construction Contracts (1) Understanding and Application", People's Court Press, April 2021, first edition.

53. How to determine the starting point of the period for exercising the priority right to be compensated for the price of a construction project?

【Q&A】:

The starting point of the period for exercising the right of priority for payment of the construction project price shall not be earlier than the time limit for payment of the project price agreed between the parties.

[Source]: Third Circuit Court of the Supreme People's Court, Understanding and Application of New Civil and Commercial Cases

Case Number: :(2017) Supreme Law Min Shen No. 356

Transferred from the same judgment rule for similar cases