The Supreme People’s Court recently issued an announcement for a second judicial interpretation (“Judicial Interpretation II”) on the application of law in disputes over undertaking contracts in construction projects. Judicial Interpretation II covers bidding, the validity of the contract, the construction period, performance bond, the settlement and determination of construction prices, and the priority of compensation.
1. Interpretation on disputes over bidding
Pursuant to Judicial Interpretation II, if the substantive contents of the construction contract executed between the tenderer and the bid winner are not consistent with those in the tender award contract, the court will use the award contract to determine the rights and obligations of the parties. If the separate contract between the tenderer and the bid winner is for disguising a lowering of the project price, the court shall, upon application of the parties, hold that such contract is invalid for such deviation from the substantive contents of the award contract.
2. Interpretation on the validity of a contract
If a project owner cannot obtain the construction project planning permit and complete the other planning review formalities and, the court shall, upon application of the parties, confirm that the undertaking is invalid unless the project owner has completed such review formalities before the complaint is filed, provided that if the project owner is capable of obtaining the permit but fails to do so, the contract shall not be deemed as invalid.
3. Interpretation of the construction period
A dispute over the construction commencement date is generally determined according to the following principles:
(1) The commencement date should be the date set forth in the work commencement notice issued by the project owner or the supervisor. If the conditions for the commencement of construction are not yet met despite having sent out the work commencement notice, the date such conditions are met shall be the commencement date. If the commencement date is postponed for reasons attributable to the project owner, the date set forth in the work commencement notice shall be the commencement date.
(2) If the contractor has actually entered the construction site for construction with the approval of the project owner, the date of the entry shall be the commencement date.
(3) If the contractor or the supervisor fails to issue a work commencement notice, and there is no relevant evidence to substantiate the actual commencement date, the date of commencement shall be determined by taking into consideration the dates set forth in the work commencement report, contract, construction permit, acceptance inspection report or acceptance inspection recordation table, coupled with whether the conditions of construction commencement are satisfied.
In case of disputes over the extension of the construction period, the extension of the construction period as agreed by the parties should be confirmed by the project owner or supervisor through certification. If the contractor fails to obtain the confirmation of the extension of the construction period, if it can be substantiated that the contractor has applied to the project owner or supervisor for the extension of the construction period within the period stipulated under the contract, and the reasons for the extension are consistent with the contract, the contractor may assert that the construction period should be extended on such basis. If the parties agree in the contract that the construction period shall be deemed not to be extended if the contractor fails to timely apply for the extension, the matter shall be handled pursuant to the contract unless the project owner later agreed to the extension of the construction period after the agreed-upon period, or the project owner asserts a reasonable defense.
4. Interpretation of disputes over performance bond
With respect to the return of the performance bond, the contractor may request the project owner to return the performance bond under any one of the following circumstances: (1) the agreed deadline for returning the performance bond has passed; (2) the parties have not agreed on a deadline for returning the performance bond, and two years have elapsed since the day the construction project passed the completion acceptance inspection; or (3) if the construction project fails to go through the completion acceptance inspection within the agreed-upon period for reasons attributable to the contractor, the agreed deadline for returning the performance bond shall be set at 90 days after the contractor’s delivery of the completion acceptance inspection report; and if the parties do not agree to a deadline, it shall be set at two years after the expiration of the 90-day period after the contractor’s delivery of the completion acceptance inspection report.
The Judicial Interpretation II also stipulates that the return of the performance bond by the project owner does not affect the contractor’s obligation to perform its project warranty obligations pursuant to the contract or law.
5. Interpretation of project price settlement
In terms of project price settlement, Judicial Interpretation II provides that if the substantive contents of an undertaking contract executed after the bidding of a construction project for which bidding is not required deviate from the award contract, the parties may request to use the award contract as the basis for settling the project price unless the separate undertaking contract was executed due to changes that were objectively difficult to foresee at the time of bidding.
If the undertaking contract signed by the parties is not consistent with the tender documents, bid documents, or the bid award notice in terms of the scope of project, construction period, project quality and project price, if one party requests to use the tender documents, bid documents or award notice as the basis for settling the project price, the people’s court shall support such a request.
If multiple undertaking contracts entered between the parties for the same construction project are all invalid, but the quality of the construction project is satisfied, the people’s court shall support a request from a party to settle the project price in reference to the actually performed contract. In case it is difficult to determine which contract was actually performed, the people’s court may agree to apply upon a party’s request to reference the ultimately executed contract to settle the project price.
6. Interpretation of appraisals
With respect to appraisal issues, in case the parties have agreed to settle the project price prior to the litigation, the court will not allow any petition to confirm the project price.
If the parties have jointly retained relevant institutions and individuals for a consultation opinion on the construction project cost before the lawsuit, the court will hear an appraisal application if one of the parties does not recognize the opinion. No petition will be heard if the parties have specifically indicated their agreement to be bound by such opinion.
If the court considers it necessary to conduct an appraisal, it shall explain such to the party with the burden of proof. If the party fails to apply for an appraisal after the court explanation, or fails to pay for the appraisal even though it applied for the appraisal or refuses to provide the relevant materials, such party will assume the responsibility for failing to assume the burden of proof.
In case the party with the burden of proof in the first-instance litigation did not apply for an appraisal, or has not paid the appraisal fee even though it applied for the appraisal, or has refused to provide the relevant materials, if such party applies for an appraisal during the second-instance litigation and the people’s court believes that an appraisal is necessary, it shall, in accordance with Article 170, Paragraph 1, Subparagraph 3 of the Civil Procedure Law, remand this matter or render a different judgment after the matter has been investigated through appraisal.
7. Interpretation of compensation priority
With respect to compensation priority issues, Judicial Interpretation II provides that the contractor who executed the undertaking contract with the project owner, the contractor responsible for renovation and maintenance works, the contractor whose work quality is qualified, or the contractor whose work quality for an unfinished project is qualified may request priority in compensation from the project discount or proceeds from any project auction. However, they shall not be entitled to prioritized compensation from interest, default penalty or damages associated with overdue payment of the project price.
Judicial Interpretation II also stipulates that the period in which a contractor may receive priority compensation of the project price shall be six months after the day the payment of the project price is due from the project owner. In case the project owner and the contractor’s agreement to relinquish or limit priority compensation is to the extent that the interests of the construction workers are being undermined, the people’s court shall reject any argument by the project owner that the contractor is not entitled to priority compensation.
In addition, Judicial Interpretation II also provides for joint and several liability and subrogation. In general, the Judicial Interpretation II as released provides clearer opinions on the application of law in handling construction project disputes. It is particularly important to note that in the case the tender documents are inconsistent with the actual contract, the court will generally follow the tender documents. This also attests to the court’s attitude of not supporting the “black-and-white” contracts practice.