[Civil Code Construction Contracts] How to settle accounts when a construction contract is invalid but the project passes the acceptance inspection

Interpretation 1: The subject entitled to make a claim: The \"Judicial Interpretation I on Construction Contracts\" stipulates that \"if the contractor requests payment for the work in accordance with the terms of the contract, such request shall be supported.\" The subject referred to in this provision is the contractor; as a result, some people overly adhere to the literal wording of this clause and mistakenly believe that the employer has no right to demand payment in accordance with the terms of the contract. In judicial practice, there are two different verdicts resulting from differences in interpretation. For example, in Case 1: \"The dispute over the construction contract between the employer, Company xx, and the contractor, Company xxx\" (the actual names of the employer and contractor are omitted here for explanatory purposes), Company xx and Company xxx entered into a construction contract; they only went through the bidding procedures after the contract was signed, and later a dispute arose regarding the settlement of payments. The contractor, Company xxx, filed a lawsuit in court, claiming that the contract was invalid due to bid rigging, and requesting that the payment for the work be calculated based on the actual costs. The employer, Company XX, argued that even if the contract is invalid, the payment for the work should still be calculated in accordance with the settlement methods specified in the contract. The court ultimately accepted the claims of xxx Company. Case 2: In the case of \"Dispute over Construction Project Contract between xx Engineering Co., Ltd. and xxx Real Estate Development Co., Ltd.\", the court held that, in line with the spirit of the relevant provisions of the \"Interpretation I on Construction Project Contracts\", for projects that have passed the completion inspection, once the contract is determined to be invalid, the contractor may request payment of the project fees as stipulated in the contract, while the employer may also claim payment in accordance with the terms of the contract. Later, local higher courts at various levels also issued relevant guidance, stating that in addition to the contractor, the employer can also take the initiative to request payment for the work in accordance with the terms of the contract. For example, Article 17 of the “Answers by the Beijing High People’s Court on Several Difficult Issues in the Trial of Cases Involving Disputes over Construction Contracts” (Jing Gao Fa Fa [2012] No. 245, dated August 6, 2012) stipulates: “How should the amount for the work be determined in an invalid construction contract?” If a construction contract is invalid, but the project passes the completion inspection, then either party may, in accordance with Article 2 of the Interpretations, request payment of compensation equivalent to the value of the project in line with the provisions of the contract, and such request shall be granted. If the contractor requests the employer to pay interest on the unpaid project funds at the loan interest rate applicable by the People’s Bank of China for the corresponding period, such request shall be granted. The employer’s request to deduct the profit included in the compensation for the discounted value of the work on the grounds that the contract is invalid shall not be supported. ” Article (IV) of the “Minutes of the 2011 Provincial Civil Trial Work Conference of the Shandong High People’s Court” (Lu Gao Fa [2011] No. 297, dated December 02, 2011) stipulates: “Regarding the issue of whether the employer can request payment for the construction work in accordance with the terms of the contract in cases where the construction contract is invalid.” In accordance with Article 2 of the Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Disputes over Construction Project Contracts, if a construction project contract is invalid, but the project passes the completion inspection, the contractor’s request to be paid the project cost in accordance with the terms of the contract shall be granted. This provision establishes the basic principle that the settlement of project payments in cases where a contract is invalid is directly linked to the quality of the construction work. The judicial interpretations do not specify whether the employer can request that the payment for the construction work be calculated in accordance with the terms of the contract in cases where the contract is invalid but the construction work has passed the completion inspection. The meeting held that although a construction contract is deemed invalid under the law, as long as the construction work has passed the completion inspection, based on the principle of consistency between rights and obligations, the employer also has the right to request that the payment for the work be made in line with the terms of the contract. ” Therefore, the Civil Code stipulates in general terms that construction contracts are invalid; however, in cases where the construction project has passed the acceptance inspection, the party entitled to request settlement of the project cost in accordance with relevant provisions can be either the employer or the contractor, thereby resolving the practical disputes regarding whether the employer can request payment for the project cost based on the terms of an invalid contract

2 Prerequisites for making a claim Article 2 of the Interpretation on Judicial Issues Concerning Construction Contracts stipulates that only when the project has passed the completion inspection can the party entitled to make a claim request that the payment for the work be calculated in accordance with relevant regulations. Therefore, some views are limited to the literal wording of this clause, arguing that it can only be applied when the project passes the completion inspection. However, in judicial practice, there are numerous cases where contractors withdraw from a project for various reasons before it is completed, resulting in disputes over settlement between the parties. This includes situations where construction work comes to a halt and remains unfinished, where the completion inspection is indefinitely delayed, and where the contractor faces the risk of never receiving payment for their work. Therefore, the Civil Code takes judicial practice into full account by expanding the conditions under which this provision applies to include situations where construction projects have passed the completion inspection, as well as situations where construction projects, though not yet completed, have satisfactory quality; this is done in order to reduce the number of cases in which completed projects have passed the inspection but the contractors are unable to claim their payment for a long time

3. In accordance with the applicable principles, if a contract is invalid, it is invalid from the outset and has no binding force on the parties to the contract. However, Article 1 of the Judicial Interpretation on Construction Contracts stipulates that although the contract is invalid, it is still possible to request payment for the work in accordance with the terms of a valid contract, which may lead to the misunderstanding that an invalid contract is being treated as valid. This provision merely provides certain reference standards for the issue of compensation at a discounted price in case of an invalid contract. The consequences of an invalid contract relate more to the return of unjust enrichment than to the performance of the rights and obligations stipulated in the contract. Although the construction contract is invalid, the contractor has incorporated costs such as labor, materials, and machinery into the construction project through the construction work carried out. These materialized parts can, in fact, no longer be returned to the contractor. Construction project contracts are non-recurring contracts whose performance makes return impossible; compensation in the form of discount serves as a substitute, and essentially it still represents a return of benefits. When the original item is lost or has been acquired in good faith by a third party, this also falls under the circumstances where return is not possible. Therefore, the Civil Code, based on the jurisprudential principles related to contract law as well as judicial practices in the field of construction projects, specifies that the \"principle of compensation at a discounted price\" shall apply in cases where a construction contract is invalid.

4 Responsibilities to be Assumed The \"Interpretation I of Judicial Provisions on Construction Contracts\" defines the employer’s responsibilities in cases where the quality of a construction project is substandard and resulting losses occur, or when the employer is at fault, as \"civil liabilities.\" However, in practice, the losses caused by substandard construction quality can be quite severe, and may even lead to casualties. In such situations, the responsibilities involved are not limited to civil liabilities; they may also include administrative liabilities or even criminal liabilities. Therefore, the \"Civil Code\" removes the reference to \"civil,\" stating instead that the employer \"shall assume corresponding responsibilities.\" Based on the wording of this provision, it can be inferred that this change will increase the responsibilities on the employer, as in addition to civil liabilities, administrative and even criminal liabilities may now be applicable.