SPC: How should the builder legally and efficiently exercise the priority right to be compensated for the construction project price?

The right of priority for payment of construction project price is an important legal system in the construction industry, which aims to ensure that contractors can be repaid the price of their construction projects in priority. Based on Article 807 of the Civil Code, the Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Construction Contracts (I) (hereinafter referred to as the Judicial Interpretation of New Construction Contracts (I)) and related cases, this article sorts out and summarizes some key and difficult issues concerning the priority right to compensation of construction project prices.

1. The subject of the priority right to be compensated for the price of the construction project

The entity that enjoys the priority right to be compensated for the price of the construction project is the contractor who has signed the construction contract with the employer. This includes the surveyor, designer and constructor of the project. However, the actual contractor (e.g., the contractor in the subcontracting relationship, the contractor in the illegal subcontracting relationship, the contractor affiliated with or borrowing qualifications, etc.) usually does not enjoy this right, unless they have reached an agreement with the employer on the settlement of the project price. For example, in the case [(2020) Zui Gao Fa Min Zhong No. 1142], the court clearly pointed out that the actual constructor who borrowed the qualification from the actual constructor does not enjoy the priority right to be compensated in accordance with the law.

2. The time limit for exercising the right of priority to be compensated for the price of the construction project

The contractor shall exercise the right of priority to be compensated within a reasonable period of time, and the maximum shall not exceed 18 months, calculated from the date on which the employer shall pay the price of the construction project. In the event of bankruptcy of the employer, the period for exercising the priority right of repayment shall be calculated from the time when the contractor's claims are declared. In the case [(2023) Zui Gao Fa Min Zai No. 114 Civil Judgment], the court pointed out that in the case of the employer entering bankruptcy proceedings, the contractor's project payment claim will be due at an accelerated time, and the period of exercising the priority right of repayment shall be calculated from the time when the contractor's claim is declared.

3. Conditions for exercising the right of priority to be compensated for the price of the construction project

The conditions for exercising the right of priority include that the quality of the construction project is qualified, the contractor has fulfilled its contractual obligations, and the project price has been due and unpaid. If the quality of the construction project is not up to standard, but the repair meets the standard of acceptance, the contractor can still enjoy the priority right of compensation. In the case [(2019) Su 02 Min Zhong No. 5180], the court held that although the project had quality problems, it could be repaired after appraisal, and the repair cost could not be recognized as a substandard project compared with the cost of the completed project, so the contractor had the priority right to be compensated.

Fourth, the way and way to realize the priority right to be compensated for the price of the construction project

The realization of the right of priority includes litigation, arbitration, negotiation with the employer for discount, application for court auction of the project, participation in the auction proceeds distribution procedure, etc. The contractor may also clearly indicate to the employer in writing that it claims the priority right to be compensated. In the case [(2023) Zui Gao Fa Min Zai No. 96 Civil Ruling], the law does not prohibit the right of action of the contractor who lends the qualification, and the right of the actual contractor to directly sue the employer has been confirmed.

5. Response to the direct exercise of the priority of the price in the enforcement procedure without confirmation of the effective instrument

In the enforcement procedure, the contractor can still claim the priority right to be compensated for the construction project price from the employer. In the enforcement procedure, the people's court has the right to conduct a formal review of whether the priority right to compensation can be established, and may judge whether the priority right to compensation is established in accordance with the provisions of relevant laws and judicial interpretations. In the case [(2021) Supreme Court Zhi Jian No. 330 Enforcement Ruling], the court made it clear that the priority right to be compensated for the construction project price is a statutory priority granted to the construction project contractor by law, and the contractor can still exercise this right in the enforcement procedure.

6. Whether the actual constructor can sue as the subject of the exercise of the right to priority compensation of the project price

After the actual constructor and the contractor reach an agreement on the settlement of the project price, they may file a lawsuit to demand payment of the project price and confirm that they have the priority right to be compensated. However, in bankruptcy, whether the priority right to repayment of migrant workers' wages should be determined still needs to be analyzed on a case-by-case basis. In the case [(2020) Zui Gao Fa Min Shen No. 68], the court pointed out that if the employer enters bankruptcy liquidation and the migrant worker declares the creditor's right based on the wages owed by the contractor, it is the migrant worker's salary in the construction project price and shall enjoy the priority right of repayment.

7. The priority holder of the project price can only be compensated for the auction price of the part of the project in priority

In the case of priority of compensation in multiple construction projects, each priority is independent of each other and dependent on their respective construction projects. Fire protection contractors may be restricted in exercising their right of first refusal. In the case [(2021) Zui Gao Fa Zhi Fu No. 48 Enforcement Ruling], the court pointed out that if there are two or more priority rights to be compensated for the price of a construction project in a construction project, the person with the priority right to be compensated for the price of each construction project can only be compensated in priority for the auction price of the part of the construction project that it has constructed.

8. Priority of project price and repayment of debts in kind

In the enforcement procedure, if the former creditor waives the repayment of debts in kind after the auction property fails, it does not mean that the creditor waives the priority right to be repaid for the proceeds from the sale of the unsold property. A creditor who accepts a debt does not receive a priority position over other creditors by accepting a debt in rem. In the case [(2021) Supreme Court Zhi Jian No. 414 Enforcement Ruling], the court clarified that the payment of debts in kind is a compulsory valuation measure and does not affect the order of repayment of multiple enforcement claims.

9. The priority of the project price and the expectation of the property right

If a consumer of commercial housing purchases a house for the purpose of residence, his right to claim for delivery of the house or the right to claim for the return of the price has priority over the priority right to be repaid for the price of the construction project, the right to mortgage and other creditor's rights. In the case [(2023) Chuan 05 Min Chu No. 38 Civil Judgment], the court pointed out that although the buyer had paid all the purchase price of the shop and actually occupied and used it, the shop was an investment and operation house and did not fall within the scope of special protection of the consumer's right to survival, and its rights could not oppose the builder's right to priority payment of the construction project price.

10. Conflict and coordination between mortgage and priority of project price

The priority right to be repaid for the construction project price is superior to the mortgage right and other creditor's rights. The mortgagee may participate in the litigation as a third party with independent claims to protect its legitimate rights and interests. If the contractor files a lawsuit for priority of compensation for the construction project, the mortgagee has the right to revoke the agreement of malicious collusion and claim compensation. In the case [(2019) Zui Gao Fa Min Shen No. 6085], the court pointed out that the sponsor actually organized the workers to carry out construction activities and fulfilled the contractor's obligations as agreed in the contract, and was both the actual builder and the actual contractor, and it should be determined that the sponsor has the right to claim the project price and the priority right to be compensated. Indeed, there are many judgment documents for construction contract dispute cases in the traversal, and the contradiction is not limited to this.

The analysis in this article is based on current laws, regulations, and judicial interpretations, as well as Guiding Cases and Judicial Adjudication Cases issued by the Supreme People's Court. In practice, the contractor, the actual contractor and other relevant parties shall reasonably exercise and protect their legitimate rights and interests according to the specific circumstances. At the same time, it is necessary to pay close attention to the changes in laws and regulations and the development of judicial practice to adapt to the new challenges in the field of priority of compensation of construction project price.