Professional Interpretation

Abstract：The validity issue is the foundation to deal with the construction contract. DOCVIT real estate and infrastructure team will analyze the circumstance where the construction contract is deemed to be invalid.

1. Circumstances where the construction contract is invalid

A. contractor didn’t obtain the necessary qualification

according to the construction law article 13: Construction enterprises, surveying units, designing units and construction supervision units engaged in construction activities shall be graded, in terms of their qualifications, on the basis of their registered capital, specialized technicians, technologies, equipment and the construction projects completed, and they may only engage in construction activities within the scope specified for them in terms of their grades after passing the qualification examination and obtaining the appropriate qualification grade certificates.

In another word, a contract signed with contractor without qualification should be deemed as unenforceable. However, there is an exception, in the circumstance that the contractor obtain the relevant qualification before the project is completed, the contract should be deemed as valid. Which turn the contract to the conditional contract, the contract is valid and enforceable only when the qualification is obtained. Otherwise, it remains invalid.

B. “borrowed” qualification

Also, “borrow” other’s qualification is forbidden. Construction law said, No construction enterprise may undertake a project beyond its business scope allowed for its qualification grade certificate or do so in the name of another construction enterprise in any form. No construction enterprise may allow, in any form, another unit or individual to use its qualification certificate or its business license, in undertaking a project in its name.

C. absent of bidding invitation

According to the Law of the People's Republic of China on Bid Invitation and Bidding, The following construction projects to be undertaken within the territory of the People's Republic of China, including the surveying, design, construction and supervision of such projects as well as the purchase of key equipment and materials for such projects, shall be subject to bid invitation:

(1) Large infrastructure and public utility projects that concern public interests and security;

(2) Projects invested completely or partly with State-owned funds or financed by the State; and

(3) Projects using loans or aid funds from international organizations or governments of other countries.

Also, there is another possible that in case of bidding invitation, where the bid result is affected by the specified situation prescribed by law, it shall be nullified. Therefore, the contract signed by the bidder is invalidated too.

D. Illegally dividing

According to “Regulations on the Administration of Construction Project Quality”, illegally dividing the contract as referred to in these Regulations means the following acts:

(1) The general contract undertaking unit sublets out the contract for the construction project to the unit having no appropriate grade of qualification;

(2) The contract undertaking unit permits any other unit to undertake part of the project it contracted if there are no stipulations in the general contract of the construction project and it obtains no approval of the building unit;

(3) The general contract undertaking unit of construction permits any other unit to construct the principal structure of the construction project; and

(4) The sub-contracting unit sublets its sub-contract for the construction project again.

The behind reasoning is somehow similar to the fruit of poisonous tree principle, which is in case that the contract is obtained illegally, then the contract itself is invalidated.

E. transfer or divide contract

No construction unit may transfer or divide illegally its contract. Transferring the contract for the project means the act wherein the contract undertaking unit, after it contracts for a construction project, fails to perform the duty and liability stipulated in the contract and transfers the contract for the entire project it contracted to another unit or transfers, in the manner of dividing the project into parts, the contract for the entire project it contracted separately to other units by sub-contracts.

2. How to calculate the construction price

According to Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of Law in the Trial of Cases Involving Project Construction Contract Disputes Article 2, if a project construction contract is invalid, yet the construction passes completion inspection, the claim of the contractor for payment of the construction price as agreed in the contract shall be upheld.

Therefore, regardless the in validness of the construction contract, when the project is inspected and the contracted claimed for contract price, the reasonable compensation should be paid.

The other factors should be taken into consideration is the contract price, PBC's lending rate for the same period. However, the price can’t be determined exactly according to the contract price.