Appeal in Construction Payment Dispute Results in CNY 582,840 Award
A dispute over an invalid construction subcontract led to a final court ruling ordering the contractor to pay an individual builder a remaining balance of 582,840 CNY. The case involved a residential development project in Eastern China City. The individual builder, Mr. Shen, had no formal contractor license but performed the actual construction work. The court of appeal upheld the lower court’s decision on the amount owed while rejecting arguments about the use of the builder’s own submitted final accounts.
In 2004, Eastern China City Development Co. hired Eastern China Engineering Co. as the main contractor for a residential project. That same year, Eastern China Engineering Co. signed an internal subcontract with Mr. Shen and Mr. Jin. However, only Mr. Shen carried out the work on three buildings. The project was completed and passed final inspection in April 2006. During construction, Mr. Shen used ready-mix concrete instead of on-site mixed concrete after the contractor issued a change request. The total project cost was later determined by a court-ordered audit to be 7,713,774 CNY. The development company had paid 6,530,000 CNY to the contractor, and the contractor had paid 6,040,250 CNY to Mr. Shen. The contractor also withheld a 7.5 percent management fee from the total as agreed in the subcontract.
At trial, Mr. Shen argued that his own submitted final accounts should be used because the owner had received them and failed to review them within four months, as stated in his contract with the contractor. He also challenged the audit report and asked for a new appraisal. The owner argued that it was not bound by that contractual clause and that the audit was correct. The contractor did not appear at the appeal. The court of appeal reviewed the evidence and found that the lower court’s factual findings were consistent. No new admissible evidence was presented on appeal.
The court held that the subcontract between Mr. Shen and the contractor was invalid because Mr. Shen lacked the required construction enterprise qualifications. However, under relevant law, since the project was completed and accepted, Mr. Shen was entitled to payment as the actual builder. The clause stating that the owner must review the final accounts within four months or else accept the builder’s figures was only binding between Mr. Shen and the contractor, not against the owner. Moreover, Mr. Shen had submitted his accounts after the two-month deadline in the subcontract, so the clause did not apply. The court therefore adopted the audit figure of 7,713,774 CNY as the correct project cost.
On the management fee, the court reasoned that although the contract was invalid, the parties had freely agreed to the 7.5 percent fee, and the contractor had in fact provided management services. Deducting this fee from the total was reasonable. The court also noted that the 553,677 CNY worth of materials supplied directly by the owner should not be subject to the management fee. After deducting the amounts already paid and the management fee, the contractor owed Mr. Shen 582,840 CNY. The owner was held liable to pay Mr. Shen only to the extent of the amount it still owed the contractor, which was 630,097 CNY. Mr. Shen’s late request for interest on overdue payment was rejected as untimely.
This case reinforces that individuals who perform construction work without a license can still recover payment for completed and accepted projects, but they cannot rely on contractual clauses that bind only the immediate contracting parties. The ruling also confirms that management fees in an invalid subcontract may still be enforced if they reflect actual services rendered and mutual consent. For practical purposes, developers and main contractors should ensure that subcontracts with individuals comply with regulatory licensing requirements, and builders should carefully file their accounts within any contractual deadlines. The court of appeal dismissed both appeals and affirmed the original judgment.
Disclaimer: This article is for informational purposes only and does not constitute legal advice.