Point of view... The conflict between the priority compensation right of construction project and the starting point of late payment interest.

Priority is based on the purpose of maintaining social equity and order and gives creditors the right to pay a special claim in priority to the general creditor, the purpose of which is to give special protection to a special claim. In view of the "chronic disease" of arrears of project payment in China's construction industry, Article 35 of the (I) of interpretation on the application of law in the trial of construction contract disputes promulgated and implemented by the Supreme People's court on January 1, 2021 clearly stipulates the priority right of compensation for construction projects: "the contractor who enters into a construction contract with the employer, if, in accordance with the provisions of Article 807 of the Civil Code, the people's court requests that the price of the construction project be paid in priority to the price of the project at a discount or auction, the people's court shall support it."

The exercise period and starting point of the priority compensation right of 1. construction projects.

Article 41 of this interpretation stipulates: "The contractor shall exercise the right of priority compensation for the construction project price within a reasonable period of time, but not more than 18 months, from the date on which the contractor shall pay the construction project price." How to determine the date on which the price of the construction project should be paid depends on the signing of the contract, and in accordance with the principle of autonomy of civil law, if the parties agree on the time of payment of the contract price, the date of the agreement shall be the date on which the price of the construction project shall be paid. However, under the premise that the parties have no agreement on the time of payment or the agreement is unclear, the time of payment stipulated in Article 27 of the (I) of Interpretation of the Supreme Court on the Application of Law in the Trial of Construction Contract Disputes is of reference significance. Article 27 of the interpretation stipulates: "if the parties have no agreement on the payment time or the agreement is unclear, the following time shall be deemed as the payable time: (1) if the construction project has actually been delivered, it shall be the date of delivery; If the (II) construction project is not delivered, it shall be the date of submission of the completion settlement documents; if the (III) construction project is not delivered and the project price has not been settled, it shall be the date of prosecution by the party."

However, it should be noted that if the time for payment is determined in accordance with the provisions of paragraphs (I) and (II) of this article, the priority of the contractor may not be effectively protected. In engineering practice, often the construction project settlement occurs after delivery, if the contractor is lazy in the settlement, the delay time will sometimes exceed the 18-month period, therefore, if the starting point is calculated in accordance with the provisions of Article 27, paragraph (I) of this interpretation, the contractor's priority compensation will not be well protected. If the construction project is not delivered, the starting point is the date of submission of the completion settlement documents, and if the contractor delays the settlement, resulting in a delay of more than 18 months, the contractor will no longer have the right of priority compensation. This is clearly in conflict with the original intent of the legislation.

The author believes that in the case of the contract does not agree on the payment time or the agreement is not clear, the actual settlement time as the starting point of the priority compensation period, the settlement is not completed, the date of the parties to sue as the starting point is more reasonable. The contractor's priority was not lost because the settlement was not completed and the terms of payment were not fulfilled. In judicial practice, the court also approved the above view. For details, please refer to Annex I (2019) Lu 10 Min Zhong No. 2721 and (2020) Ji 05 Min Zhong No. 2864 Judgment Documents.

The starting point of late payment interest in 2. construction contracts and its conflict with priority.

In a construction contract, under the premise that the contractor defaults on the payment of the project price, the contractor often claims interest and/or liquidated damages together with the payment of the construction price. For the starting point of interest, see article 27 of the (I) on the Interpretation of the Law Applicable to the Trial of Construction Contract Disputes above.

At this point, there will be a conflict between the starting point of late payment interest and the priority of the construction project. If overdue interest is calculated from the date of actual delivery of the project, it indicates that the contractor will have to fulfill the payment obligation from the date of delivery of the project. The prerequisite for the priority of the construction price to be exercised is that the settlement of the project is not completed, the payment terms are not fulfilled, and the contractor claims that the priority is not overdue in order to be recognized by the court. In this case, there is a clear conflict between the contractor claiming interest on overdue payments on the ground that the project was actually delivered and the contractor failed to pay, and the contractor claiming that the priority right of payment was not overdue on the ground that the settlement of the project was not completed. From the contractor's point of view, the court, when supporting the contractor's claim for priority compensation and overdue interest at the same time, will lead to inconsistencies in the timing of the performance of the payment obligation. In judicial practice, there are already conflict cases in which the above-mentioned provisions apply at the same time. For details, please refer to Annex II (2019) Chuan 17 Min Zhong No. 1705 and (2020) Min Min Zhong No. 1898.

From January 1, 2021, Article 40, paragraph 2, of the newly implemented (I) for Interpretation on the Application of Legal Issues in the Trial of Construction Contract Disputes clearly stipulates that "the people's court will not support the contractor's claim for priority compensation for the overdue payment of interest, liquidated damages and damages on the construction project price." Courts at all levels do not support the contractor's claim that interest and liquidated damages are included in the priority compensation of the construction project price. However, in the case of claiming the priority of construction works, many courts have recognized whether the parties can claim interest and/or liquidated damages as ordinary claims at the same time, and there have been cases in the judgment that both the interest/liquidated damages for late payment and the priority compensation right for the construction price have not exceeded the time limit.

In view of the conflict between the above-mentioned provisions, the author thinks that there should not be two starting points for the priority compensation right of the construction project price and the interest on overdue payment, and if there is a conflict of starting points, the priority compensation right of the construction project price of the contractor should be supported first, and the starting point of the interest on overdue payment should be determined by the priority starting point. There are three reasons:

(I), by nature, priority is a special effect given by law to certain special claims or other rights based on special policy considerations, ensuring that the right can be realized in priority over ordinary claims, which is based on the consideration of the public interest of society. In particular, in the new Judicial Interpretation of the Construction Contract, the period of exercise of the right to priority compensation for the construction project price is changed from "six months" from the date on which the contractor should pay the construction project price to "a maximum of not more than eighteen months". In view of the previous priority compensation right exercise period is too short, very easy to expire, resulting in the construction enterprise's project price priority compensation right to fail, by extending the exercise period to give construction enterprises maximum protection, but also a kind of tilt of the law to the interests of workers.

(II), from the perspective of social practice, the phenomenon that the employer defaults the contractor's project payment is very common in our country. The contractor does not have the project payment, which leads to the wage problem of migrant workers, and the wage problem of migrant workers has even become a social hot spot. Especially in the case of insolvency and bankruptcy of the contractor, if the contractor's claim for late payment of interest/liquidated damages is supported, the above-mentioned ordinary claims will often have a very low proportion of payment, which is not conducive to ensuring the interests of construction workers and maintaining social harmony and stability. If the contractor's right to priority compensation for the project price is supported, it will more effectively improve the situation of large-scale arrears of project payments and the general lack of protection of the contractor's rights.

(III), from the point of view of protecting the legal system and the coordination of laws and regulations, the contractor's claim and support at the same time will lead to the contradiction of the applicable law. The law should safeguard social fairness and justice. Although the preferential protection of vulnerable groups is also one aspect of ensuring social fairness, there should be no excessive protection, thus undermining the order and majesty of the law. Therefore, when the contractor exercises the right of priority compensation for the price of the construction project, it shall be deemed that the terms of payment of the contractor have not been fulfilled, and there is no late payment or breach of contract by the contractor. The Contractor's simultaneous claim for late payment of interest and/or liquidated damages shall no longer be supported.

Annex 1

(2019) Excerpts from Lu 10 Min Zhong Judgment No. 2721

"On the issue of whether the priority right to compensation for the construction price of Block A along Sakura South Street claimed by Powerful Fire Company exceeds the six-month exclusion period. Article 22 of the (II) of Interpretation of the Supreme People's Court on the Application of Legal Issues in the Trial of Disputes over Construction Contracts stipulates that the time limit for the contractor to exercise the right of priority compensation for the construction project price is six months, and the period from the date when the employer shall pay the construction project price shall be counted from the date when the employer shall pay the construction project price. After the construction of Powerful Fire Company for Shengji Company was completed, the two parties did not settle the settlement, so the date of payment of Shengji Company is uncertain. The project cost of the project was determined in the litigation by the court of first instance commissioned appraisal, the original judgment on this basis found that the strong fire company's priority compensation for the construction project price of the project did not exceed six months of the exclusion period, there is no improper, but also in line with the construction project price priority compensation right of the legislative intent and purpose, to be confirmed."

(2020) Excerpts from Ji 05 Minzhong Judgment No. 2864

With regard to the time limit for the exercise of the right of priority compensation, Article 22 of the (II) of the Supreme people's Court on the interpretation of legal issues applicable to the trial of disputes over construction contracts stipulates that "the time limit for the contractor to exercise the right of priority compensation for the construction project price is six months, counting from the date on which the contractor shall pay the construction project price." Shunxin Company and Zhengchang Company signed a construction contract for phased construction and phased payment, and the time due for the project price determined after the final completion and settlement of the project shall be taken as the starting point for the exercise period of the priority right of compensation. In this case, the completion date agreed in the contract was August 21, 2015, but the project was suspended because Zhengchang Company did not pay the project payment to Shunxin Company in accordance with the contract. After the court ruled that Zhengchang Company should pay the project funds for the construction project of Shunxin Company, Shunxin Company was still working on the site, and the project was still not completed when Zhengchang Company's bankruptcy case was accepted. Article 18 of the the People's Republic of China Enterprise Bankruptcy Law stipulates that "after the people's court accepts the bankruptcy application, the administrator shall have the right to decide to terminate or continue to perform the contract that was established before the bankruptcy application was accepted and the debtor and the other party have not completed the performance, and notify the other party. If the administrator fails to notify the other party within two months from the date of acceptance of the bankruptcy petition, or fails to reply within 30 days from the date of receipt of the reminder from the other party, the contract shall be deemed to be terminated ......" In this case, on June 3, 2019, Shunxin Company submitted a "Notice on Whether the Contract Will Continue to be Performed" when declaring the creditor's rights to the administrator of Zhengchang Company, regarding whether the construction contract between the two parties was terminated, if the manager of Zhengchang Company fails to reply within 30 days, the construction contract shall be deemed to be terminated. After the termination of the contract, Zhengchang Company shall pay the project funds for the works already constructed by Shunxin Company. Therefore, the starting point for the exercise period of the priority compensation right is July 4, 2019, and Shunxin Company did not exceed the six-month period when it sued.

Annex 2

(2019) Excerpts from Sichuan 17 Minchong Judgment No. 1705

(I) the price of the steel structure project in the painting and oxidation workshop and the interest owed for the project.

On the issue of interest owed on the payment of works. In the trial of this case, the plaintiff and the defendant Yan Feng Aluminum Company did not submit evidence of the delivery of the steel structure project of the spraying and oxidation workshop. According to Article 17 of the Interpretation of the Supreme People's Court on the Application of Legal Issues in the Trial of Disputes over Construction Contracts of Construction Projects, "If the parties have an agreement on the standard for calculating and paying the interest on the unpaid project price, they shall be handled in accordance with the agreement. If there is no agreement, calculated in accordance with the interest rate of similar loans issued by the People's Bank of China for the same period" and Article 18, Paragraph 1, Item 2 "Interest shall be calculated and paid from the date when the project price is payable. If the parties have no agreement on the payment time or the agreement is not clear, the following time shall be regarded as the payment time: (2) if the construction project is not delivered, it shall be the date of submission of the completion settlement documents. the defendant Yan feng aluminum company shall, from October 10, 2015, make the" completion settlement report of the construction project of the spraying and oxidation workshop of Sichuan Yan feng aluminum co., ltd. "from Sichuan guorui cost consulting co, the interest on the outstanding project payment shall be paid at 4.6 per cent of the benchmark annual interest rate of the People's Bank of China for the same period.

(II) whether the plaintiffs to Shaoping, Xu Jianguo and Yang Bo enjoy the right of priority compensation for the project price.

The court of first instance held that the plaintiff enjoys the priority right to compensation for the project price, and the reasons are as follows: First, in accordance with Article 17 of the "Interpretation II of the Supreme People's Court on the Application of Law in the Trial of Construction Contract Disputes" (hereinafter referred to as "Construction Judicial Interpretation II"), "The contractor who enters into a construction contract with the contractor, if, in accordance with the provisions of Article 286 of the Contract Law, the price of the construction project is requested to be paid in priority to the price of the project at a discount or auction, the people's court shall support the provision that the person entitled to the priority right of payment of the project price shall have a direct construction contract relationship with the contractor. As far as this case is concerned, according to the facts and evidence found in the court trial, although the plaintiffs Xiang Shaoping and Xu Jianguo have no construction qualifications as natural persons, they signed a construction contract with the defendant Yan Feng Aluminum Company in July 2013. After that, the plaintiffs invested funds and organized the construction to Shaoping and Xu Jianguo, and settled directly with the defendant Yan Feng Aluminum Company, the plaintiff Yang Bo also signed the Internal Agreement on Settlement of Steel Structures in Bid Section II with the plaintiff Xiang Shaoping, Xu Jianguo and the defendant Yan Feng Aluminum Company in September 2015. It should be determined that the plaintiff Xiang Shaoping, Xu Jianguo and Yang Bo are the contractors who have direct construction contract relationship with the defendant Yan Feng Aluminum Company.

Secondly, in accordance with Article 19 of the "Judicial Interpretation of Construction Engineering II", "If the quality of the construction project is qualified, and the contractor requests the price of the construction project to be paid first in terms of the project discount or auction price, the people's court shall support it." The enjoyment of the right to priority compensation of the project price is not conditional on the validity of the construction contract, but on whether the quality of the construction project is qualified. Although the project construction contract signed by the plaintiff as a natural person is invalid, the plaintiff submitted the completion settlement report of the project involved. According to the agreement between the plaintiff and the defendant Yan Feng Aluminum Company on the completion acceptance and settlement, the defendant Yan Feng Aluminum Company cross-examined the report on October 21, 2015 without raising any objection. It shall be deemed that both parties approved the completion acceptance of the project on October 21, 2015, and the construction project quality of the plaintiff is qualified. In addition, in accordance with Article 22 of the Judicial Interpretation of Construction Engineering II, "the time limit for the contractor to exercise the priority compensation right of the construction project price is six months, starting from the date when the employer shall pay the construction project price", from October 21, 2015 to March 28, 2016, the plaintiff sued to the court to claim the priority of the project price to the defendant Yan Feng Aluminum Company, and there was no time limit for exercising the priority compensation right of the project price exceeding six months. In summary, the court held that the plaintiff had the right to priority compensation for the project price.

First instance judgment: the 1. defendant Sichuan yanfeng aluminum co., ltd. paid the plaintiff Shaoping and Xu Jianguo the project price of 4.195283 million yuan and interest (from October 10, 2015, calculated at 4.6 per cent of the annual interest rate of the people's bank of China for the same period until the date of payment of the project price); The 2. defendant Sichuan yanfeng aluminum co., ltd. paid the plaintiff yang bo the project price of 4.620387 million yuan and interest (from October 10, 2015 onwards, calculated according to the annual interest rate of 4.6 of the loan of the people's bank of China for the same period until the date of paying off the project price); 3. 3.941382 million yuan of the project price payable by the plaintiff to shaoping and Xu Jianguo to the defendant Sichuan yanfeng aluminum co., ltd. and 4.156445 million yuan of the project price payable by the plaintiff yang bo to the defendant Sichuan yanfeng aluminum co., ltd, the defendant Sichuan Yanfeng Aluminum Co., Ltd. is located in Liuchi Industrial Park, Xuanhan County, Dazhou City, Sichuan Province. The steel structure project (excluding land) of the spraying and oxidation workshop of the "100000 tons of aluminum profile integration project" is used to exercise the preferential right of compensation superior to the mortgage enjoyed by Dazhou Branch of Chengdu Rural Commercial Bank Co., Ltd., the third party, at the price after discount or auction and sale.

The second instance rejected the appeal and upheld the original verdict.

(2020) Excerpts from Minmin Final Judgment No. 1898

On the calculation of interest advances. The contract signed by both parties in this case stipulates that "the developer and the contractor agree that the interest of the project payment advanced by the contractor shall be calculated according to the interest rate of similar loans of the people's bank of China in the same period. the interest shall be calculated from the date of commencement to the date of settlement of the advance payment. the interest base shall be the monthly project progress payment, and the project progress payment shall be calculated at 100 per cent of the monthly completed project quantity". It can be seen that the calculation period of interest advances is from the date of commencement to the date of settlement of the advances, and the interest-bearing base is the entire project payment. The project involved in the case started on April 15, 2016, and Tongan First Construction appealed that interest will start to be calculated from May 30, 2016, which is later than the commencement time. Therefore, Tong An Yijian's appeal request to change the starting time of interest on advances from October 31, 2016 determined by the court of first instance to May 30, 2016, and to change the interest base from 1609920.52 yuan to 3285001.01 yuan is supported by the court.

The determination of liquidated damages and expenses for the realization of claims. In view of the fact that the total amount of project funds in this case has been changed to 3285001.01 yuan, the court adjusted and determined the practice of the court of first instance to determine the liability for breach of contract based on the cost appraisal amount of 1609920.52 yuan. Tongan Yijian has provided the agency contract and Xiamen VAT special invoice to support the payment of 155000 yuan of legal fees for its creditor's rights. Daxing Company believes that the lawyer's fee is too high, the reason is not enough, the court does not support.

In addition, although both parties in this case have made an agreement on the priority of compensation that "the employer agrees and confirms that the contractor has the priority of compensation for all claims under the contract to the proceeds from the sale, lease, discount and auction of Building 8 of Daxing Mall", neither party has appealed against the second item of the first instance judgment, but since Daxing Company requested to clarify the scope of Tongan Yijian's priority of compensation in the second instance defense, at the same time, considering that the priority of compensation is a matter expressly stipulated in relevant laws and judicial interpretations, and the agreement of the parties cannot harm the legitimate rights and interests of other non-case creditors, according to the Interpretation (II) of the Supreme People's Court on the Application of Legal Issues in the Trial of Construction Contract Disputes The relevant provisions of the judgment of the first instance are adjusted and changed.

The second item of the civil judgment No. 605 of the Xiamen Intermediate People's Court of Fujian Province (2018) Min 02 Min Chu is: the first construction engineering company of Tong 'an District of Xiamen City shall have the priority to be paid within the range of 3285001.01 yuan of the outstanding project payment for the sale, lease, discount and auction of the completed construction of Daxing Mall Building 8.