Real estate perspective... Study on the rules of discount compensation for invalid construction contracts.

In the field of construction engineering, the contractor does not have the qualification of the construction enterprise but signs the construction contract with others. The validity of such contracts is denied by the provisions of Articles 1, 2 and 3 of the (I) of the Supreme People's Court on the Interpretation of Legal Issues Applicable to the Trial of Construction Contract Disputes. However, regardless of the validity of the contract, the meaning of invalidity is not the effect of the performance of the contract, does not mean that there is no legal effect, the contract price of the dispute can not be avoided because of the invalidity of the contract.

The Judicial Interpretation of Construction Projects (Fa Shi [2004] No. 14) stipulates that the construction contract for a construction project is invalid, but if the construction project is qualified after completion and acceptance, and the contractor requests to pay the project price with reference to the contract, it shall be supported. This latter provision is followed by the first paragraph of Article 793 of the Civil Code, and its expression is amended to read: "The construction contract for a construction project is invalid, but if the construction project is accepted and accepted, the contractor may be compensated at a discount by reference to the contract's agreement on the price of the project." Although in the case of invalid construction contract, the contractor to perform the construction obligations rely on the payment of the loss, but this does not mean that invalid legal acts do not have legal consequences. Given that the original has been converted into construction works, it is not suitable for return or cannot be returned. At this time, the contractor may request discount compensation to eliminate the contractor's unjust enrichment, and its right to return the original property is transformed into the right to return the unjust enrichment. It can be seen that the nature of discount compensation is positioned as unjust enrichment most in line with the basis of the right of claim and the scope of interest protection of invalid contracts, which not only solves the problem of imbalance of interests from the perspective of equity, but also makes up for the legislative gap of contract liquidation.

In the field of construction engineering, the general standard of discount compensation for construction funds can be divided into two types, one based on objective value and the other based on contractual agreement. Among them, the objective value as the settlement standard is also understood as the project quota as the standard, the method is relatively out of the subjective will of the parties to the contract, generally refer to the price of professional appraisal institutions or according to the relevant administrative departments issued at the time of the signing of the contract guidance price. The settlement by reference to the contract is more based on the subjective will of the parties to the contract, combined with the specific project for price settlement.

The second of the above two views is considered to be more in line with the specific circumstances of the construction contract, because in the field of construction projects, the project price agreement as the result of the game between the parties to the contract, the agreed amount is relatively reasonable, but also reflects the true meaning of the contractor. On this basis, if we do not refer to the contract price as the settlement standard, but simply calculate the project quota, it is possible to make the settlement price higher than the price agreed by the parties to the contract, resulting in the contractor in the case of invalid contract to obtain more benefits than when the contract is valid. In this way, the contractor may take the false qualification and other means to make the construction contract invalid, in order to obtain more benefits. Referring to the contract price as the settlement standard, not only can avoid the above situation, but also can take into account the true intention of the parties to the contract, reduce the various disputes in the process of determining the project price, and balance the interests of the parties to the contract.

However, the author believes that the above two views are not opposite, there is no need to fix a certain calculation method, let alone refer to the contract agreement to determine the project price under any circumstances. For example, when there are multiple contract prices and the authenticity cannot be distinguished, the true meaning of the parties to the contract price agreement cannot be confirmed. At this time, the court can make a judicial determination of the project price disputed by the parties by entrusting the appraisal, based on the appraisal conclusion issued by the appraisal institution, that is, the project quota.

The above views are reflected in the dispute over the construction contract between Jinan Yongjun Materials Co., Ltd. and Qihe Huandun Steel Structure Co., Ltd. (2011) Minti Zi No. 104 Bulletin. The Supreme Court held that in the three different contracts provided by the parties in this case, the distribution of the contract price was irregular and the authenticity could not be distinguished, and the true intention of the parties to the contract price agreement could not be confirmed. Therefore, none of the three contracts can be used as the basis for the settlement of the project price. At this time, it is more in the interests of all parties to settle the project quota, and it is not improper to make a judicial determination of the project price disputed by both parties according to the appraisal conclusion issued by the appraisal institution. At the same time, the Supreme Court believes that if the appraisal agency makes an appraisal conclusion based on the fixed price and the market price, the project price should generally be determined at the market price when determining the project price. This is because most of the project cost determined on the basis of quota fails to reflect the construction, technology and management level of the enterprise, and the quota standard often fails to keep up with the changes in market prices, while the market price information released by the construction administrative department is closer to the market price, closer to the actual cost of the construction project, and in line with the relevant provisions of the contract Law, which is more fair to both parties.

It can be seen that the determination of the project price by reference to the contract still has its limitations, with objective value as the settlement standard of the project quota standard settlement as a supplement, but also to a certain extent to make up for its limitations, the two complement each other, not absolute opposition. If the price of the project is only mechanically understood by reference to the contractual agreement, it may deviate from the actual situation and ignore the liability of the parties in the actual performance process. Therefore, when determining the discount compensation by reference to the contract agreement, it is still necessary to consider the objective value of the project and determine the calculation method in combination with the specific case, so as to avoid excessive deviation from the actual situation and realize the fairness of the individual case.

As mentioned above, when the construction contract for the construction project is invalid and the construction project complies with Article 793 of the Civil Code, it is reasonable and realistic to compensate the contractor by reference to the contract's agreed discount on the price of the project. Questions that must be answered before the scope of discount compensation is judged to be applicable.

Article 157 of the Civil Code provides for the legal consequences of an invalid contract: property acquired on the basis of an invalid contract shall be returned. At the same time, according to Article 33 of the Minutes of the National Court Civil and Commercial Trial Work Conference, after the contract is not established, invalid or revoked, the factors of property appreciation or depreciation shall be fully considered when determining the return of property. If the two parties acquire property as a result of the contract, they shall return it to each other after the contract is not established, invalid or revoked. If the property such as equity or house that should be returned increases in value or depreciates relative to the price agreed in the contract, the people's court shall comprehensively consider the correlation between market factors, the operation or addition of the transferee and the increase in value or depreciation of the property, reasonably distribute or share it among the parties, so as to avoid one party benefiting from the failure, invalidation or revocation of the contract. If the subject matter has been lost, resold to others or otherwise unable to be returned, the people's court shall not support the party's claim to return the original, but if it claims to be compensated at a discount, the people's court shall support it in accordance with the law. At the time of discount, the compensation standard shall be determined on the basis of the price agreed upon by the parties at the time of the transaction, taking into account the benefit of the parties in the loss or resale of the subject matter. The insurance or other compensation obtained by the parties at the time of the loss of the subject matter, and the consideration obtained at the time of resale, are the benefits obtained by the parties as a result of the subject matter. The portion of the benefit that is higher or lower than the price shall also be reasonably distributed or shared among the parties. It can be seen that in the discount compensation, the compensation standard should be determined by taking into account the loss of the subject matter or the benefit of the resale.

Article 793 of the Civil Code explicitly refers to the contract's agreement on the price of the project to compensate the contractor at a discount, and has complied with the framework outlined in Article 157 of the Civil Code and Article 33 of the Minutes of the National Court Conference on Civil and Commercial Trials."Discount compensation" already reflects the nature of compensation, that is, after adjusting the reasons for the loss of payment, the interest between the construction project and the project payment changes. Its scope should be capped at the cost of the project, and the issue of damages for breach of contract should be considered separately for adjustment factors such as construction quality and delay. When there is a cross-over of discount compensation and damages, in order to facilitate the parties to resolve the dispute, it can also be resolved together, with the discount compensation to make up for the change of interests arising from the act of payment.

After determining the upper limit of discount compensation, the scope of compensation needs to be further determined.In principle, the scope of compensation should be limited to the scope of unjust enrichment. Since the discount compensation itself is applicable on the basis that the original cannot be returned or the original is not suitable for return, in the field of construction projects, the contractor has actually completed the construction project under normal circumstances can not be returned, so only the discount compensation to fill the contractor's loss. Therefore, the scope of discount compensation should be the loss of the contractor's interests, that is, the contractor's unjust enrichment. When the value of the construction project is calculated, both parties are also responsible for the causes that lead to the invalidity of the contract according to the actual situation, mainly based on the market position of the parties at the time of the conclusion of the contract, the reasons for the invalidity of the contract, and the consequences of invalidity to comprehensively measure the proportion of fault that both parties should bear, and evaluate on the basis of authenticity and rationality. Expenses paid to obtain benefits can be deducted within the scope of income. If one party is required to assume more responsibility, it will obviously lead to an imbalance of interests. Therefore, when referring to the contract's agreement on the price of the project, the standard of return of the original shall be used to claim discount compensation, and the contractor shall return the unjust enrichment to the contractor.

After clarifying the standard and scope of discount compensation when the construction contract is invalid, it will face the most direct problem in judicial practice, that is, what is the specific reference scope of "discount compensation with reference to the contract on the project price"? There are agreements related to the project price in the construction contract, including not only the amount of the project price, but also the payment node and payment time of the project price. In addition, the composition of the construction price differs significantly from other types of contract prices, and costs such as management fees, warranty payments, and even interest may be classified as part of the construction price to some extent. Whether the above matters are factors that should be taken into account and by what standard to measure, some have already determined the standard in practice, but some do not have a completely unified standard of identification in practice, and there are cases of different judgments in class cases, which the author will analyze one by one.

In the case of a dispute over the construction contract of Beijing Shougang Construction Group Co., Ltd. and Tonghua Chengxin Real Estate Development Co., Ltd., the Supreme Court held in the (2020) Civil judgment No. 1192 that "Article 2 of the Judicial interpretation of Construction projects is based on the discount compensation stipulated by the above-mentioned law." it is determined that the parties can request discount compensation for the project price with reference to the contract. According to this provision, the time of payment of such discount compensation shall also be based on the time of payment of the contract price." The decision held that the time of payment of the project should also be based on the time of payment of the project price agreed in the contract. However, contrary to this view, in the case of Xiao Chunyou and Linquan County People's Government's construction contract dispute, the Supreme Court stated in the (2019) Supreme Famin Shen No. 1218 Civil Ruling that "Under the circumstances that the construction contract is invalid, the original intention of Article 2 of the Judicial Interpretation of Construction Projects" on requesting payment of the project price by reference to the contract "should be to determine the project price by reference to the contract agreement, mainly refers to the project payment pricing method, pricing standard and other agreements related to the amount of the project price, and the terms of the payment node agreement between the two parties, does not belong to the applicable contract agreement." The decision held that the time of payment of the project should not be based on the time of payment of the project price agreed in the contract. It can be seen that there are different views in judicial practice as to whether the time of payment is a condition that should be referred to the contract.

In this regard, the author believes that, in view of the "Civil Code" Article 793 clearly stipulates that if the construction project has passed the acceptance, the contractor can be compensated by reference to the contract on the price of the project. It can be seen that one of the prerequisites for discount compensation is the acceptance of the construction project, and the payment time of the project price is mostly carried out according to the node, so that on the one hand, the construction of the project can be maintained, on the other hand, the interests between the contractor and the contractor can be balanced. However, when the construction project acceptance is qualified, it means that the construction project has been completed, according to the node time payment is meaningless, at this time the construction contract is invalid, the contractor shall return the unjust enrichment to the contractor, should pay the project price directly to the contractor. Therefore, when the construction project acceptance is qualified, the contractor should pay the corresponding project price, the payment time is no longer bound by the contract, the contract agreed payment time, also has no reference significance.

In the case of the dispute over the construction contract between Guangxi Construction Engineering Group No. 1 Construction Engineering Co., Ltd. and Aoshihua Construction Project, the Supreme Court held in (2020) Civil Ruling No. 7019 that "on whether Aoshihua should pay project management fees to a construction company. Since the Labor Service Agreement signed between Aoshihua and Yijian Beihai Branch is invalid, the agreement in the Labor Service Agreement that Yijian Beihai Branch will charge Aoshihua a project management fee at 15% of the total settlement price is also invalid. Therefore, the original judgment was not improper in calculating the amount paid by the construction company." The judgment is that the management fee is not a factor to be referenced. However, in the case of Xu Busheng and Qinghai Branch of Chongqing No.1 Construction Group Co., Ltd., the Supreme People's Court held in (2020) Civil Judgment No. 242 of the Supreme People's Court that "Chongqing No.1 Construction Company and Qinghai Branch of Chongqing No.1 Construction Company actually performed their management duties according to the stipulations of the Internal Contract, and the labor achievements they paid have been materialized into the performance of the construction contract of the construction project involved in the case, therefore, Xu Busheng should bear the corresponding compensation obligations. The decision found that the management fee was a reference factor. Although the above decisions give different answers as to whether the management fee is a reference factor, they are essentially the same.

Consistent with the decision is the minutes of the 7th judges' meeting of the Second Circuit Court of the Supreme People's Court in 2020. The minutes of the meeting pointed out that when the construction contract for a construction project is invalid due to illegal subcontracting, illegal subcontracting or affiliation, the handling of the "management fee" charged by the subcontractor as agreed in the contract shall be judged according to the purpose of the contract and other specific cases. If the "management fee" is part of the project price, and the subcontractor also actually participates in the construction organization management coordination, can refer to the contract agreement to deal with; for the subcontractor purely through subcontracting for profit, did not actually participate in the construction organization management coordination, after the contract is invalid to claim "management fee", should not be supported. The parties to the contract shall not support the adjustment of the project price on the ground that the "management fee" as the contract price should be collected. Based on the relativity of the contract, non-contract parties cannot claim to adjust the amount of work to be paid by the agreement between the subcontractor and the subcontractor on the "management fee.

In summary, when the construction contract is found to be invalid, the "management fee" agreed in the contract shall examine whether the subcontractor is actually involved in the construction organization management coordination and other specific judgments. If the "management fee" is part of the project price, and the subcontractor also actually participates in the construction organization management coordination, can refer to the contract agreement to deal with, for the subcontractor purely through subcontracting profit, did not actually participate in the construction organization coordination work, the contract is invalid after the claim of "management fee", should not be supported.

In the case of a dispute over the construction contract of Tangshan Tonghua Real Estate Development Co., Ltd. and Jiangsu Nantong Liujian Construction Group Co., Ltd., the Supreme Court held in the civil judgment (2019) No. 504 that "although the project agreement involved in the case was confirmed to be invalid, the construction project implemented a quality warranty system. The project quality deposit is generally used to ensure that the contractor repairs the quality defects of the construction project during the project quality warranty period. Although the project quality guarantee can be agreed by both parties in the contract, but by nature, the project quality deposit is a guarantee of the quality of the project during the warranty period of the project quality, is a legal obligation, so the validity of the contract should not be the premise of the determination. The agreement between the parties on the warranty falls within the scope of the settlement clause. Therefore, the project quality deposit should be returned to the builder only when the conditions agreed upon in the contract are met."

It can be seen that if the contractor is unable to deduct the quality deposit by reference to the contract, it may not be able to repair the quality problems in a timely and effective manner in the future. Comprehensive consideration, the author believes that the quality assurance fund, as a legal obligation, should not be based on the validity of the contract as a prerequisite, so the issue of quality assurance fund should be resolved with reference to the contract agreement.

The Supreme People's Court made the following determination on the issue of interest in the case of a dispute over the construction contract of Jiangsu First Construction and Installation Group Co., Ltd. and Tangshan Changlong Real Estate Development Co., Ltd. (2017) Supreme Law Minzong No. 175: "Regarding the interest on the project price involved in the case, Jiangsu First Construction appealed that the interest on the project should be paid according to the loan interest rate of the People's Bank of China for the same period from January 30, 2012. In the opinion of the Court, Article 18 of the Judicial Interpretation of the Construction Contract stipulates that interest shall be paid from the date on which the price of the project is payable. If the parties have not agreed on the time of payment or the agreement is unclear, the following time shall be deemed as the time of payment: (1) if the construction project has actually been delivered, it shall be the date of delivery; if the (II) construction project has not been delivered, it shall be the date of submission of the completion settlement documents; if the (III) construction project has not been delivered and the project price has not been settled, it shall be the date of prosecution by the parties. The project involved in the case was completed and accepted and delivered for use on November 30, 2011. Both contracts involved in the case were deemed invalid. On the one hand, the payment time of the project price agreed in the contract cannot be applied with reference to the contract. On the other hand, the nature of the interest paid by the employer on the project arrears is legal fruits. After the completion and acceptance of the construction project is delivered to the employer, it has actual control and is conditional to exercise the rights of possession, use and income, therefore, it is in line with the balance of interests of the parties to pay the interest on the project price from the completion and acceptance of the project. Jiangsu No.1 Construction Company advocates to pay the interest on the project funds according to the loan interest rate of the people's Bank of China for the same period from January 30, 2012, which is supported by the hospital."

It can be seen that when the construction contracts of the construction project are found to be invalid, the nature of the interest paid by the employer for the project arrears is determined to be legal fruits. After the construction project is completed and accepted and delivered to the employer, it has actual control and can possess, use and benefit. Therefore, it is in line with the interests of the parties to pay the interest on the project price from the completion and acceptance of the project. Therefore, when the construction contract is found to be invalid, the interest on the project price shall be paid from the completion and acceptance of the project. Subsequent cases also basically use this judgment as a reference.

Combined with the provisions of Article 793 of the Civil Code, it is clear that the essence of discount compensation is the right to claim unjust enrichment return, abandons the wrong idea of "effective treatment of invalid contracts", and provides a theoretical basis for the pricing rules of the contract on the project price when the construction contract is invalid. It not only solves the problem of imbalance of interests from the perspective of equity, but also makes up for the legislative gap of contract liquidation.

At the same time, further analysis is made on how to understand and apply the discount compensation rules when the construction contract is invalid. It is clear that the settlement standard of discount compensation should refer to the contract agreement, and when necessary, the settlement standard should be combined with the objective value. Because the discount compensation has already reflected the nature of compensation, that is, after adjusting the reasons for the loss of payment, the scope of the change of interest between the construction project and the project payment should be capped by the project payment. At the same time, because the discount compensation itself is applicable on the basis that the original cannot be returned or the original is not suitable for return, in principle, the scope of compensation should be limited to the scope of unjust enrichment.

Finally, when the construction contract is determined as invalid, through the analysis of the factors involved in the application of discount compensation, it can be seen that: for the payment time, when the construction project is accepted, the contractor should pay the corresponding project price, and the payment time does not need to be restricted by the contract; for the management fee, when the construction contract is determined as invalid, the "management fee" agreed in the contract shall be checked whether the subcontractor actually participates in the construction organization, management and coordination, etc. for specific judgment; For quality assurance fund, as a legal obligation, the validity of the contract shall not be taken as the premise, so the issue of quality assurance fund shall be solved according to the contract agreement; For the interest on project arrears, its nature is determined as legal interest, and the interest on the project price shall be calculated and paid from the delivery upon completion acceptance.