The priority right to compensation for construction project prices is based on Article 807 of the Civil Code of the People's Republic of China, and its requesting parties are relatively diverse. In addition to the contractor of the construction contract, it also includes the contractor of the decoration and renovation project, but the actual construction personnel, material suppliers, surveyors, designers, and supervisors are not included. The scope of compensation mainly includes costs, profits, and taxes, excluding interest, liquidated damages, and compensation for damages. The determination of the starting point needs to be analyzed on a case by case basis. The exercise methods are relatively diverse, including but not limited to litigation, arbitration, and mutual agreement to use property as collateral.

1、 Definition and Characteristics of Priority Compensation Right for Construction Project Price

The priority right to compensation for construction project prices refers to the contractor's right to priority compensation for the discounted or auctioned price of the construction project, which takes precedence over mortgage rights and other creditor's rights. In the priority ranking of real estate rights, except for the consumer's expectation of property rights, no other creditor's rights shall have priority over the right to be paid for the construction project price.

This right refers to both the engineering cost creditor's right and the priority right, with the former being a creditor's right and the latter being a property right, both rights arising simultaneously. [1] The legal basis is Article 807 of the Civil Code of the People's Republic of China: If the employer fails to pay the price as agreed, the contractor may demand the employer to pay the price within a reasonable period of time. If the employer fails to make payment on time, the contractor may negotiate with the employer to discount or auction the project according to the nature of the construction project, or request the people's court to auction the project in accordance with the law. The price of the construction project shall be given priority for compensation based on the discounted or auctioned price of the project.

There are diverse views in the academic community regarding the legal nature of the priority right to compensation for construction project prices. Among them, the view that prioritizing the payment of construction project prices as one of the priority rights and treating it as a legal security interest is more reasonable and widely accepted. Based on this legal definition, this right can form a priority system together with other priority rights stipulated by special laws, thereby maintaining harmony within the property rights system.

2、 The requesting party for priority compensation of construction project price

（1） The actual construction personnel do not have the priority right to be compensated for the construction project price

The main parties of a construction contract are the employer and the contractor. From Article 807 of the Civil Code of the People's Republic of China, it can be seen that the requesting party for priority compensation is the contractor. However, in construction contract disputes, illegal situations such as subcontracting, illegal subcontracting, and affiliation often exist, which complicates the claims for priority compensation rights and raises questions about whether the actual construction personnel enjoy or should enjoy priority compensation rights.

What is an actual construction worker? The mainstream view holds that "actual construction workers" refer to the construction units and individuals who carry out the construction of the project after the construction contract is deemed invalid. They generally refer to subcontractors, illegal subcontractors, affiliated contractors, and contractors without construction qualifications. Actual construction workers do not include the contractor's performance assistants, legal professional subcontracting project contractors, and labor operation contractors. Actual construction workers are not a legal concept, but a term used in judicial interpretations to refer to specific individuals. "[2] According to the above viewpoint, actual construction workers should be illegal contractors.

Article 28 of the Construction Law of the People's Republic of China stipulates that "it is prohibited for the contracting unit to subcontract all the construction projects it has contracted to others, and it is prohibited for the contracting unit to divide all the construction projects it has contracted and subcontract them separately to others under the name of subcontracting." Article 29, paragraph 1 stipulates that "the general contracting unit of a construction project may subcontract some of the projects to subcontracting units with corresponding qualifications; however, except for the subcontracting agreed in the general contracting contract, it must be approved by the construction unit. For general contracting of construction, the construction of the main structure of the construction project must be completed by the general contracting unit itself." Paragraph 3 stipulates that "it is prohibited for the general contracting unit to subcontract the project to units that do not have corresponding qualifications. Subcontracting is prohibited. The contracting unit will subcontract the contracted project again." According to the above legal provisions, Subcontracting, illegal subcontracting, and general contracting units subcontracting projects to units and individuals without corresponding qualifications are prohibited for construction projects. The construction contract relationship between the actual construction personnel and subcontractors, as well as illegal subcontractors, is invalid due to the violation of mandatory provisions in the Construction Law. Invalid construction contracts do not have legal effect and cannot apply the provisions of Article 807 of the Civil Code of the People's Republic of China. Therefore, as an illegal contractor, the actual construction personnel have no right to enjoy the priority compensation right stipulated in Article 807 of the Civil Code of the People's Republic of China, that is, the actual construction personnel do not have the priority compensation right for the construction project. [3]

In judicial practice, the Supreme People's Court has also stated in civil rulings (2021) Supreme Court Civil Judgment No. 5733 and (2019) Supreme Court Civil Judgment No. 2755 that the actual construction personnel do not have the priority right to be compensated for the construction project price. Furthermore, in Civil Ruling No. 2852 of 2019, the Supreme People's Court stated that "as a property right, according to the principle of statutory property rights, the subject who enjoys the priority right of compensation for construction project prices must be clearly defined by law, and relevant laws and judicial interpretations clearly limit the subject of the priority right of compensation for construction project prices to be the contractor of the construction project, not the actual constructor

（2） The material supplier does not have the priority right to be compensated for the construction project price

When the debtor of a material supplier is a contractor, subcontractor, subcontractor, or actual construction worker, a sales contract relationship is formed between them based on transactional behavior. According to the current legal framework in our country, for simple sales contract transactions, the law does not grant the seller (i.e. material supplier) the privilege of priority compensation based on the price.

Legally speaking, material suppliers should not be entitled to priority compensation for construction project costs. Because the creditor's rights enjoyed by the material supplier are too far away from the employer and all their construction projects, even the liability for breach of contract is not established due to the distance, let alone the security interest. The priority right to compensation for construction project costs is only a special case, established by legislators based on considerations of specific social environments to ensure the realization of wage claims of construction workers hired by contractors. It has a high degree of specificity and purpose, and should not be arbitrarily expanded in its scope of application.

Furthermore, from the perspective of engineering industry management practice, the "Interim Measures for Settlement of Construction Project Prices" (2004) jointly issued by the Ministry of Finance and the Ministry of Construction have clearly defined the scope of construction and installation project costs, which does not include the value of the installed equipment itself that should be included in the equipment purchase cost. This regulation reflects the official position that material suppliers do not have priority in project price settlement. [4]

In summary, whether from a legal analysis or in combination with industry management standards, it can be concluded that material suppliers do not enjoy and are not suitable for enjoying the priority right to be compensated for construction project costs.

（3） The surveyor, designer, and supervisor do not have the priority right to be compensated for the construction project price

Surveyors and designers do not have the priority right to be compensated for the construction project price. According to Article 788 of the Civil Code of the People's Republic of China, "Construction project contracts include engineering survey, design, and construction contracts", surveyors and designers can also be referred to as contractors. However, considering the relatively small proportion and early occurrence of survey and design fees compared to construction fees, as well as the fact that surveyors and designers may choose not to submit relevant deliverables before obtaining survey and design fees to hinder the progress of the project approval process by the employer, it is generally believed that there is no need to provide special tilt protection for surveyors and designers. Furthermore, the original intention of establishing the system of priority compensation for construction project prices is to protect migrant workers, a relatively low-income vulnerable group. Surveyors and designers are usually considered high-income groups, so it should be considered more reasonable for them not to enjoy priority compensation for construction project prices.

At the same time, according to Article 35 of the Interpretation of the Supreme People's Court on the Application of Law in the Trial of Disputes over Construction Contracts (1) (hereinafter referred to as "Judicial Interpretation on New Construction Projects (1)"), it can also be inferred that the subject who enjoys the priority of receiving compensation for construction project prices is the contractor who enters into a construction contract with the employer, excluding design contracts and survey contracts.

But when the project is contracted through EPC or other general contracting methods, the survey and design fees belong to the scope of the general contractor's project price, and are settled and paid simultaneously with the project price. The general contractor can have priority over the relevant expenses. [5]

The supervisor does not have the priority right to be compensated for the construction project price. Article 796 of the Civil Code of the People's Republic of China stipulates that if a construction project is subject to supervision, the employer shall enter into a written supervision contract with the supervisor. Therefore, the relationship between the employer and the supervisor is a commission contract, and the supervision contract does not belong to the construction project contract. Therefore, the priority compensation system for the construction project price does not apply, and the supervisor does not enjoy the priority compensation right for the construction project price.

（4） The contractor of the decoration and renovation project has the priority right to receive compensation for the construction project price

Contractors who are entitled to priority compensation for construction project funds are not limited to those under construction contracts. In terms of the legal evaluation focus on who undertakes the work entrusted by the employer and should receive corresponding remuneration, decoration and renovation contracts have similarities, even similarities, with construction contracts. According to Article 37 of the Judicial Interpretation on New Construction (I), "If the decoration and renovation project meets the conditions for discount or auction, and the contractor of the decoration and renovation project requests priority compensation for the discounted or auctioned price of the decoration and renovation project, the people's court shall support it", the contractor of the decoration and renovation project is also included, that is, this type of contractor also has priority compensation for the discounted or auctioned price of the decoration and renovation project.

3、 The scope of priority compensation for construction project prices

The scope of engineering price priority refers to the items included in the engineering price priority, in short, which items can be prioritized for compensation. According to Article 40 of the Judicial Interpretation on New Construction Projects (I), "The scope of priority compensation for the contractor's construction project price shall be determined in accordance with the regulations of the relevant administrative department of the State Council on the scope of construction project price. If the contractor claims priority compensation for interest, liquidated damages, damages, etc. for overdue payment of construction project price, the people's court shall not support it." This provision stipulates that the scope of construction project price shall be determined by the administrative department and clarifies that interest, liquidated damages, and damages do not belong to the project price.

According to Article 5 of the Interim Provisions on the Management of Construction Contract and Contracting Prices, the engineering price is composed of costs (direct and indirect costs), profits (remuneration), and taxes.

Therefore, according to existing legal provisions, the scope of priority for engineering price includes costs (direct costs, indirect costs), profits (remuneration), and taxes, but does not include interest, liquidated damages, and compensation for damages.

4、 Analysis of the Exercise Period and Starting Point of Priority Compensation Right for Construction Project Price

（1） Regarding the deadline for exercising the priority right to compensation

According to Chinese laws and regulations, the maximum period for exercising the priority right to compensation for construction projects shall not exceed 18 months, and these 18 months belong to the exclusion period, which shall not be subject to rules such as interruption or suspension. [6] Therefore, in practice, how to accurately define the starting point of priority compensation for construction projects is a difficult point in handling cases.

（2） Analysis of starting point determination

The determination of the date on which the construction project price should be paid needs to be objectively judged based on the specific actual case. The following three situations are discussed:

(1) There are corresponding agreements between the parties involved

If the contract specifies the payment time for the project funds, in accordance with the principle of "autonomy of will", the parties' agreement should be followed.

(2) The situation where the contract is invalid

According to Article 793, Paragraph 1 of the Civil Code of the People's Republic of China, "If a construction contract is invalid, but the construction project is accepted as qualified, the contractor may be compensated at a discounted price in accordance with the provisions of the contract regarding the project price. The contractor may request payment of the project price in accordance with the provisions of the contract, or may request payment of the project price from the employer in accordance with the payment method and date specified in the contract

(3) The situation of contract termination or termination of performance

In this situation, the due date for engineering payments should be determined based on specific circumstances. After the termination of the contract, if the quality of the completed construction project is qualified, according to Article 806 (3) of the Civil Code of the People's Republic of China, if the quality of the completed construction project is qualified after the termination of the contract, the employer shall pay the corresponding project price as agreed; If the quality of the completed construction project is unqualified, it shall be handled in accordance with the provisions of Article 793 of this Law. It should be noted that in practice, most contracts are terminated or terminated when the project is not yet completed and the agreed upon settlement conditions for the project price have not been met. If the employer and the contractor reach a separate agreement on the payment of the project price after the termination of the contract, they should respect the parties' autonomy of will and use the agreed payment time of the project price as the starting time for priority compensation. If a supplementary agreement is signed, a new payment time for the project price should be agreed upon. And in the vast majority of cases, there will be disputes between the two parties regarding the amount of project funds, which require appraisal. If the parties formally claim their rights to judicial or arbitration institutions, and the people's court and arbitration institution confirm that the employer owes the contractor the project funds, the date of payment shall be calculated from the date of filing the lawsuit by the parties.

5、 The Exercise Method of Priority Compensation Right for Construction Project Price

The current laws, regulations, and judicial interpretations do not restrict the exercise of the priority right to compensation for construction project prices. In judicial practice, most contractors will also request confirmation of priority rights in litigation for the recovery of engineering costs. However, there are also disputes over priority compensation rights for construction engineering costs. The plaintiff will request the court to confirm the defendant's priority compensation rights for the engineering costs as a single litigation request, and there are many cases where the litigation request has been supported, such as (2023) E 0104 Min Chu 2943 and (2019) China International Economic and Trade Arbitration Commission Jing Zai Zi No. 0415.

At the same time, in the judgment (2019) Su 0104 Min Chu 12338 issued in Qinhuai District, Nanjing City, the plaintiff claims priority for compensation in a separate case. The main point of the judgment is: "When the plaintiff filed a lawsuit claiming engineering debts on December 20, 2016, they did not also claim the priority right to be compensated. It was not until this lawsuit that the plaintiff claimed their priority right to be compensated for the construction project price through litigation, and their exercise time had already exceeded the six-month period stipulated by law. Therefore, this court does not support the plaintiff's claim to confirm their priority right to be compensated for the construction project price. As for the plaintiff's claim that their correspondence with the defendant has confirmed their priority right to be compensated, this court believes that the correspondence between the plaintiff and the defendant does not have the effect of publicizing to the public. If the priority right to be compensated is confirmed in the form of correspondence, there is a suspicion of infringing on the interests of other creditors. The exercise of the priority right to be compensated should be carried out in the form of correspondence. Strictly grasping, therefore, this court does not adopt the plaintiff's above claims The judgment stated that the court supported the claim of priority for compensation in another case, but due to the plaintiff's failure to exercise their rights during the dismissal period, the lawsuit was rejected.

（1） Claim priority for compensation through litigation or arbitration

If the contracting party fails to pay the construction project price as agreed, the contractor has the right to exercise the priority right to be compensated for the construction project price through litigation or arbitration in accordance with the dispute resolution method stipulated in the construction contract, and request the judicial authority to confirm that the contractor has the priority right to be compensated for the construction project price within the scope of the project payment.

（2） Both parties shall negotiate to exercise the debt in the form of collateral

Both parties agree through negotiation to transfer ownership of the building to the contractor through methods such as using property as collateral or using work as collateral for the house. The collateral building serves as a tangible carrier of the engineering payment debt and should be protected in priority to other debts.

In the case of the Supreme People's Court's application for retrial of the execution objection lawsuit (No. 352, 2020), the Supreme People's Court pointed out that "in the case where the employer fails to pay the project price on time, the contractor can either obtain priority compensation for the construction project auction price through the court auction procedure, or offset the construction project price at a discounted price through negotiation with the employer." "The employer and the contractor signed an" Agreement ", agreeing to offset the unpaid project price with the house involved in the case, and the contractor purchased the house involved in the case by offsetting the project price. Its essence is to realize the contractor's priority compensation right for the construction project price of the house involved in the case through negotiation and discounted compensation, which is in line with Article 200 of the Contract Law of the People's Republic of China. Article 86 (now Article 807 of the Civil Code of the People's Republic of China) The implementation method of the priority right to compensation for the prescribed project price.

From this, it can be seen that under the premise of negotiation and signing of corresponding agreements between the contracting party and the contractor, the priority right to be compensated for the construction project price can be exercised through the method of "using property as collateral".

（3） Submit a priority claim for compensation to the executing court

According to Article 1 of the Reply of the Supreme People's Court on the Priority of Compensation for Construction Project Prices, the effectiveness of the priority of compensation for construction project prices shall prevail over the mortgage rights established on the construction project and the ordinary creditor's rights enjoyed by other creditors of the contractor. The people's court may take compulsory enforcement actions against the construction project based on the application of other creditors or mortgagees of the contractor, which will have an impact on the contractor's priority right to receive payment of the construction project price. At this time, if the contractor claims to the executing court that they have the priority right to be compensated for the construction project price, it is a legal way to exercise the priority right to be compensated for the construction project price.

（4） Claiming priority for repayment to the bankruptcy administrator

According to the Enterprise Bankruptcy Law of the People's Republic of China, in the event of bankruptcy of the contracting party, the right holder who enjoys the priority of receiving payment for the construction project price may claim this right from the bankruptcy administrator.

Creditors who claim the priority right to be compensated for the construction project price to the bankruptcy administrator must declare the construction project debt to the administrator in accordance with the law and also claim the priority right to be compensated for the construction project price. When determining, the administrator also needs to analyze and review four key points: the exercising subject, the exercising conditions, the exercising period, and the scope of the priority right to be compensated for the construction project price. After analysis and review by the manager, it is possible to determine the priority right.

（5） Contractor's letter of claim for priority of compensation (dispute)

There are different opinions and understandings among different courts regarding the exercise of this right by letter. Although some courts recognize that self notification can be used as a way to exercise priority compensation rights, the scrutiny of the content of the notification is not strict; Some courts believe that the self notification method is not an effective way to exercise the priority right of construction project price, and cannot prove that the contractor exercised the priority right within the statutory period. Therefore, simply declaring priority for compensation through a letter may not necessarily be supported by the court.

（6） If the priority right to compensation is not confirmed during the mediation of the case, can the priority right to compensation be claimed through another lawsuit

If the plaintiff does not determine in the mediation agreement that they have a priority right to compensation for the project involved in the case, there may be corresponding legal risks in confirming the priority right in the mediation agreement. Therefore, in order to determine the priority of compensation for construction projects in the case mediation statement, the plaintiff should pay attention to the fact that in the mediation record of this case, the plaintiff should insist on making clear that the priority of compensation for projects involved in the case should be handled in a separate case or retain the corresponding rights, and not abandon the claim of priority of construction projects, so as to avoid obstacles in the subsequent handling of priority of compensation for projects in a separate case. In the judgment (2020) Su 01 Min Zhong 6038, the Nanjing Intermediate People's Court held that "the appeal claim that the respondent has waived the priority right to compensation should be deemed valid, and this court supports it, as the Huaqiao Hujiang Company's civil mediation agreement (2014) Ning Min Chu Zi No. 70 did not confirm that Zhongjun Company has the priority right to compensation

References and comments (slide down to view)

[1] Refer to Cui Jianyuan's "On the Priority of Compensation for Construction Project Prices", published in the 6th issue of "Legal and Commercial Research" in 2022, pages 126-141.

[2] The First Civil Division of the Supreme People's Court: Understanding and Application of Judicial Interpretation (II) on Construction Contracts of the Supreme People's Court, People's Court Press, 2019 edition, pages 369-370.

[3] Refer to Song Huipu: "Research on the Difficult Issues of Priority Compensation Rights for Construction Project Prices", published in the 6th issue of "Application of Law" in 2021, pages 155-162.

[4] Refer to the Interim Measures for Settlement of Construction Project Prices: "The costs required for construction and installation projects do not include the value of the installed equipment itself that should be included in the equipment purchase cost.

[5] The First Civil Trial Division of the Supreme People's Court: "Judicial Interpretation of the Supreme People's Court on Construction Contracts for New Construction Projects (1) Understanding and Application", People's Court Press, 2021 edition, page 359.

[6] Refer to Article 41 of the Judicial Interpretation on New Construction Projects (I): The contractor shall exercise the priority right to be compensated for the construction project price within a reasonable period of time, but not exceeding 18 months, starting from the date on which the contractor shall pay the construction project price.

[7] Article 793 of the Civil Code of the People's Republic of China: If a construction contract is invalid, but the construction project is accepted as qualified, the contractor may be compensated at a discounted price in accordance with the provisions of the contract regarding the project price. If the construction contract of a construction project is invalid and the construction project experience is not qualified, the following situations shall be handled: (1) If the repaired construction project is accepted as qualified, the employer may request the contractor to bear the repair costs; （2） If the repaired construction project fails to meet the required standards, the contractor has no right to request compensation at a discounted price in accordance with the provisions of the contract regarding the project price. If the employer is at fault for the losses caused by the unqualified construction project, they shall bear corresponding responsibilities.