China Construction and Engineering Disputes: A Guide for Foreign Contractors

The legal framework

Construction and engineering contracts are governed by Chapter 18 of Part III (Contracts) of the PRC Civil Code, in force since January 1, 2021 (Articles 788 to 808), together with the Supreme People's Court's Interpretation (I) on construction contract disputes (Fa Shi [2020] No. 25, effective January 1, 2021). A construction contract is one in which the contractor carries out the works and the employer pays the price, and it covers survey, design and construction.

An invalid contract can still give a claim

A construction contract is invalid where the contractor lacks the required qualification or exceeds it, borrows another's qualification (a "linked" or hung-up arrangement), or where a project that must be tendered was not properly tendered; sub-contracting and illegal sub-contracting can also invalidate the contract (Interpretation I, Article 1). Crucially, under Civil Code Article 793, even an invalid contract supports a claim: if the works pass acceptance, the contractor may be compensated by reference to the agreed price, and if defects are remedied the employer bears the repair costs it caused.

The construction payment priority right

Under Civil Code Article 807, where the employer fails to pay, the contractor may demand payment within a reasonable period and then apply to the court to auction the project, with priority of payment from the proceeds. The Interpretation refines this in important ways:

• Priority over mortgages and other claims (Article 36): the construction payment priority right ranks ahead of mortgages and other claims on the same project.
• Who may assert it (Article 35): only a contractor that contracted directly with the employer; a sub-contractor or actual builder generally cannot.
• What it covers (Article 40): the construction price, but not interest, liquidated damages or damages.
• 18-month deadline (Article 41): the right must be exercised within 18 months from the date the employer became obliged to pay — a bar period, not subject to suspension or extension, so missing it turns the claim into an ordinary unsecured one.
• Waivers are constrained (Article 42): a clause abandoning or limiting the right cannot be relied on where it harms the interests of construction workers.

Recovering payment: the sequence

First, fix the evidence: site instructions and variation orders, quantity confirmations (签证) and the settlement or final account. Then demand payment in writing and preserve the demand. If payment does not follow, assert the priority right within 18 months — in practice the start date can turn on when the final installment fell due or when the account was settled, so it is safer to act early than to litigate the start date. An actual builder may also claim against the employer in the amount the employer still owes the contractor, and may bring a subrogation action (Interpretation I, Articles 43–44).

Quality disputes and defects

Where defects are attributable to the contractor, the employer may require repair, rework or reconstruction within a reasonable period (Civil Code Article 801), and quality disputes interact with the retention-money and warranty regimes. Distinguish the invalidity compensation rule of Article 793 from the separate quality-liability rule of Article 801 — they answer different questions and are often confused in negotiation.

Foreign contractors, FIDIC and arbitration

Chinese law has no special regime for FIDIC forms; they are used as international practice, with their DAB/DAAB and arbitration provisions, and the parties' choice of law and arbitration is respected for foreign-related contracts. A foreign arbitral award is generally enforceable in China under the New York Convention, which China acceded to in 1987, and is usually more predictable than enforcing a foreign court judgment. A foreign contractor that actually performs works in China must still satisfy the qualification and foreign-investment access requirements, so structure and licensing should be checked at the start, not in the dispute. Our dispute resolution team handles construction claims through negotiation, litigation and arbitration.