[Keywords] Construction Project; Nominal Contracting; Actual Contractor; Bidding and Tendering

【Key Points of the Ruling】

The construction contract for this project was directly entered into between the contracting party, a certain company in Dandong, and the actual contractor, Shi Moumou. The Shenyang-based company merely lent its qualification and provided nominal assistance to enable the two parties to achieve their contractual objectives; it did not participate in the negotiation or actual performance of the contract. Both the Dandong company and Shi Moumou were fully aware of this fact. Since the practice of individuals borrowing qualifications to undertake construction projects violates the mandatory provisions of laws and administrative regulations, all relevant construction contracts and agreements entered into among the Dandong company, Shi Moumou, and the Shenyang-based company are invalid. According to the relevant judicial interpretations issued by the Supreme People's Court, as the actual contractor of the disputed project in this case, Shi Moumou, despite the invalidity of the construction contract, is still entitled—under the premise that the contract is invalid—to claim payment for the completed work volume from the contracting party and the counterparty, the Dandong company, based on the settlement standards stipulated in the contract. However, his claim that the qualification-lending entity, the Shenyang-based company, should bear responsibility for paying the project sum has no legal basis.

[Basic Facts of the Case]

In June 2012, a company in Dandong issued a tender for the underground civil defense project of the Xin'an Underground Shopping Mall in Dandong (hereinafter referred to as the Xin'an Project), and a company from Shenyang won the bid.

On July 18, 2012, a company in Shenyang signed a “Construction Engineering Contract” with Shi Moumou, agreeing that the Shenyang company would authorize Shi Moumou to carry out all construction work on the Xin’an Project.

On August 25, a company in Dandong signed a Construction Contract with a company in Shenyang, under which the Xin’an Project was contracted to the Shenyang company. The supplementary agreement stipulates that the construction area is approximately 15,000 square meters, and the contract price is tentatively set at 75 million yuan. The commencement date is tentatively set for September 10, 2012, but the final commencement date shall be subject to the written notice from Party A. The total construction period is estimated to be 365 days. The project cost will be settled based on the actual quantities of work performed.

On October 11, in order to ensure the smooth progress of the Xin’an Project, a company in Dandong handed over to Shi Moumou a “Cost Analysis Table for the Xin’an Underground Civil Defense Project,” proposing that the project’s construction cost be calculated at a comprehensive unit price of 3,650 yuan per square meter and specifying the requirements and pending matters related to the Xin’an Project. Shi Moumou raised objections and submitted to the Dandong company a “Cost Analysis Table for the Xin’an Pedestrian Street Underground Civil Defense Project.” Based on an analysis of the items and related details listed in the Dandong company’s “Cost Analysis Table,” Shi Moumou proposed a comprehensive unit price of 4,050 yuan per square meter for the main project’s construction cost and provided detailed explanations regarding the relevant circumstances. After multiple rounds of negotiations between the two parties, on January 30, 2013, they signed a supplementary agreement (hereinafter referred to as “Supplementary Agreement No. 2”), which further specified the contents of Supplementary Agreement No. 1 concerning the scope of the Xin’an Project, the project schedule, the contracting method, and the payment settlement method for the project.

During the construction of the Xin’an project, Shi Moumou entered the construction site on June 23, 2012, as requested by a certain company in Dandong, to carry out preliminary engineering surveying and prepare for construction, awaiting the official start of work. However, as of the end of August, the project had still not commenced. On September 4, the Dandong-based company held a meeting to brief on the project’s status, informing that the originally planned continuous construction schedule for the Xin’an project could no longer be implemented, and that specific construction work would need to proceed in phased segments. At the same time, the Dandong-based company agreed to pay Shi Moumou an indemnity of 500,000 RMB for the downtime incurred due to his earlier entry onto the site without the project having started.

On March 8, 2014, the foundation and main structure of the Xin’an Project, constructed by Shi Moumou, were completed, and a request was submitted for inspection and acceptance. By May 17, after a comprehensive inspection and acceptance of the Xin’an Project conducted by all participating parties, it was determined that the project met the standards for quality inspection and assessment and thus passed the acceptance test. After the Xin’an Project successfully passed inspection and acceptance, a certain company in Dandong began using the project for subsequent renovation and sale. Shi Moumou argued that the Dandong company and a certain company in Shenyang had failed to pay his construction fees, thereby infringing upon his legitimate rights and interests. Consequently, Shi Moumou filed this lawsuit. After trial, the court of first instance held that the Shenyang company should not be held liable for compensation.

Both Shi Moumou and the Dandong company appealed the first-instance judgment to the Liaoning Provincial Higher People’s Court. The second-instance court held that the Shenyang company had merely lent its qualification and was not a party to the contract, and both Shi Moumou and the Dandong company were fully aware of this fact. Therefore, the court dismissed the appeal filed by the Dandong company and Shi Moumou seeking payment of the project funds from the Shenyang company.

【Judgment Result】

A certain company in Shenyang assumes no responsibility.

【Reasoning of the Ruling】

This case involves a dispute over a construction project contracting agreement, directly arising between the project owner, a certain company in Dandong, and the actual contractor, Shi Moumou. The Shenyang-based company merely lent its qualification and provided its name to assist the two parties in achieving the purpose of the contract; it did not participate in the negotiation or actual performance of the contract, a fact that both the Dandong company and Shi Moumou were fully aware of. Since the practice of individuals borrowing qualifications to undertake construction projects violates the mandatory provisions of laws and administrative regulations, all relevant construction contracts and agreements entered into among the Dandong company, Shi Moumou, and the Shenyang-based company are invalid. According to the relevant judicial interpretations issued by the Supreme People's Court, as the actual contractor of the disputed project in this case, Shi Moumou, despite the invalidity of the construction contract, still has the right, based on the agreed-upon settlement standards in the contract, to claim payment for the completed work volume from both the project owner and the contractual counterparty, the Dandong company. However, his claim that the qualification-lending party, the Shenyang-based company, should bear responsibility for paying the project sum lacks legal basis and is therefore not supported.

In summary, the second-instance court holds that the appeal filed by Shi Moumou and a certain company in Dandong, seeking compensation from a certain company in Shenyang, is unfounded. Therefore, by judgment in accordance with the law, a certain company in Shenyang shall not bear any liability.

【Relevant Statutes】

    Interpretation of the Supreme People's Court on the Application of Law in Adjudicating Disputes over Construction Project Contracting Contracts  

[Lawyer’s Perspective]

We believe that the relationship between a certain company in Shenyang and Mr. Shi is neither a subcontracting nor a sub-subcontracting arrangement, nor an internal contracting relationship. Therefore, the Shenyang company should not bear responsibility for paying the project funds. The specific reasons are as follows:

1. The project in question was first contracted by the actual contractor, and later construction was carried out under the name of a certain company in Shenyang.

With regard to the “Notice of Award” submitted by Shi Moumou, the notice indicates that the “procurement method” was “invitation bidding,” the “project owner” was “a certain company in Dandong,” and the “winning bidder” was “Jinling Construction Group of Jiangsu Province.” The “project manager” of the winning bidder was “Shi Moumou,” and the “project name” was “Xin’an Pedestrian Street Underground Commercial Street in Yuanbao District, Dandong City (the project involved in the litigation).” The date of the Notice of Award was “June 19, 2012.” From the above-mentioned information, it can be seen that as early as June 19, 2012, the aforementioned company in Dandong had already conducted an independent bidding process, and at that time, the so-called “project manager” of the winning bidder was indeed Shi Moumou. Moreover, since the procurement method for this bidding was invitation bidding, from a practical perspective, the bidding entity—the company in Dandong—enjoyed decisive authority over the selection of the winning bidder. Therefore, it can be determined that the company in Dandong had from the very beginning decided to assign the project involved in the litigation to the actual contractor, Shi Moumou, and only later did it designate Shi Moumou to carry out the construction under the name of a certain company in Shenyang. (Note: All bidding documents and other materials submitted by Shi Moumou to your court were subsequently prepared by a bidding agency separately commissioned by the company in Dandong; moreover, the relevant bidding and tender documents were first made available to the company in Shenyang only during the exchange of evidence among the parties after the litigation had begun, when they were obtained from the company in Dandong. Furthermore, there are clear signs of forgery in the tender documents themselves.)

Accordingly, when the Dandong-based company—the construction entity—once again launched a tender for the project in question, although it had formally changed the winning bidder, it was quite evident that Shi Moumou had already been designated by the Dandong-based company as the actual contractor. Moreover, the Dandong-based company had long been aware of Shi Moumou’s true identity and the substantive relationship that subsequently developed between Shi Moumou and a certain company in Shenyang. In fact, Shi Moumou had already secured the contract for the project prior to the tendering process; the subsequent bidding, tendering, and construction were merely carried out under the name of the Shenyang-based company.

II. The relationship between a certain company in Shenyang and Shi Moumou is neither a subcontracting nor a sub-subcontracting arrangement, nor is it an internal contracting relationship.

The “Construction Engineering Contract” previously signed between a certain company in Shenyang and Mr. Shi stipulates in detail the arrangement under which Mr. Shi borrowed the name of the Shenyang company to carry out construction work. Specifically, Article 1, Clause 3 provides: “Contract Price: Provisionally set at RMB 75 million; the final amount shall be determined by the actual settlement between Party B (Mr. Shi) and the project owner (a certain company in Dandong).” Article 5 states: “1. Party B (Mr. Shi) shall undertake the Dandong project in the name of Party A (the Shenyang company)… 2. Party A shall provide Party B with the materials required for undertaking the Dandong project according to Party B’s requests, including but not limited to Party A’s business license and qualification certificates, as well as relevant documents needed for project filing and approval, and shall guarantee the authenticity and validity of all such documents and materials. Party A shall promptly assist Party B in handling procedures related to project bidding, contract signing, and obtaining necessary permits for construction, with all associated costs borne by Party B.” Article 9 further clarifies: “Party B (Mr. Shi) under this agreement is the actual contractor for the Dandong project…” From the above provisions, it is evident that Mr. Shi is not an employee of the Shenyang company. With regard to the project in question, Mr. Shi merely borrowed the Shenyang company’s qualifications and carried out construction work in the name of the Shenyang company. During the construction period, Mr. Shi was solely responsible for investment, procurement, leasing, management, independent accounting, and bearing his own profits and losses. The Shenyang company is only the nominal contractor and does not actually participate in either the initial project acquisition or the construction itself, nor does it derive any construction-related benefits from the project in question. Therefore, there exists neither a subcontracting nor a sub-subcontracting relationship, nor an internal contracting relationship between the Shenyang company and Mr. Shi. Consequently, the Shenyang company should not be designated as the party responsible for payment of project funds, nor should it bear any obligation to make such payments. We respectfully request your court to dismiss Mr. Shi’s claims against the Shenyang company.

III. Regarding the prosecution of criminal liability.

The bidding documents submitted by Shi Moumou during the trial in this case—including, but not limited to, the bid letter, the certificate of identity of the legal representative, the power of attorney, and the document detailing the total bid price—have been verified by us and found not to have been affixed with the official seal of a certain company in Shenyang. Moreover, the said company in Shenyang is completely unaware of these documents. The aforementioned documents are suspected of having been forged using the company’s seal; therefore, the company in Shenyang reserves the right at any time to pursue criminal liability against the entities responsible for forging its seal.

This case is a typical construction engineering contract dispute involving a substantial amount of money and a complex set of circumstances. In judicial practice, the actual contractor usually seeks payment for the project from the entity under whose name the contract was ostensibly executed, demanding that the latter bear responsibility. However, in this particular case, Shi, the actual contractor, sought payment from a Shenyang-based company that had lent him its qualification—but his claim was ultimately rejected by the court. To safeguard the legitimate rights and interests of its client, the Shenyang-based company, the agent conducted thorough investigations and evidence collection, carefully analyzed the case, meticulously untangled the legal relationships, and advanced step by step. The agent discovered that the construction entity, Dandong-based Company, had conducted two separate bidding processes for the project in question. Moreover, during the first bidding process, the “project manager” of the winning bidder turned out to be none other than Shi, the actual contractor in this case. Based on this finding, the agent clearly explained to both the primary and appellate courts that although Dandong-based Company conducted another bidding process for the same project and changed the nominally winning bidder, it was abundantly clear that Shi was, in fact, the real contractor. Dandong-based Company had long ago designated Shi as the actual contractor, and it had been fully aware of Shi’s true identity and the substantive relationship between Shi and the Shenyang-based company. Furthermore, Shi had already secured the project contract prior to using the Shenyang-based company’s name for bidding and construction purposes. It was also established that there was no sub-contracting, subcontracting, or internal contracting relationship between the Shenyang-based company—acting as the shell entity—and Shi. As a result, the agent’s arguments were upheld by both the primary and appellate courts, ultimately protecting the legitimate rights and interests of the Shenyang-based company, which was not held liable in any way. This case holds significant forward-looking value and provides important guidance for the legal application of construction project payment issues in the construction industry.

This case covers several substantive and procedural disputes in the field of construction engineering. In judicial practice, when the actual contractor seeks payment from the project owner, they often demand that the entity being used as a front (the "fronting unit") assume joint and several liability. If the fronting unit fails to preserve necessary evidence during the actual execution of the project, it may end up losing much more than it gains, suffering substantial losses as a result. Therefore, to mitigate potential risks, we recommend that the fronting unit do its utmost to reduce the phenomenon of fronting. If fronting is truly unavoidable, the fronting unit should also require the actual contractor to provide a written statement clearly defining the relationship among the actual contractor, the fronting unit, and the project owner.