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Over the past 30 years, with the large-scale urbanization process in China, the real estate and construction industries have developed at a high speed. Their proportion in the national economy has been rising continuously, and their status as pillar industries and supporting roles have become increasingly prominent. According to the latest data released by the National Bureau of Statistics of China, from January to June 2023, the total output value of the construction industry nationwide reached as high as RMB 13.23 trillion, and the floor area of buildings under construction nationwide hit 11.78 billion square meters.

Against the backdrop of such a large-scale industry, the standardization level of the construction industry still remains relatively lagging. The long-standing "labor contractor" model is still active in the current industry landscape. The existence of the labor contractor model is inextricably linked to the low market concentration, low professional competence, excessive low-level competition and rent-seeking phenomena in China's current construction industry. The disorderly entry of labor contractor teams into the construction market has aggravated the excessive low-level competition in the construction field, and posed huge obstacles to the sound and orderly development of the real estate and construction industries.

At present, the maintenance of the order of China's construction market, the protection of the legitimate rights and interests of key participants in construction projects, and the regulation of legal acts concerning the letting and contracting of construction projects mainly rely on laws and regulations including the *Civil Code of the People's Republic of China*, *Construction Law of the People's Republic of China*, *Law of the People's Republic of China on Tenders and Bids*, *Regulation on the Quality Management of Construction Projects*, and *Regulation on the Work Safety Management of Construction Projects*. The state imposes strict requirements on the qualifications, contracting scope, management capacity, staffing and fund allocation of enterprises engaged in the construction industry. However, the high-threshold market access has not stopped the "labor contractors", and a large number of illegal letting and contracting acts still prevail in the market, which are mainly manifested as contract transfer, nominal affiliation and illegal subcontracting, reflecting to a certain extent that there is certain market demand for such acts. To adapt to the actual conditions of China's construction industry, China's legislative and judicial authorities have gradually recognized the internal contracting system for construction enterprises, which has been widely applied in engineering practice and is essentially a flexible accommodation to the construction qualification requirements. Even so, many labor contractors still act under the guise of internal contractors to pursue "mutual benefits" with construction enterprises. The construction enterprise only needs to cooperate in seal use and fund transfer to collect a considerable amount of "management fees", while the entire actual construction of the project is organized and carried out by the labor contractor. The aforesaid illegal internal contracting often leads to the invalidity of a series of construction contracts, which further triggers a large number of disputes over project quality, settlement, arrears owed to migrant workers and material suppliers, exerting severe negative impacts on people's livelihood, economy and social stability. According to search results of keywords such as internal contracting, illegality and contract invalidity on China Judgments Online, there have been 7,523 relevant cases nationwide in the past three years, including 3,339 cases of first instance. After a random sampling of 300 cases, 223 cases were identified as illegal internal contracting, with the contracts between the letting parties and contracting parties ruled invalid. Many construction enterprises have consulted the author on why the state-permitted internal contracting is determined as illegal by the people's courts. This article carries out analysis and discussion only from the aspects of the origin of China's internal contracting system, the circumstances, manifestations and legal consequences of illegal internal contracting, for reference only.

The Origin of Internal Contracting in China

In 1987, the former State Planning Commission, the Ministry of Finance and other relevant departments of China jointly issued the *Several Provisions on Reforming the Operation Mechanism of State-owned Construction Enterprises*. Article 2 of the Provisions stipulates that: A construction enterprise may, in light of the different conditions of the contracted projects and in accordance with the principle of appropriate separation of ownership and management rights, implement a multi-tiered, multi-form internal contract operation responsibility system within the enterprise, so as to motivate the initiative of grass-roots construction units. It may organize mixed-trade squads or professional contracting teams to contract for unit projects and adopt independent internal accounting; it may also arrange for existing construction teams to conduct collective contracting, with the teams responsible for their own profits and losses. No matter which contracting method is adopted, a contracting contract shall be concluded to explicitly define the relationship of rights, obligations and interests between the two parties. Since then, internal contracting has entered the historical stage of China.

Subsequently in 1995, the Ministry of Construction of China issued the *Administrative Measures for the Qualification Management of Project Managers of Construction Enterprises*, Article 8 of which stipulates that: In the process of managing the construction of undertaken engineering projects, a project manager shall, in accordance with the construction contract concluded between the construction enterprise and the project owner, sign a project contracting contract with the legal representative of his or her enterprise, and exercise the following management powers within the scope of authorization granted by the legal representative of the enterprise: (1) To organize the project management team; (2) To handle external relations related to the undertaken engineering project in the capacity of the representative of the enterprise's legal representative, and sign relevant contracts upon entrustment; (3) To direct the production and operation activities of the engineering project construction, allocate and manage production factors such as human resources, funds, materials, machinery and equipment deployed for the engineering project; (4) To select construction operation teams; (5) To carry out reasonable economic distribution; (6) Other management powers granted by the legal representative of the enterprise.

The 1987 Provisions were formulated against the historical background of that time, when state-owned enterprises (SOEs) held a dominant position in China. The internal contracting system promoted by construction entities was mainly aimed at realizing the separation of ownership and operation rights of SOEs, so as to grant operators more operational autonomy. The 1995 Measures stipulated that a project manager shall sign a project contracting contract with the legal representative of the enterprise, so as to define the rights and obligations of the construction enterprise and the project manager during project implementation in the form of a contract.

Circumstances and Legal Consequences of Illegal Internal Contracting

1. It is denominated as internal contracting, but actually constitutes subcontracting.

Legal Consequences

Between the Contractor (Subcontractor) and the Sub-subcontractor:

(1) The Internal Contracting Contract between the contractor and the subcontractor is null and void.

(2) Where the construction project is of qualified quality, the subcontractee may request the contractor to pay the construction funds with reference to the stipulations on project price agreed in the *Internal Contracting Contract*.

(3) Where a construction contract for construction projects is invalid due to illegal subcontracting, the handling of the management fee agreed in the contract to be collected by the contractor shall be specifically determined in light of the facts of the individual case, the purpose of the contract and other specific circumstances. 1. Where the aforementioned management fee constitutes an integral part of the project price, and the contractor has actually participated in the organization, management and coordination of construction activities, the relevant matter may be handled with reference to the stipulations of the contract; 2. Where the contractor merely seeks profits through subcontracting without actually participating in the organization, management and coordination of construction activities, and claims the management fee after the contract is confirmed invalid, such claim shall not be supported; 3. Where a party to the contract claims adjustment of the project price on the ground that the management fee as part of the project price shall be confiscated, such claim shall not be supported; 4. Based on the privity of contract, a non-party to the contract shall not claim adjustment of the payable project payment on the basis of the agreement on management fee between the contractor and the subcontractor.

Between the contract-awarding party, the contractor and the subcontractor:

(4) The "General Construction Contract" between the Employer and the Contractor is valid;

(5) The Employer shall have the right to rescind the contract, and may terminate the General Construction Contract concluded with the Contractor by exercising such right.

(6) The contractor may claim payment of the construction project price from the employer pursuant to a valid General Construction Contract.

(7) Where the quality of a construction project is qualified, the subcontractor may request the employer to pay the construction payment with reference to the provisions on project price as specified in the invalid *Internal Contracting Contract*.

(8) The contractor and the subcontractor shall bear joint and several compensation liability to the employer for losses arising from construction quality problems.

Between the Contractor, the Subcontractor and the Third Party

(9) The Material Purchase Contract and the Machinery Lease Contract shall be valid; the validity of the Construction Contract shall be determined in light of specific circumstances.

(10) Where a contract is concluded in the name of the contractor, the contractor shall generally bear external liability; however, the contractor shall be entitled to recourse against the subcontractor.

(11) Where a contract is executed in the name of the subcontractor, the subcontractor shall generally assume liability to third parties; (except for cases of apparent agency)

2. It is nominally internal contracting, but actually constitutes affiliation.

Legal Consequences

Between the Contractor and the Affiliated Party:

(1) The Internal Contract concluded between the contractor and the affiliating party shall be null and void.

(2) The contractor shall only bear the obligation to forward the construction project payment. Where the employer defaults in paying the construction project payment payable to the affiliated party for reasons attributable to the employer, the contractor shall not be liable for such payment.

(3) Where a construction project construction contract is rendered void due to affiliation, the management fee stipulated in the contract to be collected by the contractor shall be handled in the same manner as that in the case of transfer of the whole contract.

Among the Employer, the Contractor and the Affiliated Party:

(4) The "General Construction Contract" between the Employer and the Contractor is valid;

(5) Where the employer is aware that the affiliating party carries out construction by borrowing the construction qualification of the affiliated party, a de facto construction project contractual relationship is formed between the employer and the affiliating party, and the affiliated party shall withdraw from the aforesaid construction project contractual relationship.

(6) Where the party awarding the contract has accepted the work achievements of the affiliated party, thereby giving rise to the corresponding payment obligation, the affiliated party may request the party awarding the contract to pay the construction project payment.

(7) The affiliated party and the contractor shall bear joint and several compensation liability to the employer for losses caused by the lending of qualifications, such as losses arising from defective construction quality.

Between the contractor, the affiliated party and a third party, the legal consequences of affiliation are identical to those of contract assignment.

3. What is nominally referred to as internal contracting is in effect illegal subcontracting.

Legal Consequences

Between the contractor and the illegal subcontractor:

(1) The "Internal Contract" concluded between the contractor and the illegal subcontractor is null and void.

(2) Where a construction project is qualified in terms of quality, an illegal subcontractor may request the contractor to pay construction funds with reference to the stipulations on construction project price as set forth in the *Internal Construction Contract*.

(3) Where a construction contract for construction projects is void due to illegal subcontracting, the handling of the management fee stipulated in the contract to be collected by the contractor shall be the same as that in the case of contract transfer.

Between the employer, the contractor and the illegal subcontractor:

(4) The "General Construction Contract" between the Employer and the Contractor is valid;

(5) The Employer shall have the right to rescind the contract, and may terminate the General Construction Contract concluded with the Contractor by exercising such right.

(6) The contractor may claim payment of the construction project price from the employer pursuant to a valid General Construction Contract.

(7) Where the quality of a construction project is qualified, the illegal subcontractor may request the employer to pay the construction project price with reference to the stipulations on construction project price in the void Internal Contracting Agreement.

(8) The contractor and the illegal contractor shall bear joint and several liability for compensation to the employer for losses caused by construction quality defects.

As between the contractor, the illegal subcontractor and the third party, the legal consequences of illegal subcontracting shall be identical to those arising from illegal transfer of contracted works and qualification affiliation.

Legal Basis

Administrative Measures for the Determination, Investigation and Punishment of Illegal Acts in the Awarding and Contracting of Construction Projects (Jianshigui [2019] No. 1)

Article 7 For the purposes of these Measures, the term "contract transfer" refers to the act where a contracting unit, after undertaking a project, fails to perform the responsibilities and obligations as agreed in the contract, and transfers the whole project it has contracted, or divides the whole contracted project into parts and transfers them respectively to other units or individuals for construction in the name of subcontracting.

Article 8 Where any of the following circumstances exists, the relevant act shall be deemed as subcontracting, unless there is evidence proving that it falls under affiliation or other illegal acts.

(I) Where the contracting unit transfers the entire project it has contracted to other units (including the circumstance where a parent company, after undertaking a construction project, hands over the aforesaid project to its subsidiary with independent legal person qualification for construction) or individuals for construction;

(II) Where a contractor dismembers the entire project it has contracted and transfers each part thereof to other entities or individuals respectively for construction in the name of subcontracting;

(III) Where the construction general contracting entity or the specialized contracting entity fails to dispatch key management personnel such as the project principal, technical principal, quality management principal and safety management principal to the project; or where at least one of the dispatched project principal, technical principal, quality management principal and safety management principal has neither concluded a labor contract nor established labor wage payment and social endowment insurance contribution relationships with the construction entity; or where the dispatched project principal fails to organize and manage the construction activities of the said project and is unable to provide reasonable explanations and corresponding supporting evidence;

(4) Where the key construction materials, building components and fittings as well as engineering equipment that are agreed in the contract to be procured by the contracting unit, or the construction machinery and equipment that are agreed to be leased by the contracting unit, are procured or leased by any other entity or individual; or the construction unit is unable to produce relevant supporting documents such as procurement contracts, lease contracts and invoices, and fails to make reasonable explanations and provide corresponding supporting evidence.

(5) Where the scope of work contracted by the professional operation contractor covers the entire project contracted by the contracting unit, and the professional operation contractor obtains the full amount of construction project price excluding the "management fee" remitted to the contracting unit;

(VI) Where the contracting unit directly or in a disguised form transfers the entire project it has contracted to other units or individuals for construction, by means of or in the name of such forms as cooperation, joint operation, individual contracting, etc.

(VII) Where the contract-awarding entity for a specialized project is neither the general construction contractor nor the specialized contractor of the said project, except where the project owner acts as the contract-awarding entity pursuant to the contract;

(VIII) Where the entity awarding the professional work contract is not the contractor of the project concerned;

(9) There is no construction project payment collection and disbursement relationship between the parties to the construction contract, or the contracting entity transfers the relevant funds to other entities or individuals after receiving the payment, and fails to provide reasonable explanations and supporting documentary evidence for such act. Where two or more entities form a consortium to undertake a construction project, if it is agreed in the consortium work division agreement, or during the actual implementation of the project, one party to the consortium neither carries out construction work nor organizes and manages construction activities, and collects management fees or other similar fees from other parties to the consortium, such act shall be deemed as the said party subcontracting the contracted construction project to other parties to the consortium.

Article 9 For the purposes of these Measures, the term "affiliation" refers to the act whereby an entity or individual undertakes construction projects in the name of another qualified construction entity.

The term "project contracting" as mentioned in the preceding paragraph includes such activities as participating in bidding, concluding contracts, handling relevant construction formalities and engaging in construction.

Article 10 Any of the following circumstances shall be deemed as affiliation: (1) A unit or individual without construction qualification borrows the qualification of another construction unit to undertake projects; (2) Qualified construction units borrow qualifications from each other to undertake projects, including circumstances where a unit with a lower qualification level borrows the qualification of a unit with a higher qualification level, a unit with a higher qualification level borrows the qualification of a unit with a lower qualification level, or units with the same qualification level borrow qualifications from each other; (3) Circumstances specified in Items (3) to (9) of Paragraph 1 of Article 8 of these Measures, for which there is evidence to prove that they fall under affiliation.

Interpretation (I) of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Construction Project Construction Contracts

Article 1 Where a construction project construction contract falls under any of the following circumstances, it shall be determined as invalid pursuant to the provisions of Paragraph 1 of Article 153 of the Civil Code of China:

(I) The contractor has not obtained the construction enterprise qualification or exceeds its qualification grade;

(2) Where the actual constructor without corresponding qualifications borrows the name of a qualified construction enterprise;

(III) Where a construction project subject to mandatory tendering is not tendered, or the bid award is null and void.

A construction project contract concluded by a contractor with any other party through assignment of the entire contracted construction project or illegal subcontracting of the construction project shall be deemed invalid pursuant to the provisions of Paragraph 1 of Article 153, and Paragraphs 2 and 3 of Article 791 of the Civil Code of the People's Republic of China.

Article 7 Where an entity or individual without the requisite qualifications concludes a construction project construction contract in the name of a qualified construction enterprise, if the employer requests the qualification lending party and the qualification borrowing party to bear joint and several compensation liability for losses arising from the lending of qualifications, such as losses caused by the unqualified quality of the construction project, the people's court shall uphold such request.

Article 24 Where several construction contracts entered into by the parties for the same construction project are all null and void, but the construction project is of qualified quality, the people's court shall support the request of a party to compensate the contractor at a discounted price by reference to the provisions on project price in the actually performed contract.

Where the actually performed contract cannot be ascertained, if a party requests that the contractor be compensated at a discounted price with reference to the agreement on construction project price stipulated in the last executed contract, the people's court shall support such request.

Civil Code of the People's Republic of China

Article 172 Where an actor who has no power of agency, exceeds the scope of the power of agency, or whose power of agency has terminated, still performs an act of agency, and the counterparty has reasons to believe that the actor has the power of agency, the act of agency shall be valid.

Article 806 Where a contractor assigns the entire construction project to another person or illegally subcontracts part of the construction project to another person, the contract-offering party may rescind the contract.

Article 925 Where the mandatary, acting in its own name and within the scope of authority granted by the mandator, concludes a contract with a third party, and the third party is aware of the agency relationship between the mandatary and the mandator at the time of conclusion of the contract, the contract shall directly bind the mandator and the third party, unless there is conclusive evidence proving that the contract only binds the mandatary and the third party.

Minutes of the 7th Judges' Meeting (2020) of the Second Circuit Court of the Supreme People's Court

Where a contract for construction of construction projects is void due to illegal transfer of the entire contract, unlawful subcontracting, or affiliation, the handling of the "management fee" agreed in the contract to be collected by the transferor shall be determined on a case-by-case basis in light of the purpose of the contract and other specific circumstances. If the said "management fee" forms part of the project price, and the transferor has actually participated in the organization, management and coordination of construction works, the matter may be handled with reference to the stipulations of the contract. Where the transferor merely seeks profits through contract transfer without actual participation in the organization, management and coordination of construction works, and claims the "management fee" after the contract is confirmed void, such claim shall not be upheld. Where a party to the contract claims for adjustment of the project price on the ground that the "management fee" as part of the contract price shall be confiscated, such claim shall not be upheld. Based on the privity of contract, a non-party to the contract shall not claim adjustment of the payable project payment on the basis of the agreement on "management fee" concluded between the transferor and the transferee.

Answers of the Higher People's Court of Shaanxi Province on Several Issues concerning the Trial of Cases Involving Disputes over Construction Contracts for Construction Projects

13. How shall the case be handled where a qualification-borrowing constructor directly claims construction project payment from the employer?

Under normal circumstances, a qualification-borrowing construction contractor may only file a subrogation action when the qualification-lending party is remiss in exercising its rights. However, where the employer clearly knows the fact of qualification borrowing, the qualification-borrowing construction contractor may directly claim rights against the employer.

Answers of the Beijing High People's Court to Several Difficult Issues Concerning the Trial of Cases Involving Disputes over Construction Contracts for Construction Projects

20. How shall cases be handled where an affiliated constructor without the requisite construction qualifications claims payment of outstanding project funds? How shall cases be handled where the affiliated party further subcontracts or transfers the construction project to others for construction, and the constructor thereunder claims payment of outstanding project funds?

Where an unqualified actual constructor (also referred to as the affiliating constructor under an affiliation arrangement) affiliates itself to a qualified construction enterprise (the affiliated enterprise, i.e., the party accepting the affiliation) and enters into a construction contract for construction projects in the name of the said enterprise, if the affiliated enterprise is indolent in exercising its creditor's right to claim construction payment, the affiliating constructor may file a lawsuit in its own name to require the employer (project owner) to pay the construction payment. In principle, the people's court shall add the affiliated enterprise as a party to the proceedings, and the employer shall assume payment liability within the scope of the outstanding construction payment. For debts incurred from the performance of the construction contract, the affiliated enterprise and the affiliating constructor shall bear joint and several liability.

The Court's Opinion

(2018) Supreme People's Court Civil Final No. 391

The Court holds that:

As for the issues of how to determine the validity of the involved *Construction Project Construction Agreement* and whether Shen Guangfu is the actual constructor of the involved project, this Court holds that, the Metallurgical Company, Shoulashou Company and Shen Guangfu all filed claims to confirm the invalidity of the involved *Construction Project Construction Agreement*, and the Agreement is indeed confirmed invalid after trial. The reasons are as follows: First, Paragraph 1 of Article 40 of the *Law of the People's Republic of China on Urban and Rural Planning* stipulates that: "For the construction of buildings, structures, roads, pipelines and other projects within the planning areas of cities and towns, the construction entity or individual shall apply to the competent department of urban and rural planning of the people's government of the city or county, or to the people's government of the town determined by the people's government of the province, autonomous region or municipality directly under the Central Government for the Construction Project Planning Permit." Shoulashou Company and Changda Company signed the *Construction Project Construction Agreement* with the Metallurgical Company for the construction of the shoe industry center without obtaining the Construction Project Planning Permit, which violates the aforesaid legal provisions. In accordance with the provisions of Item 5 of Article 52 of the *Contract Law of the People's Republic of China* (hereinafter referred to as the Contract Law) that a contract violating mandatory provisions of laws is invalid, the Agreement shall be invalid. Second, the *Internal Contracting Agreement for Construction Project Construction* signed between the Metallurgical Company and Shen Guangfu is nominally internal contracting, but actually qualification borrowing. The involved *Construction Project Construction Agreement* is actually signed by Shen Guangfu by borrowing the qualification of the Metallurgical Company. First of all, from the perspective of Shen Guangfu's identity, there is no labor contract relationship between him and the Metallurgical Company, and he is not an internal staff of the Metallurgical Company, so the so-called "internal contracting" is obviously false. Furthermore, from the content of the *Internal Contracting Agreement for Construction Project Construction*, it is agreed that the rights and obligations of the Metallurgical Company under the *Construction Project Construction Agreement*, including project construction, quality, safety, settlement and other contents, shall be enjoyed and assumed by Shen Guangfu, and Shen Guangfu shall pay a management fee equal to 4% of the total project price to the Metallurgical Company. This shows that there is actually a qualification borrowing relationship between Shen Guangfu and the Metallurgical Company, and Shen Guangfu is the actual constructor of the involved project. In accordance with the provisions of Item 2 of Article 1 of the *Interpretation of the Supreme People's Court on the Application of Law in the Trial of Cases concerning Disputes over Construction Project Contracts* that a construction project contract signed by an unqualified actual constructor in the name of a qualified construction enterprise is invalid, the involved *Construction Project Construction Agreement* shall be invalid.

2. (2018) Supreme People's Court Civil Final No. 586

The Court holds that:

Guangsha Company is the illegal transferor of the project involved. Paragraph 3 of Article 78 of the *Regulations on the Quality Management of Construction Projects* stipulates that: "For the purpose of these Regulations, 'contract transfer' refers to the act where a contracting unit, after contracting a construction project, fails to perform the responsibilities and obligations agreed in the contract, transfers the entire construction project it has contracted to others, or dismembers the entire construction project it has contracted and transfers the dismembered parts to other units for contracting respectively under the name of subcontracting." Guangsha Company is identified as the illegal transferor in this case for the following specific reasons: 1. It received the project payment during the actual performance of the contract, and was identified as the "construction unit" in multiple documents, thus it shall be deemed as the nominal constructor of the project involved. 2. As the constructor of the project, Guangsha Company signed the *Internal Contract* with He Kaizhi in the name of its branch, contracting out the pavement works of No.7 Road, including cement-stabilized base course, asphalt pavement, sidewalk and curb stone, to He Kaizhi. The actual construction scope also covered No.2 Road. The aforesaid acts constitute a de facto full transfer of the project, and Guangsha Company did not actually perform the responsibilities and obligations agreed in the construction contract. He Kaizhi is a natural person who does not have the corresponding construction qualification. Pursuant to Article 4 of the *Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Disputes over Construction Project Construction Contracts*, "The acts of a contractor illegally transferring or illegally subcontracting a construction project, or an unqualified actual constructor concluding a construction project construction contract with others in the name of a qualified construction enterprise shall be invalid. The people's court may, in accordance with the provisions of Article 134 of the *General Principles of the Civil Law*, confiscate the illegal proceeds already obtained by the parties." The act of Guangsha Company falls into illegal project transfer, and its status is the illegal transferor.

3. (2015) Min Shen Zi No. 2872 (Civil Application for Retrial)

The Court holds that:

On the issue concerning the validity of the *Internal Contract*. After Dengda Company undertook the relevant projects contracted out by Rongsheng Company, the Hebei Branch of Dengda Company signed the *Internal Contract* with Wang Hong, subcontracting part of the projects to Wang Hong for construction. Dengda Company claims that Wang Hong is its employee, but fails to produce evidence such as the labor contract signed with Wang Hong or salary payment records that can directly prove the existence of labor relationship between the two parties. Dengda Company submitted payment vouchers, food expense lists, payrolls and agency vouchers in the original trial, but the aforesaid evidence can only prove that Wang Hong once participated in Dengda Company's Si County Flour Mill Project, and cannot prove the existence of a labor contractual relationship between the two parties. As Wang Hong is not an employee of Dengda Company, the *Internal Contract* signed by the two parties does not conform to the legal characteristics of internal contracting. The *Internal Contract* stipulates that the Hebei Branch of Dengda Company collects management fees, and after deducting relevant expenses including taxes, management fees and other related fees, Wang Hong shall assume all economic liabilities and be responsible for his own profits and losses. Such act violates the mandatory provisions of laws and administrative regulations, thus the *Internal Contract* signed by the two parties shall be determined as invalid. Dengda Company's claim that the *Internal Contract* is valid is untenable, and this Court shall not uphold it.