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Adjudication Rules:

After the employer and the contractor execute a legally valid Construction Contract for Construction Projects, they enter into a Supplementary Agreement on the basis of the original contract to further specify and supplement matters such as project settlement methods, payment methods and negotiated modifications. Provided that there is no substantive alteration to the contract, all the aforesaid agreements are the expression of the true intent of both parties and do not violate the mandatory provisions of laws and regulations, both the original contract and the Supplementary Agreement shall be valid.

[Reference Cases]

Case Name: Dispute over Construction Project Construction Contract between Zunhua Tianzhirun Real Estate Development Co., Ltd. and Nantong Xinhua Construction Group Co., Ltd.

Case No. (2019) Min Zhong No. 3, Supreme People's Court

【Case Brief】

Around January 2008, Xinhua Company and Tianzhirun Company signed a *Construction Contract for Construction Projects* in respect of the Phase III Project of Tianzhirun Beitai Urban Village Renovation in Zunhua City. Project scope: 28,937.56 ㎡ of commercial premises, 74,650.65 ㎡ of residential buildings, with a total gross floor area of 103,588.21 ㎡. The contracted scope agreed under the contract covers all civil works (including construction, decoration and finishing) and electromechanical equipment installation works within the scope of construction drawings. The contract price is provisionally RMB 79,006,000. Clause 23 *Contract Price and Adjustment* under Article 6 of the Special Conditions of Contract stipulates that: The contract adopts the adjustable price mechanism, and the price adjustment shall be implemented in accordance with the 2003 Hebei Provincial Engineering Budget Quota, relevant supporting documents and policy documents of Tangshan Municipality on the basis of construction drawings, design changes and project consultations. Materials shall be priced according to the information price of Tangshan Municipality and the market price confirmed by Party A. Clause 47 *Supplementary Provisions* stipulates that: 1. As construction drawings were incomplete at the time of bidding, the contract price specified in Article 5 of the Agreement (Part I of this Contract) is a provisional price, and the final settlement shall be adjusted in accordance with Clause 23.2(2) of the Special Conditions of Contract. 2. For any other matters not covered herein, the two parties shall sign a separate supplementary agreement through consultation.

On January 28, 2008, the two parties signed the Supplementary Agreement upon consultation, which stipulates as follows: Project Location: South of Wenli Avenue, East of Wencui Road, Zunhua City. Project Scale: Total gross floor area of 143,990 square meters. Contract Scope: All construction items indicated in the drawings of each building in Group D, except for works subcontracted by Party A (including door and window works, fire protection works, elevator works, exterior wall coatings and exterior wall putty supplied by Party A). Party B (Xinhua Company) shall be responsible for pipeline pre-embedding of the weak current system. Contract Mode: General construction contracting. Settlement Method: The *Comprehensive Base Price for Construction Engineering Budget of Hebei Province (2003)*, *Hebei Provincial Comprehensive Base Price for National Unified Construction Decoration Engineering Consumption Quota*, *Hebei Provincial Comprehensive Base Price for National Unified Installation Engineering Budget* and corresponding fee calculation standards shall apply. Specific provisions are as follows: 1. The price of materials shall be subject to the Zunhua price published in Tangshan Construction Cost Information for the corresponding construction period. For main materials not listed in the aforesaid construction cost information, Party B shall submit a written report to Party A 7 days in advance, and the price shall be confirmed upon Party A's verification. The price of steel reinforcement (price confirmation is conducted once for every 1,000 tons of steel reinforcement), wires and cables (price confirmation is conducted only once), sand and gravel (price confirmation is conducted once for every 10,000 cubic meters) shall be subject to the confirmed price. For earthwork subcontracted by Party A, the coordination fee (covering works such as line setting, trench cleaning, slope trimming, maintenance, etc.) shall be calculated at RMB 2.4 per cubic meter. 2. The adjustment of labor cost shall be implemented in accordance with the median adjustment standard specified in Circular [2007] No. 148 issued by Tangshan Municipal Construction Bureau. Article 3 Payment Method: The Contractor shall submit the monthly progress output value report signed and sealed by the chief supervision engineer to the Employer before the 25th day of each month. Upon confirmation by Party A, the report shall serve as the basis for fund appropriation. The Employer shall complete the review and settlement before the 5th day of the following month, otherwise the report shall be deemed as accepted. 1. Payment of progress payment for each building:

(1) Upon the completion and capping of the B2 parking garage, B1 commercial facilities, 1st and 2nd floor above-ground commercial facilities as well as the main structure of all buildings, Party A shall disburse a lump sum of RMB 120 million as project payment; in particular, after the capping of Building No.7 and Building No.8, Party A may disburse the project payment for the stages of secondary structure construction, interior and exterior decoration and hydropower system installation at 80% of the monthly progress output value examined and approved by Party A based on the actual project progress.

(2) Upon the qualification of the overall completion acceptance of the Project, payment shall be made up to 85% of the contract price; upon completion of the final settlement, payment shall be made up to 95% of the final settlement price; 5% of the final settlement price shall be withheld as the quality warranty deposit for the Project.

(3) Return of Quality Security Deposit: Within six months as of the commencement of the warranty period, where no quality defect arises, 2% of the quality security deposit shall be paid within 15 days upon confirmation by the employer. Upon expiration of the first year of the warranty period, the payment of the quality security deposit shall be made up to 4%. Upon expiration of the full warranty period, the payment shall be made up to 5% (with 5% of the construction cost of the waterproofing sub-project deducted therefrom, and the deducted amount shall be paid in full within 10 days after the expiration of the waterproofing warranty period). No interest shall accrue on the quality security deposit...

After the contract was concluded, Xinhua Company entered the construction site to carry out construction works. During the performance of the contract, a dispute arose between the two parties over the payment of construction funds, and Xinhua Company suspended construction. To resume construction as soon as possible, based on the *Construction Contract for Construction Works* for the Phase III Beitai Urban Village Renovation Project of Tianzhirun, Zunhua, supplementary agreements and the payment status of construction funds signed by the two parties, the two parties entered into an *Agreement* on October 21, 2010 in respect of the payment of construction funds for the aforesaid Phase III Project and Zunhua Tianzhirun Garden Project (North-of-Road Project). The Agreement stipulates as follows: I. Amount of construction progress payment payable by Party A (Tianzhirun Company) to Party B (Xinhua Company) 1. For the Phase III Beitai Urban Village Renovation Project of Tianzhirun, Zunhua, the workload completed before September 22, 2010 was confirmed by both Party A and Party B at RMB 196.56 million. Pursuant to the stipulations of the contract, Party A shall pay 80% of the workload completed by Party B as construction progress payment, which equals RMB 157.25 million. The actual construction progress payment already made is RMB 87.57 million, and the construction progress payment that is due and payable by Party A to Party B but remains unpaid amounts to RMB 69.68 million. 2. The Zunhua Tianzhirun Garden Project has passed completion acceptance and been delivered for use. The undisputed portion of the project settlement price between the two parties is RMB 106.49 million, and the construction fund already paid to Party B is RMB 91.01 million. The construction fund that is due and payable by Party A to Party B but remains unpaid amounts to RMB 15.48 million. The total amount of construction funds due and payable by Party A to Party B but remaining unpaid for the aforesaid two projects totals RMB 85.16 million...

On January 13, 2013, Tianzhirun Company organized the acceptance inspection upon completion, which was carried out by six parties including the construction entity, construction contractor, survey unit and design unit. The project involved has now been delivered and put into use.

Subsequently, as disputes arose over part of the project quantities such as dewatering and rebar planting, the two parties failed to reach a consensus on the settlement price through consultation. Xinhua Company filed a lawsuit, requesting Tianzhirun Company to pay the outstanding construction project payment and the accrued interest thereon.

[Reasons for Judgment]

The Supreme People's Court holds that:

After Xinhua Company and Tianzhirun Company signed the *Construction Contract for Construction Projects* and submitted it for record-filing, the two parties concluded a *Supplementary Agreement* on January 28, 2008. On the basis of the stipulations of the filed contract, the two parties specifically detailed and supplemented contents including project settlement methods, payment methods, and negotiated changes. There is no substantial alteration between the two contracts in terms of content. Both contracts are the genuine expression of the parties' true intent, do not violate the mandatory provisions of laws and regulations, and are legal and valid. Both parties shall fully perform their respective rights and obligations in accordance with the contract stipulations. On October 21, 2010, the two parties signed an *Agreement*. At the time of conclusion of this Agreement, a dispute had arisen over project fund payment during contract performance and Xinhua Company had suspended construction. For the purpose of resuming construction as soon as possible, the two parties reached new stipulations at this time node on contents including the amount of payable project progress payments and payment methods, completion settlement and price payment, and liability for breach of contract. This Agreement is also the genuine expression of the parties' true intent, and is legal and valid.

[Case Analysis]

Pursuant to Article 2 of the Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Disputes over Construction Contracts for Construction Projects (I), where substantive contents such as project scope, construction period, project quality and project price specified in the construction contract for construction projects separately concluded by the tenderer and the winning bidder are inconsistent with those in the bid-winning contract, the people's court shall uphold the request of a party to determine rights and obligations in accordance with the bid-winning contract. In the legal relationship of construction contracts for construction projects, it is a common scenario that the contract performance cycle is long, construction scope, pricing and measurement, and payment methods are subject to frequent changes, which requires the employer and the contractor to conclude separate supplementary agreements to supplement and refine the previously signed construction contract (for example, where tender drawings are incomplete, tendering is conducted on the basis of a mock bill of quantities and the construction contract signed is set with a provisional price, and the two parties subsequently sign a supplementary agreement to convert the price into a fixed price). Under such circumstances, even if the written agreement subsequently signed by the two parties supplements or adjusts the substantive contents of the bid-winning contract including project scope, pricing method and price adjustment method, such supplementary agreement shall be valid provided that the adjustment does not constitute a material alteration to the bid-winning contract, is the genuine expression of the will of both parties, and does not violate the mandatory provisions of the law.

【Legal Basis】

Article 2 of Interpretation (I) of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Construction Contracts for Construction Projects:

Where the substantive terms such as project scope, construction period, project quality and project price stipulated in the construction project contract separately concluded by the tenderee and the winning bidder are inconsistent with those specified in the bid-winning contract, if one of the parties claims that the rights and obligations between the parties shall be determined in accordance with the bid-winning contract, the people's court shall uphold such claim.

Where the tenderee and the winning bidder conclude a separate contract in addition to the bid-winning contract on matters including purchasing the constructed properties at a price significantly higher than the market price, constructing supporting housing facilities free of charge, making profit concessions, and donating property to the construction unit, so as to reduce the project price in a disguised manner, the people's court shall uphold the request of a party to confirm the invalidity of the aforesaid contract on the ground that such contract deviates from the substantive content of the bid-winning contract.