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Adjudication Rules:

After the employer and the contractor entered into a legally valid Construction Project Contract, the two parties separately executed a Supplementary Agreement to modify the substantial terms of the original bid-winning construction contract, including the contract price, settlement method and liability for breach of contract. However, the aforesaid Supplementary Agreement was concluded on the basis of consensus reached by both parties through consultation in light of the actual construction status. It does not constitute an unfair competition act of concluding "yin-yang contracts" through "collusive false manifestation of intent" that damages the rights and interests of other bidders. It is the authentic manifestation of intent of both parties to modify the original bid-winning construction contract, and does not violate the mandatory provisions of laws and administrative regulations. Accordingly, the Supplementary Agreement is valid.

[Reference Cases]

Case Name: Dispute over Construction Project Construction Contract between Sichuan First Construction Engineering Co., Ltd. and Zhaotong Taidou Real Estate Development and Operation Co., Ltd.

Case No. (2019) Min Zhong No. 557, Supreme People's Court

【Case Brief】

On January 23, 2013, First Construction Co., Ltd. and Taidou Co., Ltd. signed the *Construction Contract for Construction Projects* for the basement of Section 1 and Section 2 of Plot 10-07, Taiping Shengshi Heyuan through bidding procedures. The main terms of the contract are specified as follows: Taidou Co., Ltd. awards the works of the basement of Section 1 and Section 2 (Building 1 to Building 5) of Plot 10-07, Taiping Shengshi Heyuan to First Construction Co., Ltd. as the contractor. The scope of work covers the works specified in the construction drawings of the basement of Plot 10-07, Taiping Shengshi Heyuan (excluding civil air defense works, fire protection works, elevator installation, heating works, landscaping, door and window sub-projects, and municipal supporting facilities such as electric power, telecommunications and gas works), as well as the works specified in the bidding documents issued by the Employer, the record of joint drawing review and design alterations. The commencement date shall be subject to the Commencement Order, and the total project duration is 660 calendar days (the total duration of Section 1 and Section 2). The total contract price is tentatively set at approximately RMB 200 million, which shall be subject to the actual final settlement upon project completion. The two parties shall calculate the contract price in accordance with the examined construction drawings, bidding documents, *Yunnan Province Construction Project Cost Valuation Rules (2003)*, *Yunnan Province Construction Project Consumption Quota (2003)* and other relevant documents, and apply a 5.5% reduction to the total calculated amount.

On May 28, 2015, Taidou Company and Yijian Construction Company signed the Supplementary Agreement for the Taiping Shengshi Heyuan Project (hereinafter referred to as the "May 28 Supplementary Agreement"), which stated that "Party A (Taidou Company) failed to duly and fully disburse project funds during the construction of the project". The agreement confirmed that Taidou Company owed Yijian Construction Company approximately RMB 30 million in project progress payments, and Taidou Company undertook to pay off the full amount within one month from the effective date of the agreement. Meanwhile, the agreement also set forth provisions on matters such as project payment settlement, payment guarantee, and liability for breach of contract.

On July 29, 2015, Taido Co., Ltd. and No.1 Construction Engineering Co., Ltd. signed the *Supplemental Agreement Dated July 29*, which stated that "During the construction of the project, Party A (Taido Co., Ltd.) failed to disburse project progress payments in full and on time, and Party A-supplied concrete could not meet the needs of on-site construction progress, resulting in unsatisfactory project progress". The Supplemental Agreement stipulates as follows: The total contract price for Bid Section 1 and Bid Section 2 of Lot 07 shall not be subject to any downward adjustment calculated in accordance with the pricing basis stipulated in the *Construction Contract for Construction Projects*; Completion shall be deemed as achieved where No.1 Construction Engineering Co., Ltd. has fulfilled the construction tasks specified in the construction contract, excluding coordination work for projects independently contracted out by Taido Co., Ltd.; The payment term for project progress payments is amended to 80% of the amount specified in the monthly progress statement. In case Taido Co., Ltd. fails to make payment as agreed, interest on all outstanding project progress payments shall be calculated at an annual interest rate of 18%; Prior to the completion of the project scope, Taido Co., Ltd. shall pay 90% of the value of accumulated completed works, and all interest accrued on outstanding project payments shall be settled in full; Within 15 days after the completion acceptance of the project, Taido Co., Ltd. shall pay 93% of the value of accumulated completed works. Taido Co., Ltd. shall complete verification within 30 working days upon receipt of the complete and valid documents submitted by No.1 Construction Engineering Co., Ltd., and shall pay up to 97% of the total project settlement amount within 30 working days after the completion of verification, with 3% of the total project settlement amount reserved as the project retention money. The Supplemental Agreement also stipulates that, with respect to previous losses such as increased project costs and work stoppages incurred by No.1 Construction Engineering Co., Ltd. caused by delayed supply of Party A-supplied materials and other reasons affecting its construction progress, No.1 Construction Engineering Co., Ltd. shall submit documents relating to site visa fees, quality and price confirmation and other relevant fees to Taido Co., Ltd. after the signing of this Supplemental Agreement. Taido Co., Ltd. shall confirm the aforesaid contents within 7 days upon receipt of such documents. Failure to make confirmation within 7 days shall be deemed as approval, and the relevant amount shall be included in the project settlement. Taido Co., Ltd. undertakes not to hold No.1 Construction Engineering Co., Ltd. liable for breach of contract concerning the construction period of this project.

On December 9, 2016, Building 1 of Plot No. 07 of the Taiping Shengshi Heyuan Project passed the completion acceptance. Subsequently, a dispute arose between the two parties with respect to the construction project price, and the parties filed a lawsuit with the court.

[Reasons for Judgment]

The Supreme People's Court holds that:

Although the contents specified in the Supplementary Agreement, including "The contract price for Phase I and Phase II of Plot 07 shall not be subject to any downward adjustment on the basis of the total pricing basis agreed in the *Construction Contract for Construction Projects*; the payment of construction progress payments is modified to 80% of the amount stated in the monthly progress statement, where Taido Company fails to make payment as agreed, interest on all outstanding construction progress payments shall be calculated at an annual interest rate of 18%", do alter the stipulations of the filed bid-winning contract, such alteration is rooted in the background that Taido Company failed to pay construction progress payments in full and the concrete provided by it failed to meet the demand of on-site construction progress, which led to a comprehensive suspension of the project. The agreement is the result of consensus reached by the parties through consultation based on actual conditions, for the purpose of resuming work as soon as possible, reducing losses and protecting the rights of all parties, rather than an act of deviating from the substantive content of the bid-winning contract by signing "yin-yang contracts (also known as black and white contracts)" as a means of unfair competition to harm the interests of other competitors and disrupt competition order, or for the purpose of collusive bidding to damage the interests of the state, social public interests and the interests of others. It does not conflict with the relevant provisions of the *Law of the People's Republic of China on Tendering and Bidding* and relevant judicial interpretations. The Supplementary Agreement dated July 29 was signed by the legal representatives of Yijian Company and Taido Company and affixed with the official seals of each party. It is the genuine expression of the parties' true intentions, does not violate the mandatory provisions of laws and administrative regulations, and shall be deemed as a valid contract.

[Case Analysis]

1. Pursuant to 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 substantive terms such as project scope, construction period, project quality and project price agreed in the construction contract for construction projects separately concluded by the tenderer and the winning bidder are inconsistent with those specified in the bid-winning contract, the people's court shall uphold the claim of a party requesting to determine rights and obligations in accordance with the bid-winning contract. In addition, Article 46 of the *Law of the People's Republic of China on Bid Invitation and Bidding* stipulates that: "The tenderer and the winning bidder shall, within 30 days from the date of issuance of the bid winning notice, conclude a written contract in accordance with the tender documents and the bid documents of the winning bidder. The tenderer and the winning bidder shall not enter into any other agreement that deviates from the substantive content of the contract." The aforesaid provisions are intended to prohibit acts of parties to tendering and bidding activities including collusive bidding, harming the legitimate rights and interests of other competitors and disrupting competition order, and do not restrict the right of the parties to reach consensus through consultation to supplement and adjust clauses of the original contract in light of actual conditions during the performance of the contract.

2. In the course of performance of construction contracts for construction projects, work suspension caused by the owner's delayed payment of progress payments and the failure of owner-provided materials to be supplied as required is a common occurrence. It is accordingly normal for the constructor to adjust the construction organization design, incur additional construction costs, or suffer losses from work suspension and work idleness. If, without taking the actual situation of the project into account, all modifications to the substantive content of the original winning bid construction contract are deemed as acts violating the *Law of the People's Republic of China on Bid Invitation and Bidding* and the judicial interpretation of the Supreme People's Court on construction contracts for construction projects and are held invalid, the legitimate rights of the constructor will not be effectively remedied. This is essentially a misinterpretation of relevant laws and regulations as well as the legislative intent.

3. The core purpose of establishing the contract invalidity system is to prevent losses to the interests of the state, the public and third parties caused by the performance of void contracts, and to maintain the social order of the rule of law and public morality. The Supplementary Agreement dated July 29 was signed by the legal representatives of Yijian Company and Taidou Company, with the official seals of both parties affixed. It constitutes the genuine expression of the parties' intent, does not violate the mandatory provisions of laws and administrative regulations, and shall be deemed a valid contract. Taidou Company has explicitly stated in written documents on multiple occasions that it "guarantees the effective performance of the construction contract and the supplementary agreement", and never claimed that the Supplementary Agreement dated July 29 is invalid during the construction process. Given that Yijian Company has continued to perform its construction obligations in accordance with the said supplementary agreement and the subject project has been delivered and put into use, Taidou Company's claim for invalidity of the agreement in litigation violates the principle of good faith, and therefore shall not be upheld by the court.

【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 a tenderee and a successful bidder conclude a separate contract in addition to the bid-winning contract for such matters as purchasing the constructed real estate at a price significantly higher than the market price, constructing supporting housing facilities free of charge, offering profit concessions, and donating property to the construction entity, so as to reduce the project price in a disguised form, if a party requests to confirm the said contract as invalid on the ground that it deviates from the substantive content of the bid-winning contract, the people's court shall uphold such request.

Article 46 of the Law of the People's Republic of China on Tendering and Bidding:

The tenderee and the winning bidder shall conclude a written contract in accordance with the tender documents and the winning bidder's bid documents within 30 days from the date of issuance of the bid-winning notice. Neither the tenderee nor the winning bidder shall enter into any other agreement that deviates from the substantive content of the contract.