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Adjudication Rules:

Where a tenderee and a bidder hold negotiations on the substantial terms of the contract prior to tendering, and such act directly affects the bid-winning result, the successful bid shall be null and void, and the construction contract concluded thereafter shall also be null and void. Where one illegal party initiatively files a request for confirming the nullity of the contract in bad faith, if confirmation of the nullity of the contract is contrary to the principle of good faith and allows the illegal party to obtain unjustified interests therefrom, the people's court shall generally not uphold such request.

[Reference Cases]

Case Name: Dispute over Construction Contract for Construction Projects between Xinjiang Huacheng Anju Real Estate Development Co., Ltd. and China Railway Construction Bridge Engineering Bureau Group Co., Ltd.

Case No. (2019) Min Zhong No. 347 of the Supreme People's Court

【Case Brief】

On July 11, 2011, Huacheng Real Estate Co., Ltd. and China Railway 13th Bureau Group Co., Ltd. entered into the *Framework Agreement on Construction Cooperation*, which stipulates the following terms: 1. The construction scope covers the construction works of the Blue-collar Apartment (Public Rental Housing) Project located in Urumqi Economic and Technological Development Zone, Xinjiang Uygur Autonomous Region, China. ... 3. The total general preliminary estimate for the construction of the Project is approximately RMB 300 million. The specific amount of the preliminary estimate shall be otherwise agreed by both parties after the planning documents and design schemes are finalized. ...

On May 8, 2012, China Railway 13th Bureau Group Co., Ltd. was awarded the construction contract for the Blue-collar Apartment Project of the Cooperation Zone through bidding. The project has a gross floor area of 158,817.94 ㎡, a bid-winning price of RMB 418,332,352.72, a bid-winning construction period of 579 calendar days, a commencement date of May 1, 2012, and a completion date of November 30, 2013.

On May 9, 2012, Huacheng Real Estate Company (the Employer) and China Railway 13th Bureau Group Co., Ltd. (the Contractor) signed the *Construction Contract for Construction Projects* in accordance with the tender and bidding documents and the bid-winning notice.

In November 2014, the aforesaid construction project was suspended. Subsequently, the contractor filed a lawsuit with the court to claim the outstanding construction project payment, performance bond and corresponding interest.

[Reasons for Judgment]

The Supreme People's Court holds that:

1. On May 8, 2012, China Railway 13th Bureau Group Co., Ltd. won the bid for the Blue-collar Apartment Project in the Cooperation Zone through public bidding. On May 9, 2012, Huacheng Real Estate Co., Ltd. entered into the subject *Construction Contract for Construction Projects* with China Railway 13th Bureau Group Co., Ltd. The contract constitutes the authentic expression of the parties' true intent, and its contents do not violate the mandatory provisions of relevant laws and regulations, hence it is a lawful and valid contract. Both parties shall strictly perform their respective obligations as stipulated under the contract.

2. Where negotiations between the tenderer and the bidder on the substantial content of the contract affect the bid-winning result, the bid-winning shall be invalid, and such invalid bid-winning will render the contract null and void. With regard to illegal and irregular acts in the process of tendering and bidding, interested parties have the right to raise objections or file complaints with relevant administrative supervision departments in accordance with the law. Units and individuals bearing direct responsibility for such illegal and irregular acts shall be subject to administrative sanctions. In the present case, the two parties conducted negotiations and reached a cooperation intention before tendering and bidding, and signed the *Framework Agreement on Construction Cooperation*. This Agreement does not stipulate contents such as the bidding scheme, nor does it specify the commencement date. There are also a large number of uncertain stipulations in the contract clauses: for example, as for construction content, the two parties agreed that "specific planning indicators and construction content shall be subject to the final approval documents of relevant government departments"; as for the contract estimate, the two parties agreed that "the total construction estimate of the project is approximately RMB 300 million, and the specific estimate amount shall be separately agreed by the two parties after the planning documents and design scheme are confirmed". After the *Framework Agreement on Construction Cooperation* was signed, the two parties completed relevant tendering and bidding procedures in accordance with the provisions of the *Law of the People's Republic of China on Tendering and Bidding*. There is no evidence proving that there are other illegal and irregular acts in the tendering and bidding process of the involved project that may affect the validity of the contract. Although Huacheng Real Estate Co., Ltd. claims that its own violation of the *Law on Tendering and Bidding* has led to invalid bid-winning, it has failed to prove whether such illegal and irregular act has affected the bid-winning result. Nor is there any circumstance in the present case where the tendering and bidding activities fail to comply with legal provisions, and interested parties raise objections or file complaints with relevant administrative supervision departments in accordance with the law, leading to relevant personnel being held accountable. In sum, the court of first instance found that the involved *Construction Project Contract* is authentic and valid, and such finding is not improper. This Court hereby upholds the aforesaid finding.

3. In the tendering and bidding process, the employer has certain initiative compared with the contractor. In this case, Huacheng Real Estate Company, as the tenderer, was fully aware that its negotiation on the substantive content of the contract with Tiejian Bridge Engineering Bureau prior to tendering and bidding may lead to the subsequently signed *Construction Project Contract* being held invalid for violating relevant provisions of the *Law of the People's Republic of China on Tendering and Bidding*, yet it still actively pursued or connived at the occurrence of such legal consequence, and concluded the subject *Construction Project Contract* with Tiejian Bridge Engineering Bureau after completing the tendering and bidding procedures. Huacheng Real Estate Company filed the appeal claim in the second instance of this case that the subject *Construction Project Contract* is invalid, on the basis that the validity of the subject *Construction Project Contract* will bring adverse effects to it, or the benefits derived therefrom are less than those brought by the invalidity of the contract. Its purpose is to evade the payment obligation it shall bear, and exempt or mitigate the civil liability imposed on it by the first-instance judgment. This Court holds that contractual stipulations shall be strictly abided by, and the awareness of good faith shall be strengthened. As the tenderer and Party A of the subject construction project, Huacheng Real Estate Company took the lead in concluding the subject *Construction Project Contract*. After the other contracting party Tiejian Bridge Engineering Bureau duly performed its contractual obligations while Huacheng Real Estate Company failed to duly pay the project price, and the first-instance judgment ruled that Huacheng Real Estate Company shall bear corresponding liabilities, Huacheng Real Estate Company claimed the invalidity of the contract in the second instance on the grounds of violations of laws and regulations in its own tendering act. Such act not only violates the basic principle of good faith, but also is detrimental to the stability of civil legal relations, which constitutes a malicious defense act lacking integrity, seeking to maximize its own interests while disregarding the interests of others.

4. The important purpose of establishing the system of void contracts is to prevent losses to the interests of the state, the public and third parties arising from the performance of void contracts, and to safeguard the rule of law order and public morality of the society. In the present case, Huacheng Real Estate Co., Ltd., as a law-violating party, maliciously and initiatively requests for confirmation of the contract as void. If its claim is sustained, it means that the contractual stipulations reflecting the true intent of both parties not only have no binding force on it, but may even enable it to obtain illegitimate interests. This will run counter to the purpose of establishing the void contract system, connive at law violators in committing illegal acts, and reduce the void contract system to a means for law violators to seek improper or even illegal interests. To sum up, the claim of Huacheng Real Estate Co., Ltd. in the second instance that the involved *Construction Contract for Construction Works* is void violates the principle of good faith. Therefore, the claim of Huacheng Real Estate Co., Ltd. that its act of negotiating with Tiejian Bridge Engineering Bureau on the substantial contents of the contract prior to bidding and tendering violates the provisions of the *Law of the People's Republic of China on Tenders and Bids* and thus leads to the invalidity of the involved *Construction Contract for Construction Works* lacks factual and legal basis, and this Court hereby dismisses such claim.

[Case Analysis]

1

Pursuant to the provisions of Article 43 and Article 55 of the *Law of the People's Republic of China on Tenders and Bids*, prior to the determination of the winning bidder, the tenderer shall not conduct negotiations with bidders on substantive contents such as bid price, bid proposal and other relevant matters. Otherwise, the tenderer shall be subject to administrative sanctions. Where such conduct affects the bid award result, the bid award shall be null and void. In the present case, although the contract awarding party and the contractor previously negotiated on contract awarding matters and signed a "pre-bidding agreement" before the launch of the tendering procedure, the Supreme People's Court affirmed the validity of the bid-winning contract on the grounds that a large number of uncertain stipulations still existed in the "pre-bidding agreement", and Huacheng Real Estate Co., Ltd. failed to prove that its act in violation of the *Law on Tenders and Bids* had affected the actual bid award result.

2

Where a tenderee and a tenderer conduct negotiations on substantive matters such as bid price and bidding proposal prior to tendering, whether such act affects the bid-winning result shall be analyzed and determined on a case-by-case basis, and no generalized conclusion shall be drawn. In practice, it is also common that a tenderee holds consultations on substantive matters of the project with two or more tenderers prior to tendering. In the absence of evidence such as "construction contract signed before tendering or other written commitment documents", it is very difficult to directly determine whether the act in violation of Article 43 of the *Law of the People's Republic of China on Tendering and Bidding* will inevitably affect the final bid-winning result and thus render the bid award null and void.

3

In this case, the Supreme People's Court ruled that the bid-winning contract is valid, with its decision mainly based on the *principle of good faith* and the rule "no one shall benefit from illegal acts" derived from the *principle of fairness*. First, as the tenderer, Huacheng Real Estate Company holds a dominant position over the contractor in tendering activities. It was fully aware that negotiation on the substantial terms of the contract prior to the tendering and bidding process may lead to the subsequent *Construction Contract for Construction Projects* signed by both parties being ruled null and void for violating the relevant provisions of the *Law of China on Tendering and Bidding*, yet it still actively pursued or acquiesced in the occurrence of such legal consequence. Huacheng Real Estate Company has obvious fault for this illegal act and shall bear primary liability. Second, in light of the purpose of establishing the contract nullity system, if the claim of Huacheng Real Estate Company, the primary liable party for the illegal act, for a declaration that the bid-winning contract is null and void is upheld, it will obtain more benefits from the illegal act than it would if the contract is valid (for example, multiple provisions on liability for breach of contract arising from the awarding party's late payment as stipulated in the bid-winning contract will not be applicable). This violates the principle of fairness and reduces the contract nullity system to a tool for wrongdoers to seek improper or even illegal interests.

【Legal Basis】

Article 43 of the Law on Tendering and Bidding: Prior to the determination of the winning bidder, the tenderer shall not negotiate with bidders on substantive contents such as bid prices, bidding schemes and the like.

Article 55 of the Law of the People's Republic of China on Tendering and Bidding: Where the tenderer of a project subject to tender as required by law, in violation of the provisions of this Law, conducts negotiations with bidders on substantive contents such as bid price, bid plan and others, the tenderer shall be given a warning, and the directly responsible person in charge of the unit and other directly responsible persons shall be given sanctions in accordance with the law.

Where any of the acts listed in the preceding paragraph affects the bid-winning result, the winning bid shall be null and void.

Article 5 of the Civil Code of the People's Republic of China: When engaging in civil activities, civil subjects shall follow the principle of free will, and create, modify, or terminate civil legal relations in accordance with their own will.

Article 6 of the Civil Code of the People's Republic of China: Where a civil subject engages in civil activities, it shall follow the principle of fairness and reasonably determine the rights and obligations of the parties concerned.

Article 7 of the Civil Code of the People's Republic of China: When engaging in civil activities, civil subjects shall follow the principle of good faith, uphold honesty and honor their commitments.

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