Case study: Identifying employers in international EPC contracts

As the Belt and Road Initiative (BRI) advances, Chinese construction firms are undertaking more international engineering projects, resulting in a rise in legal disputes over overseas infrastructure construction.

This article analyses a contract dispute from the initial batch of engineering, procurement, and construction (EPC) projects signed with Angola, offering insights to resolve similar international contract disputes under Chinese laws.

Case overview

The Angolan government awarded a housing and municipal engineering contract to domestic company A, signing an EPC general contract agreement. Company A subcontracted part of the project to domestic company B, which subsequently subcontracted it illegally to company C.

The project has now been completed, with Angola paying about 87% of the project funds to company A, which also paid about 92% of the project funds to company B.

But due to company B failing to pay company C, the latter filed a lawsuit against both companies B and A in an intermediate court in China, requesting that company A bear joint liability for company B’s unpaid project funds.

Among multiple points of contention, can the general contractor be interpreted as an employer, and be held jointly liable?

Points of contention

Company C argues that company A should be regarded as the project employer, reasoning that in an engineering subcontract, the parties are the employer and contractor.

Under the EPC general contracting model, if the general contractor subcontracts part of the project with consent of the employer and within the scope permitted by law, the general contractor effectively plays the role of employer of the subcontracted project.

Company A, meanwhile, argues that the employer and general contractor are not the same entity, and there is no room for expanding the interpretation of the employer.

According to article 43 of the Interpretation of Issues Concerning the Application of Law in the Trial of Construction Engineering Contract Disputes (Construction Interpretation I), the employer refers only to the construction unit of the construction project, namely, the Angolan government in this case. Therefore, determining that company A, the EPC general contractor in this case, is the employer is a legal misapplication.

In the authors’ view, interpreting company A, the general contractor, as employer violates current regulations as it does not comply with provisions of article 43 of Construction Interpretation I, or the legislative intent. Nor does it align with the current judicial practice.

Specific analysis

First, from a legal perspective, the employer refers to the entity that invests in and ultimately enjoys the results of the construction project. At legislative level, the distinction between the construction unit and general contractor is clearly stipulated in article 29 of the Construction Law and article 78 of the Regulations on Quality Management of Construction Projects.

In judicial interpretation, articles 25 and 26 of Construction Interpretation II strictly distinguish the employer, general contractor, subcontractor and illegal subcontractor.

In international engineering contracting, the Regulations on the Administration of Contracting for Overseas Projects also clearly distinguish and define the employer, contractor and subcontractor.

Therefore, from a legislative perspective, the contractor (general contractor) and construction unit (employer) are different entities with equal status. The employer refers only to the project owner, excluding the general contractor and subsequent subcontractors.

Second, from the perspective of legislative intent, the Supreme People’s Court (SPC) initially issued relevant judicial interpretations concerning the actual constructors to safeguard the rights and interests of rural migrant workers. Since this dispute does not involve infringing interests of workers, there is no need for excessive protection of the so-called actual constructors.

Strictly limiting the application of article 43 to align with current development of the construction industry would better suit the circumstances of this case.

The SPC’s latest Understanding and Application of Construction Interpretation I points out: “With the further deepening of the reform of the construction industry and the further standardisation of the construction market, the judiciary should quickly return to the original intent and theory of the law. It is not appropriate to harm the legitimate rights and interests of qualified construction companies, employers, creditor banks and other creditors by emphasising special protection for subcontractors and rural migrant workers.”

Additionally, the Supreme Court’s 8th National Conference of Courts on Civil and Commercial Trial Work in 2015 emphasised: “The relativity principle of contracts must be strictly adhered to, and the scope of application of the second paragraph of the article should not be arbitrarily expanded. Only when the failure to pay the subcontractor’s labour results in the inability to pay the wages of workers in the subcontracting relationship can the employer be required to bear responsibility for the actual constructors within the scope of unpaid project funds. The scope of responsibility of the employer cannot be arbitrarily expanded.”

Third, from the perspective of judicial practice, it is widely accepted that the employer refers only to the construction unit of the project, excluding the general contractor and intermediaries in subcontracting relationships.

For example, an SPC civil ruling of Case No. 3339 (2016) stated: “The identities of the employer and the general contractor should be determined based on the overall perspective of the project and cannot be shifted or relatively determined. Whether in the guiding judicial opinions or the textual meaning of judicial interpretations in Construction Interpretation I, the employer can only be strictly interpreted as the owner of the construction project, rather than from the perspective of subcontractors or actual constructors, expanding the determination of the general contractor as the employer. In construction contract disputes, the employer should be limited to the owner of the project, that is, the construction unit.”

In addition, in many similar cases, the SPC has consistently ruled that the employer refers only to the construction unit of the project, excluding the general contractor and intermediaries in subcontracting relationships.

Conclusion

If the general contractor is considered as the employer based on the turnkey nature of international EPC projects and the comprehensive role of the general contractor, it will not only affect cross-border economic co-operation but also be detrimental to the implementation of fairness and justice, and may even impact the progress of the BRI. Therefore, similar cases should be handled appropriately.

Sarah Gao is a partner and Shao Xiaohui is an associate at Partners