With large contractors dominating the market, SME owners are confronted by higher hurdles in construction disputes, making contract management and legal strategy crucial
China’s construction industry has evolved amid economic reform from a relatively underdeveloped sector into a modern industrial system characterised by a well-structured framework and professional management.
From the 1980s to around 2005, the industry was still in its early stages of development, with contractors generally lacking strength. It was common for owners to delay project payments and compress construction periods.
Although the Construction Law (1997), the Tendering and Bidding Law (1999), and the Regulations on the Quality Management of Construction Projects (2000) were successively implemented, the market environment did not fundamentally improve in the initial stages of enforcement.
By the end of 2003, the total amount of project payments in arrears to construction units nationwide had exceeded RMB360 billion (USD23.7 billion), involving 124,000 projects, with more than RMB170 billion owed for completed projects.
Contractor specialisation
Since 2005, with vigorous promotion and deepening of policies to resolve payment arrears, along with continuous improvement and strict enforcement of the qualification management system, the construction industry entered a new phase of accelerated integration and professionalism.
In 2010, general contracting and specialised contracting construction enterprises with qualifications achieved nationwide profits of RMB342.2 billion. Large construction enterprises – especially central state-owned enterprises and leading provincial state-owned enterprises – rapidly expanded by leveraging qualification upgrades, management improvements and capital operations, leading to increased market concentration.
In recent years, large construction groups have come to dominate the market with their strong financial resources, core technologies, efficient management and brand advantages.
At the same time, the status of project owners has become significantly polarised; in major projects, the government and large central or provincial state-owned enterprises still maintain a strong position as owners.
However, the situation is markedly different for private owners. In high-end commercial and residential projects in core cities, private owners often find themselves at a distinct disadvantage when facing experienced large general contractors.
Case analysis
A series of major construction project disputes in Beijing’s core area handled by the author’s team exemplify the current contradictions and dilemmas between owners and dominant contractors.
In this case, the owner, a private enterprise, signed a general contracting agreement with a well-known domestic specialised contractor. However, shortly after the project began, the contractor committed serious breaches and delays before seeking to amend key contractual terms.
When the owner made reasonable claims for contract termination and compensation, the contractor not only refused to return the construction site but also attempted to use site handover as a bargaining chip, demanding that the owner abandon claims and litigation. Even substantial counterclaims were filed against the owner.
As the project was in Beijing’s core area, failure to promptly regain control of the site would have led to indefinite suspension and direct economic losses exceeding RMB100 million annually.
To help the owner regain site control as quickly as possible, the author’s team promptly filed a case in court on behalf of the owner. Under litigation pressure, the contractor was compelled to return the site before conclusion of the first instance hearing, allowing the project to proceed.
During the substantive trial, the contractor filed substantial counterclaims, but the court ultimately ruled in favour of the owner’s main claims, dismissing all the contractor’s counterclaims.
Notably, in the past 25 years, this contractor has been involved in 1,183 civil litigation cases nationwide, and this was the only case in which all counterclaims made by this contractor were dismissed, representing a dismissal rate of just 0.08%. This data fully illustrates the difficulty owners face in defending their rights.
Specific response strategies
Early intervention. At the initial contract signing stage, owners often focus on project payments and construction progress, while neglecting seemingly less important clauses such as payment settlement methods, site recovery and liability for breach of contract.
In fact, these clauses often play a critical role in the event of a dispute. Engaging external legal counsel early in the contract drafting stage to scrutinise details can help owners secure greater initiative.
Mid-term monitoring. Many owners neglect comprehensive supervision of contract performance during project implementation. However, construction projects are lengthy, complex and subject to frequent changes. It is therefore essential for lawyers to be involved throughout the construction phase, to promptly identify potential breaches by contractors such as schedule changes or site control issues, and to collect and preserve favourable evidence.
Crisis response. A professional legal team should swiftly formulate a systematic crisis response strategy within the legal framework. Lawyers should also tailor litigation strategies to the owner’s industry regulatory environment and the specific operational mechanisms of the construction project, ensuring that all legal measures consistently serve and align with the owner’s commercial objectives.
Key takeaway
In the past 50 years, China’s construction market has gradually shifted from extensive development to a high degree of specialisation. However, as the above-mentioned case analysis demonstrates, with the right strategy and well-timed actions, lawyers can help disadvantaged owners regain the initiative, even in seemingly unwinnable confrontations.
In a market environment where contractors have risen to dominance through specialisation, owners increasingly require lawyers with deep industry knowledge, insight and litigation skills to safeguard their interests and effectively resolve the legal challenges they face.
Lu Jinxi
Senior Partner
Kangda Law Firm
Tel: +86 186 1810 6591
Email: [email protected]