Domestic Subcontracting and Re-subcontracting of Overseas Projects — Is the Contract Necessarily Invalid?
2026/10/14
— An Industry Practice Wrongly Caught
in the Crossfire, and Counsel's Path to a Breakthrough
"Others do not prohibit it — why
should we tie our own hands?" This sentiment captures the hearts of
countless Chinese enterprises engaged in overseas contracting.
For many years, an unresolved
controversy has vexed China's construction and engineering sector: is the
domestic subcontracting or re-subcontracting of overseas projects lawful or
not? In practice, not a few adjudicatory bodies, upon merely seeing the words
"re-subcontracting," "subcontracting," or "further
subcontracting," have directly invoked the Construction Law and held the
contract invalid. A judgment of invalidity can mean, at best, that the contract
price is irretrievably lost, and, at worst, the collapse of the entire project
chain.
The core of the conflict lies in the
confusion over the boundary of applicable law.
Article 2 of the Construction Law
expressly provides that it governs "construction activities carried out
within the territory of the People's Republic of China," and is strictly
territorial in nature. The Regulations on the Administration of Foreign
Contracted Projects, as special law, expressly permit the main contractor to
subcontract overseas projects, do not prohibit the subcontracting of the main
works, and do not prohibit the main contractor from re-subcontracting. Under
the principle that "special law prevails over general law," the
subcontracting and re-subcontracting of overseas projects should be governed by
the latter in priority.
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A certain central state-owned
enterprise, after undertaking a project in an African country, subcontracted
part of the works to a domestic specialized company. A dispute later arose over
the contract price and the matter was brought before the court. The court of
first instance held the contract invalid on the ground of "unlawful
subcontracting." On appeal, counsel for the appellant firmly anchored the
argument on the territorial boundary of the Construction Law and the
special-law effect of the Regulations on the Administration of Foreign
Contracted Projects, and invoked the reasoning of relevant retrial cases of the
Supreme People's Court, ultimately turning the case around and confirming the
contract as lawful and valid. The key turning point in this case lay precisely
in counsel's precise grasp of the boundary of applicable law.
Counsel's Opinions and Recommendations:
First, disputes over contract validity
are not insoluble. Apart from the general grounds of invalidity provided in the
Civil Code, contracts for the domestic subcontracting or re-subcontracting of
overseas projects should in principle be held valid. Enterprises should not
abandon their lawful rights merely because of isolated adverse rulings.
Second, compliance must be arranged in
advance. Contracts should expressly invoke the Regulations on the
Administration of Foreign Contracted Projects, stipulate that the subcontractor
may not further subcontract, and preserve core evidence such as project quality
acceptance and price settlement.
Third, qualification review should
respect the rules of the country where the project is located, rather than
rigidly applying domestic construction qualification standards.
Fourth, after a dispute arises, counsel
may construct an argumentative framework from the perspectives of the boundary
of applicable law, the priority of special law, and the nature of the
contracting relationship, and persuade the adjudicator by reference to typical
cases, thereby safeguarding the enterprise's lawful rights and interests to the
greatest extent possible.
The subcontracting and
re-subcontracting of overseas projects is not a legal forbidden zone, but an
industry practice that has been misread. The intervention of professional
counsel is precisely the key force for dispelling such misreadings and
clarifying the boundaries.