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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.

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