Supreme Court: Does the construction project payment have a personal attribute? How should the right of subrogation be coordinated with the interests of other creditors in the process of realization when the debtor's assets are insufficient to cover its liabilities?

Source: Lawmen Prisoner

　　Summary of Judgment

　　1. Construction project payments, which are usually claimed in lawsuits, may contain the wages of construction workers and therefore have a certain labor compensation aspect. However, this labor compensation is the wage that the contractor or actual contractor needs to pay to the construction workers. It is not the beneficiary, so the conclusion that it belongs to "debt exclusively belonging to the debtor" cannot be drawn simply because the construction project payment may contain the wages of construction workers.

　　2. When the debtor's assets are insufficient to cover its liabilities, the implementation of the right of subrogation should be linked to the participation distribution system and the bankruptcy system to achieve a balanced protection of the subrogee and the debtor's other creditors. In the execution procedure, the amount realized through the exercise of the right of subrogation should be treated as the debtor's liable property and handled according to the relevant provisions of the participation distribution system, so as to take into account the interests of various right holders, including the wages of construction workers, the subrogee, and other creditors of the debtor. The contribution made by the subrogee through the subrogation lawsuit to preserve the debtor's claims should also be considered.

　　Case Index

　　Guizhou Xinjianye Engineering Co., Ltd., Chen Jian Guang Creditor's Right of Subrogation Dispute Retrial Case [(2020) Highest Court Min Zai 231]

　　Points of Dispute

　　Does the construction project payment have a personal attribute? How should the right of subrogation be coordinated with the interests of other creditors in the process of realization when the debtor's assets are insufficient to cover its liabilities?

　　Judicial Opinion

　　The Supreme Court believes that: Article 73, Paragraph 1 of the Contract Law of the People's Republic of China stipulates that "if the debtor is negligent in exercising its due claim and causes damage to the creditor, the creditor may request the People's Court to exercise the debtor's claim in its own name, except for claims exclusively belonging to the debtor.". Article 11 of the Interpretation I of the Contract Law stipulates that "a creditor who brings a subrogation lawsuit in accordance with Article 73 of the Contract Law shall meet the following conditions: (1) The creditor's claim against the debtor is legal; (2) The debtor is negligent in exercising its due claim and causes damage to the creditor; (3) The debtor's claim is due; (4) The debtor's claim is not a claim exclusively belonging to the debtor.". In this case, Chen Jian Guang's claim against Song Wen Ping is legally confirmed by the effective civil mediation document. Song Wen Ping has not claimed the project payment from Xinjianye Company or Zhongling Company through litigation or arbitration, and all parties involved have no objections. Therefore, whether Chen Jian Guang's subrogation right is established still needs to solve the problem of whether the secondary claim is due and whether the secondary claim exclusively belongs to the debtor. Since the secondary claim in this case is the construction project payment, and the secondary debtor involves two subjects: the contractor and the contracting party, and the debtor Song Wen Ping also has multiple debts in the execution procedure, this case also needs to solve the specific responsible subject and the way of exercising Chen Jian Guang's subrogation right, and the balance of interests between Chen Jian Guang and other creditors of Song Wen Ping. Therefore, the focus of the retrial dispute in this case is: 1. Whether the receivable project payment is a claim exclusively belonging to Song Wen Ping; 2. Whether Song Wen Ping's claim against Xinjianye Company and Zhongling Company is due; 3. The specific amount and responsible subject of Chen Jian Guang exercising the right of subrogation; 4. The coordination of this case with other cases where Song Wen Ping is the debtor.

　　I. Whether the Receivable Project Payment is a Claim Exclusively Belonging to Song Wen Ping

　　Article 12 of Interpretation I of the Contract Law stipulates that "the claims exclusively belonging to the debtor himself as stipulated in Article 73, Paragraph 1 of the Contract Law refer to the payment claims arising from the support relationship, raising relationship, alimony relationship, inheritance relationship, and rights such as labor compensation, retirement pensions, old-age pensions, pensions, resettlement fees, life insurance, and claims for personal injury compensation.". The "claims exclusively belonging to the debtor himself" stipulated in this judicial interpretation has a strong personal attribute, including labor compensation claims that are listed with "retirement pensions, old-age pensions, and pensions", and are labor income exclusively belonging to the subject to be subrogated. Construction project payments that are usually claimed in lawsuits may contain the wages of construction workers and therefore have a certain labor compensation aspect. However, this labor compensation is the wage that the contractor or actual contractor needs to pay to the construction workers. The ultimate beneficiary is not the actual contractor to be subrogated in this case. Therefore, the conclusion that it belongs to the "claims exclusively belonging to the debtor himself" stipulated in Article 73, Paragraph 1 of the Contract Law cannot be drawn simply because the construction project payment may contain the wages of construction workers. Even if Song Wen Ping's debts include legally prioritized worker wages, they can be properly handled according to law in the execution procedure. Xinjianye Company's claim that the receivable project payment exclusively belongs to Song Wen Ping himself and that Chen Jian Guang cannot bring a subrogation lawsuit is untenable.

　　II. Whether Song Wen Ping's Claim Against Xinjianye Company and Zhongling Company is Due

　　(1) Due Date of Secondary Claim and Determination of Secondary Claim

　　The main purpose of the subrogation system is to solve the problem of how to protect the creditor's rights when the debtor is negligent in exercising the secondary claim. If the exercise of the right of subrogation requires the determination of the secondary claim as a prerequisite, then when the debtor is negligent in determining the secondary claim, the creditor will not be able to exercise the right of subrogation, and the purpose of the subrogation system will be completely frustrated. Therefore, Item 3 of Article 11 of Interpretation I of the Contract Law stipulates that the exercise of the right of subrogation requires the secondary claim to be due, but does not require the secondary claim to be determined. In practice, there is some dispute about whether the determination of the secondary claim is required for the exercise of the right of subrogation. One reason for advocating that the secondary claim should be determined is that some creditors try to leverage large claims with small claims through subrogation lawsuits. For example, when the construction project payment is due but not settled, a small-scale private loan creditor intervenes in the contract relationship of others through a subrogation lawsuit and requests the adjudication of a complex construction project payment dispute, which is hardly reasonable in theory or practice. This Court believes that, when the judicial interpretation only requires the "secondary claim to be due", whether the secondary claim is determined should not be a prerequisite condition for the exercise of the right of subrogation in principle, but should be a problem to be solved in the subrogation lawsuit. In this case, compared with the amount of project payment that Zhongling Company and Xinjianye Company admitted to owe Song Wen Ping, the 12,487,420 yuan claim that Chen Jian Guang claimed from Song Wen Ping does not belong to the situation of leveraging large claims with small claims. If Song Wen Ping's claim against Xinjianye Company and Zhongling Company is due, the right of Chen Jian Guang to bring a subrogation lawsuit should not be directly denied on the grounds that Song Wen Ping's claim against Zhongling Company and Xinjianye Company is not determined.

　　The project involved in the case has not yet been completed and accepted, but Song Wen Ping has already withdrawn from the site and submitted the settlement materials. The project is now being carried out by Zhongling Company. Song Wen Ping has the right to claim the project payment from Xinjianye Company and Zhongling Company for its part of the construction. Since Song Wen Ping and Xinjianye Company agreed that Xinjianye Company would transfer the payment to Song Wen Ping in time after receiving the payment from Zhongling Company, whether Song Wen Ping's claims against Xinjianye Company and Zhongling Company are due should be discussed separately.

　　(2) Whether Song Wen Ping's Claim Against Zhongling Company is Due

　　Based on the principle of contract relativity, Song Wenping can generally only claim payment from Xinyuan Industry Co., Ltd., with whom he has a contractual relationship. However, to protect the rights and interests of construction workers who are in a weak position, judicial interpretations break through the principle of contract relativity and grant the actual contractor the right to directly claim payment from the client. Article 24 of the Interpretation II of Construction Project Judicial Interpretation stipulates that "if the actual contractor claims rights with the client as the defendant, the people's court shall add the subcontractor or illegal subcontractor as a third party in this case. After ascertaining the amount of construction project payment owed by the client to the subcontractor or illegal subcontractor, the court shall rule that the client is responsible to the actual contractor within the scope of the unpaid construction project payment." The actual contractor can directly claim the payment receivable from the client by bypassing the contractor according to this provision, indicating that the client's responsibility to the actual contractor has a certain independence and is not premised on the contractor's assumption of the payment obligation. As mentioned earlier, Song Wenping has the right to claim payment for his part of the construction from Xinyuan Industry Co., Ltd. and Zhongling Co., Ltd. Both Xinyuan Industry Co., Ltd. and Zhongling Co., Ltd. admitted that they owed payment, and Xinyuan Industry Co., Ltd. agreed that Zhongling Co., Ltd. should pay Song Wenping directly. Song Wenping can require Zhongling Co., Ltd. to assume responsibility within the scope of the unpaid payment according to the above-mentioned judicial interpretation, so Song Wenping's claim against Zhongling Co., Ltd. has matured. The internal agreement between Xinyuan Industry Co., Ltd. and Song Wenping on timely transfer of payment after Xinyuan Industry Co., Ltd. receives payment from Zhongling Co., Ltd. does not affect Zhongling Co., Ltd.'s obligation to perform payment to Song Wenping.

　　(3) Whether Song Wenping's claim against Xinyuan Industry Co., Ltd. has matured

　　Xinyuan Industry Co., Ltd. claims that Zhongling Co., Ltd. knew that Song Wenping undertook the project by borrowing qualifications and should assume the payment obligation to Song Wenping on its own. This court believes that in the case of the actual contractor borrowing qualifications, the distinction between borrowing qualifications and illegal subcontracting should be combined with the entire project implementation process to examine the stage at which the actual contractor participated in the project and the status and role of the actual contractor in the project implementation. If there is evidence to prove that the actual contractor directly contacted the client before the conclusion of the construction project construction contract, actually participated in the bidding process and the conclusion of the construction project construction contract, and substantially dominated the operation of the entire project from contract performance to settlement, it should be determined that the actual contractor belongs to borrowing qualifications. In this case, although Zhongling Co., Ltd., Xinyuan Industry Co., Ltd., and Song Wenping unanimously acknowledged that "the Zhongling project was contacted by Song Wenping," there is no evidence to show that Song Wenping actually participated in the process of Xinyuan Industry Co., Ltd. and Zhongling Co., Ltd. concluding the "Construction Project Construction Contract"; combined with the fact that Xinyuan Industry Co., Ltd. paid a large amount of money for Song Wenping during Song Wenping's construction period and Xinyuan Industry Co., Ltd. organized the construction on its own after Song Wenping left, it is impossible to conclude that Song Wenping substantially dominated the operation of the entire project. Therefore, the claim of Xinyuan Industry Co., Ltd. that Zhongling Co., Ltd. knew that Song Wenping borrowed qualifications to undertake the construction, and therefore Xinyuan Industry Co., Ltd. is exempt from liability, cannot be established.

　　Deadline and condition are two important concepts in law. The difference between the two lies in the angle of observing the problem. The former is based on the time dimension, and the latter is based on the logical perspective; but in terms of extension, the two are not clearly distinguished, but there is overlap. The maturity of the secondary claim as a condition for the exercise of subrogation means that the objective conditions for the debtor to request the secondary debtor to repay the debt are met. In this sense, the maturity of the secondary claim has the same effect as the fulfillment of the payment conditions of the secondary claim. In this case, whether Song Wenping's claim against Xinyuan Industry Co., Ltd. has matured depends on how to view the special agreement on payment conditions between Xinyuan Industry Co., Ltd. and Song Wenping in the "Project Management Target Responsibility Letter," that is, Xinyuan Industry Co., Ltd. deducts 4.5% of the management fee from the project payment paid by Zhongling Co., Ltd., and pays the rest to Song Wenping in time. There are two views on the effectiveness of such clauses in practice: one is that contractual freedom should be respected, and the other is that violation of the regulations on access to the construction market should be denied. In individual cases, judgment should be made in combination with specific circumstances, and no one-size-fits-all approach should be adopted. In this case, Xinyuan Industry Co., Ltd. claims that it has paid all the funds received from Zhongling Co., Ltd. for Song Wenping's construction part to Song Wenping or paid them on behalf of Song Wenping, and Song Wenping has no objection. Chen Jian Guang also failed to provide evidence to prove that Xinyuan Industry Co., Ltd. received the payment from Zhongling Co., Ltd. but did not pay Song Wenping, so Xinyuan Industry Co., Ltd. fulfilled the agreement with Song Wenping in the "Project Management Target Responsibility Letter" on timely transfer of payment after receiving payment from Zhongling Co., Ltd. In addition, Song Wenping also acknowledges that Xinyuan Industry Co., Ltd. has paid about 30 million yuan in project funds on behalf of Song Wenping. When Chen Jian Guang jointly sued Zhongling Co., Ltd. and Xinyuan Industry Co., Ltd., and this court has determined that the payment conditions of Zhongling Co., Ltd. have been met, it is contrary to the contract agreement and the principle of fairness to simultaneously determine that Xinyuan Industry Co., Ltd.'s overdue payment to Song Wenping due to Zhongling Co., Ltd.'s failure to pay has matured and should bear the payment responsibility.

　　In addition, since Zhongling Co., Ltd. paid Xinyuan Industry Co., Ltd., Xinyuan Industry Co., Ltd. can collect a certain percentage of management fees, and there is no motive to prevent the fulfillment of conditions for its own interests. The "Payment Agreement of Accounts Receivable and Payable," to which all parties have no objection, can prove that Xinyuan Industry Co., Ltd. has previously claimed its receivables from Zhongling Co., Ltd. The court of first instance applied Article 45, paragraph 2, of the Contract Law of the People's Republic of China, which states that "a party who improperly prevents the fulfillment of a condition for its own benefit shall be deemed to have fulfilled the condition," and believed that Xinyuan Industry Co., Ltd. improperly prevented the fulfillment of the condition for Song Wenping to exercise his receivables against Xinyuan Industry Co., Ltd., and that Song Wenping's claim against Xinyuan Industry Co., Ltd. had matured, which was wrong. This court corrects this.

　　III. Specific Amount and Responsible Entity for Chen Jian Guang's Exercise of Subrogation Right

　　(1) Amount of Receivables that Chen Jian Guang Can Claim from the Secondary Debtor

　　In litigation of subrogation of monetary claims, the amount of receivables that a creditor can claim is subject to two factors: the amount of receivables of the creditor against the debtor and the amount of receivables of the debtor against the secondary debtor, and the smaller of the two amounts shall prevail. In this case, Chen Jian Guang's claim against Song Wenping has been determined by an effective legal document, and Chen Jian Guang's claim for subrogation based on this is 12,487,420 yuan. Zhongling Co., Ltd. admitted in the retrial that it still owed Xinyuan Industry Co., Ltd. 73,614,624.28 yuan. Xinyuan Industry Co., Ltd. admitted in the retrial that if Zhongling Co., Ltd. actually paid 73,614,624.28 yuan to Xinyuan Industry Co., Ltd., after deducting Song Wenping's unpaid taxes and Song Wenping's use of Xinyuan Industry Co., Ltd.'s funds, Xinyuan Industry Co., Ltd. should pay Song Wenping 13,597,156.27 yuan. Xinyuan Industry Co., Ltd. also admitted that it can be paid directly to Song Wenping by Zhongling Co., Ltd. within the scope of 13,597,156.27 yuan. According to the admission of Zhongling Co., Ltd. and Xinyuan Industry Co., Ltd., the scope of Song Wenping's undisputed receivables is 13,597,156.27 yuan, which is greater than Song Wenping's debt of 12,487,420 yuan to Chen Jian Guang. To sum up, Chen Jian Guang can exercise the right of subrogation within the scope of 12,487,420 yuan.

　　(2) Payer of 12,487,420 Yuan

　　Article 24 of Interpretation II of the Construction Project Judicial Interpretation stipulates that the actual contractor can file a lawsuit with the client as the defendant, and the client is responsible to the actual contractor within the scope of the unpaid construction project payment. In this case, Zhongling Co., Ltd. admitted that it owed Xinyuan Industry Co., Ltd. 73,614,624.28 yuan. Xinyuan Industry Co., Ltd. admitted that the scope of Song Wenping's undisputed receivables is 13,597,156.27 yuan and agreed that Zhongling Co., Ltd. should pay Song Wenping directly within this scope. Therefore, regardless of whether the amount owed by Zhongling Co., Ltd. to Xinyuan Industry Co., Ltd. includes the part of the construction undertaken by Xinyuan Industry Co., Ltd. itself, ordering Zhongling Co., Ltd. to bear the responsibility within the scope of 12,487,420 yuan does not exceed the scope of responsibility determined in the original trial, which Zhongling Co., Ltd. did not apply for retrial.

　　For newly established companies, as mentioned above, considering the agreement between the newly established company and Song Wenping regarding payment terms, as well as the full case details such as the amount owed by Zhongling Company and the amount paid by the newly established company, it cannot be determined that the debt of the newly established company has matured. Therefore, given that Zhongling Company has been determined to have a payment obligation of 12,487,420 yuan, it is inappropriate to determine that the newly established company also has a payment obligation of 12,487,420 yuan.

　　It also needs to be clarified that the newly established company does not bear the payment obligation in this case; it only enjoys a temporary right of defense based on the contract agreement, not an exemption from its payment responsibility. Upon final settlement of the project involved in the case, if the newly established company receives the payment for the project involved in the case from Zhongling Company, after deducting the payable taxes and the amount advanced by the newly established company on behalf of Song Wenping, there is still an unpaid amount; it should still bear the corresponding responsibility according to the law and judicial interpretations.

　　In addition, the original judgment first requires that "after the newly established company receives the project payment from Zhongling Company, it shall bear the payment obligation to Chen Jianguang within the range of 12,487,420 yuan," and then states that "in the event that the newly established company fails to fulfill its payment obligation to Chen Jianguang, Zhongling Company shall bear the payment obligation to Chen Jianguang within the range of the unpaid project payment." This is logically contradictory; the judgment that the newly established company and Zhongling Company are jointly responsible is inappropriate; and the procedure of not revoking the first-instance judgment and directly modifying the judgment is erroneous. This court corrects the above errors.

　　IV. Coordination with other cases where Song Wenping is the debtor

　　In addition to this case, there are other assignees who have obtained effective judgments and have applied for compulsory execution against the newly established company and Zhongling Company. Other creditors of Song Wenping have also failed to receive full repayment in the execution proceedings. In the retrial, both the newly established company and Zhongling Company argued that the total amount of claims of the applicants for execution is greater than the project payment owed to Song Wenping. This court believes that Article 20 of the Interpretation of the Contract Law, which states that "when the assignee's subrogation action against the secondary debtor is determined to be valid after being heard by the people's court, the secondary debtor shall perform the repayment obligation to the assignee, and the corresponding creditor-debtor relationship between the assignee and the debtor and the debtor and secondary debtor shall be extinguished," stipulates a general rule for one-time repayment to extinguish two debt relationships simultaneously. It simplifies the procedure and is conducive to the one-time resolution of disputes. However, when the debtor's assets are insufficient to cover its liabilities, if the interests of other creditors of the debtor are disregarded, and the secondary debtor directly repays the assignee, this may disrupt the principle of equal rights of creditors and is also different from the legal effect of applying the system of participation in distribution and the bankruptcy system to the debtor when there is no subrogation. The theoretical reflection of this issue is the debate on whether to adopt the "in-warehouse" principle in subrogation litigation, and in legislation, it has led to the improvement of the subrogation system in the "Civil Code of the People's Republic of China" to be implemented on January 1, 2021. Article 537 of the Code provides that "when the people's court determines that subrogation is established, the counterparty of the debtor shall perform the obligation to the creditor, and after the creditor accepts the performance, the corresponding rights and obligations between the creditor and the debtor and the debtor and the counterparty shall terminate. If the debtor's claim against the counterparty or an accessory right related to the claim is subject to preservation or execution measures, or if the debtor goes bankrupt, it shall be handled in accordance with relevant laws and regulations."

　　According to the legal principles of balancing the protection of the assignee and the equality of creditors reflected in Article 537 of the "Civil Code of the People's Republic of China," when the debtor's assets are insufficient to cover its liabilities, the realization of subrogation should be linked to the system of participation in distribution and the bankruptcy system to achieve balanced protection of the assignee and other creditors of the debtor. In this case, the creditor Song Wenping is a natural person and does not qualify for bankruptcy, but when his property is insufficient to repay all debts, there is a system similar to bankruptcy proceedings for participation in distribution to ensure that creditors receive fair compensation. Regarding Zhongling Company's obligation to pay Chen Jianguang 12,487,420 yuan, according to the current laws and regulations, it is expressed in the main text of the judgment that Zhongling Company shall pay Chen Jianguang directly, but in view of the fact that Song Wenping's property has been found to be insufficient to repay all debts, in the execution proceedings, according to the legal principles contained in Article 537 of the "Civil Code of the People's Republic of China," this amount should be treated as Song Wenping's responsible property and handled according to the relevant provisions of the system of participation in distribution, so as to balance the interests of various right holders, including construction workers' wages, assignees, and other creditors of Song Wenping. This also needs to consider the contribution made by the assignee through the subrogation litigation to realize the preservation effect of the debtor's claims. In addition, after Zhongling Company actually performs the payment obligation in the subrogation litigation and execution proceedings, the debts owed to Song Wenping shall be extinguished accordingly within the scope of actual performance. If Song Wenping or other assignees subsequently sue Zhongling Company for the project payment involved in this case, Zhongling Company can use the facts of performance in this case as a defense.