Supreme Court: Can a house purchased by offsetting project funds be excluded from execution?

Source: Famenu Prisoner

　　Judgment Summary: The contractor purchased the subject property by offsetting the project funds. This essentially means that the contractor, through negotiation and discounted compensation, realized its priority right to payment for the construction project. The claim for project funds has priority over other ordinary claims, and the subject property is the materialized carrier of the claim for project funds. Article 28 of the provisions on objections and review of execution is not applicable in this case, therefore, the contractor's right to the subject property can be excluded from the creditor's forced execution.

　　Case Index: Sichuan Provincial Construction Mechanization Engineering Co., Ltd., Chengdu Zijie Investment Management Co., Ltd. Applicants Execution Objection Litigation Retrial Case [(2020) Supreme Court Min Zai 352]

　　Point of Contention: Can a house purchased by offsetting project funds be excluded from execution?

　　Court Opinion

　　The Supreme Court holds that the contractor's priority right to payment for construction projects is a statutory right. The forms in which the contractor exercises this priority right include, but are not limited to, notification, negotiation, litigation, and arbitration. If the contractor has asserted its priority right to payment for construction projects in these forms within the exclusionary period, it should be considered that its assertion did not exceed the statutory time limit for exercising the priority right to payment. The "Explanation on the Relevant Matters of Our Company's Delivery of Engineering to Dayi Yindu Real Estate Development Co., Ltd." provided by Jianji Engineering Company in the retrial clearly states that the completion acceptance and delivery of the project were on April 25, 2009, January 8, 2011, and February 28, 2011, respectively. The settlement statements signed by Dayi Yindu Company and Jianji Engineering Company submitted by Jianji Engineering Company in the retrial were dated September 29, 2009, and March 28, 2011, respectively. Dayi Yindu Company's "Explanation on the Relevant Matters of My Company's Handling of the Transfer Registration of Housing for Sichuan Provincial Construction Mechanization Engineering Co., Ltd." states: "Given that our company owes Sichuan Jianji Company 6,830,778 yuan in project funds for the Yidu Shangcheng project at No. 458, Dayi Avenue, Dayi County, and Sichuan Jianji Company has a priority right to payment for this project, after several consultations, on July 11, 2013, our company and Sichuan Jianji Company signed an "Agreement", agreeing to use 15 sets of houses worth 7,330,778 yuan from our company's housing resources to offset 6,830,778 yuan of the project funds owed to Jianji Company…" Jianji Engineering Company had submitted this statement as evidence in the original trial, and Dayi Yindu Company's agent in the original trial did not object to the authenticity of this statement, so this statement can prove that Jianji Engineering Company asserted its priority right to payment for the project funds through negotiation to Dayi Yindu Company within the six-month statutory time limit for exercising the priority right to payment for the project funds, therefore, when Jianji Engineering Company and Dayi Yindu Company signed the subject "Agreement" on July 11, 2013, they did not exceed the statutory time limit for exercising the priority right to payment for construction projects.

　　II. Jianji Engineering Company exercised its priority right to payment for construction projects by signing a debt-for-housing agreement with Dayi Yindu Company.

　　According to Article 286 of the Contract Law of the People's Republic of China, in cases where the developer fails to pay the project funds in a timely manner, the contractor may obtain priority payment through court auction of the construction project, or may offset the construction project by negotiation with the developer. Jianji Engineering Company undertook the earthwork and water and electricity installation projects of the "Yidu Shangcheng" project developed by Dayi Yindu Company. Dayi Yindu Company owed Jianji Engineering Company 6,830,778 yuan in project funds for the project. On July 11, 2013, the two parties signed an "Agreement", agreeing to offset the 6,830,778 yuan owed by Dayi Yindu Company to Jianji Engineering Company with 15 sets of houses, including 13 sets of houses located in the "Yidu Shangcheng" project, valued at 7,330,778 yuan. Later, Jianji Engineering Company and Dayi Yindu Company signed a "Commercial Housing Sales Contract" for the subject property. Jianji Engineering Company purchased the subject property by offsetting the project funds. Essentially, this is the realization of Jianji Engineering Company's priority right to payment for the project funds through negotiation and discounted compensation. Jianji Engineering Company and Dayi Yindu Company offset the outstanding project funds with the subject property, which complies with the method of realizing the priority right to payment for project funds as stipulated in Article 286 of the Contract Law of the People's Republic of China.

　　III. Jianji Engineering Company's priority right to payment for project funds is sufficient to exclude the forced execution of Zijie Investment Company.

　　Article 1 of this Court's "Reply on the Issue of Priority Right to Payment for Construction Projects" stipulates: "In hearing real estate disputes and handling execution cases, people's courts shall, in accordance with Article 286 of the Contract Law of the People's Republic of China, determine that the priority right of payment of the contractor of construction projects is superior to the mortgage right and other claims." Zijie Investment Company has an ordinary loan claim against Dayi Yindu Company, while Jianji Engineering Company, as the contractor of the subject project, has a priority right to payment for the project funds for the subject property. Jianji Engineering Company's claim for project funds has priority over Zijie Investment Company's ordinary claim, and the subject property is the materialized carrier of the claim for project funds. Article 28 of the provisions on objections and review of execution is not applicable in this case, and Jianji Engineering Company's right to the subject property is sufficient to exclude the forced execution of Zijie Investment Company.

　　In summary, the retrial reasons of Jianji Engineering Company are tenable, and its retrial request should be supported. The original judgment is unclear in its findings of fact and misapplies the law, and should be corrected.