International Construction Law Review
CORRESPONDENTS’ REPORTS: MAINLAND CHINA INTERPRETATION OF THE SUPREME PEOPLE’S COURT ON “CONTRACTOR’S LIEN”
RICO CHAN
Partner, Baker & McKenzie
“Contractor’s lien” under Article 286 of the Contract Law
The concept of “contractor’s lien” was embodied in Article 286 of the 1999 Contract Law of the People’s Republic of China (“Contract Law”), thanks to the lobbying efforts of the contracting community during the legislative process of the Contract Law. In brief, under Article 286 of the Contract Law, if a project owner defaults in making payments to the contractor, the contractor may apply to the local court to have the construction work auctioned and then recover the outstanding payments from the proceeds realised from the auction. However, Article 286 is very brief and it leaves many issues unclear. Most importantly, Article 286 is unclear as to whether the contractor’s lien (or, more accurately put, contractor’s right of enforcement) has priority over a bank which holds a mortgage over the project site and/or the superstructure work in progress.
On 20 June 2002 the Supreme People’s Court of China issued the Reply of the Supreme People’s Court on Several Issues Concerning the Right of Priority in Receiving Construction Payments
(the “Reply”). The Reply has clarified several important issues relating to the application of Article 286. Unfortunately, some important issues are still not clarified by the Reply.
Priority of various parties’ claims
Articles 1 and 2 of the Reply state the following order of priority for protection of the rights and claims of various parties:
- First priority—presale buyers : In the case of a real estate project which has started “strata-title presale”, the contractor’s lien may not be enforced against those property units for which the buyers have paid more than half of the purchase price to the project owner.
- Second priority—contractor : The contractor’s claim shall have priority over the claims of a bank which holds a mortgage over the project site and/or the superstructure work in progress as well as the claims of other trade creditors of the owner.
[2004
International Construction Law Review
132