(Tang Shuiyuan information to be updated) Several legal and practical issues in the case of default of kiln project payment
Introduction: Compared with payment arrears in the construction industry, payment arrears in the manufacturing sector are also quite severe. The current situation and underlying causes reflect both industry-wide trends and the unique characteristics of the manufacturing sector itself.
Accounts receivable delinquency in the manufacturing sector exhibits the following characteristics:
(I) The scale of arrears is large, and the duration is long;
(II) The issue of "hidden payment terms" is prominent, with a prolonged waiting period between delivery and acceptance;
(III) Core enterprises leverage their dominant position to pass on risks and long-term occupy funds from upstream and downstream businesses.
The reasons for the aforementioned situation are multifaceted.
On the one handIt is economic and competitive pressures—under the strain of an economic downturn, businesses are generally facing insufficient demand and intensifying competition. To maintain their operations, some companies will proactively extend their accounts payable to upstream suppliers, thereby shifting financial pressure downstream.
On the other handDue to industry practices and the dominant position of certain players, many manufacturing projects are highly customized, involving numerous non-standardized equipment items, which can easily lead to disputes over technical specifications and acceptance criteria. Moreover, large core enterprises leverage their market dominance and strong bargaining power to institutionalize and prolong payment delays by imposing excessively long payment terms and complex, stringent acceptance conditions.
This article takes a project payment case in the kiln industry as an example to sort out and analyze some of the issues faced by kiln companies in pursuing outstanding project payments.
The kiln industry belongs to the industrial equipment manufacturing sector.
Not in the construction industry
Manufacturing enterprises, such as kiln‑furnace companies, undertake projects and enter into contracts for services with the client, rather than construction contracts. Consequently, litigation over the recovery of project payments is typically classified as a dispute over a contract for services; however, disputes arising from equipment purchase and sale contracts cannot be ruled out.
In litigation practice, one party asserts that the underlying legal relationship is a contract for the purchase and sale of equipment, while the counterclaimant contends that it is a contract for services. With respect to acceptance, breach of contract, and termination of the contract, both parties, due to their dispute over the underlying legal relationship, advocate entirely different modes of contractual performance.Taking Arbitration Case No. (2024) Fo Zhong Zi No. 0013 as an example.After the respondent entered into a Technical Renovation Service Contract with the contracting party, it subsequently signed a Sales Contract with the applicant; in the arbitration case in which the applicant sought payment of the goods’ price from the respondent, the respondent filed a counterclaim seeking rescission of the contract for services and imposition of liability for breach of contract.
During the adjudication of the case, the applicant contends that the legal relationship between the parties is governed by a equipment sales contract and that acceptance shall be conducted in accordance with the “specifications/model” set forth in the quotation schedule of the Sales Contract. The respondent, on the other hand, maintains that the legal relationship is one of a custom‑made contract and that acceptance should be based on the technical modification parameters agreed upon through WeChat communications. Relying on a list of outstanding defects and the failure to achieve the contractual objectives, the respondent seeks to rescind the contract and hold the applicant liable for breach of contract.
The central issue in the case revolves around whether the underlying legal relationship is one of a sales contract or a contract for work; the winner takes all, and the loser bears all losses.
The arbitral award addresses the dispute over the nature of the contract as follows: More than 80% of the itemized quotation in the contract in question pertains to equipment costs, while civil engineering and labor costs account for less than 20%; moreover, there is no clause providing for “customized production.” Furthermore, the respondent has failed to provide evidence demonstrating that the equipment was exclusively custom-made. Therefore, the arbitral tribunal has determined that the nature of the contractual dispute is a sales contract dispute.
The reasoning should be based on the “Reply of the Supreme People’s Court Concerning the Determination of Jurisdiction When the Name and Content of an Economic Contract Are Inconsistent” (Fa Fu [1996] No. 16) for a specific determination. The reply states: “If the rights and obligations stipulated in a contract are inconsistent with its name, the nature of the contract shall be determined by the rights and obligations as agreed upon in the contract, thereby determining the place of performance and the court’s jurisdiction.” This reasoning also takes into account the characteristics of a custom‑made contract, namely its specificity to a particular object, its personal nature, and its remuneratory feature.
PART 02Jurisdiction in contract dispute cases concerning the recovery of project payment.
Can it be in the plaintiff’s jurisdiction?
Many of the defendant’s project construction sites are located across provincial boundaries, and whether the lawsuit is filed in the plaintiff’s jurisdiction or in the defendant’s jurisdiction can significantly affect the handling of the case.
Cases (2023) Yue 0605 Min Chu 18673 and (2023) Xin 4021 Min Chu 1380 are contract-for-work disputes brought by affiliated enterprises against the same defendant to recover construction payments.The two cases are not significantly different in terms of the trial procedure; however, there are substantial differences between them in terms of the ease of case handling, property preservation, and enforcement.
When litigation can be brought in the plaintiff’s jurisdiction, it is generally preferable to do so rather than in the defendant’s jurisdiction, particularly in the case of construction projects located in remote areas.In accordance with Article 18, paragraph 2 of the Interpretation of the Civil Procedure Law (as amended in 2022): “If the contract does not specify the place of performance or the specification is unclear, and the subject matter of the dispute is the payment of money, the place of performance of the contract shall be the domicile of the party receiving the money.”In the absence of an agreed‑upon venue for litigation, a dispute over a construction contract concerning the recovery of project payment may be brought in the plaintiff’s domicile; however, the claim must be limited to “payment of the contract price and interest.” If the claim extends beyond a monetary demand based on the contract price, or if it includes two or more distinct claims—such as payment of the contract price and specific performance—it will be difficult for the case to be heard in the plaintiff’s domicile.
Cases (2023) Yue 0605 Min Chu 18673 and (2023) Yue 0604 Min Chu 30966, both pertaining to contract-for-services disputes, can both be adjudicated based onArticle 18, paragraph 2, of the Interpretations of the Civil Procedure Law (as amended in 2022) provides that cases shall be filed and tried at the domicile of the plaintiff.
Finally, it should be noted that even if the claim is clear and the dispute arises from a contract for services that does not contain a jurisdiction clause, certain judges may, for various reasons, transfer the case to the court in the defendant’s domicile for adjudication.
PART 03Careful selection of project settlement terms
Taking the kiln industry as an example, project settlements typically stipulate a fixed unit price for the works, with a note in the unit price stating: “If there are any additions or reductions to the equipment, the final settlement will be based on the actual quantities.” This settlement clause is relatively fair: when the number of project items or the scope of work increases or decreases, the fixed contract price will not result in losses for either party, nor will it necessitate frequent referrals to engineering consulting firms for cost appraisals due to the contract price becoming unenforceable.
At present, certain large enterprises are leveraging their dominant market position and strong bargaining power,Setting complex and onerous payment terms in contract negotiations is something kiln manufacturers must carefully avoid.. For example, aEnergy-saving renovation contract may stipulate that the client will not contribute any funds for the project; the kiln company will bear all investment costs for the renovation. After the plant resumes production, the energy savings achieved each month will be shared according to a 40/60 split. Compared with the original production process, the energy-saving incentive sharing is contingent upon meeting targets for firing yield rate, tile warehousing volume, and energy-efficiency improvement rate.
Regarding these compliance requirements,On the one hand, there is too much subjectivity.The quality of natural gas is variable, and equipment settings, production parameters, and inbound quantities can all be adjusted, making it impossible to compare energy-saving performance.On the other hand, production data and energy consumption figures are controlled by Party A.A month’s worth of data is just that—data for one month. If energy-saving incentives are calculated over a 24-month period, the timeframe becomes excessively long; moreover, since ceramic enterprises cannot maintain continuous production, it further complicates the settlement of project payments.
Taking Case No. (2024) Yue 06 Min Zhong 501 as an exampleThe case recounts a rather absurd anecdote: after applying an energy-saving, high-emissivity coating (a functional material) to the surface of the refractory lining inside a kiln to reduce heat absorption by the flue gases, not only was no energy-saving effect observed, but the calculated energy-saving rate even turned out to be negative. Although this account comes from one of the parties involved, it nonetheless illustrates just how unreliable it is to use energy-saving rates as a payment condition or to base compensation on a share of energy-saving gains.
PART 04Promptly proceed with the acceptance process, gather evidence of completion and handover, and prevent the client from withholding payment or imposing contractual penalties for schedule delays on arbitrary grounds.
Whether a kiln is newly constructed or retrofitted, the construction is primarily carried out at the client’s site. Unlike the delivery of standard custom-made products, no physical handover is required; the date on which the kiln manufacturer completes the work marks the date of delivery.
The acceptance of a kiln is, in essence, also a form of delivery.This constitutes both the primary obligation that the kiln manufacturer is required to fulfill under the contract for services, the point at which the risk of damage or loss shifts to Party A, and the threshold for precluding the client’s right to unilaterally terminate the contract (for details on the client’s right of unilateral termination, see Article 787 of the Civil Code: “Before the contractor has completed the work, the client may terminate the contract at any time; if such termination causes losses to the contractor, the client shall compensate for those losses”).
The importance of timely commissioning and acceptance for kiln enterprises in fulfilling their contractual obligations is self-evident.How to advance the process and collect acceptance evidence—this document offers only broad recommendations as follows:
First, the spin-off contract.Do not consolidate contracts for different production lines and distinct renovation projects into a single contract. Taking kiln renovation as an example, the project involves multiple processes. The drying kiln renovation is governed by a separate contract for services, the desulfurization duct renovation is another distinct contract, the No. 1 production line renovation constitutes yet another independent contract, and the No. 2 production line renovation is likewise covered by a separate contract. After dividing the project into discrete contracts, the benefits in terms of contract execution, schedule management, and acceptance procedures are readily apparent.
Taking case No. (2023) Xin 4021 Min Chu 1380 as an example, the contract for services in question comprises more than 20 renovation contracts; similarly, in case No. (2025) Yue 0604 Min Chu 14141, the contract for services also involves nearly 10 renovation contracts.
Second, standardize the contract’s acceptance clauses and acceptance documentation.The legal concept of acceptance refers to the commissioning party’s receipt of the work product and its inspection with respect to both quantity and quality. In terms of the method of acceptance, it is divided into actual acceptance and constructive acceptance. Constructive acceptance requires the signing of an acceptance document; however, if the commissioning party fails to sign such a document within the agreed period and does not raise any objections to the work product, it is deemed to have been accepted.
The acceptance of the kiln project, even if it is only an acceptance based on completed quantities, still represents a breakthrough in the acceptance process.Even if the notice of urging acceptance is served via WeChat, it can still be of great assistance in subsequent litigation.. In case No. (2025) Yue 0604 Min Chu 14141, it was only due to the confirmation of quantities by Party A’s personnel that no financial loss was incurred in the final settlement amount for the project.
Third, the normal handling of defect resolution matters.Defect rectification items serve as the vehicle for addressing discrepancies and vested interests; the existence of such items also implies that everything outside these items has been accepted without objection. In the handling of litigation cases, the reasonableness of defect‑remediation matters is also subject to reasonable scrutiny by the judge. For example, the occurrence of brick damage during kiln commissioning is an inevitable consequence of the commissioning process and does not, in itself, constitute a valid defect‑remediation issue.
Fourth, retaining shipping lists and other relevant evidence also serves as a remedial measure in response to the Party A’s refusal to accept the goods.
Engineering payment disputes in the kiln industry involve the performance of the entire contract and constitute a complex issue with extensive practical legal implications. This article broadly outlines several points for reference only. In the kiln industry, the issue of delayed payment for engineering projects is similar to that in the broader manufacturing sector; however, due to the high degree of project customization and customer concentration, the situation is even more pronounced. This article offers my own perspectives on several practical legal issues arising in litigation involving construction payment disputes; I welcome any constructive criticism regarding its shortcomings.
lawyer
Introduction
Attorney Tang Shuiyuan
Guangdong Zhiheng (Foshan) Law Firm
Member of the Revolutionary Committee of the Chinese Kuomintang
Deputy Director of the Foshan Management Committee of Zhiheng
Director of the Real Estate and Construction Engineering Legal Affairs Department at Zhiheng Foshan
Representatives of the 15th and 16th People’s Congresses of Gaoming District, Foshan City
Executive President of the Federation of New Social Strata Persons in Gaoming District, Foshan City
Supervisor of the Gaoming District Youth Chamber of Commerce in Foshan City
Advanced Individual in Public Interest Legal Services, Foshan City, 2009
Outstanding Lawyer in Foshan City for Serving Private Enterprises
Outstanding People’s Congress Deputy of the 15th Session of Gaoming District, Foshan City
Attorney Chen Weizhong holds a Bachelor of Laws degree from Peking University. Since 2007, he has been deeply engaged in the legal profession and currently serves as a senior equity partner at Zhiheng (Foshan) Law Firm. With exceptional professional expertise and extensive practical experience, Attorney Chen adheres to the law as the guiding principle, precisely analyzes the essence of each case, and is committed to providing clients with legal services that combine professional depth and humanistic care.
Past issuesRecommendation
Zhiheng · Foshan