In 2026, China's Supreme People's Court issued a new judicial interpretation on construction project disputes that significantly changes the legal landscape for unlicensed contractors, known as baogongtou in Chinese practice. These independent project leaders, who operate under the name of licensed construction companies by paying management fees, have historically faced immense difficulty recovering payment for completed work. The new rules change this dynamic by establishing three specific circumstances where a direct lawsuit is permitted, providing long-overdue legal protection for the workers who actually perform construction labor.

Condition One: The Client Paid, but the Company Withholds

Under the 2026 interpretation, when the project owner has paid the full amount to the construction company, yet the company refuses to forward the payment to the unlicensed contractor without legitimate cause, the contractor may sue the company directly. This is the most straightforward scenario and the one with the highest success rate. Article 3 of the new interpretation provides clear legal basis for this claim. Courts will order the company to disgorge the funds, and the primary evidentiary burden on the unlicensed contractor is to demonstrate through bank records, payment receipts, or the licensed contractor's own accounting entries that the upstream payment was received. The new interpretation expressly provides that the licensed contractor's账簿 records may be subpoenaed for this purpose, removing a significant evidentiary hurdle that previously prevented unlicensed contractors from proving their claims.

Condition Two: The Company Refuses to Cooperate with Debt Collection

When the project owner is delinquent on payment and the construction company refuses to assist in collection, by declining to affix its official seal to demand letters, withholding necessary settlement documents, or allowing the claim to exceed the statute of limitations, the unlicensed contractor may bring a direct action. The new interpretation provides that where the construction company's refusal to cooperate materially impedes the unlicensed contractor's ability to collect the debt, the unlicensed contractor may bypass the construction company entirely and sue the company for the unpaid amount. In severe cases where the licensed contractor allows the limitation period to expire or actively colludes with the project owner to avoid payment, the unlicensed contractor may also exercise a subrogation right, effectively stepping into the licensed contractor's position to pursue the project owner directly.

Condition Three: Company Debts Freeze the Contractor's Funds

Where the construction company's own financial troubles, including pending lawsuits, debt enforcement actions, or insolvency proceedings, cause the unlicensed contractor's project payments to be frozen or seized by third-party creditors, the contractor may sue the company for full compensation. The 2026 interpretation provides that the unlicensed contractor may assert a priority claim against the frozen funds to the extent of the value of the work actually performed, taking priority over the claims of the construction company's general unsecured creditors with respect to specific project funds. This represents a significant expansion of the rights of unlicensed workers in Chinese insolvency proceedings. Foreign companies engaging licensed construction contractors in China should conduct basic due diligence on the contractor's financial health before entering into a construction agreement, as a contractor facing creditor pressures may expose the foreign project owner to direct litigation from unlicensed subcontractors. Shi Peng at Hubei Jingli Law Firm in Shiyan has extensive experience advising on construction contracts, project payment disputes, and the new 2026 legal framework.

Key Words: Real Property, Real Estate Development, Contract Drafting and Review