I. Introduction to the Issue

In the field of construction engineering, it is highly common for a contractor to assign its claims for project costs for reasons such as financing or debt offsetting. As a monetary claim, the claim for project costs is legally assignable, and an agreement between the parties prohibiting assignment generally cannot be asserted against a bona fide third party. The true controversy lies in whether the assignee of the claim acquires merely an ordinary unsecured claim, or simultaneously acquires the priority of compensation for the construction project costs (hereinafter referred to as the “priority of compensation”).

On this issue, Article 807 of the Civil Code of the People’s Republic of China (hereinafter referred to as the “Civil Code”) and previous judicial interpretations remained silent, leading to long-standing divergences in theory and practice. Article 19 of the Interpretation II of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Cases of Disputes over Construction Project Contracts (hereinafter referred to as the “Construction Project Interpretation II”), effective June 30, 2026, responds to this issue for the first time in the form of an official judicial interpretation. Based on this, this article intends to review the theoretical context and judicial divergences before and after the promulgation of this provision, interpret the judicial path it establishes, and offer a few practical insights regarding its application.

II. Does the Priority of Compensation Transfer with the Underlying Claim?

Prior to the promulgation of the Construction Project Interpretation II, existing laws and judicial interpretations did not explicitly stipulate whether the priority of compensation could be assigned together with the claim for project costs. The First Civil Division of the Supreme People’s Court (SPC) pointed out in the Understanding and Application of the New Judicial Interpretation (I) on Construction Project Contracts of the Supreme People’s Court that “whether the assignee is entitled to the priority of compensation after the assignment of the claim for construction project costs remains inconclusive in current judicial interpretations.” Revolving around this issue, theory and practice mainly formed two opposing views: the negative view and the affirmative view.

(I) The Negative View

Scholars holding the “negative view” argue that the priority of compensation is a statutory priority right with personal exclusivity, and the subject exercising this right should be limited to the contractor who signed the construction contract with the project owner. The main reasons are fourfold:

First, when stipulating the priority of compensation, current legal norms use the terms “Project Owner” (发包人) and “Contractor” (承包人), rather than “Debtor” and “Creditor” in the general sense of the law of obligations. This wording restricts the subjects of rights and obligations to a specific construction contract relationship, reflecting an emphasis on the specific identities of the parties.

Second, the original institutional purpose of the priority of compensation is to secure the labor remuneration of construction workers. Once the contractor assigns the claim and receives consideration, the workers’ remuneration is theoretically realized; the assignee is not involved in labor remuneration issues, thus requiring no extra legal protection.

Third, the justification for this priority is that the labor and materials invested by the contractor have materialized into the construction project, increasing its value. An ordinary assignee has not participated in construction and has no direct connection to the formation of the project’s value, lacking a legitimate basis to enjoy this priority.

Fourth, the priority of compensation lacks a public registration system yet commands an extremely high repayment rank. Allowing it to flow freely with claims would drastically increase transaction risks for mortgagees and other creditors, and make it difficult to prevent moral hazards such as the contractor and owner colluding to inflate claims to circumvent mortgage rights.

At the judicial level, the High People’s Courts of Chongqing and Sichuan explicitly adopted a negative stance in their Answers to Several Issues Concerning the Trial of Disputes over Construction Project Contracts, holding that courts shall not support an assignee’s claim for priority of compensation after a debt assignment. In cases such as (2019) Zui Gao Fa Min Shen No. 3349, (2020) Wan Min Shen No. 4235, and (2020) Yu Min Zhong No. 484, the courts also ruled that the assignee merely acquired an ordinary monetary claim and could not concurrently acquire the priority of compensation.

(II) The Affirmative View

Scholars holding the “affirmative view” argue that the priority of compensation possesses an accessory nature rather than personal exclusivity, and should be assigned together with the principal claim.

First, from a normative perspective, Article 547 of the Civil Code provides that when a creditor assigns a claim, the assignee acquires the accessory rights associated with the claim, unaffected by the lack of transfer registration; Article 407 also clearly states that a mortgage is transferred together with the principal claim. The function of the priority of compensation is to secure the realization of the project cost claim, making it an accessory right by nature. Since it does not arise from personal relationships, it does not fall under the exception of rights “exclusively belonging to the creditor.”

Second, regarding institutional function, protecting construction workers is not the sole objective of this priority; its direct function is to provide security for the contractor’s project cost claim. Allowing the priority to be transferred along with the claim actually enhances the transactional value of the claim, accelerating the contractor’s cash realization, which indirectly ensures the timely payment of workers’ wages, aligning with legislative intent.

Third, regarding transaction safety, whether the priority is exercised by the contractor or the assignee, the secured claim amount remains unchanged. Allowing the transfer does not impose any additional burden on the project owner, mortgagees, or other creditors.

At the judicial level, the SPC recognized the assignment of the priority right together with the project cost claim in multiple judgments, including (2019) Zui Gao Fa Min Zhong No. 519, (2021) Zui Gao Fa Min Zhong No. 958, and (2021) Zui Gao Fa Min Zai No. 18. Guiding trial documents issued by various High People’s Courts—such as those in Jiangsu, Shandong, Hebei, Shaanxi, Hunan, and Fujian—adopted the same stance. The Sixth Circuit Court of the SPC even explicitly proposed a judging rule: “Where a contractor assigns its construction project claim to another party and notifies the project owner, starting from the perspective of ensuring the prompt realization and reasonable value retention of the contractor’s claim, in accordance with Article 547 of the Civil Code, the assignee of the project claim shall be deemed to have the right to assert the priority of compensation for project costs against the project owner.”

(III) From “Two Parallel Options” to an Eclectic Choice

In fact, as early as the drafting of the Interpretation (I) on the Application of Law in the Trial of Disputes over Construction Project Contracts (Construction Project Interpretation I), the SPC noted the issue of whether the priority of compensation could be assigned, but no final opinion was formed due to significant controversy.

In the Draft for Comment on Construction Project Interpretation II, the drafters presented two completely opposite options for public consultation:

Option 1: “Where a claim for construction project costs is legally assigned, if the assignee asserts priority of compensation from the discounted or auctioned price of the project by reference to Article 807 of the Civil Code, the people’s court shall support it.”

Option 2: “Where a claim for construction project costs is legally assigned, if the assignee asserts priority of compensation from the discounted or auctioned price of the project, the people’s court shall not support it.”

Following the publication of the Draft, widespread discussions took place in theoretical and practical circles. Generally, more opinions supported the transfer of the priority right with the claim. However, some argued that because the assignee did not participate in construction or bear the responsibility of paying workers, granting them priority status merely due to claim assignment might cause the system to deviate from its original intent. Ultimately, Article 19 of the officially promulgated Construction Project Interpretation II neither stipulates that the assignee automatically enjoys the priority right, nor does it categorically deny the claim. Instead, it requires people’s courts to make comprehensive judgments based on factors such as project quality, price settlement, the validity of the assignment contract, and the payment of assignment consideration.

III. Analysis of the Judicial Review Path under Article 19 from a Practical Perspective

Article 19 of the Construction Project Interpretation II stipulates: “Where the assignee of a claim for construction project costs asserts priority of compensation from the discounted or auctioned price of the construction project, the people’s court shall make a judgment by comprehensively considering factors such as whether the construction project has passed the completion inspection and acceptance, whether the project costs have been settled, whether the assignment contract is valid, and whether the assignee has paid a reasonable assignment price.”

Textually, this article neither directly “supports” (as in Option 1) nor categorically “does not support” (as in Option 2) the assertion, but rather requires the court to evaluate multiple factors comprehensively. This phrasing conveys at least two layers of meaning:

First, by making “the assignee asserting priority of compensation” the object of the regulation, the provision logically affirms that the priority of compensation can be transferred with the claim.

Second, the provision imposes constraints on this transfer. However, the listed factors end with “such as,” meaning they are non-exhaustive. Furthermore, these four factors occupy different positions in the chain of rights: passing the quality inspection is an inherent condition for exercising the priority right itself, whereas the validity of the assignment contract and payment of consideration are factual issues pertaining to the assignment phase. Therefore, the author believes that these four factors should not be construed as strict prerequisites that the assignee must cumulatively satisfy to acquire the right; rather, they should be evaluated individually based on their normative functions in specific cases, as detailed below:

(I) Whether the Construction Project Passed Completion Inspection and Acceptance

Whether the project has passed the completion inspection and acceptance is essentially a review of the foundation of the priority right and is the most crucial consideration for its exercise. However, it should be noted that “passing the completion inspection” should not be interpreted merely as a formal acceptance. It requires a systematic interpretation in conjunction with relevant judicial interpretations. According to Articles 9, 14, 38, and 39 of the Construction Project Interpretation I, it is not the case that an assignee can only assert priority if a formal completion inspection report is obtained; rather, courts must specifically determine whether the project quality is qualified or can be presumed to meet qualified conditions.

For example, if the completed portion of an unfinished project passes quality standards, the contractor still enjoys priority of compensation over the discounted or auctioned proceeds of that portion. Similarly, if the owner uses the project without authorization prior to inspection, this serves as a key fact to presume the conditions for exercising the right are met. Therefore, when an assignee acquires a claim corresponding to an unfinished project, the priority right is not automatically forfeited; the crux remains the quality status and reality of the completed portion.

(II) Whether the Project Costs Have Been Settled

First, it must be clarified that the settlement of project costs is not a statutory prerequisite for exercising the priority of compensation. This factor emphasizes whether the project costs are “determinable,” not that they must be already “determined.” In practice, disputes over the exact amount of project costs are rampant; if the rule strictly required costs to be settled and “determined,” this provision would rarely apply in practice.

Second, as SPC First Civil Division Chief Judge Chen Yifang noted in a press conference regarding the Interpretation II: “The condition that project costs have been settled is to better ensure the authenticity and reliability of the project cost claim.” That is to say, a formal settlement is not strictly mandatory; what matters is the authenticity of the claim and whether it is “capable of being settled.”

Article 17, Paragraph 1 of the Construction Project Interpretation II states: “Where a contractor requests confirmation of enjoying the priority of compensation for construction project costs, the people’s court shall ascertain the amount of the project costs entitled to the priority right and the corresponding project, and specify them in the main text of the judgment.” Accordingly, exercising the right requires the amount to be determinable. If it has been settled and fixed, that is naturally sufficient; but if the claim is unsettled, the court must ascertain the amount or clarify it via cost appraisal, rather than outright rejecting the assignee’s priority right solely on the grounds of “non-settlement.”

(III) Whether the Assignment Contract is Valid and Whether Reasonable Consideration was Paid

Compared to the first two points, the validity of the assignment contract and the payment of a reasonable price are review matters pertaining more to the debt assignment transaction itself.

A valid assignment contract means the assignee can succeed to the project cost claim, but it does not mean they can bypass restrictions regarding project quality, claim scope, and time limits for exercise. Furthermore, courts should review whether the owner was properly notified of the assignment, and whether the transaction is a sham concealing illegal practices such as transferring the entire contract (转包), illegal subcontracting, borrowing qualifications (affiliation/挂靠), or false litigation.

Whether a reasonable price was paid reflects the court’s scrutiny over the authenticity and legitimacy of the assignment. Under China’s civil law, debt assignment does not strictly require consideration; whether consideration is paid, or fully paid, does not intrinsically govern the validity of an assignment contract. The regulation lists this as a discretionary factor primarily to give courts a tool to identify the authenticity and legitimacy of the claim. Scenarios involving gratuitous transfers, transfers at obviously unreasonable low prices, or dubious payment trails often point to improper motives—such as sham assignments or debt evasion—thus becoming important grounds for courts to exclude the assignee’s priority of compensation.

IV. Conclusion

From the two parallel options in the draft to the comprehensive discretionary approach in the final text, Article 19 of the Construction Project Interpretation II carves out an eclectic path. Premised on the accessory nature of the priority of compensation, it generally affirms that the right can be transferred with the project cost claim. Simultaneously, by introducing comprehensive reviews of project acceptance, cost settlement, contract validity, and reasonable consideration, it reserves judicial discretion to exclude alienated scenarios such as sham assignments, debt evasion, and disguised affiliations. This approach preserves the normative logic of Article 547 of the Civil Code while responding to the legislative intent of protecting construction workers. Naturally, as this new rule comes into effect, the weighting of these factors and the allocation of the burden of proof in individual cases await further accumulation in judicial practice. For the time being, assignees structuring transactions are well-advised to evaluate the target claim using “Contractor Standards”—scrutinizing project quality, determinability of the amount, validity of the time limit, and documenting the payment trail—to ensure that a priority right on paper can truly materialize in practice.

Main References

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