Case Introduction
In 2016, C Industrial Co., Ltd. (hereinafter referred to as "C Company") and B Road and Bridge Engineering Co., Ltd. (hereinafter referred to as "B Company") signed a "Construction Engineering Labor Cooperation Agreement", stipulating that each company would operate independently, with C Company bearing the risks and profits and losses on its own. C Company would pay B Company a management fee of 1% of the bid price, and the portion of the total project cost after deducting the management fee would be used as C Company's construction accounting cost and would be accounted for independently.
In 2016, Company A (hereinafter referred to as "Company A") and Company C signed a "Cooperation Agreement," stipulating that the two parties would jointly undertake the "Reconstruction Project of a Certain National Highway" (hereinafter referred to as "the Project in Question") under the name of Company B, with profits split 50/50, and Company A would be responsible for construction and advance the initial expenses. Subsequently, Company A subcontracted part of the project to Company D.
In December 2016, the three parties signed a "Project Fund Management Agreement" to establish a joint management account. The agreement stipulated that after Company B withheld management fees and taxes, the profits would be distributed between Company A and Company C as agreed and transferred to the accounts of the two companies respectively.
The project in question was completed in September 2017, and the warranty period expired in September 2019. In August 2020, the auditing department issued an audit report, approving the construction cost at approximately 31 million yuan. As of September 2021, the project owner, E City Investment Company, had paid all project funds to Company B's account.
However, after receiving payment, Company B failed to make the agreed payment to Company A. Instead, it arbitrarily deducted over 7 million yuan in fees, a large portion of which involved payments for other projects unrelated to the project in question, litigation costs, attorney fees, and enforcement payments. After repeated unsuccessful attempts to collect payment, Company A filed a lawsuit. The court of first instance dismissed all of Company A's claims on the grounds that "Company B and Company C have not yet settled accounts." Company A appealed, and the court of second instance overturned the original judgment and remanded the case for retrial.
Challenges and Solutions in the Case
This case involves a dispute over the distribution of project funds under a dual relationship of affiliation and partnership. The legal relationship is complex, and the interests of the parties are in sharp conflict. There are four key points of contention, and any oversight may lead to the failure of the rights protection.
The first major challenge is whether the court can dismiss a lawsuit for profit distribution from partnerships on the grounds that the partnership has not been liquidated. The court of first instance held that Company A and Company C were in a partnership, and profit distribution was contingent upon the liquidation of the partnership. Since Company B and Company C had not settled their accounts, the partnership profits could not be determined, and therefore, all of Company A's claims were dismissed. If the court of second instance upholds this logic, Company A will be trapped in a vicious cycle of "no settlement, no litigation; no litigation, no settlement," and its legitimate rights will never be able to be redressed through judicial means.
Solution: Use the Supreme People's Court's ruling to break the inertia of "rejecting cases without liquidation," and use the urgency of realizing the third party's claims and the ever-accumulating interest burden to advance the litigation process.
First, we submitted the Supreme People's Court's Civil Ruling No. 268 of 2025 to the appellate court. This ruling clearly states: "The appellate court's decision to dismiss Company X's litigation solely on the grounds that the cooperative project between the two parties had not been liquidated and that the facts and amount of losses could not be determined is without legal basis and should be corrected according to law." In this case, the Supreme People's Court established an important rule: in partnership disputes, the court's duty is precisely to liquidate and distribute partnership property based on evidence when the partners are unable to liquidate it themselves. Dismissing a litigation on the grounds of "lack of liquidation" is tantamount to refusing to exercise judicial power.
Secondly, citing Article 978 of the Civil Code and the guiding opinion on Article 978 in "Understanding and Application of the Contract Law of the Civil Code (IV)" edited by the Leading Group for the Implementation of the Civil Code of the Supreme People's Court: "For partnership property and partnership debts that have been clearly identified, a judgment should be made first, rather than dismissing the plaintiff's claims indiscriminately."
Furthermore, it is emphasized that the partnership in this case has reached a liquidation deadlock—Company A has sent a letter requesting liquidation, but Company C has not responded; Company B and Company C have a conflict of interest and are unlikely to cooperate with the settlement. If the court refuses to intervene, the dispute will remain unresolved indefinitely, resulting in a waste of judicial resources and the idleness of social resources.
Finally, it is clear that the outcome of this case directly affects the legitimate rights and interests of the third party, Company D. As a downstream contractor for the project in question, Company D has already asserted its rights through a separate litigation, and the effective judgment has confirmed that Company A should pay Company D approximately RMB 1.8 million in project funds, with Company C bearing joint liability. This judgment has entered the enforcement stage, and Company D's claim has been unrecoverable for a long time. If this case continues to be stalled on the grounds of "unsettled accounts," not only will Company A and Company C's funds be occupied by Company B for an extended period, but Company D's project funds and the interest determined by the effective judgment will also continue to accumulate, further increasing the costs and losses for all parties involved. If the court can proactively intervene in the liquidation and clarify the distribution plan, it can simultaneously resolve the debt repayment issues between Company A, Company C, and Company D, achieving a final resolution of the dispute and avoiding procedural delays and multiple litigations.
The second major challenge is that Company B denies the tripartite co-management agreement on the grounds that "the project department's seal was affixed by Company C," and claims that it has no direct payment obligation to Company A. Company B argues that Article 4, Clause 15 of its "Construction Project Labor Cooperation Agreement" with Company C stipulates that "the project department seal shall be kept and used by Company C, and Company C shall not affix the project department seal to documents exchanged with its subordinate labor service providers or other economic entities." Therefore, the "Project Fund Management Agreement" was affixed by Company C without authorization and does not represent Company B's true intentions, thus having no binding force on Company B. If this defense holds, Company A will be unable to directly assert its rights against Company B and will only be able to claim a share of the partnership profits from Company C. However, Company C will refuse on the grounds of "unsettled accounts," leaving Company A in a dilemma.
Solution: Counter Company B's defense by demonstrating actual performance and using legal principles regarding seals.
First, the affiliation agreement is invalid, and the clauses on which it is based as a defense are also invalid. Company B and Company C have an affiliation relationship, and the "Construction Engineering Labor Cooperation Agreement" signed by them is invalid because it violates mandatory legal provisions. Company B cannot invoke the internal agreements in the invalid agreement to oppose Company A.
Second, the release of a seal from control constitutes authorization. Company B, by allowing its project department's seal to leave its control and be entrusted to Company C for safekeeping and use, should bear the legal consequences of the seal's misuse. Based on the seal's external representation, Company A had sufficient reason to believe that the agreement represented Company B's will.
Third, the actual performance of the agreement constitutes ratification of its validity. The three parties established a joint escrow account according to the "Project Fund Management Agreement," with the payment process being "Company A submits – Company C reviews – Company B authorizes." Company B directly paid project funds and labor costs to downstream units such as Company D through this account, and never raised any objections during the years-long construction and settlement process. A witness (the project manager of Company A) testified that employees of Company B explicitly mentioned the joint escrow account in WeChat messages. These actions irrefutably prove that Company B not only knew of Company A's actual affiliation status but also acknowledged the validity of the tripartite agreement through its actions.
The third major challenge is whether it should be supported that Company B arbitrarily withheld more than 7 million yuan in expenses unrelated to this case. Because Company B and Company C had other collaborative projects, and Company C also owed Company B related payments, Company B listed 24 deductions totaling over 7 million yuan in the litigation. A large portion of these were unrelated to the project in question, including construction costs, litigation costs, attorney fees, and enforcement proceeds. If these deductions were deemed legal, Company A's distributable profits would be significantly reduced, potentially even to zero. The court of first instance failed to conduct a substantive review of this, directly evading this crucial dispute on the grounds of "unsettled accounts."
Solution: Verify the legality of each deduction based on contractual agreements and the principle of dedicated use of funds.
First, the affiliation agreement clearly stipulates that each project is "accounted for independently." The "Construction Engineering Labor Cooperation Agreement" signed between Company B and Company C stipulates that "each party shall account for independently during the cooperation process" and "Company C shall bear full responsibility for any litigation matters arising from this project." It is evident that the rights and obligations of both parties for different projects should be independent, and losses from other projects should be resolved in separate cases. Under no circumstances should the project payment for this project be misappropriated.
Second, the co-management agreement clearly stipulates that the funds are for designated purposes only. The "Project Funds Management Agreement" stipulates that "project funds should, in principle, be used for designated purposes only." Company B's use of the project funds in this case to offset debts for other projects violates the agreement and infringes upon the property rights of Company A and Company C as the actual contractors and investors.
Third, prepare a "Item-by-Item Verification Opinion on the Settlement Statement of Expenses", marking each of the 24 deductions: which are related to the project in question (such as payment of engineering fees, management fees, and taxes to Company D), and which are unrelated to the project in question (such as engineering fees, litigation fees, attorney fees, and enforcement fees for other projects), and calculate the amount payable after deductions for each item, so as to visually demonstrate to the court the impropriety of the deductions.
The fourth major challenge is whether the partnership's profits are truly "uncertain"? Does the dispute among the parties necessarily lead to the dismissal of the claim? The court of first instance held that Company A's claim was based solely on its own compiled income and expenditure statement, which was not approved by all parties, and therefore the profit could not be determined, thus dismissing the claim. However, in reality, the vast majority of the income and expenditure for the projects in question had been confirmed or were undisputed by all parties, with only a few items subject to objection. Dismissing the entire claim on the grounds of partial disputes would clearly violate the principle of proportionality.
Solution: Provide accurate accounting records to prove that the settlement conditions have been met, and apply for judicial audit for the disputed parts.
First, submit a detailed project account statement, listing all income and expenditure items, with each item clearly marked with supporting evidence: total income approximately 31 million yuan (undisputed by all parties); management fees deductible by Company B approximately 300,000 yuan + taxes approximately 2 million yuan (supported by contractual contracts and invoices); construction costs approximately 20 million yuan (including approximately 1.8 million yuan in project payments due to Company D as confirmed by an effective judgment); financial costs approximately 7 million yuan (supported by a summary of expenses signed and confirmed by the finance department and legal representative of Company C). Based on this, calculate the partnership profit, etc.
Second, regarding the disputed parts (such as the authenticity and relevance of some expenses), submit an "Application for Appraisal" to request the court to entrust an auditing institution to conduct a judicial audit of the disputed amount.
Third, the judicial approach of "making a judgment on undisputed parts first and resolving disputed parts through auditing" has been explicitly supported by the Supreme People's Court. Even if some facts are disputed, it should not be a reason to dismiss all claims.
Judgment
The appellate court adopted the core arguments of the defense attorney. After our submission of the "Application for Appraisal," the court held that "new circumstances arose in the second instance, leading to the first instance court's unclear determination of the basic facts of the case." Therefore, in accordance with Article 177, Paragraph 1, Item (3) of the Civil Procedure Law of the People's Republic of China, the court ruled to overturn the first instance judgment and remand the case for retrial. The case is currently in the retrial stage, and the retrial will focus on substantive issues such as the liquidation of partnership assets, the legality of Company B's deductions, and the amount of money owed to Company A.
Significance: A dual lesson for corporate risk prevention and legal case handling
Although this case involves a dispute over the distribution of project funds under a subcontracting and partnership relationship, the problems it exposes and the lawyer's approach to resolving the issue offer valuable insights for both business operations and legal practice.
1. For businesses: Partnerships require attention to contract terms and process management, and these three aspects must be "meticulous".
Contract Drafting: Clarify the liquidation mechanism to avoid "settlement deadlock". When signing a partnership agreement, enterprises should stipulate a clear liquidation procedure and time limit, such as "liquidation shall be completed within 30 days after the termination of the partnership" and "if liquidation is not completed within the time limit, either party may apply for a third-party audit", and clarify how the audit fees shall be borne, so as to avoid the inability to realize rights due to a liquidation deadlock.
Process Management: Establish a joint account and written confirmation system to ensure every transaction is documented. During the partnership, all income and expenditure should be processed through the joint account, and significant expenses require written confirmation from all partners. In this case, although Company A and Company C established a joint account, they failed to promptly confirm the ownership of each expenditure, leading to subsequent disputes. It is recommended that companies reconcile accounts regularly (e.g., quarterly) and generate written confirmation documents to avoid "dredging up old accounts" during settlement.
Evidence Preservation: Replace "Post-Event Remedies" with "Simultaneous Archiving." Engineering companies should establish a "Simultaneous Archiving System for Performance Evidence." From project commencement to final settlement, all site confirmation, changes, payment vouchers, acceptance documents, etc., should be archived and preserved promptly to avoid loss of evidence due to personnel changes or the passage of time. In this case, if complete records of escrow account payment approvals could be preserved, it would more directly demonstrate Company B's acceptance of the tripartite agreement.
2. For lawyers: They should make good use of the Supreme People's Court's ruling rules to break the deadlock in partnership liquidation through "consolidated trial + judicial audit".
First, lawyers should promptly pay attention to and utilize the latest rulings of the Supreme People's Court. The Supreme People's Court's Ruling No. 268 of 2025 established the important rule that "a partnership cannot be dismissed without liquidation," providing a powerful tool for handling partnership disputes. Lawyers should remain sensitive to the latest rulings of the Supreme People's Court and promptly apply the latest rules to their legal practice.
Secondly, the "inability to liquidate" problem can be resolved by using "precise accounts + judicial audit application". When partners are unable to liquidate on their own, lawyers should not wait passively, but should proactively submit detailed accounts and audit applications to provide the court with a workable liquidation path—a preliminary judgment on the undisputed parts, and a resolution through audit for the disputed parts.
Finally, make good use of the "consolidated trial" approach to clarify multiple legal relationships. This case involves the intersection of affiliation and partnership relationships. In terms of litigation strategy, lawyers should urge the court to try the rights and obligations of all parties together, avoiding fragmented fact-finding due to "separate case handling." Through systematic analysis and visual presentation of the case, help the court quickly grasp the core of the dispute and promote a substantive resolution of the case. However, it is also important to note that payments in affiliation relationships must be clear, fixed, and agreed upon by all parties, so that the partnership relationship can be emphasized in the trial. However, on June 29, 2026, the Supreme People's Court issued the "Interpretation (II) on Several Issues Concerning the Application of Law in the Trial of Construction Project Contract Disputes" (Fa Shi [2026] No. 12). Given that this judicial interpretation will take effect on June 30, 2026, whether management fees should be paid needs to be discussed separately. This sharing will not elaborate on this point but will be discussed later.
Attorneys in charge: Li Wangjun and Li Yamei, Shaanxi Qindian Law Firm