Common dispute scenarios in subcontractor debt collection and legal handling approaches

In construction projects, subcontractors are often provided with advance payments or paid in accordance with contractual milestones to carry out agreed scopes of work. In practice, however, there are numerous cases where subcontractors fail to perform or inadequately perform their agreed obligations, thereby giving rise to obligations to refund amounts received or to compensate the main contractor for damages.
On that basis, in the article below, TNTP will summarize typical dispute scenarios arising in subcontractor debt collection and analyze the corresponding legal handling approaches, with a view to safeguarding the lawful rights and interests of the parties in construction contractual relationships.

1. Common scenarios in subcontractor debt collection and handling approaches

In practice, the subcontractor’s payment obligations may arise from various situations. Typical scenarios and recommended handling approaches include:

• Subcontractor receives advance payment and abandons the project site: The main contractor should promptly record the current status of the works, determine the portion of the advance payment not corresponding to the completed works, and prepare a replacement plan to ensure project progress.
• Subcontractor fails to complete the work and refuses to sign work volume confirmation records: The main contractor may rely on supporting evidence such as site photographs, confirmations from supervision consultants, and other relevant documentation to determine the actual volume of completed works.
• Defects or quality issues arise in the works: The main contractor should prepare records identifying the defects, request the subcontractor to remedy them within a reasonable period, and, where remediation is not feasible, determine the cost of rectification as a basis for claiming damages.
• Subcontractor shows signs of asset dissipation or suspension of business operations: The main contractor should collect evidence, verify the subcontractor’s legal status, its legal representative, assets, and related transactions, and promptly initiate appropriate dispute resolution measures to safeguard the recoverability of outstanding receivables.

2. Legal risks to be avoided by the main contractor in debt collection from subcontractors

In the course of handling the subcontractor’s payment obligations, the main contractor must adopt appropriate measures and ensure strict compliance with applicable laws. In practice, the application of measures lacking legal basis or failing to follow proper procedures may expose the main contractor to additional legal risks. Accordingly, when conducting debt collection, the main contractor should avoid the following actions:

• Avoid applying unlawful coercive or pressure measures;
• Avoid unilaterally retaining or seizing the subcontractor’s assets without a valid contractual basis or without proper handover records and confirmations;
• Avoid making statements or disclosing information that may adversely affect the subcontractor’s reputation in the absence of sufficient grounds to establish its breach or financial obligations.

Debt collection should be carried out on the basis of proper documentation, evidence, and contractual agreements to ensure the protection of the main contractor’s lawful rights and interests.

3. Documents to be prepared by the main contractor when engaging with the lawyer

To ensure that legal advice and dispute resolution are conducted promptly and effectively, the main contractor should prepare in advance all relevant documents relating to the subcontract agreement and the project implementation process. The required categories of documents include:

• Contractual documents: The subcontract agreement and all appendices thereto;
• Documents evidencing cash flow: Transaction records, advance payment documents, payment records, receipts, and other documents evidencing transfers made to the subcontractor;
• Site and construction records: Site diaries, site minutes, records of delays or quality breaches, together with emails, messages, and other correspondence exchanged between the parties;
• Documents on additional costs: Documents evidencing costs incurred for engaging replacement contractors, including quotations, contracts with replacement contractors, and invoices and supporting documents relating to remedial costs;
• Legal information of the subcontractor: Information on the subcontractor’s legal entity status, registered address, legal representative, and operational status.

4. Frequently asked questions

Is the main contractor entitled to set off the subcontractor’s debt against amounts still payable?

Response: Set-off of payment obligations may be effected where the subcontract agreement provides for such mechanism or where the parties’ obligations satisfy the legal conditions for set-off under applicable laws. In construction practice, set-off is commonly implemented through contractual provisions on deduction or set-off of mutual debts.

Can the main contractor claim repayment of advance payments in the absence of signed confirmation records?

Response: The main contractor may still claim repayment of advance payments where other evidence is available to demonstrate that payment has been made and that the actual completed work does not correspond to the amount received. Such evidence may include bank transfer records, site minutes, confirmations from supervision consultants, or correspondence exchanged between the parties.

When can the main contractor demand payment under an advance payment guarantee or a performance bond?

Response: A demand under a guarantee is typically made where the subcontractor breaches its contractual obligations and the conditions stipulated in the guarantee instrument issued by a credit institution are satisfied.

Should the main contractor prioritize negotiation or initiate legal proceedings when the subcontractor avoids engagement?

Response: As a general principle of contractual dispute resolution, parties are encouraged to prioritize negotiation and amicable settlement. However, where the subcontractor fails to cooperate or does not perform its contractual obligations, the main contractor may proceed to initiate legal proceedings before a competent court or refer the dispute to arbitration in accordance with the subcontract agreement and applicable laws.

What should the main contractor prepare to substantiate damages caused by the subcontractor?

Response: Pursuant to Article 303 of the Commercial Law 2005, in order to claim damages, the main contractor must establish the following elements: (i) a breach of contract; (ii) actual damages incurred; and (iii) a causal link between the breach and the damages.

Supporting documents may include the subcontract agreement and its appendices, records confirming delays or quality breaches, site documentation, as well as invoices and supporting documents evidencing reasonable remedial costs, together with correspondence exchanged between the parties.

Debt collection from subcontractors in construction projects involves not only payment obligations but also disputes relating to progress, quality, certified work volume, and liability for damages. Accordingly, the main contractor should prepare comprehensive documentation and evidence, and adopt appropriate strategies to protect its interests. For complex cases or those involving high risks, it is advisable for enterprises to seek legal counsel at an early stage to enhance the likelihood of successful debt recovery and to minimize potential losses.