In 2017, the Respondent entered into an EPC General Contract (the “Main Contract”) with D Power Company of U Country (the “Employer”) for the U Country D Power Project(the “Project”).

In June 2019, the Claimant and the Respondent signed the Construction Cooperation Contract for the 330kV Transmission and Transformation Project in U Country (the “Contract”) covering the design, procurement, and construction of the Project.The Contract provided for a provisional lump sum price of approximately USD 75 million. TThe Claimant was responsible for the design, procurement, and construction of the Project, while the Respondent was responsible for coordinating with the Employer and handling all external matters.

After the Contract was executed, the Claimant signed relevant procurement contracts with domestic suppliers and subcontracted certain construction sections to various subcontractors.. The Claimant submitted monthly progress reports to the Respondent. With respect to completed works, the Claimant submitted a total of thirteen progress measurement statements to the Respondent, all of which were approved by the Employer. However, the Respondent made no further payments to the Claimant after December 2019.

On 16 July 2022, the Claimant issued to the Respondent a notice titled Notice of Forced Suspension of Work Due to Unresolved Funding Issues at the Project Site, requesting that the Respondent propose a reasonable solution to the funding problem and notifying the Respondent that a full suspension of work would occur on 10 August 2022. On 13 August 2022, the Claimant sent a letter by email to the Respondent, formally notifying the termination of the Contract and all related agreements.

Following the Claimant’s withdrawal from the Project site, the Respondent made several payments to the Claimant’s former subcontractors for construction works and workers’ wages, and also deposited three payments into the parties’ joint escrow account.

On 10 August 2022 and 7 December 2022, the Employer issued two letters requiring rectification of defects in the Project.

On 30 May 2024, the Respondent made a claim under the performance bond issued for the Contract to the X Branch of J Bank,alleging that the Claimant had unilaterally terminated the Contract, suspended work and withdrawn from the project site without authorization, and refused to rectify construction defects. On 26 June 2024, the X Branch of J Bank paid the Respondent over RMB 54 million under the performance bond.

The Claimant commenced this arbitration, seeking confirmation that the Contract had been terminated, payment of outstanding project sums and interest, and compensation for losses arising from domestic equipment procurement, subcontractor claims, and the Respondent’s call under the performance bond.

The Respondent filed counterclaims, seeking an order for continued performance of the Contract, repayment by the Claimant of alleged overpayments and interest, liquidated damages for failure to rectify the works and compensation for the losses the Respondent claimed to have incurred. . The Respondent also disputed the amount of payments claimed by the Claimant.

• I. Whether the parties’ relationship should be characterized as a consortium
• II. Whether the Chinese legal prohibitions on illegal subcontracting and subcontracting of main structural works apply to international engineering contracting projects
• III. Whether, under a “back to back” payment arrangement, the Respondent’s payment obligations had become due and enforceable

I. Consortium Relationship

The Claimant contended that the parties had not entered into a consortium agreement for the Project and therefore did not form a consortium but rather an overseas international engineering subcontracting arrangement.

The Respondent maintained that the legal relationship between the parties amounted to a consortium formed on the basis of a series of governmental documents and bilateral agreements, with the Respondent acting as the consortium leader. Accordingly the Respondent argued that the rights, obligations, and liabilities should be determined in accordance with the consortium model and the provisions of the Contract.

The arbitral tribunal noted that the Respondent had submitted its bidding documents—which included a draft consortium agreement emailed to the Claimant but never executed by the parties—together with the emails transmitting that draft and consortium agreements signed by the parties in similar projects with the same Employer. These materials were intended to demonstrate an established commercial practice of cooperation between the parties under a consortium model.

The tribunal found, however, that the Employer’s tender documents expressly required consortium members to execute a consortium agreement and submit it together with the bid documents. The parties did not sign any consortium agreement for the Project, and neither the Main Contract documents nor the contractual provisions made any reference to such an agreement. The consortium agreements executed by the parties in other similar projects were insufficient to establish a commercial practice; rather, they underscored the necessity of a duly executed consortium agreement. Accordingly, for the purposes of the Main Contract in this case, the Respondent and the Claimant did not form a consortium.

Furthermore, the Contract stipulated, “Party A, as the general contractor of the Project, shall be responsible for external liaison and handling all external relations with the Employer and other parties..., while Party B shall organize technical personnel and complete the design, procurement, and construction tasks of the Project...” It also provided that “If, before Party B has fully performed its contractual obligations, the Main Contract is terminated or the Employer’s engagement of Party A is terminated for any reason, Party A shall notify Party B to immediately cease its employment within 24 hours upon such termination.”

The tribunal noted that a consortium relationship constitutes a contractual partnership. Pursuant to Articles 967 and 973 of the Civil Code of the People's Republic of China, the parties should be in an equal cooperative relationship, sharing profits and risks and bearing joint and several liabilities to the Employer for the contracted project.However, the wording of the above contractual provisions clearly indicates that the Respondent acted as the general contractor of the Project and that the relationship between the Respondent and the Claimant was one of “employer” and “employee.” Therefore, even under the Contract itself, the relationship between the parties was not a consortium relationship.

II. Application of the Prohibitions on Illegal Subcontracting and Main Structural Works Subcontracting

Both parties agreed that Chinese laws would apply to the substantive adjudication of the case. However, the Respondent argued that the provisions in the Construction Law and Chapter 18 of the Civil Code concerning construction contracts, as well as relevant judicial interpretations—particularly those prohibiting illegal subcontracting and subcontracting of main structural works—should not apply in this case.

The tribunal held that, having regard to the spirit of Article 8(1) of the Administrative Measures for the Identification and Investigation of Illegal Acts in Construction Project Contracting and Subcontracting (Jianshigui [2019] No. 1), the Contract could not be excluded from falling within the scope of subcontracting. It was therefore necessary, as a preliminary matter, to determine whether the provisions of the Construction Law and the Civil Code prohibiting illegal subcontracting and the subcontracting of main structural works applied to this case, and whether the Contract was valid.

The tribunal accepted the Respondent’s position that the provisions of the Construction Law and Chapter 18 of the Civil Code concerning construction contracts—including the prohibitions on illegal subcontracting and the subcontracting of main structural works—do not apply to the substantive issues in this case, and upheld the validity of the Contract. The tribunal’s principal reasons were as follows:

First, ensuring construction quality and safety is one of the primary legislative purposes of the Construction Law. This purpose is reflected through the construction industry qualification management system, which uses qualifications as the statutory criterion for determining whether market participants possess the necessary capability to perform construction contracts, as well as through provisions prohibiting subcontracting and subcontracting of main structural works. However, overseas international engineering projects rarely require Chinese construction qualifications. In the present case, the Employer’s tender documents did not require bidders to possess Chinese engineering design or construction qualifications. Therefore, the provisions of the Construction Law related to China’s qualification management system—such as the prohibitions on subcontracting and subcontracting of main structural works—lack a basis for application in overseas engineering contracting activities.

Second, one of the competitive advantages of Chinese “going global” contractors lies in utilizing domestic production resources to reduce costs. At the same time, they may face difficulties due to limited familiarity with the host country laws. If Chinese contractors were required to avoid the provisions of Chinese law concerning subcontracting by selecting foreign governing law when concluding cooperation or subcontracting agreements, this would significantly increase transaction costs and operational risks for both parties, thereby undermining the competitiveness of Chinese enterprises in international engineering markets.

Third, it would be inconsistent with rational economic conduct for parties to choose Chinese law with full awareness that certain provisions might invalidate the contract. Such a choice would not reflect the true intention of reasonable commercial men.

Fourth, the Respondent undertook the Project with the approval of the competent Chinese authorities. For state-approved “window-type” engineering contractors like the Respondent, selecting domestic enterprises with relevant construction qualifications and capabilities to cooperate or act as subcontractors in the design and construction of overseas projects, helps ensure project quality and safety and protects the interests of the Employer. Such arrangements are consistent with the legislative purpose and should be encouraged.

III. “Back-to-Back” Payment and the Maturity of the Respondent’s Payment Obligation

Relying on the alleged consortium relationship, the Respondent argued that it bore only a pass-through payment obligation and had no obligation to demand payment from the Employer.

The tribunal noted that the Respondent’s alleged a pass-through payment obligation referred to a situation under a consortium agreement in which the Employer would apply to the Export–Import Bank of China for payment, which would then be transferred to the Respondent directly, after which the Respondent would pay the Claimant’s share. Under the Contract, however, the payment procedure provided that the Claimant would complete the relevant work under the Main Contract and submit compliant payment certification documents to the Respondent, after which the Respondent would settle the payment with the Employer and the Export–Import Bank of China, and then pay the amount due to the Claimant within 30 days after receiving payment from the Export–Import Bank of China.

The tribunal held that since the parties were not in a consortium relationship and since, under the Contract, pursuing project payments from the Employer was the Respondent’s contractual obligation, the tribunal did not accept the Respondent’s argument that it only bore a pass-through payment obligation under the Contract. The payment arrangement under the Contract was closer to what is commonly referred to as a “back-to-back” payment mechanism. The key distinction between such a mechanism and pass-through payments lies in whether the Respondent has an obligation to urge the Employer to make payment.

After reviewing the parties’ evidence and the facts established during the proceedings, the tribunal found that, as of the Employer’s approval of the thirteenth measurement and the Claimant’s withdrawal from the project site on 10 August 2022, the Employer owed the Respondent over USD 70 million in outstanding project payments. Although the Respondent sent several letters to the Employer between December 2021 and June 2023 stating that funding problems had seriously delayed the progress of the project and indicating that it might claim extensions of time and additional costs, it never expressed any intention to suspend performance or terminate the Main Contract in accordance with its terms.

The tribunal noted that the Respondent’s failure to timely assert its rights against the Employer may have been influenced by international political considerations—for example, the risk that the dispute might escalate to matters of national sovereignty or affect debt negotiations between China and Country U. It was also evident that the Respondent was motivated by its interest in maintaining other projects in Country U, which constituted one of its principal markets, as well as by its own long term commercial interests. The Respondent therefore refrained from asserting its rights out of its own commercial considerations. Pursuant to Article 159 of the Civil Code, the “back to back” payment condition under the Contract should accordingly be deemed to have been satisfied, and the Respondent was under an obligation to promptly pay the outstanding project sums to the Claimant.

After a line-by-line analysis of the parties fund flows, the tribunal determined that as of the Claimant’s withdrawal from the project site on 10 August 2022, the Respondent owed the Claimant over USD 32 million in accumulated advance payments and project payments. In accordance with Article 563 of the Civil Code and related provisions, the Claimant was legally entitled to terminate the Contract. The tribunal confirmed that the Contract was terminated on 13 August 2021, the date on which the Claimant’s notice of termination was served.

Based on the tribunal’s findings on the core issues above, there was no overpayment by the Respondent; the Claimant’s withdrawal from the project site did not constitute a breach of contract; and the Respondent’s call on the performance bond after the termination of the Contract was improper. Accordingly, the tribunal upheld the Claimant’s claims for contract termination, outstanding payments and interest, and compensation for losses caused by wrongful performance bond and related interest. The tribunal dismissed the Claimant’s claims for losses arising from domestic equipment procurement and subcontractor claims, and rejected all of the Respondent’s counterclaims.