The code you posted is correct and valid. According to W3S nesting lists like this:
<ul>
  <li>Coffee</li>
  <li>Tea
    <ul>
      <li>Black tea</li>
      <li>Green tea</li>
    </ul>
  </li>
  <li>Milk</li>
</ul>
is the right way (exactly as you do it). Error is somewhere else. Please provide more code.
Even with DOCTYPE XHTML 1.0 Strict W3C validates this code
<!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd">
<html xmlns="http://www.w3.org/1999/xhtml">
<head>
<meta http-equiv="Content-Type" content="text/html; charset=utf-8" />
<title>Title</title>
</head>
<body>
<ul>
    <li>1</li>
    <li>2</li>
    <li>3
        <ul>
            <li>3.1</li>
            <li>3.2</li>
        </ul>
    </li>
    <li>4</li>
</ul>
</body>
</html>
as correct.