China: Building In China — Some Legal Considerations

Last Updated: 28 October 2011
Article by Nick Molan

Recent data on the Chinese construction market confirmed it as the second largest in the world, and it is expected to surpass the U.S. to take the number one spot by 2020. Since the Central Government indentified the significance of the construction industry for China's modernisation plans during the early 1980s, the industry has boomed to the point that today construction-related output is valued at US$1.4 trillion, equivalent to approximately 24 percent of China's GDP. The current strength and expected growth of the construction market is underpinned by China's rapid population growth, an accelerated trend towards urbanization, increased industrial output and the increased infrastructure and other capital needs stemming from the foregoing.

However, although China's economy has become increasingly open, particularly since China's accession to the World Trade Organization in 2001, the construction industry remains relatively protected by a combination of

----------------------------------------------------------

Mainland China is governed by a multi-tiered civil regime which is constantly evolving at the hands of the central, provincial and municipal governments.

----------------------------------------------------------

legal, political and economic mechanisms which must be understood and managed by foreign construction and services firms hoping to tap into this market. In this article we set out some of the legal considerations which should be borne in mind when considering the relative advantages and disadvantages for foreign construction companies of seeking to do business in China.

Legal Barriers to Foreign Construction Companies

According to the National Statistics Bureau of China, there are approximately 59,000 construction enterprises in China, but only 351 foreign firms (not including firms from Hong Kong or Macau) that have registered activity on the Mainland. Interestingly this number has been steadily decreasing since 2004, when the number stood at 386. The majority of these foreign companies are based in Beijing and Shanghai, they employ (on average) approximately 300 people, and realised a combined total profit in 2009 of almost US$350 million.

However, focusing on wholly foreign-owned companies can be misleading, given that (as a general rule) foreign companies must team up with a local partner (either in joint venture or by creating a special purpose company) to be eligible to work in the Chinese market. This obviously involves a degree of risk, both in selecting a suitable partner and forming a cohesive working unit with that partner on an ongoing basis. Nonetheless, it also reflects a general underlying symbiosis between foreign companies, whose strength often lies in their technical and management know-how, and local companies, whose strength often lies in their manpower, local knowledge and connections.

A key exception to this general prohibition on foreign construction companies operating in China in their own right is that foreign firms may be awarded contracts for construction projects financed by foreign governments, international and multilateral organizations (most notably, the World Bank and the Asian Development Bank) or foreign companies. This is generally a good fit, given that in scope and technicality these projects are often complex, which provides sophisticated foreign contractors with an advantage over their lower cost domestic competitors for such work.

Legislative Framework

Mainland China is governed by a multi-tiered civil regime which is constantly evolving at the hands of the central, provincial and municipal governments. The following laws passed by the central government are of particular significance for the construction industry (and apply equally to local participants, foreign companies and foreign/local joint ventures):

  • The Contract Law of the PRC, notably Chapter 16 which defines a construction project contract to include survey contracts, design contracts and project construction contracts. Chapter 16 also sets out certain general principles for tendering, contractual terms, supervision and inspection of the site and works, and remedies;
  • The Construction Law of the PRC, which regulates construction licensing, contracting, supervision of construction projects, occupational health and safety, project management and quality regulation; and
  • The Invitation and Submission of Bids Law of the PRC, which standardizes the procurement process (including bid invitation and submission) for projects with a bearing on public interest, including large-scale infrastructure and public utility projects, and projects which are funded by the Chinese government, foreign governments or multilateral organizations.

In addition to these laws of general application, there are a number of laws which have been prepared by the Ministry of Construction (the Central Government Ministry which has general oversight for construction activities and the construction industry in China) specifically targeting foreign firms operating in China.

These include:

  • The Regulations on Administration of Foreign Invested Firms;
  • The Regulations on Foreign Invested Construction and Engineering Firms; and
  • The Regulations on the Management of Foreign Funded Urban Planning Service Enterprises, each of which seeks to reconcile the general construction laws described earlier with various laws governing foreign investment in China, including the Sino-Foreign Equity Joint Ventures Law and the Wholly Foreign-Owned Enterprises Law.

The above represents a sample of the major legislation which is likely to apply to a foreign-owned construction company doing business in China. It is important to remember, however, that behind this are a significant number of further laws, regulations, directives, issues papers and memoranda issued by different levels of China's bureaucracy which must be considered in reaching a decision about whether to participate in a particular project. However there is a growing number of law firms and other specialist advisers, both inside China and elsewhere, who are able to assist companies in navigating this complex field.

Standard Form Contracts

As with many jurisdictions, standard form contracts have been introduced within the Chinese construction industry to improve the efficiency of the contract negotiating process and to manifest certain generally accepted principles about the way business is done in the market.

Foreign contractors generally draw comfort from the fact that FIDIC conditions of contract have been widely used in China for the delivery of major construction projects for a number of years now. It is important to recognize, however, that the FIDIC form is primarily used for projects financed by foreign governments, international and multilateral organizations or foreign companies.

For projects procured by the Chinese public sector or state-owned enterprises, there are a significant number of Chinese standard form contracts, and their use in a project may be influenced by the industry in which the project is situated or the nature of the procuring entity. The most important general form of construction contract is the Model Conditions of Contract for Works of Building Construction, released by the Ministry of Construction and the State Industrial and Commercial Administration Bureau in 1991 and re-issued in a revised second edition in 1999. This general form of agreement and related forms are constantly being revised and refined with reference to prevailing international trends and developments in relevant laws.

Most recently, the National Development and Reform Commission released draft versions of the Standard Project Design and Construction Main Contractor Bidding Documents and the Simplified Standard Construction Project Bidding Documents (which are basically simplified versions of the Standard Documents for Tendering of Construction Projects issued in 2007). The public consultation process regarding these drafts closed at the end of December 2010, and many had been expecting final versions to be released in the first half of this year. However, at the time of writing this article, these were yet to be published.

In addition to the forms of contract published by the government bodies identified above, many other public bodies and state-owned companies have also created standard conditions of contract for their works, including (by way of example) the Ministry of Water Conservancy, the Ministry of Electricity and the State Industrial and Commercial Administration Bureau.

To Build or Not to Build?

The Chinese economy has become synonymous with boundless enthusiasm and potential, and few people challenge the fundamental role which the construction industry has played and will continue to play in the future of that growth.

This article has discussed some of the preliminary legal issues which a construction enterprise should consider when deciding whether to pursue business opportunities in China. Of equal importance will be considerations regarding the economics and commerciality of such opportunities, cultural constraints to doing business in China and the organizational fit (in the case of a joint venture structure) within an enterprise's broader structure. That said, in light of prolonged economic difficulties in more familiar markets, it may be timely for skilled foreign construction companies to consider a foray into China.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions