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New Draft PRC Construction Law

On 27 August 2004, the Ministry of Construction of the PRC ("the MOC") published a Draft Construction Law ("the Draft") (which was only posted on the MOC's website on 3 September 2004) inviting comments from the public by 20 September 2004.

This is part of the MOC's ongoing plan to amend the existing PRC Construction Law and its related rules and regulations. For example, in respect of residential projects, the MOC has already issued new rules imposing a requirement that both the employer and the main contractor should provide payment or refund guarantees for the performance of the parties' respective obligations. According to the MOC, by the end of 2004, the MOC will introduce 9 more sets of rules and regulations relating to the existing PRC Construction Law, including a set of "Rules for Final Account Management" being made jointly by the MOC and the Ministry of Finance.

The Draft represents the MOC's efforts to introduce new concepts and structures into the PRC construction and engineering market and to bring PRC construction practice more in line with international practice. According to Article 2 of the Draft, the PRC Construction Law will henceforth regulate amongst others survey, design, construction, construction supervision, project management, quantity surveying, technical consultancy, and testing and inspection activities in relation to construction projects. Although the MOC has promulgated regulations, rules and policies to regulate the provision of construction-related services such as project management, quantity survey, technical consultancy and testing and inspection services, this is the first time that it has attempted to codify these provisions in a law.

It is also important to note that the Draft has expanded the main contracting provisions to include both construction main contracting (as provided in the current PRC Construction Law) and project main contracting. This is a substantial advance which effectively introduces the Engineering Procurement and Construction ("EPC") concept into Chinese construction practice. Based on the provisions of Article 42 of the Draft, an enterprise with a survey, design or main construction qualification certificate can contract for EPC projects as the main contractor, as long as the relevant parts of the EPC project for which it is not qualified are subcontracted out to suitably qualified subcontractors.

The Draft is loaded with penal provisions, many of which involve heavy criminal penalties. For example, the owner requires the works contractor or design institute to "cut corners" by shortening the construction period and this leads to sub-standard construction works in breach of quality and safety standards, the owner will be liable for penalties of between RMB 200,000 to RMB 500,000.

Some of the new concepts are not clearly well or fully developed in the Draft. .For example, Article 31 of the Draft prohibits "dismembering" of a construction contract. According to the MaC, excessive subcontracting has caused a lot of problems in the construction industry. However, there is no definition of "dismembering" in the Draft and it may be necessary for the MaC and/or the PRC Courts to provide further definition or interpretation to get a clear picture of how the rules will work in practice.

The Draft also addresses the problem of so-called "Yin Yang" Contracts. In the PRC, sometimes there are two contracts between the employer and the main contractor. The "Yin" Contract is the contract being followed by the parties in practice, while the "Yang" Contract is the contract being used for applying for registration and applying for permits etc. When disputes arise, one of the main issues is whether the parties should use the Yin Contract or the Yang Contract. Article 31 o,f the Draft addresses this issue. According to Article 31, a construction contract should be submitted for filing. When disputes arise regarding the contract, the disputes shall be resolved in accordance with the version submitted for filing.

Overall, the Draft represents a major step forwards in terms of bringing PRC construction and engineering practice more in time with international standards. However, some of the numerous penalties for breaches are quite harsh, which may not be conducive to attracting further foreign investment or overseas professionals into the industry, and many of the new concepts will need to be further clarified before their full impact can be assessed.