Incoterms_® and Commercial Contracts

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1. Introduction

As the construction industry in the People’s Republic of China (the PRC) represents more than USD 300 billion of annual spending, fourth among domestic sectors of activity, and as China has gradually opened up its market in connection with its World Trade Organization commitments, opportunities for foreign investors have multiplied.

The transition to a socialist market economy has entailed the creation of a legal framework for managing the transfer of functions conducted within the State structure toward outside suppliers of goods, services, construction, public amenities, and infrastructure development and other services.

Although in the early phases of opening up and reform, most contracts, including for public projects, were attributed by private negotiations and their attribution was influenced by personal relations (guanxi), the Chinese authorities have more recently sought to impose transparency, competition and fairness in the awarding of projects.

Chinese law emphasizes the use of public bidding for the attribution of government procurement contracts while admitting national preference.

The Chinese authorities have encouraged the diversification of the forms of participation of private, including foreign, operators, with techniques such as Build-Operate-Transfer (BOT) and Transfer-Operate-Transfer (TOT).

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2. The attribution of projects

The process of awarding projects in the PRC is subject to general laws and regulations specific to certain industries and activities.¹

Under the Contract Law,² announcements of calls for tenders are deemed to be invitations to offer.³

In sales by tender, the provisions of special laws and regulations with respect to the rights and obligations of the parties and the tendering procedures prevail over conflicting provisions of the Contract Law.⁴

Article 271 of the Contact Law requires that tendering for construction projects be conducted in an open, fair and impartial manner.

2.1. Tenders

The Law with respect to Invitations and Submissions of Bids (the Law with respect to Tenders), which became effective as of January 1, 2000, governs invitations and bid submission activities conducted in the PRC.⁵ The application of these rules has been standardized by joint adoption of implementing instruments by the National Development and Reform Commission, the Ministry of Construction, the Ministry of Railways, the Ministry of Communications, the Ministry of Information Industry, the Ministry of Water Resources and the Civil Aviation Administration of China.⁶

Whenever a project:

• touches upon the public interest or affects public safety, such as large-scale infrastructure projects or public utility projects;
• is fully or partially funded by the investment of State-owned funds or financed by the State, such as by the issue of government bonds; or
• is financed with loans from international organizations or foreign governments, or aid funds,

then bids must be invited for the surveying and design services, for its construction and supervision, as well as for the procurement of important equipment and materials.

The State Development Planning Commission (now the National Development and Reform Commission – NDRC) further specifies the projects touching upon the public interest or public safety in which tendering is obligatory.

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The following infrastructure projects are deemed to relate to public interest or public safety:

• petroleum, natural gas, electricity, new energy resources and similar energy resource projects;
• transportation, such as railways, highways, bridges, subways, light railways, pipelines, water transport, air transport;
• communications, postal services, telecommunications hubs, information networks;
• flood prevention, irrigation, flood drainage, water diversion, tidal land management, soil and water conservation, key irrigation systems;
• sewage, drainage and treatment, waste disposal, underground pipelines, public vehicle parking, and similar urban infrastructure projects; and
• environmental protection projects.⁷

The following public utility projects are deemed to relate to the public interest or to affect public safety:

• supply of water, electricity, gas, heat;
• science and technology, education, culture;
• physical education, tourism;
• health, social welfare; and
• commercial housing including economical residential housing.⁸

As regards such projects, the NDRC has decreed that government procurement rules apply to individual contracts:

• for construction valued at RMB 2 million or more;
• for equipment worth at least RMB 1 million per item;
• for design and supervision services for RMB 500,000 or more; and
• for projects involving a total investment of RMB 30 million or more.⁹

Projects may not be divided into parts to avoid the invitation of bids.¹⁰

2.1.1. General principles

Bid invitation and bid submission activities must adhere to the principles of openness, fairness, impartiality and good faith.¹¹

They may not be subject to territorial or departmental restrictions.¹²

Projects not suited to the invitation of bids, such as those that involve State security, State secrets or emergency rescues, the use of poverty relief funds, or the need to use farm workers, may be exempted from calls for tenders.¹³

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Where bids are invited for a project using loans from international organizations or foreign governments or aid funds, and the lender imposes different provisions in respect of the specific conditions and procedures for the invitation and submission of bids, its provisions are applied, unless they are contrary to the public interest of the PRC.¹⁴

2.1.2. Issuing invitations to bid

Any legal person or other organization may put forward a project and invite bids.¹⁵

Before any party may issue a call for tenders, it must have the required funding.¹⁶

Invitations of bids may be addressed to the public or to specified legal persons or other organizations.¹⁷

For projects identified as key by the development planning department of the State Council or a people’s government of a province, autonomous region or municipality directly under the central government, private invitations of bids may only be conducted with that authority’s approval.¹⁸

Invitations of bids may be carried out directly or through the intermediary of specialized agencies.¹⁹

In public calls for tenders, announcements must be made in a State-designated newspaper or periodical, on a State-designated information network or in other State-designated media.²⁰

Private invitations to bid must be sent by letter to at least three specific legal persons or other organizations that have the ability to handle the project and that have a good credit standing.²¹

Potential bidders may not be subjected to unreasonable conditions²² or conditions that favour some or preclude others.²³

Bid inviting parties may not disclose to third parties the names or number of potential bidders or other information that could affect fair competition and, in particular, the confidentiality of reserve prices must be respected.²⁴

Bid inviting parties must allow a reasonable time for the bidders to prepare their documents. For projects that must be attributed by invitation of bids, the time between the date on which the bid invitations are issued and the deadline for the submission of bids may not be less than 20 days.²⁵

2.1.3. Submission of bids

Any legal person or other organization may make bids provided that they have the capacity to undertake the project in question.²⁶

The bid inviting party must refuse to accept bid documents delivered after the deadline specified in the bid invitation documents.²⁷

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When bidders intend to subcontract out any work, they must so specify in their bid documents.²⁸

Bidders may organize as a consortium and jointly submit a single bid. In such cases, each of the consortium’s members must have the capability to undertake the project. They must conclude an agreement clearly specifying the work and responsibilities each member intends to undertake. The members of the consortium jointly execute a contract with the bid inviting party and they bear joint and several liability for the whole project.²⁹

Bid inviting parties may not coerce bidders into organizing a consortium and may not restrict competition among the bidders.³⁰

Bidders may not collude on prices, violate fair competition with other bidders or violate the rights of the bid inviting party or other bidders. Bidders and the bid inviting party may not collude to harm the interests of the State, the public interest or the lawful rights and interests of a third party. Bidders are prohibited from bribing the bid inviting party or members of the bid evaluation committee.³¹

Bidders may not submit bids below cost or submit bids in the names of third parties or use other fraudulent means to have their bids accepted.³²

2.1.4. Determination of the winning bidder

Bids are opened in public by breaking of their seals upon reaching the deadline for submission of bids at the place specified in the bid invitation documents.³³ The meeting is led by the bid inviting party and all the bidders are invited to attend.³⁴ All the bids must be opened. Minutes of the meeting are kept for future reference.³⁵

According to article 37 of the Law with respect to Tenders, bids are evaluated by special committees organized according to law by the bid inviting parties. When the invitation of bids is required, the bid evaluation committee must be composed of the representative of the bid inviting party and experts in the fields concerned. It must be selected by the bid inviting party from the list of experts provided by the competent departments of the State Council, or the competent departments of the people’s governments, or from the list of experts in the relevant fields in the bid invitation agency’s pool of experts. The expert members in the committee must account for no less than two thirds of the committee’s composition. Persons with a material interest in the bid inviting party may not sit on the bid evaluation committee. The list of members of the bid evaluation committee must be kept confidential until the winning bidder has been determined.

The bid evaluation process is subject to strict confidentiality and no unit or individual may illegally intervene to affect its outcome.³⁶

The bid evaluation committee submits a written report to the bid inviting party and recommends bidder(s) qualified to win.

Where the bid invitation issuer does not delegate the decision to the committee, it decides the winning bidder on the basis of the evaluation reports and recommendations.³⁷

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The winning bidder is the one:

• that conforms most closely to all of the overall evaluation standards specified in the bid invitation documents;
• that satisfies the substantive requirements of the bid invitation documents; and
• whose bid price is the lowest among those evaluated, except for bid prices below cost.³⁸

If the bid evaluation committee considers that none of the bids meets the requirements of the bid invitation documents, it may reject them all.³⁹

Until the winning bidder has been determined, the bid inviting party may not hold negotiations with bidders on substantive issues, such as bid prices.⁴⁰

The members of the bid evaluation committee must perform their duties in an objective and impartial manner, observe their profession’s ethics and bear personal liability for their evaluation opinions.

The members of the bid evaluation committee may not have private contacts with bidders or receive from them any property or other benefits and they must respect the confidentiality of the information received in the context of their functions.⁴¹

The bid inviting party issues a letter of acceptance to the winning bidder and simultaneously informs all the losing bidders of the result. The letter of acceptance is legally binding on the bid inviting party and on the winning bidder.⁴²

Within 30 days of the date of issuance of the letter of acceptance, the bid inviting party and the winning bidder must conclude a written contract consistent with the winning bid, the substantive terms of which may not later be altered.⁴³

For projects that legally require calls for tenders, the bid inviting party must submit a written report to the competent administrative supervision department within 15 days of the date of determination of the winning bidder.⁴⁴

According to article 48 of the Law with respect to Tenders, the winning bidder must complete the project according to the contract and it may not assign the project in whole or in part to third parties. Subject to the provisions of the contract or the consent of the bid inviting party, the winning bidder may subcontract some of the non-principal parts of the work to qualified subcontractors while remaining accountable for the project and bearing joint and several liability with the subcontractors for the subcontracted work.

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2.1.5. Liabilities

For violations of provisions of the Law with respect to Tenders, a range of administrative sanctions are applicable, including fines, cancellation of the contract in dispute, confiscation of illegal gains, suspension or revocation of professional licences or qualifications and demotions.

The sanctions apply to the persons directly responsible for the illegal acts as well as to those directly in charge of their activities.

Where crimes are committed, the procuratorate is informed and prosecution may be initiated.

Under the Law against Unfair Competition,⁴⁵ bidders may not act in collusion with each other so as to force up or down the bidding prices, and bidders and tender-inviters may not collude to exclude competitors from fair competition.⁴⁶

Where bidders collude to force up or down the bidding price, or bidders collude with tender-inviters to exclude their competitors, the bid is invalidated, and the supervision and inspection department may impose a fine of not less than RMB 10,000 but not more than RMB 200,000.⁴⁷

The Interim Provisions on Prohibiting Bid-Rigging issued by the State Administration for Industry and Commerce (SAIC)⁴⁸ target in particular bid-rigging during the tendering and bidding for contracting construction projects, purchasing complete sets of equipment or other commodities, leases or contracting out of businesses, concessions of land-use rights, and leasing of sites of operations.

Bid-rigging is defined as the use of unfair means between the caller for bids and a bidder, or between bidders, to exclude competitors or harm the caller’s interests.

Article 3 of the Interim Provisions specifically prohibits bidders:

• from agreeing to raise or lower the bid price;
• from agreeing to take turns to win bids at high or low prices; and
• from deciding on a winner before participating in bidding.

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Article 4 prohibits the following specific forms of collusion between callers for tenders and bidders:

• the caller for tenders opens the bidding documents and reveals the bidding conditions to other bidders or helps a bidder change its bidding documents;
• the caller for tenders discloses the floor price to a bidder;
• the caller for tenders and a bidder decide through consultation to raise or bring down the price during bidding or tendering, with extra compensation to be paid to the tenderer or the bidder after the bid is won; and
• the caller for tenders decides on a bid winner beforehand or chooses a bid winner during bidding according to a decision made in advance.

2.2. Government procurement

The processes of government procurement have undergone radical transformations in the course of the adoption of the socialist market economy and most recently in connection with China’s joining of the World Trade Organization.

The Government Procurement Law was adopted at the 28th meeting of the Standing Committee of the Ninth National People’s Congress (NPC) on June 29, 2002.⁴⁹

Procurement refers to activities conducted by means of contract for the acquisition of goods or services for consideration, including purchases, leases, agencies and employment.⁵⁰

Government procurement refers to the purchasing activities of government departments, institutions and public organizations at all levels, where the goods, construction and services concerned are listed in the centralized procurement catalogue and where their value exceeds prescribed procurement thresholds.⁵¹

2.2.1. General principles

Government procurement activities must be conducted in accordance with the principles of openness, transparency, fair competition, impartiality and good faith.⁵²

Freedom of access to government procurement contracts for outside suppliers is protected by article 5 of the Government Procurement Law.

Contracts for government procurement must remain within the approved budgets.⁵³

Whether procurement is carried out at the central or local level of the administration is defined in the centralized procurement catalogue published by people’s governments at or above the provincial level.⁵⁴

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The centralized procurement catalogue applicable to the central administration is determined and published by the State Council. The centralized procurement catalogue for government procurement items that come under local budgets is determined and published by the people’s governments of the provinces, autonomous regions or municipalities directly under the central government, or the departments authorized by them.

Government procurement must be conducted in such manner as to promote environmental protection, to assist under-developed and ethnic minority areas, as well as to encourage small- and medium-sized enterprises.⁵⁵

Domestic preference applies in government procurement except:

• where the contracted goods or services are not available in the PRC or, though available, cannot be acquired on reasonable commercial terms;
• where the items to be procured are for use abroad; and
• where otherwise provided for by other laws and administrative regulations.⁵⁶

Public notice of government procurement opportunities must be given in a timely manner.⁵⁷

Personnel involved in the administration of government procurement must withdraw from processes when they have an interest in any of the bidders or suppliers.⁵⁸

Where government procurement involves loans from international organizations or foreign governments, the agreement reached between the creditor and the Chinese party prevails over conflicting provisions of the Government Procurement Law, provided that the interests of the State and the public are not harmed.⁵⁹

2.2.2. The government procurement process

Procuring entities include government departments, institutions and public organizations.⁶⁰ They are obligated to act through institutions for centralized procurement that are non-profit legal persons instituted by people’s governments at all levels above the county level.⁶¹ They seek to contract lower-than-average market prices for higher quality goods and services.⁶²

When items are not on the lists of the centralized procurement catalogue, procuring entities may act directly. Departments may directly purchase goods and services for their individual use and individual entities may act directly upon approval of the people’s government at or above the provincial level.⁶³

The State Council and the people’s governments at the provincial level publish lists of certified government procurement agencies to which procuring entities may entrust government procurement within a defined scope.⁶⁴

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To qualify as a supplier for government procurement, candidates must meet the following requirements:

• they must enjoy the capacity to assume civil liabilities independently;
• they must be of good business reputation and possess sound financial and accounting systems;
• they must possess the equipment and professional expertise needed for performing contracts;
• they must have a clean record of paying taxes and making financial contributions to social security funds; and
• they must not have committed major breaches of law over the three previous years.

Suppliers may form consortiums to participate in government procurement. They may enter jointly into a procurement contract with the procuring entity and they then would bear joint and several liabilities toward the procuring entity for matters agreed upon in the contract.⁶⁵

Collusion among suppliers is forbidden when it harms the interests of the State or the public or the legitimate rights and interests of other parties to government procurement, or excludes by any means other potential suppliers from participating in the competition.

It is forbidden for suppliers to win a bid or conclude a deal by any illegitimate means including bribing personnel of the procuring entity, the procuring agency, the bid evaluation committee, the competition’s negotiating team or the quotation inquiry team. No procuring agency may pursue illegal interests through bribing members of the procuring entity or by any other illegitimate means.⁶⁶

2.2.3. Methods of government procurement

According to article 26 of the Government Procurement Law, public invitation is to be the principal method adopted to attribute contracts, but recourse may also be had to invited bidding, competitive negotiation, single-source procurement, inquiry and other forms as approved by competent authorities.

Invited bidding is permitted under any of the following circumstances:

• where the goods or services in question are special in character and can only be procured from a limited number of suppliers; or
• where the cost of public invitation forms an excessive proportion of the total value of the government procurement items.⁶⁷

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Competitive negotiation is permissible where:

• after bidding is invited, no qualified suppliers submit tenders;
• it is hard to determine detailed specifications because of the technical complexity or special nature of the goods or services;
• bid invitation takes so long that it is hard to satisfy the urgent needs of the procuring entity; or
• the total value of the goods or services to be procured cannot be determined in advance.⁶⁸

Single-source procurement may only be practised where:

• goods or services can be procured from only one supplier;
• goods or services cannot be procured from other suppliers due to unforeseeable emergencies; or
• the consistency of the items or compatibility of the services procured require procurement of additional items or services from the same supplier, provided that the total value of the additional procurement does not exceed 10% of the value of the base procurement contract.⁶⁹

For goods of which the specifications and standards are uniform, whose supply for spot transactions is sufficient and whose prices fluctuate very little, government procurement may be carried out after inquiries for quotations from suppliers.⁷⁰

2.2.4. Government procurement proceedings

In invited bidding, the procuring entity must randomly choose three or more suppliers from among those that meet the qualifications required, and send them invitation documents.⁷¹

In public invitations, the period of time beginning from the date of issuance of the bid invitation to the deadline for submission of the bids may be not less than 20 days.⁷²

In competitive bidding, the procuring entity decides the successful supplier from among the candidates recommended by the negotiation team on the principle that the supplier meets the needs and that the price it quotes is the lowest among the prices quoted for goods of equal quality and for equal services.⁷³

Where the single-source method is adopted, the procurement must be carried out on the basis of guaranteed quality and reasonable prices.⁷⁴

Where contracts are awarded based on quotations upon inquiry, the successful supplier must meet the relevant needs and its price must be the lowest among the prices quoted for goods of equal quality and equivalent services.⁷⁵

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For large and complex procurement items, quality-testing institutions confirmed by the State carry out inspections.⁷⁶

Procurement documents must be kept not less than 15 years starting from the date of completion of the procurement.⁷⁷

2.2.5. Government procurement contracts

Parties to government procurement must conclude written contracts. Government procurement contracts are subject to the Contract Law. The rights and obligations of the procuring entity and the supplier are determined in accordance with the principles of equality and free will.⁷⁸

Within seven working days after the date on which the contract is signed, the procuring entity must submit a copy of the contract to the department for supervision over government procurement at the same level and a copy to the competent department for the record.⁷⁹

Subject to consent of the procuring entity, the winner of the bid or the successful supplier may resort to subcontractors while remaining responsible to the procuring entity for both the whole procurement project and its subcontracted parts, with the subcontractors being responsible for their respective parts.⁸⁰

Under article 50 of the Government Procurement Law, no parties to government procurement may, without mutual consent, alter, suspend or terminate their contracts. If continued performance of the government procurement contract is detrimental to the interests of the State or the public, the parties to the contract may adapt, suspend or terminate it. Parties at fault must pay compensation.

2.2.6. Complaints

Suppliers dissatisfied with the award of a government contract have seven days to complain to the procuring entity or its designated procuring agency, which has the obligation to reply in writing within a further seven days of receipt of the complaint.⁸¹

Suppliers may lodge complaints, within 15 working days following the expiry of the time limit, with the department for supervision over government procurement at the same level which must reply within 30 working days.⁸²

Otherwise, complainants may submit their case to administrative reconsideration or bring a suit before the people’s courts.⁸³

2.2.7. Supervision of government procurement

The department for supervision over government procurement conducts “rigorous” supervision and inspection over government procurement activities and the institutions for centralized procurement.⁸⁴

No department for supervision may set up an institution for centralized procurement or participate in procuring items for the government.

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No procuring agency may be subordinate to, or share interests with, any government department.⁸⁵

The powers and duties of those who are engaged in procurement and of those who are in charge of examination and acceptance of procurement contracts must remain independent.⁸⁶

Upon completion of a process of procurement, procuring entities must publicize its results.⁸⁷

The performance of institutions for centralized procurement is to be evaluated in terms of their procurement prices, cost-effectiveness, quality of services, reputation and compliance with the law, and they must regularly publish the final results of the assessments.⁸⁸

All units and individuals have the right to denounce violations of laws with respect to government procurement, and the competent authorities must handle complaints without delay in fulfillment of their duties.⁸⁹

2.2.8. Liabilities

For violations of provisions of the Government Procurement Law, a range of administrative sanctions is applicable, including fines, cancellation of the contract in dispute, confiscation of illegal gains, suspension or revocation of professional licences or qualifications and demotions.

The sanctions apply to those directly responsible for the illegal acts, as well as to those directly in charge of their activities.

Where crimes are committed, the procuratorate is informed and prosecutions may be initiated.

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3. Construction

Construction contracts are defined in the Contract Law as those whereby the contractor performs project construction, and the developer pays the price. Contracts for construction projects include contracts for survey, design and construction.⁹⁰

The Construction Law has been in effect since March 1, 1998.⁹¹ It applies to construction activities conducted within the territory of the PRC.⁹²

Construction enterprises guarantee the quality and safety of construction projects and their projects must comply with the State’s applicable safety standards.⁹³

The competent construction administrative department under the State Council exercises jurisdiction over construction activities throughout the PRC.⁹⁴

Where public invitation or invited bidding is used to award contracts of government procurement for construction, the Law with respect to Tenders applies.⁹⁵

The Chinese authorities have adopted rules with respect to the implications of project implementation for other fields of regulation, such as Regulations on the Administration of Construction Project Environmental Protection.⁹⁶

3.1. Contracts for construction projects

Developers may enter into a contract for construction of a project with a general contractor, or they may enter into separate contracts for surveying, design and construction. However, they may not divide projects to be completed by one contractor into parts and contract them out to several contractors.⁹⁷

Subject to consent by the developer, the general contractor or the contractor undertaking the surveying, design or construction may delegate part of the contracted work to a third party. The third party and the general contractor or the contractors for surveying, design or construction are jointly and severally liable to the developer for the work completed by such third party. The contractor may not assign the entire contract to any third party or divide the whole contract into several parts and separately assign each part to third parties under the guise of subcontracting. ⁹⁸

Contractors are prohibited from sub-contracting any part of a project to an entity not appropriately qualified. Sub-contractors are prohibited from further subcontracting.

The main structure of the construction project must be built by the contractor itself.⁹⁹

Contracts for major State projects must be concluded in accordance with the procedures prescribed by the State and contain the required State-approved documents, such as the investment plan and the feasibility report.¹⁰⁰

If a project is subject to supervision, the developer must conclude a contract in writing for that purpose with a project supervisor.¹⁰¹

Provided that the developer does not interfere with the normal operation of the contractor, it may inspect the progress and quality of the work at any time.¹⁰²

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In the case of concealed work, the contractor must give the developer notice for inspection prior to concealment. Prior to concealing any work, a contractor must notify the developer to carry out its inspection. If the latter fails to conduct inspection in a timely manner, the contractor may extend the related project deadlines, and may claim damages.¹⁰³

Upon completion of a construction project, the developer must carry out acceptance inspection in accordance with the construction drawings and specifications and in accordance with the rules governing construction inspections and quality inspection standards imposed by the State. Once the project has passed the inspection, the developer must pay the price and accept the construction project. The completed project may not be put into use until it has passed the acceptance inspection.¹⁰⁴

Contractors are liable for personal injury and property damage due to any cause imputable to them during their projects’ expected reasonable terms of use.¹⁰⁵

If the developer fails to pay the price on time or within a reasonable period after notice to pay, the contractor may ask the developer to liquidate the project, or it may petition the people’s court to auction the project. The amounts owed to the contractors are paid in priority out of proceeds from the liquidation of the project.¹⁰⁶

3.2. Construction licences

Except for small projects below the threshold value set down by the competent construction administrative department under the State Council, before the start of any construction project, the responsible units must apply to the competent construction administrative departments attached to the prefecture-county governments or above to obtain construction licences.¹⁰⁷

To qualify for construction licences, applicants must have gone through the approval formalities for construction projects for land-use. For construction projects within urban planned districts, they must have obtained planning licences.

Demolition and relocation, if necessary, are implemented in compliance with the laws and regulations.

The competent construction administrative departments issue construction licences to qualified applicants within 15 days from the date of receipt of their applications.¹⁰⁸

Construction should start within three months of issue of the construction licence. A maximum of two extensions of three months each may be obtained.¹⁰⁹

Where construction is halted, a report must be filed within one month with the licence-issuing agency.¹¹⁰

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3.3. Qualifications to carry on construction activities

Construction engineering enterprises, prospecting units, design units and project supervisory units that engage in construction activities must possess:

• registered capital that complies with the statutory minimum;
• specialized technical personnel with statutory professional qualifications appropriate for their activities; and
• technologies and equipment necessary for the intended activities.¹¹¹

Construction engineering enterprises, prospecting units, design units and project supervisory units are rated into different classes according to their registered capital, the number of experts among their professionals and technicians, their technical equipment and their performance records. Only upon passing qualification examinations may they engage in construction activities commensurate with the scope of their qualification classes.¹¹²

To qualify to undertake the construction of stadiums, bridges, etc., an applicant must have registered capital of at least RMB 300 million and net assets of at least RMB 360 million, and to qualify to build high-rise buildings, an applicant must have capital of at least RMB 50 million and net assets of RMB 60 million.

3.4. Awarding of contracts and contracting

Construction contracts must be concluded in writing.¹¹³

Tendering and bidding activities for construction projects must respect the principles of openness, justice and equal competition, and contractors must be selected on their merits.¹¹⁴

According to article 17 of the Construction Law, contract awarding units and their staff may not accept bribes, commissions or other benefits for awarding of construction projects. Contractors and their staff may not have recourse to illegitimate means such as bribes, commissions or benefits to obtain contracts.

In principle, construction projects are contracted through public bidding according to law, but when the project is not suitable for bidding, it can be contracted out directly.¹¹⁵

When construction projects are awarded by public calls for tenders, the bids are opened at the time and place specified in the tender documentation, after which the bids are evaluated in accordance with the specified standards and procedures. Successful bidders are selected among the bidders with appropriate qualifications based on their merits.¹¹⁶

Construction projects are to be awarded on an overall basis, not in parts.¹¹⁷

Large or complex construction projects may be jointly contracted by two or more units that bear joint liability for performance. Each of the participants must contract within its business scope at their lowest common level of qualification.¹¹⁸

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When recourse is had to bid invitation to award construction projects, the process may be delegated to specialized agencies approved by the competent department of construction administration of the State Council or of the people’s government of the province, autonomous region or municipality directly under the central government. Bid invitation agencies may not stand in a hierarchical relationship or enjoy a relationship of shared interest with correspondent administrative agencies or State organs.¹¹⁹

Bids for construction work should include the resumes and business achievements of the person proposed to be in charge of the project and those of the principal technical personnel intended to work on the project, as well as a list of the machinery and equipment to be used for its completion.¹²⁰

3.5. Supervision of construction projects

Construction projects subject to supervision must be overseen by units with appropriate qualifications. They are appointed by the project owners.

Construction supervising units supervise construction quality, construction periods, the use of construction funds, and conformity with applicable administrative regulations and technical standards, design documents and contracts. They report non-compliance to the project owners which must then require the concerned units to adopt corrective measures.¹²¹ Construction supervision must be carried out in an objective and fair manner.

Construction supervising units may not have hierarchical relations with, or other interests in, the contractors or the suppliers under their supervision. They may not transfer their supervising business to third parties.¹²²

According to article 35 of the Construction Law, if construction supervising units do not inspect the items that should be supervised or do not follow the regulations, thereby causing losses to project owners, they are liable for damages. They are also liable if they collude with contractors to gain illegitimate profits, thus causing losses the project owners.

3.6. Safety and operations management

According to article 36 of the Construction Law, the foremost priorities are safety and prevention.

When construction activity may cause damage to adjacent buildings, structures or the operating environment, the construction enterprises must adopt safety and preventive measures.¹²³

Construction enterprises must adopt measures to manage dust, waste-gas, wastewater, solid waste materials, noise, vibrations and other nuisances.

Construction enterprises are responsible for overall safety on and around their sites. Subcontractors may be liable toward their general contractors and they are subject to their general administration with respect to site safety.¹²⁴

Personnel are entitled to make proposals for improving conditions that adversely affect health and for obtaining appropriate protective equipment. They are entitled to criticize and denounce actions that endanger human life or health.¹²⁵

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Construction enterprises must provide accident and casualty insurance for workers engaged in dangerous activities.¹²⁶

Changes to the main parts and bearing structures of buildings may not be undertaken without having had a plan prepared in advance by a design institution or institution of equivalent capability.¹²⁷

Demolition may only be undertaken by enterprises able to guarantee the safety of their operations.¹²⁸

In carrying out work in public places, on roadsides or in passageways, builders must post clear warning signs and adopt safety measures. If their failures to do so cause harm, they may be held liable.¹²⁹

If a building or any other installation or an object placed or hung on a structure collapses, becomes detached and causes damage, builders must prove that they were not at fault to avoid liability.¹³⁰

In the event of an accident, construction enterprises must adopt emergency measures to reduce the number of casualties and losses and they must immediately report incidents to the competent authorities.¹³¹

3.7. Construction quality

The government administers a voluntary quality certification system for construction enterprises.¹³²

Construction enterprises are responsible for the quality of construction projects.¹³³

Construction enterprises must implement the design drawings of projects and respect technical standards.

Construction enterprises may not alter the design of projects without authorization. The original designing institution is responsible for proposing necessary alterations of its designs.

General contractors carry out quality control over, and are accountable, for their performances.¹³⁴

In their design documents, design institutions may not designate manufacturers and suppliers of construction materials, structural parts, construction fittings and equipment.¹³⁵

For the duration of any building’s normal service life, the foundations and main parts are warranted as sound.¹³⁶

Construction enterprises must repair defects.¹³⁷

Only after a construction project has been proved to meet the applicable standards can it be delivered for use.¹³⁸

According to article 62 of the Construction Law, the scope of warranties on construction projects covers: foundations, main structural elements, roof covering, electrical wiring, water and gas supply, drainage, heating and air-conditioning.

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In fixing the durations of warranties, account is taken of the need to ensure the regular use of buildings within their normal service life while safeguarding users’ legitimate rights and interests.

3.8. Liabilities

For violations of provisions of the Construction Law, the range of applicable administrative sanctions includes fines, cancellation of contracts in dispute, confiscation of illegal gains, suspension or revocation of professional licences or qualifications and demotions.

The sanctions apply to the persons directly responsible for the illegal acts as well as to the persons directly in charge of their activities.

Where crimes are committed, the procuratorate is informed and pursuits are initiated.

Article 68 of the Construction Law specifically outlaws the asking or taking of bribes in project awarding and contracting. Those in direct charge of, and those directly involved in, the acts are liable to criminal punishment. Guilty contractors are ordered to stop business operations while implementing measures of rectification and their qualifications are lowered or revoked.

Project supervisory organizations that collude with project owners or construction enterprises to commit fraud causing the quality of the project to deteriorate may be prosecuted under the criminal law.¹³⁹

Criminal liabilities may also be imposed when:

• designers change the major structure or load-bearing structure of buildings;¹⁴⁰
• construction enterprises do not adopt necessary measures to eliminate potential dangers of accidents;¹⁴¹
• construction enterprises force workers to take risks in performing operations resulting in major casualties or other serious consequences;¹⁴²
• project owners request project designers and construction enterprises to sacrifice quality and safety standards and lower construction quality;¹⁴³
• project designers do not abide by quality and safety standards in designing projects;¹⁴⁴
• construction enterprises violate labour laws and regulations and use inferior sub-standard materials, components and equipment or depart from the blueprints or specifications;¹⁴⁵
• construction enterprises do not perform their obligations pertaining to maintenance and cause losses due to quality defects such as ceiling or wall leaks and cracks;¹⁴⁶
• employees of government agencies or their subordinate authorities direct contract awarders to contract the project to designated contractors;¹⁴⁷ and
• authorities or their employees fraudulently issue construction permits or project quality or acceptance tests or certifications.¹⁴⁸

Victims of inferior construction quality during the reasonable life span of buildings are entitled to claim compensation from those responsible.¹⁴⁹

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4. Foreign-invested enterprises in project development

4.1. Foreign-invested construction and engineering design enterprises

The Ministry of Construction and the Ministry of Foreign Trade and Economic Cooperation (now Ministry of Commerce – MOFCOM) have issued the Regulations on Administration of Foreign-invested Construction and Engineering Design Enterprises that came into force on December 1, 2002 (the FCEDE Regulations).¹⁵⁰

The Regulations apply to the establishment of foreign-invested construction and engineering design enterprises within the territory of the PRC, whether in the form of Equity Joint Ventures (EJVs), Cooperative Joint Ventures (CJVs) or Wholly Foreignowned Enterprises (WFOEs).¹⁵¹

Investors from the Hong Kong Special Administrative Region (SAR) and from the Macao SAR or Taiwan investments in construction and engineering design enterprise are also governed by the FCEDE Regulations.¹⁵²

To establish an FCEDE within the territory of the PRC, foreign enterprises must obtain approval from the relevant MOFCOM bureau, register with the SAIC or its local offices, and obtain the qualification certificate as a construction and engineering design enterprise from the competent construction administration department.¹⁵³

To establish an FCEDE, an application is filed with the MOFCOM at the level of the people’s government of the province, the autonomous region or the directly administered municipality of intended establishment. Within 30 days, the application is either rejected or given preliminary approval and forwarded to the MOFCOM under the State Council. Within ten days of receiving the application for approval, the latter forwards the application to the construction administrative department of the State Council for review and comments in writing within 30 days. Within a further 30 days, the MOFCOM below the State Council decides whether or not to approve the application and renders a written decision. In cases of rejection, the reasons must be explained in writing.

Within 30 days of receiving the approval certificate, the applicant must register with the competent enterprise registration department.

Applications for construction and engineering design enterprise qualifications are processed in accordance with the Regulations on Administration of Construction and Engineering Design Enterprise Qualifications.

All materials submitted must be formulated in Chinese.¹⁵⁴

Applicants must be enterprises engaged in construction and engineering design or certified architects or engineers in their home countries.¹⁵⁵

The capital contribution of Chinese parties to EJVs or CJVs in construction and engineering design may not be less than 25% of their registered capital.¹⁵⁶

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Within WFOE construction and engineering design enterprises, foreign service providers who have been qualified as certified architects or certified engineers in China may not represent less than one quarter of the total certified professionals, and the foreign service providers who have relevant design experience may not represent less than one quarter of the total key technical personnel, which ratios are reduced to one eighth for EJVs and CJVs.¹⁵⁷

All architects and engineers certified in China as well as the key technical personnel of the foreign service provider in an FCEDE must reside within the territory of the PRC for no less than a cumulative period of six months during each year.¹⁵⁸

4.2. Foreign-invested construction enterprises

The Regulations on Administration of Foreign-invested construction enterprises adopted jointly by the MOFCOM and the Ministry of Construction became effective as of December 1, 2002 (the FCE Regulations).

They apply to the establishment of foreign-invested construction enterprises within the territory of the PRC.¹⁵⁹

Investors from the Hong Kong and Macao SARs or Taiwan in construction enterprises that carry on construction business are also subject to the FCE Regulations.¹⁶⁰

Foreign investors intending to establish FCEs in the PRC must obtain the approval of the competent office of the MOFCOM and register with the SAIC or its local offices, and they must obtain their qualification certificates from the competent construction administration department.¹⁶¹

Applications are submitted to the MOFCOM at the level of the people’s government of the province, the autonomous region or the directly administered municipality where the proposed FCE is to be established. It must reject or grant preliminary approval within 30 days and then forward it to the MOFCOM of the State Council for further approval. Within ten days of receiving the application for further approval, it is sent to the Ministry of Construction under the State Council that provides a written opinion within 30 days. Within 30 days of receiving the response, the MOFCOM below the State Council renders a written decision that, in the event of rejection, must explain its reasons.

Within 30 days of receiving the approval certificate, applicants must then register with the competent office of the SAIC.

Construction administration departments of the people’s governments of the provinces, the autonomous regions or the directly administered municipalities that are seized of applications for certification of qualifications must report approvals within 30 days to the Ministry of Construction at the level of the State Council.¹⁶²

The total capital contribution of the Chinese party to construction EJVs or CJVs may not be less than 25% of the registered capital.¹⁶³

All documents submitted in this context must be in Chinese.¹⁶⁴

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Wholly foreign-owned construction enterprises may only undertake the following types of construction projects within the scope of their qualifications:

• those funded totally by foreign investments and grants;
• those financed by international financial organizations and awarded through an international tendering process in accordance with the provisions of the loan agreement;
• sino-foreign jointly constructed projects where the foreign investment is equal to or greater than 50%; subject to the approval of the construction administration departments of the people’s government of provinces, or autonomous regions or directly administered municipalities, sino-foreign jointly constructed projects where the foreign investment is less than 50% but that Chinese construction enterprises cannot undertake independently due to technical difficulties; and
• China-invested construction projects that Chinese construction enterprises cannot undertake independently due to technical difficulties.¹⁶⁵

Sino-foreign construction EJVs and CJVs must undertake construction projects in conformity with their qualifications.¹⁶⁶

Where FCEs undertake a construction project as the contractor, they must directly complete the main structure of the project.¹⁶⁷

FCEs may form consortia to carry out construction projects within the permitted scope of their lowest common grade.¹⁶⁸

Where FCEs violate the law and regulations, they face administrative sanctions including suspensions and revocations of licences, fines and confiscation of illegal gains.¹⁶⁹

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5. Build-Operate-Transfer projects

Build-Operate-Transfer (BOT) project financing was introduced into the PRC at the beginning of 1980s in the fields of energy (power plants) and transportation (highways and tunnels). Given the absence of specific legislation on BOTs in the PRC at the time of their implementation, these projects were set up on an empirical basis.

In 1995, a circular entitled Several Issues Concerning the Examination, Approval and Administration of Experimental Foreign-invested Concession Projects¹⁷⁰ (the 1995 Concession Circular) was jointly promulgated by the State Planning Commission, the Ministry of Power Industry and the Ministry of Communications as part of China’s first Pilot BOT Programme to develop projects in designated areas, in an attempt to lay the groundwork for the first comprehensive legal and regulatory framework for BOTs applicable to all infrastructure projects throughout the country.

Eligible BOT projects that could be carried out during the trial period under the 1995 Concession Circular were limited to coal-fired power plants with a capacity of 2 X 300 megawatts and above, hydroelectric power plants with a capacity of less than 250 megawatts, high-grade 30 to 80 kilometre highways, free-standing bridges of more than 1,000 metres, free-standing tunnels and urban water treatment plants.

The bidding and approval procedures under the 1995 Concession Circular were highly centralized and the State Planning Commission was involved in all phases. Pilot projects were subject to the approval of the State Planning Commission or, if the project’s investment exceeded USD 100 million, that of the State Council.

Under the 1995 Concession Circular, owners of projects were made responsible for, and held all rights in respect of, investments, financing, design, construction, equipment procurement, operations, management and maintenance during the project’s concession period. The government had the right to supervise, inspect and audit projects and to require project companies to rectify defects and could impose penalties for violations of concession agreements.

The project company could take the form of either an EJV, CJV or WFOE.

Upon expiration of the concession period, the project’s assets were to be transferred to the government without any consideration.

The 1995 Concession Circular further prohibited domestic financial institutions and nonfinancial institutions from providing security for the project company’s financing. These provisions reinforced the Law on Secured Transactions promulgated in 1995 that prohibits guarantees from or procured by the State authorities.

The Laibin B Project, a 2 X 350 megawatt coal-fired power plant in the Guangxi Zhuang Autonomous Region, was the first BOT project governed by the 1995 Concession Circular. This project turned out to be very successful, due in particular to the transparency and efficiency of its tendering process and the quality of its financial montage.¹⁷¹

Because of the 1995 Concession Circular’s limited scope, only two other projects were launched and approved under it: the Changsha Power Project (1998) and the Chengdu Water Project (1998), of which only the latter came to a financial close.

Due to a changing environment in the early 2000s, Chinese authorities decided to put an end to the Pilot BOT Program and the 1995 Concession Circular was abolished in 2002.

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However, in order to cope with the increasing demand to open public sectors in the PRC to both foreign and domestic private investment, the Ministry of Construction promulgated the Measures for Administration on Concession of Municipal Public Utilities in 2004 (the Municipal Utilities Measures).

While the 1995 Concession Circular only applied to foreign-invested BOT projects, the Municipal Public Utilities Measures apply to a wider range of concession projects, such as BOTs and TOTs invested or operated by either domestic or foreign investors. However, the Municipal Public Utilities Measures apply only to the municipal public utilities sector, which includes water, gas or heat supply, public transportation and the treatment of wastewater and garbage.

According to the Municipal Public Utilities Measures, projects to be implemented under a concession scheme are determined by the government of a province, autonomous region or municipality directly under the central government, pursuant to specific legal forms and procedures. As opposed to the 1995 Concession Circular, the power to determine and approve concession projects has been decentralized to local governments. Since granting a concession is considered to be an act of administrative licensing, the adoption of a concession project and the granting of a concession right must be carried out in accordance with the Administrative Licensing Law also promulgated in 2004.¹⁷²

The public utilities authorities at the municipal or county level that have been designated by local governments are responsible for the implementation of specific concession projects under the supervision and guidance of the construction authorities at the provincial level, and of the Ministry of Construction.

As was the case under the 1995 Concession Circular, public bidding is compulsory for selecting the qualified concessionaires under the Municipal Public Utilities Measures. Bidders must satisfy certain qualifications, including:

• being an enterprise with legal person status;
• having good creditworthiness and financial condition;
• having a record of appropriate professional experience and performance;
• having an appropriate number of technical, financial and operational personnel;
• having a realistic and feasible business plan; and
• any other conditions that may be required by local regulations or rules.

Pursuant to the Municipal Public Utilities Measures, five steps must be followed by the competent authorities when selecting a concessionaire:

• an announcement of the bidding requirements after the project proposal has been approved by the local government;
• an examination and selection of qualified bidders in conformity with the bidding requirements;
• a selection of the preferred bidder by an assessment and deliberation committee;
• a public announcement of the bidding result for at least 20 days; and
• if there is no objection within the public announcement period and after approval by the local government, execution of the concession agreement with the preferred bidder.

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According to the Municipal Public Utilities Measures, a concession agreement must include the following contents:

• the subject matter, area, scope and term of the concession;
• product or service standards;
• ownership and disposition of the facilities;
• maintenance, renovation and renewal of facilities;
• safety management;
• performance bond;
• termination and change of concession rights;
• default liabilities; and
• dispute settlement.

The term of any concession depends on the characteristics, scale and mode of operation of the underlying industry, but the maximum term must is 30 years. Upon expiration of the concession period, the competent authorities organize public bidding to select a new concessionaire.

During the concession period, the competent authorities have the right to supervise the performance of the concessionaire and conduct an evaluation of its performance at least every two years. The competent authorities have the right to withdraw the concession in the event of unauthorized assignment or lease of the concession rights by the concessionaire, unauthorized disposal or mortgage of its property, serious quality defects or an accident due to its poor management.

In order to reassure concessionaires with respect to their investment interests, the Municipal Public Utilities Measures expressly provide that in case of a breach of the concession agreement either by the competent authorities or by the concessionaire, the party in default must assume liability and pay compensation to the other party for its losses. Where the concessionaire suffers economic losses due to its performance of instructions issued by the government in the public interest, it must be compensated.

While implementation of the Municipal Public Utilities Measures is expected to further encourage BOT projects financed by foreign investors in the public utilities sector in China, a BOT Law, which has long been discussed and awaited, is still needed to create a comprehensive legal framework.

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6. Financing of foreign projects by Chinese entities

The Temporary Procedures for the Administration of Project Financing Conducted Outside China were promulgated by the NDRC and the SAFE and have been in effect since April 16, 1997 (the Overseas Project Financing Procedures).

The regime applies principally to infrastructure projects, such as power-generating facilities, high-grade highways, bridges, tunnels, urban waterworks, sewage treatment plants, etc., as well as other construction projects that require large scale investment and generate longterm and stable revenues.¹⁷³

To qualify, the principal Chinese investors must have ample economic resources and the ability to perform the contract, while the leading foreign investors must in addition have relatively strong international financing capabilities and positive track records in project financing.¹⁷⁴

Article 7 sets down a framework for pricing of inputs to projects:

• prices must respect Chinese price controls and be approved where required by the competent authorities;
• they must be conducive to the generation of stable revenues;
• they must reasonably reflect the effect of rises in commodity prices and fluctuations in exchange rates;
• they must make full allowance for the price levels that the project can sustain; and
• project charges within China may not be denominated in foreign currencies.

After preliminary examination by the authority in charge of the industry, a prospectus and a feasibility study are reviewed by the NDRC. Major projects are ultimately submitted to the State Council for approval.¹⁷⁵ When projects are promoted by local authorities, they must be reviewed by the local SAFE department prior to submission to the SAFE in Beijing for approval.¹⁷⁶

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