1 Making Construction Projects
1.1 What are the standard types of construction contract in your jurisdiction? Do you have: (i) any contracts which place both design and construction obligations upon contractors; (ii) any forms of design-only contract; and/or (iii) any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and engineering contracts.)
A construction contract is a nominate contract specially regulated under Chapter XVIII of the Civil Code of the People’s Republic of China (“PRC Civil Code”, with its effective date of 1 January 2021), and Article 788 of this Chapter identifies a Construction Contract as a contract under which a contractor carries out the construction of a project and the contract-offering party pays the price in return. Article 788 further provides three types of Construction Contract: 1) survey contract; 2) design contract; and 3) construction contract.
Individual use of the three nominate Construction Contracts is therefore considered standard in mainland China. It is also common to find the following combinations of works/services in a construction contract: 1) survey and design contract; 2) design and construction contract; and 3) engineering, procurement and construction contract (“EPC contract”). It is worth noting that the EPC contract has been promoted by the PRC government in recent years and this is expected to continue for the next few years.
In mainland China, there is a similar concept to management contracting, in the form of the “construction agent system” (“代建制”), which is prevalent in non-profit government-invested projects.
1.2 How prevalent is collaborative contracting (e.g. alliance contracting and partnering) in your jurisdiction? To the extent applicable, what forms of collaborative contracts are commonly used?
Collaborative contracting in the form of a joint venture is common in construction practice. For a bidding project, the PRC Bidding and Tendering Law provides that two or more qualified parties may form a joint venture as an individual tenderer. The parties to the joint venture shall enter into an agreement on joint bidding, in which the works and responsibilities of each party shall be clearly determined, and such agreement shall be submitted together with bidding documents. Where a joint venture wins the bid, all parties to the joint venture should sign the contract with the bid inviter and bear joint and several liability to the bid inviter.
1.3 What industry standard forms of construction contract are most commonly used in your jurisdiction?
Many standard forms of construction contract have been published by different levels of the governmental agencies for the purpose of providing guidance on different levels of the market. However, parties are not bound to use a particular form of a construction contract.
The commonly used standard forms of construction contract are published by central government agencies, mainly co-published by the Ministry of Housing and Urban-Rural Development of the PRC, State Administration for Market Regulation and other relevant departments, or by the National Development and Reform Commission and other relevant departments, which are:
• For survey: Model Survey Contract for Construction (GF-2016-0203) (2016).
• For design: Model Design Contract for Municipal Housing Construction Projects (GF-2015-0209) (2015); and Model Design Contract for Professional Construction Projects (GF-2015-0210) (2015).
• For construction: Standard Bidding Document for Construction Works (2007) (contract document included); Simplified Standard Bidding Document for Construction Works (2012) (for small projects, contract document included); and Model Contract for Construction Works (GF-2017-0201) (2017).
• For design and construction: Standard Bidding Document for General Contracting of Engineering and Construction (2012) (contract document included).
• For EPC: Model Contract for EPC Project (GF-2020-0216) (2020).
In addition, the 1999 version (and the following versions) of Conditions of Contract for Construction (“Red Book”), Conditions of Contract for Plant & Design-Build (“Yellow Book”) and Conditions of Contract for Engineering, Procurement and Construction (“Silver Book”) published by the International Federation of Consulting Engineers (“FIDIC”) are often used, with modifications for compliance with PRC law, for foreign-invested construction projects.
1.4 Are there any standard forms of construction contract that are used on projects involving public works?
Though it is not mandatory to use the standard forms of construction contract published by the PRC government (please see the answer to question 1.3) in any particular type of project, the projects involving public works usually adopt said standard forms of construction contract; except that the Model Contract for EPC Project specifies that its applicable scope is for projects involving housing construction and municipal infrastructure.
1.5 What (if any) legal requirements are there to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations are usually required)? Are there any mandatory law requirements which need to be reflected in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?
For a legally binding contract under the PRC Civil Code, in general terms, it is required that: (i) the parties to the contract have the required capacity for civil juristic acts; (ii) the intention expressed (offer-acceptance process) is genuine; and (iii) the contract does not violate the mandatory provisions of laws and administrative regulations, and does not contravene public order and good morals. Consideration is not an element necessary for the creation of a legally binding contract under PRC Civil Code.
As for a construction contract, it has one additional requirement of written formality. Besides said legal requirements, in situations of: (i) large infrastructure and public utilities concerning public interests and security; (ii) projects invested in completely or partly by State-owned funds or financed by the State; and (iii) projects using loans or aid funds from international organisations or governments of other countries, in order to conclude a contract (for activities including survey, design, construction and supervision of construction projects as well as the purchase of key equipment and materials relating to construction projects), a bidding process must be held in accordance with the PRC Bidding and Tendering Law.
Under PRC law, there is no requirement for contractual provisions of adjudication, or for a contract to be evidenced in writing.
1.6 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in which an employer can give either a legally binding or non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether or not a full contract is ever concluded.
The PRC Civil Code provides that a letter of subscription/order/reservation concluded by parties, in which parties agree to conclude a contract in a prescribed period, constitutes a “precontract”. Where a party fails to perform the “precontract”, such party is liable for breach. Thus a “letter of intent” (regardless of its name) concluded by parties and containing the same intention as a “precontract” would be legally binding.
A unilateral undertaking, in general, would be deemed an offer to conclude a contractual relationship under the PRC Civil Code, which is revocable prior to the offeree’s acceptance. A letter of intent unilaterally issued by an employer undertaking to assume certain costs to be incurred by the contractor will therefore be legally binding upon the contractor’s timely acceptance.
1.7 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer’s liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors’ all-risk insurance?
Under PRC law, the following insurance should be obtained for carrying out any construction work:
• Work Injury Insurance (under social security) – additionally provided in the PRC Construction Law (amended purposely for such insurance requirement in 2011), covering work-related injury and occupational disease. Some local authorities accordingly make it a policy that the purchase of work injury insurance is a condition for the issuance of the construction work permit.
• Work Safety Liability Insurance – required by the Measures for the Implementation of Work Safety Liability Insurance, covering personal injury/death of employees (not affecting the right to claim under Work Injury Insurance), personal injury/death and property loss to a third party, expenses for accident rescue, medical aid, accident appraisal and legal proceedings, etc., arising from a work accident. The insurance company shall also provide services of work accident prevention to the insured.
• Inherent Defects Insurance (for housing project) – required by some local ordinances, such as the Beijing Construction Quality Ordinance, covering the defects liability arising from the works of ground foundation, main structure and waterproofing.
Other common commercial insurance for construction activities includes Personal Accident Insurance (encouraged by the PRC Construction Law), Construction All Risks Insurance, Erection All Risks Insurance and Construction Machinery and Equipment Insurance. Professional Liability Insurance is mainly for design work.
1.8 Are there any statutory requirements in relation to construction contracts in terms of: (a) labour (i.e. the legal status of those working on site as employees or as self-employed sub-contractors); (b) tax (payment of income tax of employees); and/or (c) health and safety?
The following statutory requirements exist for:
(a) Labour – the general PRC Labour Law and its related rules apply. Based on the contractual relationship, there are three types of legal status for the labour working on site: (1) direct employment (employees); (2) labour dispatched by a qualified agent company; (3) self-employed labour; and (4) “rural migrant workers” – rural residents who work for employers (their wages are specially protected under the Regulations for Guaranteeing the Wage Payment to Rural Migrant Workers).
(b) Tax – in addition to general income tax laws/rules, the Interim Measures for the Collection and Administration of Individual Income Tax in the Construction and Installation Industry apply, and provide that the company and individual undertaking the contraction and installation works are withholding agents and the income tax shall be withheld and paid prior to any income being paid to an individual.
(c) Health and safety – many rules and standards in detail have been issued by various levels of governmental authorities; some of the foundational statutory requirements are the PRC Employment Law, the PRC Construction Law, the PRC Work Safety Law, the PRC Occupational Disease Prevention and Control Law and the Regulations on the Administration of Work Safety in Construction.
1.9 Are there any codes, regulations and/or other statutory requirements in relation to building and fire safety which apply to construction contracts?
Under PRC law, the basic requirements in relation to building and fire safety are provided by various laws and regulations, such as the PRC Work Safety Law, the Regulations on Administration of Work Safety of Construction, and the PRC Fire Protection Law. Meanwhile, the technical requirements of building and fire safety are detailed in a series of standards. According to Article 2 of the PRC Standardisation Law, the standards include national standards, industry standards, local standards, community standards and enterprise standards. National standards include standards that are mandatory and recommended, whereas industry standards and local standards are recommended standards.
Parties of a construction contract shall perform to meet or exceed the minimum requirements of the mandatory standards. When standards agreed in a construction contract are inferior to the mandatory standards, such agreements are invalid.
1.10 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability period is complete?
Yes, it is permissible for parties to have such retention agreement in a construction contract. The retention deducted from progress payment usually functions as the guarantee-of-quality warranty and it will be released when the agreed defects liability period is expired.
In accordance with the Administrative Measures on Deposits for Construction Project Quality, the retention sum is subject to a limitation of 3% of the total price of the work. The employer is not allowed to retain the payment for works if: (1) the contractor has made a deposit to the employer for guaranteeing its performance prior to the completion of the work; or (2) other forms of guarantee are adopted, such as a third-party guarantee or quality warranty insurance.
1.11 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee the contractor’s performance? Are there any restrictions on the nature of such bonds? Are there any grounds on which a call on such bonds may be restrained (e.g. by interim injunction); and, if so, how often is such relief generally granted in your jurisdiction? Would such bonds typically provide for payment on demand (without pre-condition) or only upon default of the contractor?
In recent years, the government has encouraged the adoption of performance bonds as a guarantee of the contractor’s performance and lately they have become popular for domestic projects, although the PRC Bidding and Tendering Law still only provides for cash deposit as the performance guarantee (the PRC Bidding and Tendering Law - Draft for Public Comments of 2020 has aimed to provide tenderers the freedom to submit any type of guarantee). Both independent bond and contractual bond (joint and several liability guarantee or general liability guarantee) are used in practice. However, the nature of an independent guarantee will be recognised by law only if the issuer is a bank or non-bank financial institution.
In accordance with the Provisions of the Supreme People’s Court on Several Issues concerning Trial of Disputes over Independent Guarantee, the competent court may grant an injunction against the payment under an independent guarantee if one of five fraud circumstances is found: 1) the underlying transaction is fraudulent; 2) the third party’s document presented by the beneficiary is forged or the content within it is fictitious; 3) a court decision or arbitration award determines that the debtor of the underlying transaction has no liability to pay; 4) the beneficiary has confirmed that the obligations of the underlying transaction have been fully performed or the event of payment condition provided in the independent guarantee has not occurred; and 5) other circumstances wherein the beneficiary clearly knows it has no right to make the claim but it still abuses such right. The standard of proof for said fraud circumstances needs to be “highly possible” so that the injunction can hardly be obtained from a PRC court.
The independent guarantee is generally issued as on-demand guarantee that the bank’s only obligation is to make the payment against documents required in the independent bond. The contractual guarantee generally requires evidentiary documents showing contractor’s breach.
1.12 Is it permissible/common for there to be company guarantees provided to guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such guarantees?
A lawfully issued parent company guarantee or other company guarantee is permissible, and is not uncommon in domestic projects. Normally, a contractor’s parent company (not a bank/non-bank financial institution) is not eligible to provide an independent guarantee (please see the answer to question 1.11).
1.13 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and supplies used in the works? Is it permissible for contractors to claim that, until they have been paid, they retain title and the right to remove goods and materials supplied from the site?
PRC law does not provide the contractor’s right to retain the title rights in relation to goods and supplies in a construction project. However, Article 807 of the PRC Civil Code provides that if the employer fails to make the payment due, the contractor can negotiate with the employer to sell the project at a discounted price or request a court to auction the project. The payment due for construction shall be paid in priority from the proceeds of said sale or auction.
In practice, it is rare to have retention of title rights in a construction contract, but it can be found in the Model Contract for EPC Project (GF-2020-0216), which provides that the titles of materials and equipment supplied by the contractor (the price of materials and equipment will be accounted for in the progress payment) will be transferred to the employer after the employer has made the progress payment.