New Provisions Issued for Sino-foreign Construction Design Activities

Interestingly, the Provisions only refer to the provision of construction design activities by foreign enterprises (defined as enterprises engaged in construction design activities that are registered outside of China). While the Provisions provide that design institutions from Hong Kong, Macau and Taiwan shall engage in construction activities in accordance with the Provisions, no mention is made of foreign individuals providing construction design services. It is unclear, therefore, whether and how these rules will be applied to such situations.

Perhaps the most significant aspects of the Provisions relate to the requirement for the foreign enterprise to work together with a PRC design institute. Article 4 stipulates that a foreign enterprise undertaking construction design activities in China must select at least one Chinese design institute that possesses a Construction Project Design Qualification Certificate issued by the Ministry of Construction in order to engage in "Sino-foreign cooperative design". Moreover, the design business undertaken must be within the scope of the Chinese design institute's approved business scope and qualification.

The Provisions require the signing of two separate contracts, one between the foreign design enterprise and the PRC design institute (the cooperative design agreement) and the other between the PRC design institute (or the PRC design institute jointly with the foreign design enterprise) and the construction unit that will carry out the actual construction work for the project (the construction design contract). The Provisions stipulate that the construction design contract must be written in Chinese (应为中文文本) and that the cooperative design agreement must have a Chinese version (应有中文文本). It is not clear, however, if this difference in wording is a simple error in drafting or whether it is intended to imply that a foreign language version of the cooperative design agreement can be the binding version. In any event, it is clear that there must be Chinese versions of both contracts, and that the binding version of the construction design contract is the Chinese one.

Somewhat surprisingly, the Provisions authorize the construction unit that is doing the actual construction work for the project to make the preliminary determination as to whether a foreign enterprise possesses the necessary design capability, as opposed to giving a government body, such as the local level of the Ministry of Construction, such authority. While on one hand it is encouraging to see this indication of reduced government involvement in private sector business activities, giving such authority to a local construction unit creates a serious issue of potential corruption and extortion in the form of extracting payment for confirming the foreign enterprise's qualifications.

Another provision that is likely to be either problematic, or ignored in practice, is the stipulation that foreign design enterprises charge design fees "with reference to Chinese design fee standards" (应叁照执行中国的设计收费标准). Like the "equal pay for equal work" negotiations that often arise in joint venture projects, tying international payments to a domestic fee standard is certain to be a non-starter with foreign design institutes. However, the fact that the Provisions state that payments should be "with reference to" (叁照) rather than "according to" (按照) indicates that the drafters were aware of the practical impossibility of enforcing such a provision, and as such it is likely to be a dead letter. Interestingly, the Provisions also state that when a design document is required to be examined and confirmed by a Chinese design enterprise, the fees for such examination and confirmation shall be determined by the parties "in accordance" (按照) with international current practice!

The Provisions prohibit foreign design enterprises from participating in design works in certain situations. One category, understandably, is confidential projects. Another category, inexplicably, is emergency and relief projects. A third category is projects for which China has not yet made any commitment with respect to opening to foreign investment. This last category is somewhat vague, but presumably means that if a project is listed in the "prohibited" category of the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) as periodically published by the National Development Reform Commission and the Ministry of Commerce, then a foreign enterprise's involvement in the design is also prohibited.