Black and White Construction Contracts

'Black and white construction contracts' is a newly coined phrase in the Chinese construction industry that describes a project company signing two versions of a contract with the contractor. A white contract is consistent with the winning bid, which is submitted, registered and filed with the relevant authorities. A black contract contains terms that are harsher on the contractor - i.e. lower contract price, longer payment term, etc. Moreover, a black contract usually has an additional term that provides it is the binding contract between the parties and the white contract should be void and used only for "registration purposes". This prevalent practice has come under the spotlight because of a few recent cases.

The Cases

In the cases of Beijing Chengjian Fourth Construction Company suing Beijing Haohong Real Estate Development Company, and Ningbo Tongsan Construction Company suing Ningbo Wuzhouxing Group Company, the respective plaintiff contractors sought to overturn the black contracts and enforce the white contracts. In each case, the courts of first impression held in favour of the plaintiff contractors and upheld the white contracts that provided for higher contract prices.

The court decisions were based on Article 46 of the PRC Invitation for and Submission of Bids Law (中华人民共和国招标投标法)(Bidding Law) which provides that "within 30 days of the issuance of the bid winning notification, the project company shall enter into a written contract based on the terms of the bidding documents, and shall not enter into any other contracts that materially deviate that written contract". They were also based on Article 21 of the Supreme Court's Issues Concerning the Application of the Law to the Trial of Construction Project Contract Disputes Interpretation which provides that, "if the parties enter into construction contracts that are materially different from the contract that has been registered, then the registered contract shall be used as the basis for calculating the contract price".

The Obvious Questions

Why do the parties endorse both a black and white contract The answer is related to the required bidding process. The Bidding Law imposes mandatory bidding for large basic facilities, public facilities including safety projects, and projects wholly funded by the state.

Certain government agencies require projects to undergo the bidding process, which otherwise is not required by law. Nevertheless, the project sponsor may coerce the contractor to collude in falsifying the project terms with a white contract for registration and budgeting purposes. By simultaneously issuing a black contract with lower costs, a project sponsor can retain a margin of funding. When a contractor wants to overturn the black contract and seek judicial help to enforce the registered white contract, the hidden bargains are revealed. How should the court and the legal community deal with this practice

The Legal Debate

The aforementioned cases suggest that the courts have recently taken a consistent legal approach in honouring registered white contracts and disregarding black contracts. However, some legal scholars argue that black contracts represent the true intentions of the parties and should be honoured providing they do not violate the Bidding Law and Article 52 of the Contract Law.

Some scholars have differentiated between the projects required to go through the bidding process by the Bidding Law and those that do not. They argue that signing black contracts for the projects where there are mandatory bidding requirements should invalidate the black contract because it violates the Bidding Law and causes damage to the public interest. Alternatively, signing black contracts for the projects where there are no mandatory bidding requirements would not violate the Bidding Law or invalidate the contract pursuant to Article 52.

A consistent legal approach to enforce the registered white contract and disregard the black contract is legally superior for the following reasons.

While Article 3 of the Bidding Law specifies the activities subject to mandatory bidding activity, Article 2 provides that bidding activities should be enforced according to this law. Neither Article 2, nor the other Bidding Law provisions, state that such provisions apply only to mandatory bidding activity. Therefore, a reasonable statutory interpretation is that while not all projects are subject to mandatory bidding, once bidding activity is implemented it should adhere to the Bidding Law and enforce the contract that has been registered (i.e. the white contract). It should also disregard the contract that materially deviates from the white contract (i.e. the black contract).

Moreover, the lower contract price and shortened project term specified in black contracts would likely compromise the quality of the projects. Hence, black contracts, regardless of being subject to mandatory bidding requirements by law, should be invalidated. A legal judgement that honours all registered white contracts and disregards the black contracts would clearly avoid this outcome. Since few black and white contracts are disputed in court, it is necessary to signal that the collusion and deceptiveness represented by the black contracts are not rewarded with judicial enforcement.

The Implications

Foreign companies are often invited to bid for construction projects. If they win, these companies usually sign and register a white contract, adhere to the terms accordingly, and would unlikely consider a black contract. As such, foreign companies may become more competitive in bidding for projects as the Chinese authorities tackle the problem of black and white contracts and improve the regulation of the construction industry.