Construction Enterprise Qualifications

With the growth of China's economy in recent years, construction projects have spread rapidly across the country. Here we discuss briefly China's regulations concerning construction enterprise qualifications and how construction contracts are affected if these regulations are not complied with.

Administration of Construction Enterprise Qualifications

The PRC Construction Law provides that construction enterprises be differentiated into different grades depending on their registered capital, specialized technical personnel, experience and so on. A construction company can only engage in construction activities within the permitted scope specified in its qualification certificate.

Pursuant to the Provisions on the Administration of the Qualifications of Construction Enterprises (the 'Qualification Provisions') effective July 1, 2001, the Ministry of Construction and its local counterparts are in charge of the qualification administration of construction enterprises in the country.

Construction enterprises must apply to the construction authorities at the county or higher level for qualification approval.

Qualifications for Foreign-invested Construction Enterprises

The Provisions on the Administration of Foreign-invested Construction Enterprises (the 'FICE Regulations'), jointly issued by the Ministry of Construction and the Ministry of Foreign Trade and Economic Cooperation (now the Ministry of Commerce (MOFCOM)) and effective on December 1, 2002, set out the application and approval procedures for the establishment and qualifications of foreign-invested construction enterprises.

The FICE Regulations replaced the Tentative Measures for the Administration of the Quality of Foreign Enterprises Contracting Projects in the PRC, promulgated in 1994 (Tentative Measures). Under the Tentative Measures, a foreign company could directly apply to the construction authorities for a qualification certificate for contracting construction projects in China. However, the Ministry of Construction now makes it clear that as of July 1, 2005, foreign companies must set up entities in China if they intend to enter the market.

A foreign-invested construction enterprise must now apply for a qualification certificate from the construction authority. The construction activities of such an enterprise is limited to the scope specified in its construction enterprise qualification certificate.

The classification standards for construction enterprise qualifications issued by the Ministry of Construction also apply to foreign-invested construction enterprises. However, pursuant to the Circular on Issues Concerning Proper Handling of the Administration of Qualification for Foreign-invested Construction Enterprises issued by the Ministry of Construction and MOFOM on September 6, 2004, if a newly established foreign-invested construction enterprise fails to meet the qualification requirements in terms of track record and staffing, the construction authorities may handle the matter as follows:

i. The construction performance of the foreign investor outside of China may be counted as its performance inside China;

ii. The foreign-invested construction enterprise may hire foreign service providers as technical and economic management personnel of the enterprise; and

iii. The foreign-invested construction enterprise may hire service providers from overseas as project managers of the enterprise with no limitation imposed on the number of such service providers.

Invalid Construction Contract

A construction contract signed by a construction enterprise may be held invalid by courts in China if the enterprise has violated the construction qualification regulations.

Pursuant to the Supreme People's Court Interpretation on Issues Concerning the Application of the Law to the Trial of Construction Project Contract Disputes, effective as of January 1, 2005, a construction contract shall be held invalid if a contractor has not obtained construction enterprise qualification or has undertaken a project that exceeds its qualification grade. Such a contract will also be void if an unqualified builder uses the name of a qualified builder to undertake a project.

If a construction contract is held invalid, the court will determine how the contractor should assume the liabilities based on whether the construction work passes an 'acceptance test' and the seriousness of the violation of the law.

If a construction contract is invalid but the construction work successfully passes the acceptance test, the court shall uphold the contractor's request for payment of the contract price with reference to the provisions of the contract.

If a construction contract is invalid and the construction work fails to pass the acceptance test, it will be handled as follows:

i. If the construction work passes the acceptance test after repairs, the court shall uphold the contractor's request for payment of the contract price and the project owner's request for the contractor to bear the repair expenses;

ii. If the construction work fails to pass the acceptance test after repairs, the court shall reject the contractor's request for payment of the contract price.

However, in the case an unqualified builder undertakes a project using the name of a qualified construction enterprise, the court may confiscate the profit received by such a builder.