Following Building’s whirlwind tour of China earlier this month, two experts explain the Chinese approach to contract law, regulations and business practices
After China joined the World Trade Organisation in 2001, foreign companies began to find it much easier to take advantage of the enormous opportunities offered by its booming construction market. That said, the approach to the negotiating, drafting and enforcement of contracts differs from the West, and those who want to join the rush to the east need to do so with open eyes and well-prepared minds.
The body of laws affecting Western players has improved in recent years, thanks to the enactment of the Contract Law, the Bidding Law, the Administrative Licensing Law and the Government Procurement Law. These have been complemented by regulations for the management of construction projects, and the administration of foreign-invested construction enterprises.
The project management regulations clarify a number of issues, but in other respects may not be viewed positively by existing players. This is because, although previous legislative loopholes allowed foreign companies to engage in project management without establishing a legal entity, this avenue has now been closed.
The regulations on the administration of foreign construction companies clarify the circumstances in which foreign contractors can obtain the skills certificates that are needed to carry out work, and also establish that overseas experience can be taken into account by the Ministry of Construction when determining what grade of certificate should be issued to a contractor. However, contractors should note that the higher the grade of certificate they obtain, the greater the amount of capital investment they will be required to put into their China entity (all foreign invested enterprises have to follow registered capital requirements set out in law).
The Ministry of Construction recently circulated a new draft of the 1997 Construction Law which, when enacted, will address a number of important issues. For example, hitherto subcontracting has been highly restricted as a quality control measure. Subject to restrictions on “excessive” subcontracting, the law will allow main contractors to subcontract portions of a project for which it is not qualified.
Despite what you hear about the primacy of ‘guanxi’, meaning relationships, do not neglect to cover yourselves with clear contracts that say the same thing in English and Chinese. This will help avoid conflicts later
Apart from the legislative front, negotiating a successful deal in China calls for a lot of persistence and patience. The requirement for multiple permits and approvals has not disappeared. In terms of negotiating tactics, Chinese parties know how to drive a hard bargain. It is a tough and competitive market.
It can be satisfying to work in a country that produces some excellent engineers and construction crews who display a skill and enthusiasm. But no matter how good the relationship may seem, it is necessary to verify everything you are told. Despite what you hear about the primacy of “guanxi”, meaning relationships, do not neglect to cover yourselves with clear contracts that say the same thing in English and Chinese. This will help avoid conflicts later.
Clear agreements can also limit problems. You may share a common undertaking but you first need to ascertain that you share common objectives. As the Chinese expression goes: “Same bed, different dream.”
Andrew Halper is a partner at Eversheds who advises UK companies doing business in China; he is a fluent Mandarin-speaker and worked in Bejing for seven years