Contract Laws of China Regarding Construction and Engineering

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Contract Laws of China

The Construction and contract laws of China are a complex and changing field. We hope this article can give some useful information.
The Contract Law of the People’s Republic of China (hereinafter referred to as the Contract Law) came into force on 1 October 1999. At the same time, the three former contract laws (the Economic Contract Law of the People’s Republic of China, the Law of the People’s Republic of China on Economic Contracts Involving Foreign Interests and the Law of the People’s Republic of China on Technology Contracts) were abrogated.
The new Contract Law was based on the UNIDROIT (International Institute for the Unification of Private Law) Principles of International Commercial Contracts. Specific provisions were included to regulate different types of contracts.

Construction law of China

Construction law of China

Article 38 of the Contract Law states:
“If the State issues mandatory assignments or State purchase orders in accordance with requirements, the legal persons and other organisations concerned shall conclude contracts in accordance with the rights and obligations provided for by the relevant laws and administrative regulations.”

One of the reasons this provision was included was to safeguard important construction work. It means that the contracting parties may not refuse to fulfil the tasks allotted under State mandatory plans or purchase orders by invoking “freedom of contract”.
Standard form contracts have been introduced within the Chinese construction industry to improve the efficiency of contract negotiations. FIDIC (International Federation of Consulting Engineers) conditions of contract are widely used for the delivery of major construction projects. The FIDIC form is primarily used for projects financed by foreign governments, foreign companies or international organisations.

Chinese standard form contracts are used for projects procured by the public sector or state-owned enterprises. The most important general form of construction contract is the Ministry of Housing and Urban-Rural Development’s Model Conditions of Contract for Works of Building Construction. This general form is constantly revised and brought up to date with prevailing international trends and developments in relevant laws. Many other public bodies and state-owned enterprises have created their own standard conditions of contract.

The principle of good faith, entrenched in the Contract Law and the General Principles of the Civil Law of the People’s Republic of China, requires the parties to act in an honest and fair manner in their dealings with one another. This means they must act reasonably and perform their obligations, during both the formation and performance stages of the contract. It is important to note that in China, pre-contractual liability arises where one party caused harm to the other in the formation of the contract, regardless of whether or not a valid contract was concluded. The Contract Law maintains that such liability can result from actions contrary to the principle of good faith.

As a key component of the construction and contract laws of china, the Contract Law provides that parties may specify arbitration as the means for contract dispute resolution. If one of the contracting parties is foreign, they may agree to arbitrate outside of China. Hong Kong is a popular location for the resolution of disputes involving Mainland Chinese enterprises.
The Arbitration Law of the People’s Republic of China states that where parties fail to agree upon the arbitrators when drafting the contract, the arbitration agreement will be rendered invalid. Specific performance or restoration of the original position (rather than payment of damages) is the preferred remedy for breach of contract.

Due to the amount of construction activity in China, the number of construction disputes concerning design, quality, delay and cost overruns are on the rise. There are still several areas of unresolved tension between the Chinese system and internationally accepted best practice. Therefore, Construction and Contract Laws of China can be expected to continue developing in the near future.