Problems in the filing of construction contracts need to be addressed

By Wang Jihong and Zhang Xiaofeng, V&T Law Firm
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In recent years there has been a tendency for local government departments in charge of construction to review the filing of construction contracts more aggressively, and to expand the purview of their administrative powers.

Wang Jihong, Managing partner, V&T Law Firm
Wang Jihong
Managing Partner
V&T Law Firm

In Beijing, for example, the writers served as legal counsel on a large-scale construction project which started in 2004. It complied fully with the conditions for construction contracts set out in the 1999 Red Book published by the Fédération Internationale des Ingénieurs-Conseils and was successfully filed with the city’s construction committee. However in 2010, the construction tender and contract for a related, subsidiary project were required to adopt the Beijing Municipality Construction and Municipal Infrastructure Projects Model Tender Documents compiled by the city’s administrative departments. No major changes to the clauses of the model text were permitted. The parties were not able to increase the amount of liquidated damages for delay to the project, add clauses on liquidated damages, transfer part of the risk to the contractor or to make any other substantial changes to the provisions of the model text. In other provinces, the local departments in charge of construction also require the adoption of locally drafted model contracts or the model construction contracts introduced by the former Ministry of Construction in 1999.

This phenomenon is not only inconsistent with the need to put the construction market in China on a market basis, and not in line with international practice, it is also in conflict with the law.

Going astray

Zhang Xiaofeng
Zhang Xiaofeng
Partner
V&T Law Firm

The Construction Projects Permits Administrative Measures, issued by the former Ministry of Construction, stipulate that one of the conditions for applying for a construction permit is that the construction contractor be specified. On the basis of this provision, local departments in charge of construction link the issue of a construction permit to the filing of a construction contract. For example, article 18 of the Beijing Municipality Construction and Municipal Infrastructure Projects General Construction Contracts Administrative Measures (Trial) stipulates that “where a project has received a construction permit according to the law, the construction contract should be filed”.

By filing is meant archiving for future reference. According to the law, the departments in charge of construction are not required to carry out a substantive review because the construction contract should already have been freely agreed by the parties according to the principle of freedom of contract. Whether the rights and obligations set out in the contract are reasonable, or whether the contract is valid, are not matters for review by government organs. Furthermore, if bidders think that specified tender conditions do not conform to their interests or requirements, they can simply choose not to bid. Government organs are not entitled to review whether the commercial conditions in the tender documents are reasonable or not.

In practice, however, local departments in charge of construction require parties to sign contracts for construction projects in accordance with their own model texts or the 1999 Ministry of Construction model contracts. They do not allow the parties to make major amendments to the model texts. If such changes are made, the contract cannot be filed.

Currently, Beijing, Hebei, Hubei, Guangdong, Chongqing and Heilongjiang have local versions of model construction contracts, while most other localities have adopted the 1999 Ministry of Construction model contracts.
However, the so-called model contracts were not supposed to be mandatory – their use was only recommended. The parties to a contract can choose whether to use or modify these templates. Yet in the process of implementation, local government departments have come to require that there be no substantive deviation from the model contracts. What should be a recommendation has become mandatory.

The legal character of filing

Although China’s law does not clearly define the legal character of the filing of contracts, the writers believe that according to the State Council Reform of the Investment System Decision (Guo Fa [2004] 20), filing means neither approval nor permission, but rather archiving for future reference. Even if there is a review of a contract whose filing is requested, it should be a pro forma review rather than a substantive one.

Suspected illegality

The departments in charge of construction have changed the review of the filing of construction contracts into a substantive review. If a contract signed by the parties does not meet their requirements, it is not filed. This kind of approach may be in breach of the Contract Law, the Administrative Licensing Law and other legal provisions.

Under article 4 of the Contract Law, “the parties shall enjoy the right to enter voluntarily into a contract in accordance with the law and no unit or individual may illegally interfere”. Yet the substantive review of contracts by government departments constitutes interference with the freedom of parties to enter into contracts and may violate the Contract Law.

In addition, according to the provisions of articles 2 and 4 of the Administrative Licensing Law, “the administrative licensing referred to by this Act means government organs, upon the application of citizens, legal persons or other organizations, permitting them, following a review in accordance with the law, to engage in certain activities … The setting and implementation of administrative licensing should be in accordance with legally specified authority and its scope, as well as other legally specified conditions and procedures”. Substantive review by an organ of government is essentially a kind of administrative licensing. However, there is no legal authority for this administrative licensing where filing reviews are carried out by government organs. The law does not mandate administrative licensing as constituted by the review of the filing of contracts. Nevertheless, administrative organs treat filing and review as an exercise of administrative licensing. This may violate the provisions of the Administrative Licensing Law.

Wang Jihong is the managing partner of V&T Law Firm. She practises in the field of infrastructure development. Zhang Xiaofeng is a partner at V&T Law Firm

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E-mail: wangjihong@vtlaw.cn
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