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China revises key Construction and Planning Laws

7/23/2020

1. Short Introduction

In accordance with the Decision of the Standing Committee of the National People's Congress, revisions were made to public construction and planning laws in China including the Construction Law, the Fire Protection Law, and the Law of the People's Republic of China on Urban and Rural Planning that came into force on 23 April 2019.

In addition, lawmakers in Beijing have passed the first Civil Code of the People's Republic of China, landmark legislation scheduled to come into force on 1 January 2021.

Because the revisions and the Civil Code are expected to have practical effects in the construction sector, the following article details these changes.

2. Public Construction Laws

a) The Construction Law still requires employers involved in the construction and decoration of various buildings and other construction projects (including municipal infrastructure projects) to apply for construction permits with the competent construction authority. These permits must be obtained at the place where the construction projects are located and before the start of construction, unless a construction project's value of investment is below CNY 300,000 or the construction area is below 300 square meters.

According to the revised Construction Law, the construction authority will – within seven days (fifteen days in the previous law) from the date of receipt of an application – issue a construction permit if the following requirements are met:

  • The permit has been obtained for the planned use of the land for construction;
  • The permit has been obtained for the planned construction project;
  • The construction site has been prepared according to relevant construction laws and regulations (e.g. in the case of a planned demolition);
  • The contractor has been designated;
  • Funding arrangements, construction drawings and technical information, which meet the requirements of the relevant construction laws, have been completed; and
  • Specific measures to ensure project quality and safety have been taken.

The construction authority must also formally notify the employer in writing including explanations within the seven-day period (previously fifteen days) if the above requirements for the construction permit have not been met. Apart from speeding up the application procedure, the above requirements – generally deemed to be effective – have not been significantly changed since the Construction Law first came into force on 1 March 1998, except for the following:

The Administrative Measures for Construction Permits of Construction Projects, which went into force on 25 June 2014, are the relevant implementing provisions concerning construction permits vis-à-vis the Construction Law. According to a revision of these Measures on 11 October 2018, however, the construction permit requirement “completion of fund arrangement” (see the fifth bullet point above regarding "Funding arrangements, construction drawings and technical information") can be demonstrated by simply having the employer provide an undertaking letter. This letter is usually a form provided by the relevant authority, and an additional bank statement does not need to be submitted. Furthermore, the construction permit requirement for “entrustment of supervisor” has been deleted entirely. In other words, the contractual arrangement with a local site supervision (监理), which is mandatory for certain construction projects (e.g. public-utility projects), no longer needs to be demonstrated in construction-permit proceedings. However, we have observed regional and local disparities in the administrative practice of a number of areas, and authorities could still apply outdated or additional special requirements before they grant the construction permit of construction projects.

b) The Fire Protection Law, adopted on 29 April 1998, was revised for the first time on 28 October 2008. According to this law, design entities, project owners, construction and supervision entities and others will be responsible for fire-protection designs and ensuring that the relevant construction project meets national fire protection technical standards for construction projects. The newly revised Fire Protection Law provides for the following: except for special construction projects as designated by the competent authorities under the State Council, a fire protection design examination and acceptance system will be adopted. This system simplifies the relevant administrative procedures for many industrial construction projects. According to the system, the project owners submit drawings and technical materials of the fire protection design to the competent authority for examination when applying for a construction permit or seeking approval of the report for the start of construction. After their acceptance, the project owners will check and report their results to the competent department of housing and urban-rural development, which will conduct a random inspection of the construction project. If the competent authority finds the project in violation after an inspection, the project owner must suspend its construction project. If the owner does not comply, an administrative penalty of between CNY 30,000 and CNY 300,000 will be imposed.

c) Construction land-use rights can be created by means of transfer from the relevant governmental authority to entities against payment of fees and through tender, auction or any other public bidding methods. According to the Urban and Rural Planning Law, the land-use right grant contract must include conditions of the urban land-use planning and will only be concluded between the relevant contracting parties after mandatory development planning has been determined for the land plot to be transferred. In respect to the transfer of land-use rights for lawfully registered collective-operation land to enterprises or individuals, see our previous newsletter of May 2020 on Land and Housing Policy Reforms in China.

Art. 38 para. 2 of the Urban and Rural Planning Law, which was the only revision of this law in 2019, provides that for a construction project, where the right to use state-owned land is obtained through transfer, the developer should apply to the department in charge of urban and rural planning under the city or county government responsible for issuing permits for planned use of land for construction. The developer should make this application after it receives the approval, verification and record-filing documents for the construction project and concludes the land-use right grant contract. In comparison with the wording of the previous version of the Urban and Rural Planning Law in 2015, the reason for this revision remains unclear, since the revised Art. 38 para. 2 simply uses other wording for the same regulation. However, the commentary literature has assumed that the reason for the revision was based on the recent reshuffle of several ministries where the newly formed Ministry of Natural Resources replaced the functions of the Ministry of Land & Resources, State Oceanic Administration and the State Bureau of Surveying and Mapping effective from 19 March 2018. As a result, the developer theoretically was no longer required to further demonstrate relevant approval, verification and record-filing documents for the construction project or the conclusion of the land-use right grant contract for its application to obtain the permit, since the relevant department of the Ministry of Natural Resources would have direct access to these information and documents.

3. Private Construction Laws

The Contract Law of the People's Republic of China, effective since 1 October 1999, contains special provisions in the field of construction project contracts (Art. 269 - 287), which include contracts for project surveys, design and construction. Otherwise, the general provisions on contracts for works (Art. 251 bis 268) are applicable.

In the meantime, the Civil Code was promulgated on 28 May 2020 and will go into force on 1 January 2021. Art. 770 - 808 of the Civil Code has taken over all the above Contract Law provisions on contracts for works and construction project contracts, and the Contract Law will be simultaneously repealed. In addition, the Civil Code includes two new articles concerning construction project contracts, which govern rights and remedies of both the employer and contractor:

Article 793 Civil Code: If a construction contract for a construction project is invalid, but the construction project has passed the acceptance inspection, the contractor is entitled to compensation by reference to the agreement of the construction contract on the price of the construction project (agreed remuneration). Where a construction contract for a construction project is invalid, and the construction project fails to pass the acceptance inspection, the following provisions shall apply: 1. if (the rectified work of) the construction project passes the acceptance inspection, the employer is entitled to request the contractor to bear the cost of the rectification; and 2. if (the rectified work of) the construction project fails to pass the acceptance inspection, the contractor has no right to claim compensation by reference to the agreement of the construction contract on the price of the construction project (agreed remuneration). Where the employer is at fault with regard to the losses caused by the non-conformity of the construction project (with compulsory standards), it shall bear the corresponding liability.”

Such compensation claims by the contractor to the contractually agreed remuneration, according to Article 793 Civil Code, is based on the understanding that there is no rescission of the construction project contract under the law of unjustified enrichment because the employer will instead replace the objective value of the construction work rendered by the contractor, which is assumed to correspond with the agreed-upon remuneration. However, court decisions have shown that the competent courts exercise their discretion to adjust the remuneration of the contractor on a case-by-case basis. Note Article 806 of the Civil Code:

“Where the contractor assigns or illegally subcontracts a construction project, the employer is entitled to rescind the contract. The contractor is entitled to rescind the contract if the main building materials, components, fittings and equipment provided by the employer fail to meet the compulsory standards, or the employer fails to perform its assistance obligations, resulting in the contractor's failure to perform construction, and fails to perform the corresponding obligations within a reasonable period after being reminded to do so. If, after a contract is rescinded, the quality of the completed construction project is qualified, the employer shall pay the corresponding construction price in accordance with the terms of the contract; if the quality of the completed construction project is unqualified, Article 793 of the Code shall apply mutatis mutandis.”

The above new Articles 793 and 806 of the Civil Code are already applicable laws in China and have been covered by the Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Construction Project Contract Dispute Cases, which has been in effect since 1 January 2005. These SPC-Interpretations clarified several reasons for the invalidity of construction project contracts, which is still an issue of serious concern in the construction praxis in China in the following situations:

  • The contractor has not obtained the qualification as a construction enterprise or undertakes construction work in excess of its qualification grade;               
  • An unqualified actual constructor (or subcontractor) undertakes construction work in the name of a qualified construction enterprise;                                                    
  • The construction project requires public bidding, but no bid is invited, or the winning bid is invalid; or
  • The contractor unlawfully subcontracts the entire construction project or part of the project to others if the project was unlawfully divided.                                                                                                          

We have explained this practice and the legal consequences in our presentation on "Interesting Facts about Construction Disputes in China – New Interpretation Rules of the Supreme People’s Court" on July 4, 2019 in Shanghai (see China Real Estate Market Update and Forecasts Q3 and Q4 2019).

Final remarks

The revisions on the Construction Law, Fire Protection Law and Urban and Rural Planning Law are based on the reform of  "delegating powers, streamlining administration and strengthening regulations, and improving services", which have already been addressed in the circular of the State Council dated May 12, 2015 [国发(201529] and further determined d in the State Council's executive meeting chaired by Premier Li Keqiang on 17 March 2020.

The procedures of the fire protection design examination and acceptance system (supra 2. b)), according to the latest revision of the Fire Protection Law, have been further detailed in the new Interim Provisions for the Examination and Acceptance Management of Fire Protection Design of Construction Projects, which came into effect on 1 June 2020.

Authors

Dr. Oliver Maaz
Partner
Shanghai