China: China’s Ministry of Construction Issues Foreign Design Enterprise Regulations

On March 24, 2004 the Ministry of Construction released the Provisional Regulations on the Administration of Construction Engineering Design Activities Undertaken by Foreign Enterprises Within the People’s Republic of China (the "Provisional Regulations") for comment. The consultation period for the Provisional Regulations ends on April 10, 2004.

The Provisional Regulations apply to foreign enterprises that provide construction engineering design services inside China. Such services include producing construction project-related preliminary design and working drawings or detailed design. The Provisional Regulations do not apply to any design that precedes preliminary basic design. It is not entirely clear how this distinction will be drawn in practice, but we suspect that project proposal or feasibility design may not be covered by the Provisional Regulations.

The Administrative Regulations of Foreign-Invested Construction Engineering Enterprises (Decree 114) govern the commercial presence of foreign engineering design firms in the PRC. Decree 114 provides for setting up wholly foreign- owned construction and engineering design enterprises ("WFODE") and Sino-foreign equity or co-operative joint venture construction and engineering design enterprises ("SFDJV") in China. Given that no Decree 114 implementation rules or standards have been promulgated and the Ministry of Construction is not yet accepting applications under Decree 114, it is not clear how applications for WFODEs or SFDJVs will be processed under Decree 114. Notwithstanding this, in principle foreign engineering design firms have two options for entry to the China market under Decree 114, namely WFODE or SFDJV.

The Provisional Regulations appear to give foreign engineering design firms a further option, by enabling them to collaborate with a Chinese design enterprise with appropriate qualifications on a project-specific basis. In other words, a foreign engineering design firm may establish a contractual relationship with a Chinese design enterprise on a project-by project basis (and not necessarily even with the same Chinese design enterprise). Such a contractual relationship will not constitute a joint venture under Chinese law.

The collaboration between the foreign engineering design firm and the Chinese design enterprise must be reflected in an agreement specifying the rights and obligations of the parties. The Provisional Regulations set out certain mandatory provisions that must be included in the collaboration agreement, including the scope and duration of the collaboration and the allocation of specific design tasks and fees between the parties. The collaboration agreement must be filed with the provincial level administrative authorities with jurisdiction over the site of the project.

A foreign engineering design firm can only undertake collaborative design projects that are within the scope of design activities that the Chinese design enterprise it is collaborating with is qualified to perform. An engineering design contract for a collaborative design project is required to be entered into between the owner/project developer on the one hand and either the Chinese design enterprise alone or the foreign engineering design firm and the Chinese design enterprise jointly. The engineering design contract must specify the rights and obligations of the parties and must be in Chinese. The engineering design contract must also be filed with the provincial level administrative authorities with jurisdiction over the site of the project.

The owner/project developer is responsible under the Provisional Regulations for undertaking a preliminary examination of the foreign engineering design firm’s qualifications. Only those foreign engineering design firms that pass such preliminary examination may participate in collaborative design projects. It is not clear whether the qualification of a foreign engineering design firm would only be subject to the preliminary review of the owner/project developer, or whether it would also be subject to examination and approval by the relevant construction commissions. Our reading of the Provisional Regulations suggests the former, as the collaboration agreement and the engineering design contract only require filing with the provincial construction commissions for record purposes.

The Provisional Regulations appear not only to open an additional avenue for foreign engineering design firms to undertake design activities in China on a project by project basis, they also give the owner/project developer (rather than the Ministry of Construction or provincial construction commissions) discretionary power to determine whether a foreign engineering design firm is qualified to conduct the relevant engineering design project.

These are significant developments and perhaps shed some light on the direction that might be taken by the Ministry of Construction in relation to the implementation of Decree 113 and Decree 114 in the future. Having said this, however, there remain some issues of concern for foreign engineering design firms. For a start, the involvement of Chinese design enterprises, although not in a joint venture context, will nevertheless likely increase the costs of the design and may make the collaboration commercially uncompetitive. In addition, the fact that the Chinese design enterprise needs to be a party to the contract with the owner/project developer means that the full project pricing will most likely need to be disclosed to the Chinese design enterprise, and such information may be commercially sensitive.

Notwithstanding these concerns, the Provisional Regulations are a welcome clarification for foreign engineering design firms operating in China.