Construction authorities must keep it simple on recordals

The construction contract recordal system has long been criticised. The criteria of the housing, and urban and rural construction commissions of different regions for recordal reviews are inconsistent, with a significant number of regions treating recordal as a substantive review with stringent criteria and an overly broad scope of review. With the central authorities calling for simplifying administration, the “long-arm jurisdiction” of construction commissions seems particularly out of place.

Recently, a client of ours encountered such a situation when carrying out construction contract recordal. The enterprise successfully participated in a public bid for “investment plus general construction contract” works for a certain infrastructure build-transfer (BT) project in Shandong. The bid invitation documents expressly specified that the general construction contract was to be entered into by the investor-established project company – the employer – and the bidder.

Subsequently, the parties entered into the general construction contract on this basis. However, the relevant officer at the construction commission denied the recordal on the grounds that the employer under the construction contract and the bid-inviting party were different. The inability to complete recordal affected the procedure for obtaining the construction permit, seriously impeding the normal progress of the project.

Construction contract recordal system

Article 47 of the Administrative Measures on Bid Invitation and Submission for Construction of Premises and Urban Infrastructure specifies that within seven days after the formation of a written contract the winning bidder is to submit the contract to the construction authority, at the county level or above, of the place where the project is located for the record, thus establishing China’s construction contract recordal system. Pursuant to the Decision of the State Council on Reforming the Investment System, recordal is not examination and approval, falling rather within the category of placing on file for future reference.

Construction contract recordal should be deemed document authentication by authorities, with the construction authorities only required to place a construction contract that has been determined through a bid invitation and submission procedure on file, without a review. Even if some review is thought to be necessary, it should be limited to a formal review that is not overly concerned with the substantive content.

In this respect, article 6 of the Administrative Measures of Henan Province for the Recordal of Construction Project Contracts (for Trial Implementation) specifies that construction contract recordal is of an informative nature, with contract parties liable for the truthfulness and lawfulness of the contract. If it is discovered, or if it is corroborated after a tip or complaint, that a contract violates a law, rule, regulation or regulatory document, the authority charged with recordal administration has the authority to order rectification of the matter and deal with the situation in accordance with the law. Article 3 of the Measures of Shenzhen for the Recordal of Construction Project Contracts also specifies that recordal is of an informative nature.

Lack of understanding

Regrettably, not all local construction authorities know the substantive meaning of the recordal system, instead treating it as a stage upon which administrative authority is to be fully demonstrated, setting forth stringent provisions in respect of the scope, content and form of recordal, and even the sample contracts and commercial terms to be used, seriously violating the autonomy of will. Furthermore, because every region links contract recordal to construction permits, recordal administration that involves substantive reviews will usually result in delays in project construction.

Currently, the “investment plus general construction contract” bid invitation investment and construction model is used for urban infrastructure construction projects in many regions. In this model, the winning bidder is not only the investor but also the general construction contractor. Accordingly, all bid-inviting parties specify, when drawing up the bid invitation documents, that the general construction contract is to be entered into by the winning bidder and the bidder’s project company (the employer).

The execution of the general construction contract for the BT project mentioned at the beginning was in full compliance with the bid invitation and bid documents, and the procedures and content were lawful. The construction commission should have conducted a review only as to whether the form of the contract was in compliance with the law, and did not need to overly concern itself with the content of the contract. Even if it is necessary to examine the qualifications of the contracting entities, the authority needs to go beyond dogma and old-fashioned thinking, and consider the actual circumstances of the project, and not deny recordal simply on the grounds that the “employer and bid-inviting party are different”.

Simplification

Reform decisions at the Third Plenum point out that government functions must be genuinely transformed, innovations made in administrative methods and a government ruled by law, and a service type government created. The execution and performance of construction contracts are micro matters that can be adjusted by the market itself. Under a legal framework with a Contract Law, Law on the Invitation and Submission of Bids, etc., the bid-inviting party and bidder, as equal civil entities, fully have the capacity and meet the conditions to themselves bear the liability for the truthfulness and lawfulness of their contract, and have the right to themselves set the terms of contract conditions provided that they reach a consensus through negotiations. The construction commission, as the competent authority, should not overly involve itself in the specific terms of the contract.

It is precisely because construction authorities of certain regions have implemented construction contract recordal as a substantive review that parties to contracts have resorted to fraudulent invitations of bids, the execution of “black and white contracts” – parties execute more than one contract in respect of the same subject matter – and other such acts to ensure the progress of their projects and circumvent review, thereby negating the effectiveness of the recordal system and even producing the exact opposite results, greatly increasing the probability of disputes arising between parties.

The authors would again like to call upon certain construction authorities to return to the market those powers that they ought to delegate, simplify the recordal review contents and procedure, and promptly formulate recordal administrative measures appropriate for the bidding for build-operate-transfer, BT and other such projects.

Wang Jihong is a partner and Yu Li is a paralegal at Zhong Lun Law Firm