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.

Scope of Application

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.

Relationship with Decree 114

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.

Collaboration with Chinese Design Enterprises

The collaboration between the foreign engineering design firm and the Chinese design enterprise must be reflected in an agreement specifying the rights...