International Construction Law Review
RECENT LEGAL DEVELOPMENTS IN CHINA ON THE USE OF BONDS
RICO CHAN
Partner, Baker & McKenzie, Hong Kong/China
Performance bonds and payment security bonds are standard documents expected by the international construction community. The Chinese Government has been pushing for the use of bonds in construction projects for some time. This article provides a brief overview of the current regulatory regime of bonds in the Chinese construction industry and some recent legal developments in this area.
Current regulatory regime: bonds by contractors and owners
At present, the Regulations on the Promotion of Bonds for Construction Contracts for Real Estate Development Projects (Trial Implementation) (“National Bonds Regulations”), issued by the Ministry of Construction (“MOC”) and effective since August 2004, are the only major regulations at the national level dealing with the use of bonds for construction projects. Under the National Bonds Regulations, for real estate development projects with a contract price for construction of over RMB10m., the contractor is generally required to provide a performance bond issued by a local financial institution for a sum of not less than 10% of the contract sum. For most construction projects this is already more or less the standard market practice. The National Bonds Regulations seek to turn this market practice into a legal requirement.
What is particularly interesting about the National Bonds Regulations is that for a real estate project with a contract price of over RMB10m. the owner is also required to provide to the contractor a payment security bond issued by a local financial institution for a sum usually not less than 10% of the contract sum. Both internationally and in China, while a performance bond from the contractors is a fairly standard requirement, a payment security bond from the owner is relatively rare. Usually contractors will decide whether to bid for a project based on their assessment of the credit standing of the owner. The National Bonds Regulations now make the payment security bond a filing requirement for the owner to obtain the commencement permit for the construction works. The main reason for this requirement is that default in payment has been a serious problem in the Chinese construction industry. The National Bonds Regulations are just
[2006
The International Construction Law Review
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