Hong Kong: Proposed Hong Kong Security Of Payment Legislation For The Construction Industry

In April 2016, the Development Bureau of the Hong Kong Special Administrative Region Government published its report (the Report) on the public consultation on the proposed security of payment legislation ("SOPL") for the construction industry. The public consultation was open from June 2015 until 31 August 2015 and received a total of 1,116 responses. The Report details the Development Bureau's findings, which generally support the proposed terms of the SOPL.

The background to and further details of the public consultation are outlined in our previous article from 29 January 2016.

Overview of the SOPL

The aim of the SOPL is to ensure the expedient payment of contractors, subcontractors, consultants and suppliers operating in the construction industry in Hong Kong and to provide a means of rapidly resolving disputes.

The SOPL comprises similar principles to those enshrined in existing security of payment legislation in jurisdictions such as the United Kingdom, Singapore and Malaysia. In common with those other jurisdictions, the SOPL includes a prohibition of "pay-when-paid" (or similar conditional payment) terms, timing and valuation of payments (including a proposed right to claim payments by way of statutory payment claims), suspension rights in the event of non-payment, and rights for parties to refer certain types of disputes to adjudication.

Conclusion of the Report

According to the Report, there has been an enthusiastic response to the public consultation exercise and there is positive public support, in particular, for the following key proposals:

  • SOPL should apply to all Government contracts and contracts entered into by specified statutory and/or public bodies and corporations;
  • coverage of SOPL should be limited to contracts relating to construction activities within Hong Kong;
  • SOPL should apply to contracts for the supply of materials or plant;
  • parties should be free to agree when payments can be claimed and the basis of valuation of such payments, but the maximum payment periods which can be imposed once a party is entitled to claim should be limited;
  • there should be a mechanism to ensure those who undertake work or provide services, materials or plant can claim payments and payers can respond to such claims;
  • there should be "default" payment terms in the event that parties do not make express provision in their contracts as to when payments can be claimed, how they are to be valued and responded to and when amounts due must be paid;
  • set off against a payment claim should not be allowed unless notified in a timely payment response;
  • "Pay when paid" and conditional payment provisions should be unenforceable, including in relation to nominated sub-contracts;
  • parties who have not been paid an amount admitted as due in a payment response or decided as due by an adjudicator should be entitled to suspend or slow down works and should be entitled to additional costs and extensions of time to compensate them for any resulting delays;
  • either party to a contract should be entitled to refer disputes arising in relation to payment claims to adjudication within 55 working days (or a longer period agreed by the parties);
  • there should be a 28 calendar day time limit for commencing adjudication once a right to adjudicate arises;
  • parties should be free to agree in their contracts an independent body to nominate an adjudicator in the event the parties are unable to agree; and
  • adjudicators' decisions should be enforceable in the same way as court judgments without set off or deduction and paying parties should only be allowed a short period within which to challenge the enforceability of a decision.

However, the Report also acknowledges that the public and industry stakeholders have divergent views relating to some aspects of the current proposed legislative framework. These include the following:

  • whether private sector coverage should be limited to contracts for "new buildings" with a main contract value in excess of HK$5million;
  • whether SOPL should apply to oral (and partly oral) as well as written contracts;
  • whether SOPL should apply to professional services contracts;
  • the setting of appropriate maximum permissible payment periods and whether there should be different periods applicable to interim and final payments;
  • whether payers who fail to serve a timely payment response should or should not be automatically liable to pay the full amount of the relevant payment claim;
  • whether parties should be entitled to refer disputes in relation to extension of time under the contracts to adjudication;
  • whether a better process/procedure is needed for appointment of an adjudicator and referral of the dispute to the adjudicator once a notice of adjudication is served;
  • whether parties should only be able to agree an adjudicator after a dispute has arisen or whether it would be better if they could do so in their contracts or
  • after their contracts are entered into; and
  • whether the default adjudicator nominating body should be HKIAC or whether different or other bodies should be able to carry out default nominations of adjudicators.

The Government has, nonetheless, expressed its intention to proceed with the legislation and has suggested it will do so by carefully examining the above issues and give due consideration to the public and stakeholders' views in formulating the legislative framework for the SOPL.

SOPL going forward

In light of the SOPL's implications for the entire supply chain, the progress of the SOPL and its final legislative framework will likely continue to be of interest to a wide spectrum of construction industry stakeholders, and should be monitored closely by clients that are involved in projects (and/or prospective projects) in Hong Kong.

It remains to be seen how the Government will ultimately address those areas in relation to which differing views have been expressed by the public and industry stakeholders, and whether or not it will take into account certain feedback which deviates from existing security of payment legislation in other jurisdictions. For example, the consultation has returned suggestions to defer or limit the application of the SOPL in relation to oral or partly oral contracts – while a similar approach is taken under Singaporean and Malaysian security of payment legislation, which both require contracts to be in writing or evidenced in writing, this differs from the UK security of payment legislation which covers not only written contracts, but also oral and partly oral contracts. In a similar vein, it will also be interesting to see whether the Government retains its proposal to allow the parties freedom to agree adjudicator nominating bodies in their contract in contrast to the Singaporean and Malaysian model which require all adjudicators to be nominated by the Singapore Mediation Centre or the KLRCA, respectively.

The next step is for the Development Bureau to finalise the framework of the SOPL and to prepare a bill for submission to the Hong Kong Legislative Council which is expected in 2017. Although there is currently no concrete indication as to when the legislation will come into force, we recommend that clients who are employers, main contractors, and lead consultants, in particular, start to consider (if they have not already) the potential impact of the SOPL on the terms of any relevant internal standard construction contracts and/or consultants' appointments, contract management practices and even accounting procedures in order to ensure compliance with the SOPL in anticipation of its coming into force.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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