10 June 2015

Proposed security of payment legislation for the Hong Kong construction industry

This article was written by Edmund Wan and James Wilkinson.

The Hong Kong Government has released a long-anticipated consultation document on the proposed security of payment legislation (SOPL) for the construction industry.

The SOPL aims to help contractors, consultants and suppliers receive payments within a reasonable time. It also proposes introducing adjudication to rapidly resolve disputes.

Payment terms in construction contracts

Time for payment

Under the proposed SOPL, interim and final payments must be paid within 60 and 120 calendar days respectively.

Prohibition on “pay when paid” clauses

Any “pay when paid” clauses in construction contracts would be deemed ineffective and unenforceable. These clauses typically specify that a sub-contractor will only be paid once the head contractor is paid.

Right to suspend works for non-payment

The SOPL would provide parties with the right to suspend all or part of their works or to reduce the rate of progress in the event of non-payment.  

Parties which suspend or slow down work due to non-payment would have rights to extensions of time and costs arising from the delay.

Adjudication – Rapid dispute resolution

The SOPL would introduce adjudication as a means of resolving disputes quickly and cost effectively. A typical adjudication would be resolved within 60 working days from the commencement of adjudication. In order to achieve this quick resolution, a strict timetable is imposed.

The right to adjudication would arise in the event of non-payment, disputes about the value of work, or disputes about extensions of time.

The adjudicator’s decision would be “interim”, in that either party may still take the dispute to court or arbitration for final determination. However, the adjudicator’s decision stands in the interim and any amounts found due would have to be paid immediately.

It is also proposed that adjudicators’ decisions are to be enforceable in the same way as judgments of the court and without set-off or deduction. Only a short period would be allowed for responding parties to lodge any challenge to the validity of decisions. The procedural aspects of enforcement are to be discussed with the Hong Kong Courts.

Experience overseas is that parties often accept adjudicators’ decisions as finally determining disputes and they are not taken further, according to the consultation document on the SOPL.

Each party would bear their own costs of the adjudication, although the adjudicator would have the right to decide who should pay the adjudicator’s fees.

What types of construction contracts are covered?

Public sector

The SOPL would apply to all contracts under which the Government and specified public entities procure construction activities or related services, materials or plant.

Specified public entities include the Airport Authority, Housing Authority, MTR Corporation and various universities.

Private sector

The SOPL would apply to private sector contracts only where:

  • the employer is procuring construction activities or related services, materials or plant for construction of a “new building” (as defined in the Buildings Ordinance); and
  • the main contract value is more than HK$5 million for construction contractors or HK$500,000 for professional services and supply only contracts.

If the SOPL applies to the main contract then it would also apply to all sub-contracts.

The minimum contract values for private section contracts mean, in effect, that the SOPL would not apply to most individuals and small businesses procuring routine construction works.

Will I be able to contract out of the SOPL?

Under the current proposal, it would not be possible to contract out of the SOPL.

Consultation

The consultation document is available at www.devb.gov.hk/sop. Construction industry stakeholders have been invited to make submissions on the proposed legislation by 31 August 2015.

Please feel free to contact us should you wish to discuss the proposed laws. 


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