1. Introduction
The implementation of Security of Payment (“SOP”) legislation has been contemplated and debated in Hong Kong for decades. See our previous article, here, about what SOP legislation is and the pilot scheme that has been running in Hong Kong since December 2021.
On May 16, the Development Bureau published the Construction Industry Security of Payment Bill (“SOP Bill”). The SOP Bill was gazetted on May 17, and will be introduced into the LegCo for first reading on May 29. A copy of the SOP Bill, together with the LegCo Brief, is accessible here.
The SOP Bill, once enacted, will have a significant impact on the Hong Kong construction industry, and will drive significant changes to how contracts are administered, how contractors, sub-contractors and suppliers are paid and how disputes are managed in Hong Kong.
2. Who will be impacted?
All construction industry stakeholders in Hong Kong will be impacted by the new legislation.
The SOP Bill incorporates mandatory payment and dispute resolution provisions into all contracts for construction work (subject to some limited exclusions) in Hong Kong, that are entered into on or after the commencement date of the legislation.
The legislation will also apply to contracts for “ancillary” construction work such as architectural, landscaping, electrical and civil works, as well as contracts for “related goods and services” such as feasibility and planning studies and plant and equipment supply.
3. When will the legislation commence?
While the LegCo timeline has not been made public yet (beyond the date for the first reading speech), we expect that the legislation will be enacted this year.
Once enacted, the Secretary for Development will immediately be empowered to approve the registration of Adjudicator Nominating Bodies (“ANBs”) that will be set up to appoint suitable adjudicators and establish rules for conducting adjudications. The SOP Ordinance will then come into full operation 8 months after it is enacted.
4. What are the key features of the new SOP Bill?
While there may be further changes to the SOP Bill to be debated by LegCo, the highlights from the current SOP Bill are:
- Parties entering into applicable construction contracts on or after the commencement date cannot contract out of the new SOP Bill and any attempts to do so will be invalid.
- Conditional payment terms, such as “pay when paid” clauses (clauses that provide that a sub-contractor will not receive payment until the main contractor has been paid) will no longer be enforceable.
- Time limits for responding to claims for payment and making payment of admitted amounts will be imposed.
- Mandatory provisions that specify how and when progress payments must be made will be introduced into contracts that do not have an express progress payment mechanism.
- Payment claims and responses (i.e., interim payment applications and certificates) will set the scope for any adjudication proceedings, encouraging the industry to proactively assess claims (for both time and money) contemporaneously, rather than at the end of a project.
- Parties will be entitled to refer payment disputes to an adjudicator for rapid determination.
- Adjudicators will have limited jurisdiction, at least in the short term, to consider and decide disputes concerning claims for extensions of time.
- Adjudication decisions will be binding on an interim basis (a decision will not limit parties’ rights to commence or continue with court or other dispute resolution proceedings).
- Parties can apply to court to set aside an Adjudicator’s determination (albeit on limited grounds), or to enforce the determination as a judgment debt.
- Parties will also have rights to delay work or the supply of goods and services pending payment of an adjudicated amount.
King & Wood Mallesons has extensive experience in dealing with SOP regimes in other jurisdictions and can guide you through the technical and legal minefield to ensure you receive the best possible outcome. We would be happy to discuss the adjudication process, preparatory work required to get ready for this new regime, and what support we can offer to your organisation.
*For purposes of this article, “Hong Kong” means “Hong Kong Special Administrative Region of the People's Republic of China”, and “China”, “China Mainland” or “PRC” shall mean the People’s Republic of China excluding Hong Kong, Macau Special Administrative Region and Taiwan.
