Security of payment in Hong Kong: SOP bill first and second reading and next steps

A new day is about to dawn for construction industry participants in Hong Kong, with the enactment of Security of Payment (“SOP”) legislation set to happen by the end of 2024, and the key provisions of the legislation set to commence operation 8 months after enactment.

As we reported last week (see our article here), the Development Bureau has now published the long-awaited Construction Industry Security of Payment Bill (“SOP Bill”), it has been gazetted, and it has now (on 29 May 2024) been introduced to the LegCo for first and second reading.

The LegCo proceedings (that you can watch here), closely followed the content of the LegCo Brief for the SOP Bill (accessible here).

All eyes will be on LegCo for the House Committee consideration of the SOP Bill, the Bills Committee consideration of the SOP Bill, and the resumption of the 2^nd reading (for any debate about the SOP Bill). Details of this will be published here.

The new SOP legislation will bring welcome changes for the Hong Kong construction industry; helping to stamp out unfair payment practices and expedite dispute resolution processes.

But those changes will come at a price. Those with experience with similar SOP legislation in other jurisdictions (Malaysia, the United Kingdom, New Zealand, Australia, Singapore, Ireland, and Canada) will be acutely aware of what is at stake, and that extensive work will need to be done to prepare, so that:

Contracts that are impacted by the SOP legislation are drafted to give maximum latitude for payment and dispute resolution processes.
Contract administration is tightly managed, and contract administrators are given adequate training so that necessary steps are taken to preclude liability for unmeritorious SOP claims.

Annex C to the LegCo Brief sets out, in a series of tables, the key elements of SOP legislation in other jurisdictions that are said to have been incorporated into the SOP Bill. Those tables (sans notes) are extracted below:

Table C1 - Scope of Application

Key Feature	HK	UK	NZ	SGP	MAL	NSW	WA
Contract can be written or oral	●	●	●	(In writing only)	(In writing only)	●	●
Impose restriction(s) on certain Construction Contracts (e.g., excluding works on residential buildings, works of certain scale etc.)	●	●	●	●	●	●	●
Professional services covered	●	●	●	●	●	●	●
Supply contracts covered	●			●	●	●	●

Table C2 - Improvement of contract Payment Terms

Key Feature	HK	UK	NZ	SGP	MAL	NSW	WA
Prohibition on “conditional payment terms” such as “pay when paid”	●	●	●	●	●	●	●
Parties free to agree on inclusion of provisions in contract setting out specific payment schedules	●	●	●	●	●	●	●
Default payment provisions in the absence of express agreement under the contract	●	●	●	●	●	●	●
Claiming party entitled to serve payment claim / notice	●	●	●	●	●	●	●
Paying party entitled to give payment response	●	●	●	●	●	●	●

Table C3 - Introduction of Adjudication Mechanism

Key Feature	HK	UK	NZ	SGP	MAL	NSW	WA
Only payment disputes (including time-related payment disputes) can be adjudicated	●	(Any disputes)	(Any disputes)	●	●	●	●
Only claimant can initiate adjudication	●	(Both parties)	(Both parties)	●	(Both parties)	●	●
Adjudication can only be initiated within a set period after the dispute arises	●	(At any time)	(At any time)	●	(At any time)	●	●
Adjudicator Nominating Body (ANB) set up for appointment of adjudicators	●	●	●	●	●	●	●
Immunity from civil liability for adjudicators	●	●	●	●	●	●	●
Adjudicator can determine the proportion of the cost of adjudication proceedings to be paid by the parties	●		●	●		●	●
Adjudicator to disregard new submissions or evidence under certain circumstances	●			●			●
Parties required to go through claim handling procedures under the contract before adjudication	●			●
Enforcement of adjudicator’s determination (i.e. entered as court order / judgment)	●	(need to apply for summary judgment)	●	●	●	●	●

Table C4 - Suspension or Slowing Down Work or Services

Key Feature	HK	UK	NZ	SGP	MAL	NSW	WA
Unpaid party’s right to suspend in relation to non-payment of adjudicated amounts	●		●	●	●	●	●
Unpaid party’s right to suspend in relation to non-payment of (deemed) admitted amounts	●	●	●			●	●
Unpaid party required to serve advanced notice to paying party	●	●	●	●	●	●	●
Unpaid party required to notify principal and / or owner	●			●
Suspending party (i.e. unpaid party) expressly entitled to extension of time	●	●	●	●	●
Suspending party (i.e. unpaid party) expressly entitled to loss and expenses (either general or specified)	●	●		●	●	●	●
Suspending party to resume work in specific period after receiving payment	●	No specified period	No specified period	●	●	●	●

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.