Featured Insight,

The Security of Payment Ordinance is Here: What Should You Do Next?

27 December 2024

Introduction

We are happy to report that Hong Kong has enacted Security of Payment (SOP) legislation.

The Construction Industry Security of Payment Ordinance (Cap. 652) (“SOP Ordinance”) was gazetted on 27 December 2024 (available here), following the passage of the Construction Industry Security of Payment Bill on 18 December 2024 (see our announcement here).

The SOP Ordinance will come into full operation on 28 August 2025.

The Government’s press release about the new SOP Ordinance (available here), explains that over the next 8 months the Government and the industry will undertake preparatory work, including “registering ANBs, training a sufficient number of adjudicators, reviewing and revising the standard contract and subcontract templates, and conducting publicity and promotion activities”. Applications for registration of Adjudicator Nominating Bodies are expected to commence in January 2025.

1. What are the changes?

The SOP Ordinance is different to the SOP Bill that was circulated for public consultation (the LegCo paper setting out the amendments is available here).

Some amendments have been made to the language of the legislation, to clarify the legislative intent (i.e. sections 49(4)(b), 52(2)(e) and 57).

The more substantive amendments to the SOP Ordinance fall into three broad categories:

Namely, China Mobile Hong Kong Company Limited, HGC Global Communications Limited, HKBN Enterprise Solutions HK Limited, HKBN Enterprise Solutions Limited, Hong Kong Broadband Network Limited, Hong Kong Cable Television Limited, Hong Kong Telecommunications (HKT) Limited, Hutchison Telephone Company Limited, PCCW-HKT Telephone Limited, SmarTone Communications Limited and SmarTone Mobile Communications Limited.

EXPAND

The District Court, in addition to the Court of First Instance, will have the power to set aside an adjudicator’s determination and enforce such determination under sections 48 and 49 of the SOP Ordinance (see also the definition of “Court” in section 22).

The time for the Court to decide whether to grant or refuse an enforcement application has been extended from 7 days from the date of the application to 14 days from the date of the application (or a longer period that the Court considers appropriate) (section 49(5)).

The Court must not grant an enforcement application unless certain requirements under sections 49(2), 49(3) and 49(4) are complied with.

The Chief Judge is also empowered to make rules to provide for the practice and procedure relating to applications for setting aside and enforcement (section 50).

An adjudicator has the power to bar any new legal representative proposed by a party if the adjudicator considers that the change may give rise to either (i) a conflict of interest between the proposed new representative and the adjudicator in relation to the payment dispute, or (i) justifiable doubts as to the adjudicator’s independence or impartiality in considering the payment dispute (section 38(2)).

A total of 11 telecommunication service providers[1] have been added to Schedule 3 (bringing them within the definition of a “specified entity” under the SOP Ordinance). Any construction contract where a party is a specified entity listed in Schedule 3 will be regarded as a “public contract” under section 4(1) under the SOP Ordinance.

2. What should you do next?

Mandatory payment and dispute resolution provisions will be automatically incorporated into contracts that the SOP Ordinance applies to, that are entered into on or after 28 August 2025.

The SOP Ordinance applies (subject to some limited exclusions) to all public and private contracts for construction work (including “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) in Hong Kong that are above HK$5M (for construction work) or HK$500K (for the supply of related goods and services) respectively.

Notably, the SOP Ordinance does not apply to contracts for works on existing residential buildings (including interior renovation and building maintenance works). For our earlier commentary and tips on how to prepare for the SOP Ordinance, please see our articles Construction Law Reform: Security of Payment in Hong Kong – what is it and what can you do to prepare? and Security of Payment in Hong Kong: Get Ready – it’s happening.

With the SOP Ordinance taking full effect in around 8 months’ time, it is time to start preparing, if you haven’t already by:

2.1 Amending contract terms and payment regimes

While parties will not be able to contract out of the SOP Ordinance, it is vital to review your contracts and consider various means to accommodate the new regime.

(a) key considerations and issues to take into account

Issue	Considerations	Example uses 2
1. Monetary threshold for application of SOP	Given the threshold values for the application of the SOP Ordinance, one of the first considerations is whether there is any scope to execute multiple contracts so that the monetary threshold for the application of the SOP Ordinance is not met.
2. Conditional payment provisions	Conditional payment provisions (for example, pay if/when paid clauses) are rendered unenforceable under section 17 of the SOP Ordinance. Where contracts have previously largely relied on a contractual entitlement being subject to pay if/when paid provisions, these provisions will need to be reconsidered not just in terms of deleting the pay if/when paid provision, but re-drafting the relevant sections to set out what the pre-requisites to any contractual entitlement will be.
3. Payment regime	Section 16 of the SOP Ordinance allows parties to agree certain aspects of the payment regime, including when progress claims can be made. This means that the parties can, to a certain extent, through the drafting of the contract, control when (1) the requirement to make progress payments; and (2) the entitlement to refer claims to adjudication, will arise.
4. Claim handling procedure	Pursuant to section 23(4) of the SOP Ordinance, if the contract provides for a claim handling procedure, a payment dispute does not arise in respect of that claim unless (1) an assessment has been made in accordance with the claim handling procedure; (2) no assessment has been made within the period for which an assessment is to be made; or (3) no assessment has been made within a reasonable period. The claim handling procedure is therefore extremely important as it can affect whether / when a claim can be progressed to adjudication. It will be important, from a strategic perspective, to consider how onerous that claim handling procedure should be and what it will entail. Careful drafting will also be required, to ensure that claim handling procedure provisions are not construed as an attempt to contract out of the SOP Ordinance.
5. Final account submissions	The SOP Ordinance covers all claims for progress payments and therefore includes the final payment / final account claim. Currently, most contracts in Hong Kong provide for a longer certification and payment period for final accounts, but this will now be shortened by the SOP payment timeframes in the SOP Ordinance (section 15 of the SOP Ordinance provides that all progress payments must be made within a maximum of 60 days from when a payment claim is served). Consideration should be given to how this may be managed when drafting construction contracts (for example, when the right to make the final payment claim will accrue).
6. Termination	The SOP Ordinance does not specifically address whether the right to make a payment claim will survive, or accrue, on termination. This may be something to specifically address when drafting the contract.
7. Adjudicator Nominating Bodies (ANB)	Under section 26 of the SOP Ordinance, the parties can agree on the ANB in the contract. The list of ANBs has not yet been published, but the ANBs under the Pilot Scheme include HKIAC, HKIE, HKIA and HKIS.
8. Service of documents	It is important to ensure that your contract sets out the manner in which documents under the SOP Ordinance should be served (i.e., how and on whom they are to be served). Otherwise, the default provisions in section 69(3) of the SOP Ordinance will apply, and parties may overlook a payment claim or adjudication notice.
9. Managing the contractual chain	Under the SOP Ordinance, a contractor / sub-contractor can delay work if a certified or adjudicated amount is not paid. Consideration should be given as to what provisions may be included in the construction contract to deal with this scenario, particularly for employers or upper tier contractors that may be affected by a sub-contractor delaying work lower down the contractual chain.
10. Right to commence arbitration	Under the SOP Ordinance, adjudication determinations are binding only on an interim basis. They are not binding in any final arbitration or court proceedings. Many construction contracts currently prohibit commencing arbitration proceedings prior to completion of the works. This will be an important consideration when drafting contracts that will be subject to SOP. Do the parties want to be ‘stuck’ with the adjudication decision until completion of the works, or have a right to refer disputes about adjudication decisions to arbitration earlier? Can bespoke clauses be drafted to, for example, allow only disputes the subject of adjudication decisions to be referred to arbitration before completion?

2.2 Preparing for adjudications

The timeframes for making and responding to claims under the SOP Ordinance are short and strict.

It is therefore important that project teams are properly trained and equipped to manage contract administration in line with the new SOP Ordinance.

(a) See our enclosed Flowchart which leads you through the detail of the adjudication process.

Click here to download the high resolution A3 printable version.

2.3 Below are some key considerations when making and responding to claims

Issue	Considerations	Example uses 2
1. Identifying a ‘payment claim’ under the SOP Ordinance	It is very important that contract administration personnel are trained to identify payment claims made under the SOP Ordinance so that they (1) provide sufficient information in the claim or in any response to the claim; and (2) ensure that responses to claims are delivered within the prescribed timeframes. The criteria for what constitutes a payment claim in section 18(3) of the SOP Ordinance is very broad; an invoice or a simple email or WhatsApp message demanding payment could constitute a “payment claim” for the purposes of the SOP Ordinance. It may be difficult to identify a “payment claim” as there are no ‘endorsement’ requirements for payment claims included in the SOP Ordinance; in other jurisdictions, there have been requirements to ‘endorse’ a payment claim as being made under the relevant SOP Ordinance (i.e., by stamping it with a statement along the lines of “This is a payment claim made under the [SOP Ordinance]”). A further complicating factor is that if multiple “payment claims” are served for each billing date, only the first one will be valid (sections 18(4) and 18(5) of the SOP Ordinance).
2. Considerations in preparing or responding to a payment claim	As set out above, payment claims and responses must contain sufficient information. This is because, under section 37 of the SOP Ordinance, if a submission, response, document or evidence given by one party is something which the other party was (1) unaware of as at the date the adjudication notice was served; (2) should have been served before the adjudication notice was served; and (3) cannot fairly be considered and responded to, then the adjudicator must disregard that submission, response, document or evidence. Parties must carefully consider what information, submissions and documents are included in the payment claim / response as opposed to held back for the adjudication notice / response. There is a risk that, if they are not included in the payment claim / response, they may be inadmissible. The payment response must also include any counterclaims or other set-off claims. These cannot be raised for the first time in an adjudication response.
3. Be mindful of future arbitration / litigation	Adjudication determinations are binding on an interim basis only. Parties can refer disputes to final determination by way of litigation or arbitration (whichever the contract provides for). However, it is important to keep this in mind when preparing adjudication material. For example, how much do you want to ‘give away’ at the adjudication stage? Also, keep in mind that any witnesses who give factual or expert evidence may also be required to give evidence in litigation or arbitration – statements and opinions will need to be consistent.
4. Timeframes	As mentioned above, the timeframes under the SOP Ordinance are short and strict (see our enclosed flowchart). It is important to be ready for disputes to go to adjudication before the process and the timeframes kick in. Have your documents in order, ensure your witnesses are available, have your external lawyers and experts (if likely to be required) on standby. Also keep in mind that it has been common in other jurisdictions for claiming parties to serve adjudication notices during holiday periods (such as Christmas or Lunar New Year).
5. Extension of time and prolongation / time related costs	Under section 57 of the SOP Ordinance, adjudication proceedings cannot be commenced in respect of time-related disputes (including claims for additional payment arising from delay) under a main private contract or its subcontract, unless the extension of time has been agreed. This needs to be kept in mind for both claiming parties and paying parties – agreeing an extension of time will mean associated costs claims can be referred to adjudication. This also reinforces that the SOP Ordinance does not necessarily negate the utility of contractual adjudication – as the latter could include claims that are not captured by the SOP Ordinance (such as EOT claims).

King & Wood Mallesons has extensive experience in dealing with SOP regimes in many 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.