Construction Law Reform: Security of Payment in Hong Kong – what is it and what can you do to prepare?

Oct 2021

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Security of Payment (“SOP”) legislation has been enacted in numerous jurisdictions around the world as a successful means of ensuring that construction industry participants are paid on time, disputes are resolved early, and contractors and sub-contractors maintain cash flow.  For over 10 years now, the Hong Kong Government has been debating the idea of implementing SOP legislation, and recently the Government took its biggest step yet in that direction by releasing Technical Circular (Works) No.6/2021 (“Circular”), which introduces mandatory SOP provisions into certain Public Works Contracts.  This is intended to be a trial run before the Government enacts the long-anticipated SOP legislation.

Depending on the type of Public Works Contract, these changes will come into effect for contracts for which the tender invitations are issued after 31 December 2021 or 1 April 2022.

We have recently published a more detailed overview of the coming changes, which you can find here.  In this post, we summarise the key changes introduced by the Circular, the main features of the adjudication process and what you can do to prepare for the changes.

SOP Framework

While the specifics of the SOP legislation that the Government intends to enact are still being finalised, the Circular sets out a number of key aspects of the legislation which are likely to be mandatory.  This includes:

  • mandatory due dates for payment;
  • conditional payment provisions, or “pay-when-paid” clauses will be rendered unenforceable;
  • the ability for a payment dispute to be resolved by adjudication; and
  • the ability for an unpaid party to suspend work or reduce its rate of progress.

We will provide further updates on the SOP legislation as they come to light.

Contractual Provisions to be Incorporated

The Circular includes draft contractual provisions (at Annexures B to H) that are intended to implement “the spirit of the SOP legislation”.  It is these provisions which must be incorporated into Public Works contracts and sub-contracts tendered from 31 December 2021 onwards.

Features of the Adjudication Process

The main features of the adjudication process are:

  1. The process begins with the Claimant serving a “Payment Claim” on the Respondent.
  2. The Respondent has 30 days (or an earlier agreed timeframe) to serve a “Payment Response”. There are strict formality rules that apply to the Payment Claim and Payment Response, and these documents must comply with these requirements.
  3. If a Payment Claim is disputed, not paid, or a Payment Response is not served, a “Payment Dispute” will arise, following which the Claimant will be entitled to refer the Payment Dispute to Adjudication.
  4. For a “Payment Dispute” to arise the parties must have stepped through the “claim handling procedure” (i.e., contractual process for assessing claims) under the contract.
  5. To refer a dispute to Adjudication, the Claimant will serve a “notice of adjudication” on the Respondent and the adjudicator nominating body within 28 days of the Payment Dispute.
  6. An Adjudicator will then be appointed within 5 working days and the Claimant will have only 1 business day to serve an “Adjudication Submission”. This is, in essence, the Claimant’s case contained in a single submission.
  7. The Respondent then has 20 working days to serve its “Adjudication Response”.
  8. The Adjudicator then has 55 working days to deliver an Adjudication Decision to the parties.

For the party submissions, these are incredibly tight time frames, and following our experience in other jurisdictions, we expect that a contested Adjudication Submission or Adjudication Response would include legal submissions, witness evidence and possibly expert evidence.  It will be fundamental to deploy the necessary resources quickly and to the right areas to maximise the use of time.  Any delay here can be costly.

Because the adjudication process as proposed is a creature of contract, as opposed to a statutory instrument, parties will not be entitled to apply to the Court to overturn or enforce Adjudication Decisions.

An Adjudication Decision will be final and binding, on an interim basis, until the Payment Dispute is resolved between the parties, or the Payment Dispute is decided by the dispute resolution mechanism in the contract.

Enforcement Rights

Suspension or Go-Slow

Where a Claimant has not been paid an amount that the Respondent admits is due, or that has been decided by the Arbitrator as being due to the Claimant, it may suspend work or reduce its rate of progress.

Direct Payment

Where a party is successful in obtaining an Adjudication Decision from its counter-party, which is not paid, the aggrieved party can request for the Employer to make direct payment of the outstanding amount and where the necessary conditions for payment have been met, payment will be made directly to the lower-tier sub-contractor (and charged against the contractor).

Procedural Requirements

There are several administrative requirements that contractors and sub-contractors will need to be aware of as a result of these changes.  At a high level, main contractors will be required to:

  • ensure that certain mandatory SOP provisions are contained in sub-contracts of all tiers (and sub-contractors have similar back-to-back obligations);
  • submit copies of its construction sub-contracts to the Employer’s Representative and report on a monthly basis in relation to adjudications and payments; and
  • display a Site Notice in the approved form that contains information including the contact details of the Employer and the Main Contractor.

What can you do to prepare for these changes?

The mandatory contractual provisions will require careful consideration by contractors, of all tiers, working on Public Works projects that are tendered for after December 2021.  It will be fundamental to ensure that sub-contracts are compliant, and we are sure that there will be novel drafting deployed to try to deal with the mandatory contractual provisions.  Further, in-house legal teams and contract administrators must be aware of the many steps and notice requirements, and prepared to handle adjudication claims on an incredibly short timetable.  Given the fact that Hong Kong relies so heavily on sub-contracting arrangements, this is a significant step which will increase the administration of contracts for main contractors.

KWM has extensive experience in dealing with SOP regimes which have been in place in other jurisdictions for many years, and dealing with construction disputes in Hong Kong, and would be happy to guide you in ensuring your company is prepared for these changes.

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