Hong Kong – Once So Near, Yet So Far – The Construction Industry Security Of Payment Ordinance (Cap. 652) Will Come To Full Effect Later This Year.

Introduction 

After heated debate for over a decade, the Construction Industry Security of Payment Ordinance (Ordinance) was finally passed and will come into full force on 28 August 2025. 

The Ordinance aims to: – 

1. ameliorate the longstanding late payment problem and to facilitate the recovery of payments;  

2. introduce an adjudication mechanism for cost-effective and rapid resolution of payment disputes; 

3. allow unpaid contractual parties to suspend or reduce the supply of goods and services;  

4. empower the Hong Kong Court to set aside or enforce an adjudicator’s determination; and  

5. address ancillary matters. 

The Ordinance significantly changes how contracts in the construction industry are prepared and enforced. Thus, it is vital for legal practitioners to keep abreast of this ground-breaking development. 

The section numbers in this article refer to the Ordinance unless otherwise specified. 

Background 

Lack of cashflow, disputes over payment and unfair contract terms have long been recognized as common problems that plagued stakeholders in the construction industry around the world. To tackle these issues, many jurisdictions have already implemented security of payment legislation to make sure that contractors and sub-contractors consistently maintain positive cash flow, allowing them to meet their payment obligations. 

Meanwhile, in Hong Kong, industry participants have been calling for the enactment of security of payment legislation since 2011. A pilot scheme was eventually launched in 2021, setting the basis for the Ordinance. The Ordinance is a concerted effort to tackle payment problems and to bring Hong Kong in line with other jurisdictions, such as Singapore, Malaysia, the United Kingdom, and New Zealand. 

The key features and the implications of the Ordinance will be discussed below. 

Applicability 

Ss. 7 and 8 and Schedule 4 state that the Ordinance applies to both public and private main contracts for: – 

1. carrying out construction work with a contract value of not less than HK$5,000,000 (s. 7(1)(a)(ii), s. 8(1)(a)(ii) and Schedule 4); and 

2. the supply of related goods or services, such as materials and plant, with contract value of not less than HK$500,000. 

Subcontracts under main contracts are also covered by the Ordinance, regardless of the amount. 

Meanwhile, s. 8(3) states that the Ordinance does not apply to contacts for: – 

1. works on existing private residential units; and 

2. relatively minor works on existing private non-residential units, namely works that do not require approval and consent of the Building Authority under the Building Ordinance (Cap. 123). 

Key features of the Ordinance 

No conditional payment terms allowed 

An important feature under the Ordinance is that conditional payment provisions, such as a “pay when paid” (PWP) clause whereby liability to pay is conditional on the payor receiving payment from a third party, and a condition whereby payment liability is contingent or conditional on operation or completion of any other contract or agreement, are prohibited, and would be rendered unenforceable if included (s. 17). 

Payment process facilitated 

The Ordinance contains provisions for progress payments (ss. 13-16) which are payments for carrying out construction work or for supplying related goods and services under a construction contract, and includes a one-off payment, an interim or final payment, and a payment that is payable on the occurrence of an event or on a date (s. 2). 

A progress payment is required to be paid within 60 days from when a claim for a progress payment is served, alternatively to be paid on a specified date if provided in the subject contract. It is expected that such mechanism will help facilitate interim or final payments with a designated deadline, preventing the payments due from snowballing until the end of a project.  

Mandatory adjudication mechanism 

A claiming party (Claiming Party) of a payment dispute arising from a construction contract (as defined in s. 23) has the right to initiate adjudication proceedings within 28 days from the date on which the dispute arises (s.24) in accordance with the rules stipulated in Divisions 3 to 5 of the Ordinance. This could serve as a safeguard against “ambush”. Further, the time limit for determining a dispute is 55 days after the adjudicator is appointed or a longer period as agreed by the parties (s. 42(5)). Meanwhile, s. 43 provides that a paying party must pay an adjudicated amount within the period specified by the adjudicator; and if not specified, within 30 days after the termination is served on the parties under s. 42(7).  

The introduction of the adjudication mechanism is regarded as a prime feature of the Ordinance as it guarantees speedy determination for payment disputes, is binding on the parties (unless being set aside, settled or determined in other dispute resolution proceedings) (s. 44), and can be enforced like a court judgment (see further below). It is also welcomed by stakeholders in the construction industry as it does not affect a contractual party’s right to claim payment in other dispute resolution proceedings (s. 51) and is confidential (s. 52) with certain exceptions.  

Adjudication proceedings are akin to court proceedings. An overview is as follows: –  

1. A Claiming Party makes a claim (s. 18). 

2. The paying party serves a payment response in 30 days (s. 20), admitting and/or disputing the unpaid amount. 

3. If there is a payment dispute, the claimant has 28 days to initiate the adjudication proceedings (Adjudication Notice) (s. 24) by serving the Adjudication Notice on the respondent (s. 25(1)) and on the an adjudicator nominating body (ANB) on the same day (if only one ANB is specified in the contract) or within eight working days after service on the respondent (if no or more than one ANB is specified in the contract) (s. 25(3)). 

4. An adjudicator will be appointed by an ANB within seven working days from the service of the Adjudication Notice on the ANB (s. 26(2)). 

5. The Claiming Party must serve on the ANB and the respondent a written submission relating to the Adjudication Notice (Adjudication Submission) within one working day after it is informed of the adjudicator appointment (s. 30). 

6. The respondent must serve a reply (Adjudication Response) within 20 working days, or a longer period as specified by the adjudicator after the Adjudication Submission is served on it (s. 31). 

7. The Claiming Party must serve on the adjudicator and on the respondent a reply to the Adjudication Response within two working days after the Adjudication Response is served on it (s. 32). 

8. The adjudicator must make a determination and serve it on the ANB within 55 working days from the date of his/her appointment or a longer period agreed by the parties (s. 42). 

9. The paying party under a determination must pay within the specified period; and if not specified, within 30 days after the determination is served on the parties under s. 42(7) (s. 43). 

Setting aside or enforcing determinations 

Ss. 48 and 49 provide that the Court of First Instance and the District Court can set aside or enforce an adjudicator’s determination on an application of a party to the adjudication proceedings. A set aside application can be made if the determination was improperly procured through fraud or bribery; there has been a material denial of natural justice in the proceedings; the adjudicator has not acted independently or impartially in the proceedings; or the adjudicator has acted in excess of the adjudicator’s jurisdiction in the proceedings. 

A side aside application must be made within 14 days from the date of service of the determination (s. 48(3)) and be supported by an affidavit exhibiting the determination and the subject construction contract (Affidavit). It is worth noting that the applicant of a set aside application must pay an unpaid portion of the adjudicated amount into the Court as security. Leave is required to further appeal against the Court’s decision to grant or dismiss a set aside application. 

With leave of the Court, a determination can be enforced in the same way as a judgment of the High Court.  

It should be noted that an enforcement application must be made after expiry of the payment deadline under the determination and can only be made if no set aside application is pending. Similarly, it must be supported by an Affidavit. 

Right of Unpaid Contractual Parties 

A Claiming Party is entitled to suspend or reduce the rate of works progress if the following conditions are met (s. 59): – 

1. the Claiming Party has served a payment claim on the paying party in respect of a progress payment under s.18; 

2. the paying party has served a payment response under s.19, stating that an admitted amount will be paid, but failed to pay by the payment deadline; and 

3. after the said payment deadline and at least five working days before the intended starting date (the date on which the Claiming Party intends to start delaying progress of work), the Claiming Party has served upon the paying party a properly drafted notice of intention. 

A Claiming Party exercising its right to delay work progress under s.59 is protected by s.59(5), pursuant to which it is not considered as in breach of the construction contact; is not liable for any loss arising from its delay of progress; is entitled to have additional time to complete the contract; and is entitled to recover from the paying party a reasonable amount of damages resulting from the delay of work. However, a Claiming Party is required to resume work progress within five working days after the Claiming Party receives the admitted amount in full under the same provision. 

Implications and key takeaways 

The Ordinance is the product of a collective effort that is regarded as a triumph in the construction industry. It is a timely measure as the Hong Kong Construction Industry Employees General Union reported that there is a record high of delayed wages and project fees in the first 11 months of 2024, involving a total of HK$300 million. The Union also pointed out that there had been unprecedented delay of payments to workers, involving large-scale project fees of subcontractors, whose fees have been owed by main contractors. It is expected that the Ordinance will help ensure that timely payments are made to stakeholders and also decrease construction costs with the implementation of mandatory payment security. 

Legal practitioners practising in this field should scrutinize the Ordinance before preparing construction contracts for their clients and when advising on payment disputes arising therefrom to protect their clients’ interests. The key points to note include the prohibition of conditional payment provisions, the automatic incorporation of dispute resolution provisions, and the entitlement of unpaid contractual parties to suspend or delay work under the Ordinance. 

Under this new legal framework, for instance, the applicability or interpretation of a PWP clause will no longer be subject to dispute, such as the case in Choi Kei Ltd -v- David Decoration Ltd [2024] HKDC 1737 in which the Court did not give effect to a PWP clause based on the evidence given before him, and in Sze Fung Engineering Ltd -v- Trevi Construction Co Ltd [2023] HKCFI 419 in which Mimmie Chan J applied ordinary commercial common sense and upheld a properly drafted PWP clause.  

Furthermore, legal practitioners should give proper advice on the drafting of the payment clauses to provide certainty on the parties’ intention under s.16, including the number of progress payments, the interval(s) between the payments, the amount of each payment and the circumstances in which those payments may be claimed. Practitioners may consider spelling out the necessary details in contracts to avoid disputes arising from ambiguities in the future. 

The government has already commenced the preparatory work for the Ordinance, including registering ANBs, revising the standard contract and subcontract templates, and promoting the Ordinance. We await to see how the Ordinance will reshape the construction industry when it comes into full effect later this year. 

This article first appeared in the February 2025 issue of the Hong Kong Lawyer, the official journal of The Law Society of Hong Kong.