24 July, 2015
Payment issues have long been recognised as a key problem causing construction disputes in Hong Kong. Employers, contractors, sub-contractors, suppliers and consultants alike are all affected. Following examples in England and Wales, a number of states in Australia, New Zealand, Singapore, Malaysia and Ireland since 1996, Hong Kong has been considering a solution to the problem through legislation to provide for payment security and to regulate payment practices in the construction industry.
In June the Development Bureau published its long expected consultation document on Security of Payment Legislation (SOPL). The consultation period will run until 31 August. The main features of the proposed SOPL and some potential areas of concern are discussed below.
Which construction contracts will be covered by SOPL?
SOPL will apply to both written and oral contracts relating to works in Hong Kong, even where the law of the contract is not Hong Kong law and the contracting parties are not Hong Kong parties. The rationale to include foreign parties is said to be fairness to all. However, it will in a way help foreign parties enforce project payments against Hong Kong parties, which may not be mutual when Hong Kong companies are carrying out construction works in other countries. That seems to go above the purpose of SOPL and is perhaps worth some further consideration and comments in the consultation period.
Coverage of the types of construction works under SOPL will be different in the public and private sectors.
In the public sector, SOPL will apply to all contracts under which the Government procures construction activities or related services, materials or plant, including maintenance and renovation. Works procured by specified statutory and/or public bodies and corporations will also be covered. Sub- contracts of all tiers will also be covered regardless of value.
In the private sector, SOPL will only apply to procurement of "new buildings" over HK$5 million or related consultancy services costing over HK$0.5 million. Where the main contract is subject to SOPL then sub-contracts of all tiers will also be subject to SOPL regardless of value.
Private sector repair, maintenance and renovation will not be covered by SOPL, nor will routine construction works below the threshold value. This is in order to avoid imposing legal and contract administration burdens upon the general public who are not familiar with construction contracts and who are contracting on lower value works (such as small businesses or Owners Corporations). This seems a sensible approach as for private residential properties at least, it seems time and again it is the individual owners that would need more protection for the money they spend, as evident in the bid rigging saga for building renovation projects in Hong Kong.
Key statutory provisions
SOPL recognizes freedom of contract subject to statutory scrutiny over some minimum standards regarding payments and a new statutory scheme, namely adjudication, for speedy resolution of payment and time related disputes by an independent party. The key provisions on the proposed SOPL are set out below.
Removal of unfair payment terms from the industry:
SOPL will prohibit what is generally considered unfair payment provisions, in particular "pay when paid" and "pay when certified" type clauses. It also sets statutory maximum payment periods from the time a payment claim is made, i.e. no longer than 60 days for interim payments or 120 days for final payments.
Rights to make statutory Payment Claims: SOPL provides a parallel statutory payment claim procedure that seeks to cut through the conventional contractual and procedural hurdles to allow contractors to recover, dispute and enforce payments quickly and efficiently. Claims under contracts can, in addition, be made as statutory ‘Payment Claims’ and disputed by 'Payment Responses' within a specified timeframe. This helps identify quickly whether claims for payment are admitted or disputed. If Payment Claims are ignored or disputed they can be taken to adjudication for an interim binding and enforceable decision.
Adjudication of disputes: SOPL provides a statutory right to adjudicate payment and extension of time disputes. This is a middle ground approach between the Singapore approach which only allows adjudication of payment disputes and the England and Wales approach which allows adjudication of all disputes. This is an issue that is perhaps worth some thought as the purpose of the SOPL is to resolve cash flow problems. It is itself a procedure for rough and ready justice that may not be suitable for other types of disputes involving complex and/or sophisticated legal, factual and/or expert issues. The consultation document also invites comments on the scope of statutory adjudication.
Adjudication under SOPL must be commenced within 28 calendar days of the dispute arising and conclude within 55 working days (as may be extended by the adjudicator from the date of his or her appointment) unless both parties agree to a longer period. This is already a relatively long period compared to other jurisdictions. Payers will therefore be aware that action can be rapidly taken against them for non- payment, which should incentivize them to pay.
Parties may take the adjudicated dispute to court or arbitration for final determination (which will be a fresh start and not an appeal) using the normal procedures and timescales but the adjudicator’s decision stands in the interim. Any amounts found due by the adjudicator would have to be paid first or else the adjudicator's decision may be enforced in court immediately. This changes the dynamic between claiming and paying parties as to who may keep the money in its pocket (and use it to fund legal proceedings if necessary) pending final resolution of the disputes in court or arbitration.
Right to suspend: Parties who have not been paid amounts admitted as due or awarded in adjudication have the right to suspend the whole or part of the works or slow it down until payment. They will also be compensated for the time and costs incurred as a result of the suspension and different models of compensation are proposed for consideration in the consultation document. This is a powerful tool apart from enforcement of the adjudicator's decision to put pressure on the paying party to pay.
Comment
The proposals draw upon substantial experience overseas and discussions amongst stakeholders in Hong Kong. It marks a significant change to the running of construction projects in Hong Kong. A bill is anticipated to be tabled in LegCo during 2016.
Further details on the SOPL consultation can be found here. Stakeholders are encouraged to voice out any of their concerns in the consultation period, by responding directly to the Development Bureau.
For further information, please contact:
Timothy Hill, Partner, Hogan Lovells
timothy.hill@hoganlovells.com
