For several years the Hong Kong Government has been exploring the possibility of introducing security of payment legislation. The case for intervention is well known: disputes over payment in the construction industry are often complex, costly and time consuming; contractors and sub-contractors, whose survival depends on being paid on time, cannot afford to be kept out of their money. Legislation can provide them with an effective procedure to obtain the payments they are due under their contract. The UK brought in mandatory adjudication in 1996, with the Housing Grants, Construction and Regeneration Act. With that, “pay when paid” provisions practically vanished. Other countries enacted similar laws, notably Australia, New Zealand, Singapore, Malaysia and Canada. There are minor differences between these statutory regimes but they all aim to provide a dependable statutory adjudication process for contractors to collect payment.
And so, in Hong Kong, we appear to be taking the same course and at a time when we are beginning to see an up-tick in construction activity. According to ResearchandMarkets.com, the Hong Kong construction industry is forecast to grow by 2.5% this year, up from 2.1% in 2021. The introduction of security payment (SOP) will be a key driver in supporting the industry’s recovery, by addressing the concerns and issues raised over the years from those advocating the introduction of some form of security of payment mechanism.
The SOP process in Hong Kong began with an industry-wide survey commissioned by the Hong Kong Government and the Construction Industry Council in 2011, revealing widespread cash flow problems, the result of unfair and inconsistent payments, affecting contactors, sub-contractors and suppliers. As a result, the SOP draft bill was formulated and is broadly regarded as a safety net, sparing contractors the financial burden of being left exposed before their projects are completed. The draft legislation is similar to that in place in other jurisdictions, the differences between them not being significant.
There will be more legal work, but the time pressure and the stress would be tremendous to the legal industry as things will be expedited. Also, legal costs may be very competitive, and some law firms may find it not worth the effort getting involved with these forms of disputes”
Dr Christopher To, Barrister-at-law at Gilt Chambers
There are differences in coverage envisaged in Hong Kong for the public and private sectors. When it comes to the public sector, all construction contracts, consultancy appointments, supply contracts and sub-contracts for Government works will be covered regardless of value. For the private sector, SOP will only cover construction contracts, consultancy appointments, supply contracts and sub-contracts relating to a “new building”. It is expected that SOP will apply to all written and oral contracts and where construction works, consultancy services or plant and materials are being supplied for works in Hong Kong. Of special note, it will also apply even where the law of the contract is not Hong Kong law.
Under the SOP the adjudicator’s decision is legally binding unless one or other of the parties go to litigation or arbitration. As one Hong Kong lawyer has remarked to us, “If other countries’ experience is anything to go by, the overwhelming majority of cases – some sources say as high as 80% – go no further than adjudication. This may be because parties do not wish to use up resources, arguing the same points again in arbitration or court proceedings”.
However legal firms will face significant challenges in meeting the severe time constraints of statutory adjudication, which in Hong Kong will require a decision within 55 days from notification of claim.
“There will be more legal work, but the time pressure and the stress would be tremendous to the legal industry as things will be expedited. Also, legal costs may be very competitive, and some law firms may find it not worth the effort getting involved with these forms of disputes,” says Dr Christopher To, of Gilt Chambers.
The Hong Kong Government is being cautious in its approach, testing the sector with a pilot scheme for public works which was launched in October 2021. In the light of experience gained in this sector, Government will revise its draft bill. The legislation in final form will extend to both sectors, private as well as public. The SOP may well become law throughout the industry, which will provide a more fluid and transparent playing field. As Dr To says, “The SOP is an administrative way of testing the water to see whether such a method of addressing cash flow and dispute resolution is effective with public works contracts. With sufficient data, the Government will aim to fine tune legislation so that it will cover not just public works but also private works going forward.”
“Most participants will be familiar with adjudication, its rigorous procedure and tight time scale. The best preparation is good record keeping, especially in relation to quantum and programming, while a thorough knowledge of the security of payment legislation is also advisable”
Jim James, Consultant with Hill Dickinson Hong Kong.
Given the various timing constraints for settling disputes, the onus is on all parties to have efficient record keeping practices in place to ensure any disputes can be heard in a timely manner, a point not lost on legal industry experts. So, what advice do local lawyers have to their clients in case they need to prepare for any action in relation to the SOP?
“Most participants will be familiar with adjudication, its rigorous procedure and tight time scale. The best preparation is good record keeping, especially in relation to quantum and programming, while a thorough knowledge of the security of payment legislation is also advisable,” commented Jim James, Consultant with Hill Dickinson Hong Kong. Dr To agrees, “Have a good document management system in place. Train personnel on the process and how to prepare information (such as the Notice of Adjudication) for lawyers to review quickly and effectively.”
This article was written by Chris Bisogni for Conventus Law in association with Hill Dickinson.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position or policy of Hill Dickinson or its other employees and affiliates.
For further information, please contact:
Jim James, Consultant, Hill Dickinson
jim.james@hilldickinson.com
Richard Lyons, Partner, Hill Dickinson
richard.lyons@hilldickinson.com
