New Security of Payment Provisions in Hong Kong Public Works Contracts from 31st December 2021, and Some Practical Considerations for Contractors
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Legal Development 08 December 2021 08 December 2021
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Asia Pacific
Thoughts and practical considerations for Contractors.
Background
Security of Payment (“SOP”) legislation has been introduced in a number of jurisdictions around the world with the primary objective of speeding up the flow of cash down through the subcontracting chain. This benefits all in the supply chain by enabling ongoing disputes about entitlements to payment to be resolved quickly, if only temporarily, through a statutory adjudication process.
After spending roughly 20 years considering the introduction of SOP legislation in Hong Kong, the Hong Kong Government earlier this year unexpectedly decided not to go down the legislative route but, at least initially, to introduce a contractual SOP arrangement into new public works contracts. On 5th October 2021 the Development Bureau formally published Technical Circular (Works) No. 6/2021 (“Circular”)1. The Circular, which takes immediate effect, sets out the full details of the introduction of mandatory SOP contractual provisions into Public Works Contracts “with a view to facilitating timely processing of contract payments and providing an interim mechanism for speedy resolution of payment disputes before the enactment of Security of Payment Legislation”.
Given that the timetable for the introduction of the Construction Industry Security of Payment Ordinance still remains uncertain, the implementation now by way of mandatory contractual provisions into public works in Hong Kong is, in all but name, a pilot scheme “with a view to facilitating smooth introduction of the legislation through the experience gained in public works contracts”, albeit that the Circular does set out the proposed security of payment legislative framework at Appendix A and explains how it is intended to operate.
This article covers the brief takeaway points from the Circular:-
1. What Contracts are Covered and when are the SOP Provisions to be introduced?
Additional Conditions of Contract (“ACC”) for government NEC contracts and Special Conditions of Contract (“SCC”) for all other government standard forms of contract implementing the changes to all public works contracts (including design and build contracts and term contracts) will be introduced in two stages in respect of tender invitations issued on or after:
- 31st December 2021: in the case of “Group B (ie contracts with a value not exceeding HK$400 million) or Group C contractors (ie contracts which have a value greater than HK$400 million) on the List of Approved Contractors for Public Works”; and
- 1st April 2022: in the case of “other contractors on the “List of
Approved Contractors for Public Works”” or the “List of
Approved Suppliers of Materials and Specialist Contractors
for Public Works”
The ACC/SCC/amendments and provisions for the various standard form main contracts are published in Annexes B and C of the Circular, whilst to enable a speedy introduction of the SOP regime and to ensure it cascades down through all of the subcontracting tiers, the Circular makes clear that SOP will apply only to construction subcontracts, which are defined as “all subcontracts under main contracts for construction work and related goods and services” (“Relevant Contracts”). Subcontracts “solely for supply of materials, plants or services” without a construction or installation element are excluded.
2. Payment rights and obligations – the adjudication process
The adjudication process is driven by the contractual payment claim process. Parties are generally free to agree the terms for the adjudication process, except for four mandatory requirements which cannot be contracted out of:-
- once a payment claim has been made under the contract, a payment response by the paying party must be served on the claiming party within 30 days of the payment claim;
- payment of any admitted amount must be within 60 days of the claim;
- if the claimant disputes the amount in the payment response, it may refer the dispute to an adjudication process in which an adjudicator will decide on the payment dispute within 55 days; and
- conditional payment provisions such as “pay when paid” clauses are rendered ineffective and unenforceable;
The graphic below summarises the stages of the adjudication process.
3. Enforcement and Claiming Party’s remedies
- The SOP legislative framework in other jurisdictions allows application to the local court system to set aside adjudicated decisions, or to seek enforcement. However, in the contractual context in Hong Kong, the courts do not have a supervisory role.
- However, there are a couple of contractual remedies available to encourage the payment of adjudicated amounts, in particular a right for subcontractors to seek payment of the adjudicated amount directly from the main contract employer, to suspend works or to reduce the rate of progress until payment is made.
- The contractual claim handling provisions in the underlying contract must have been gone through before claims for additional payment (including extension of time claims associated with the payment dispute) can be determined by adjudication.
- The adjudicator is able to decide time-related costs forming part of the payment disputes and in doing so also has the power and jurisdiction to decide a party’s entitlement to extension of time which may well be different to that derived from an earlier assessment by the contract administrator. The adjudication decision on the extension of time element is not finally binding but prevails over that of the contract administrator. Consequently, a party will not be liable for liquidated damages if the works have been completed within the adjudicated extension of time for completion.
4. Thoughts and Practical Tips for Contractors
- The obligation is on the Main Contractor to police the system who shall ensure that the SOP provisions for direct Relevant Subcontracts are entered into and who shall also take all reasonable steps to ensure compliance with all lower tiers of subcontracting.
- Contractors should quickly get to grips with how the regime will affect them and their subcontractors and consider how they should be amending their subcontracts to take account of the new regime.
- They should also start to prepare compliant templates for payment claims, payment responses, and administration which are ready to go and address service content required etc. This will require well trained teams who are fully up to speed with the formalities and the timeframes for each of the steps.
- It goes without saying that contractors should have their record keeping fundamentals in place, to support the new changes and be ready to take a proactive approach to the adjudication process.
Whilst there is much detail in the Circular and this article can only highlight key points, it is to be expected that there will be teething problems as the regime beds itself in and uncertainties are ironed out in the early days following its introduction. However, if the experience from other jurisdictions is anything to go by, once these initial problems are resolved, adjudication is likely to have a positive effect on the construction industry. It is hoped that it will not be too long before the contractual regime is replaced by a statutory process of broad application across both private and public sector construction projects.
If you wish to discuss any aspect of this article, issues surrounding the introduction of security of payment, or matters related to construction in general, please get in touch with a member of our team - contact Jon Howes, Chris Short, or Stephanie Lau.
1 The full Circular is available here: https://www.devb.gov.hk/filemanager/technicalcirculars/en/upload/386/1/C-2021-06-01.pdf
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