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Thoughts and practical considerations for Contractors.
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:
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:-
The graphic below summarises the stages of the adjudication process.
3. Enforcement and Claiming Party’s remedies
4. Thoughts and Practical Tips for Contractors
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