Similar to many jurisdictions, the Hong Kong construction industry has long suffered from poor payment practices which result in supply chain cash flow issues. So the launch of the Development Bureau’s consultation paper on the proposed security of payment legislation (“SOPL”) (which closed on 31 August 2015) was a particularly welcome move. This blog takes a look at the SOPL in more detail, providing an overview of the proposed legislation.
What type of contracts will the SOPL apply to?
It is proposed that the SOPL will apply to the following types of contracts: Public sector: All contracts under which the Government and public bodies and corporations, such as the Airport Authority, CLP Power and MTR Corporation, procure construction activities or related services, materials or plant. The definition of “construction activities” includes new build works and repair, maintenance and renovation works.
It is proposed that the SOPL will apply to the following types of contracts:
- Public sector: All contracts under which the Government and public bodies and corporations, such as the Airport Authority, CLP Power and MTR Corporation, procure construction activities or related services, materials or plant. The definition of “construction activities” includes new build works and repair, maintenance and renovation works.
- Private sector: Private sector contracts where:
- the employer is procuring construction activities or related services for construction of a new building; and
- the main contract value is over a certain specified value (HK$5,000,000 for construction contracts and HK$500,000 for professional services and supply only contracts). A word of warning – remember that if the main contract is covered by the SOPL then so are all the sub-contracts.
It is worth noting that it is currently proposed that the SOPL will not apply to building repair and maintenance contracts procured by individual owners, owners’ corporations or small businesses.
Key proposed SOPL provisions include the following:
- Prohibition of “Pay when paid” clauses: Under the new regime, it is proposed that such clauses will no longer be enforceable. The hope is that this will speed up payment disputes for sub-contractors because contractors can no longer rely on the defence that they have not been paid by employers.
- Statutory cap on payment periods: It is proposed that parties will still be free to agree payment periods between applications and payments, but interim and final payments should not exceed 60 and 120 calendar days respectively.
- Statutory “Payment Claim”: Under the new regime, it is proposed that parties will be able to make a statutory claim for payment disputes. Be aware that the plan is for the SOPL to only apply to certain payment disputes including those relating to the value of work, services, materials and plant supplied, set offs and deductions against amounts due under Payment Claims and extensions of time. The paying party can dispute a payment by serving a “Payment Response” within 30 calendar days of receiving the claim. If the Payment Claim is ignored or disputed, the claiming party can then refer the dispute to adjudication.
- Statutory right to adjudicate: The SOPL will introduce the right to adjudicate and will provide that this statutory right cannot be contracted out of or be limited. A particular advantage of adjudication is that it offers a more rapid resolution of disputes as there is an overall time limit of 55 working days between the appointment of the adjudicator and the production of a decision. Unlike court and arbitral proceedings, there is no discovery nor examination and cross-examination of witnesses.Adjudicator’s decision is interim: Parties who are unhappy about the adjudicator’s decision can still refer the dispute to court or arbitration for final determination. There is a short period of time to challenge the validity of the adjudicator’s decision (for example, the jurisdiction of the adjudicator, matters of procedural fairness) but not its correctness. However, since the adjudicator’s decision is interim, any amounts found due would have to be paid in the meantime.
- Legal costs: The plan is for each party to bear its own legal costs, therefore saving a lot of time which might otherwise be spent on cost liability arguments. The losing party is only likely to bear the adjudicator’s fee. This may encourage smaller parties to pursue disputes now that the cost risk is more manageable.
- Right to suspend work: The SOPL introduces the right for the claiming party to suspend part or all of its work if it is still not paid after the adjudicator’s decision.