Since the United Kingdom introduced statutory adjudication and payment legislation nearly 20 years ago, many other jurisdictions, including Australia and Singapore, have followed suit. Hong Kong is now gearing up with its own proposed security of payment legislation.

In 2012, the Hong Kong Government established a working group of 14 industry stakeholders to evaluate options for security of payment legislation. A consultation paper was issued by the working group on 1 June 2015 setting out key aspects of the proposed legislation, with interested parties being invited to give comments by 31 August 2015.

The aim of any such legislation is two-fold. Firstly, to stop unjustified delay of cash flowing through the supply chain by seeking to ensure that contractors and subcontractors have a right to periodic payments. For example, a comprehensive and industry wide survey in 2011 on payment practices in the local construction industry reported that 45% of main contractors and 57% of subcontractors experienced serious delays to payment. Secondly, to introduce a fast track dispute resolution process to ensure problems are resolved quickly during a project.

Scope

The proposed legislation will apply to contracts related to construction activities carried out in Hong Kong regardless of the nationalities of the parties, or the prescribed governing law. It will apply to all contracts entered into by the government for the procurement of construction activities or related services, materials, or plant and subcontracts of any tier. It will also apply to private sector contracts in the same manner but limited to new building works where the original contract value is more than HK$5 million. If a private sector main contract is subject to the legislation, then all lower tier subcontracts will be similarly caught.

The proposed legislation will also apply to professional services contracts but not employment, insurance, guarantee, loan, and investment contracts. Consistent with the legislation in the United Kingdom, the proposed legislation will apply to oral and partly oral contracts.

Requirements concerning payment clauses

Under the proposed legislation, “pay when paid” clauses and clauses of similar effect will be unenforceable. This is the standard position taken in security of payment legislation overseas.

Parties are free to agree payment intervals for progress payments, provided that such intervals do not exceed 60 days for interim payments and 120 days for final payments. Similar provisions are implied in construction contracts which do not provide for payments. This approach is consistent with legislation in New South Wales, Western Australia and Singapore.

Statutory payment claim procedure

Both claiming and paying parties are entitled to claim progress payments by way of statutory payment claims. The statutory payment claim procedure is intended to operate in parallel with contractual payment procedures. The paying party must serve his payment response within 30 days of a payment claim. If the paying party ignores a payment claim, then he will not be able to raise any set off or counterclaims during an adjudication. The proposed legislation will imply the payment claim procedure operating on a monthly basis into contracts which do not provide any payment provisions.

As the proposed legislation will prescribe the required form and content of payment claims, it is queried whether compliance with such prescribed requirements would determine the jurisdiction of the adjudicator. In New South Wales, adjudicators have been found to lack jurisdiction when the requisite footer was not included in a payment claim.

Statutory adjudications

Statutory adjudication is a process which operates in parallel with other legal and contractual remedies. Even after an adjudication determination has been issued, the parties to a dispute are still entitled to proceed to mediation, arbitration or litigation for final resolution of the dispute. The purpose of the adjudication process is to provide a provisional determination and on account payments so as to keep the cash flowing in a project.

Under the proposed legislation, both parties will be able to refer disputes concerning payments, set off/deductions and extensions of time to adjudication, but not quantum meruit or breach of contract damages claims. The proposed legislation does not make clear when time disputes arise which may result in disputes concerning an adjudicator’s jurisdiction to deal with such disputes.

Within 28 days of non-payment of the amount admitted as due in a payment response; rejection of all or part of a payment claim; failure to serve a payment response; or a time dispute arising, a claiming party may commence an adjudication by serving a notice of adjudication. The notice must set out brief details of the parties, the nature of the dispute and the redress sought. It is queried whether an adjudicator would lack jurisdiction if an adjudication notice was issued out of time, as is the case in Western Australia where an adjudicator is required to dismiss such an adjudication application.

An adjudicator is then either appointed by agreement, or by nomination by an agreed or default nominating body, such as the Hong Kong International Arbitration Centre, within five working days. The adjudicator is not bound by the rules of evidence and can conduct the adjudication in such manner as he thinks fit. The consultation document suggests that adjudicators should decide matters on documents only, rather than requiring hearings and cross examination of witnesses and experts.

The claiming party must serve submissions together with all supporting evidence relied upon on or before the appointment of the adjudicator. An interesting issue facing the claiming party is that he must provide all submissions and documents and anticipate and address any arguments which might be raised by the paying party as he might not get another chance to address them.

The paying party must respond with his own submissions and supporting evidence within 20 working days, with the possibility of extensions by the adjudicator. This is in stark contrast with the Australian legislation which provides no possibility for extensions.

Paying parties often complain that adjudication is inherently unfair and exposes them to ambush by claiming parties who have had substantially more time to prepare their submissions and evidence. The proposed legislation seeks to address ambush concerns by providing an adjudicator with discretion to extend the deadline for serving an adjudication response and providing that an adjudicator may disregard any submissions or evidence not made in the notice of adjudication which should reasonably have been made earlier. However, the claiming party will always have a strategic advantage as he could simply withhold making his payment claims until they are properly prepared and substantiated (or immediately before a public holiday), and the paying party will still have to respond within the limited timescale of the adjudication.

The adjudicator is required to reach and publish his decision within 20 working days, extendable by the adjudicator up to 55 working days, and in excess of 55 working days if the parties agree. The adjudicator is entitled to resign if he considers that it is not possible to decide the dispute fairly in the time available.

Right to suspend

The proposed legislation also introduces a right for parties to suspend all or part of the works, or reduce their rate of progress in the event of non-payment of a sum determined in an adjudicator’s decision or non-payment of an amount admitted as due in a payment response.

Use of statutory adjudications

Adjudications assist the parties in resolving disputes without arbitration or litigation because requiring the making of on account payments helps narrow the gap of the disputes between the parties and provide parties with a provisional determination so that they could better assess their positions. It is hoped that statutory adjudications will become one of the common means of resolution of construction disputes in Hong Kong.