On 1 June 2015, the HKSAR Government published its long awaited consultation document on Hong Kong's proposed 'security of payment legislation' (SOPL) for the construction industry. The rationale is for the alleviation of cash flow pressure on contractors, sub-contractors and suppliers.

Does the proposed SOPL apply to all construction projects?

Hong Kong has a broad construction 'Employer' base, including statutory corporations and other 'public' bodies and corporations, commercial owners and developers, and the general public (who may engage contractors as individuals, through Owners Corporations/Incorporated Owners, or as a business concern). As presently framed, the proposed SOPL will only apply to a limited range of construction projects.

What do Employers need to know about whether the proposed SOPL applies to their project? In this Legal Update, we summarise the proposed scope of the SOPL. Future Legal Updates will analyse the provisions of the consultation document in more detail.

1. Public sector contracts

The proposed SOPL will apply to all construction works procured by the HKSAR Government, and also to all construction works procured by a list of specified statutory organisations and other 'public' bodies and corporations, including the Airport Authority, the Housing Authority, the MTR Corporation and West Kowloon Cultural District Authority.

The proposed SOPL legislation would cover all types of construction works procured by the public sector, regardless of their value, including general construction, maintenance, repair and renovation, and the installation of fixtures and fittings such as air conditioning and security systems. Contracts to be covered include main contracts, consultancy appointments, supply contracts and sub-contracts.

2. Private sector contracts

The proposed SOPL will apply only to 'new buildings' (a term defined in the Buildings Ordinance (Cap. 123)), where the main contract has an original value in excess of HK$5 million (or HK$500,000 for consultancy appointments and supply only contracts). This means the proposed SOPL will not affect:

  • works for the maintenance, repair, renovation or restoration existing buildings, including major renovation of multi-storey buildings, often procured by an Owners Corporation/Incorporated Owners, or
  • the majority of individuals and small businesses procuring routine maintenance, improvement or decoration works.

While the general public will generally remain unaffected by the proposed SOPL, commercial owners and developers engaged in the construction or redevelopment of new apartment blocks, retail premises, offices or industrial facilities will need to understand the proposals and their potential impact.

Among other things, the SOPL proposes maximum payment periods, a prohibition on 'pay when paid' clauses and the right to adjudication in the event of disputes about non-payment, value of work and extensions of time. In short, affected Employers and main contractors will be obliged to process, certify and pay claims within defined timeframes and any disputes will be subject to an interim adjudication procedure. Parties at any tier of the contracting chain will be able to avail themselves of these rights.

Many regular Employers have well-established relationships with their regular main contractors, specialist contractors and consultants, and established payment regimes. However, it is worth bearing in mind that the SOPL, when it is eventually passed into legislation, may bring unexpected pressures to an otherwise settled relationship.

Main contractors and consultants who are faced with statutory claims for payment and adjudication of disputes made against them by sub-contractors, sub-consultants and suppliers, may have to involve the Employer by passing claims upwards in the chain of the statutory payment and adjudication scheme, at least to preserve their own commercial position.

The consultation document is available at http://www.devb.gov.hk/sop. Those who procure construction services in the public sector, or for new buildings in the private sector, will certainly want to understand the proposals, and may wish to submit formal comments. We will be pleased to discuss the potential impact of these proposals on your contracting arrangements. We look forward to working with you in contributing to this important consultation exercise for Hong Kong's construction industry.

The consultation period ends on 31 August 2015.