Consultation Paper

The Development Bureau of the Hong Kong Government has issued a consultation paper on the proposed introduction of security of payment legislation (SOPL) in Hong Kong, to regulate certain aspects of payment practice in the construction industry.  The aim is to help main contractors, sub-contractors, consultants and suppliers receive payments on time for their work and to provide a mechanism whereby disputes can be resolved quickly.

The consultation came about as a result of an industry wide survey conducted by the Government and Construction Industry Council which revealed that main contractors, sub-contractors, consultants and suppliers were experiencing significant problems in receiving payment for work done, particularly where contracts contained “pay when paid” clauses. The survey results also showed that payments were being delayed by disputes.

We have discussed the proposed SOPL and some of the issues arising in respect of pay when paid clauses in previous articles:

Is help on the way for Hong Kong contractors?

Proposed Legislation for Security for Payment

Recent case considers “Pay When Paid” issue

What is proposed?

The following is proposed under the SOPL:

  • Although parties will retain a large degree of freedom to agree payment terms, the following will be introduced:-
    • “Pay when paid” clauses will not be effective or enforceable.  
    • Parties can agree payment periods between applications and payments, but not exceeding 60 calendar days (for interim payments) or 120 days (for final payments).  
    • A right to resolve the dispute by Adjudication-a rapid procedure under which an Adjudicator gives an independent decision on the dispute and any payment due.  
    • The right to adjudication in the event of non-payment and when there are disputes about the value of work, services, materials or plant and/or disputes about extensions of time and financial claims under the contract  
    • A maximum period of 55 working days for adjudications, from appointment of the Adjudicator to the issue of his/her decision, unless the parties agree a longer period. Straightforward cases should be decided more quickly.  
    • A right to refer the matter to the court or arbitration (if specified in the contract) where either party is unhappy with an Adjudicator’s decision. Any amount the Adjudicator decides as due has to be paid in the meantime.  
    • The right for unpaid parties to suspend or reduce the rate of progress of work after either non-payment of an Adjudicator’s decision or non-payment of amounts admitted as due.

What contracts will the SOPL apply to?

The SOPL will apply to:

  • All contracts under which the Government (and specified statutory and/or public bodies and corporations) procure construction activities or related services, materials or plant. Sub-contracts of all tiers will also be covered. Construction activities include, amongst other things, new build works, repair, maintenance and renovation works.  
  • Private sector contracts where the employer is procuring construction activities or related services, materials or plant for construction of “new buildings” (as defined in the Buildings Ordinance) and where the employer’s main contract value exceeds a specified amount (tentatively HK$5 million for construction contracts and HK$500,000 for professional services and supply only contracts). Where the main contract is subject to SOPL then the sub-contracts of all tiers will also be subject to SOPL, regardless of value.  
  • Oral and partly oral contacts as well as written contracts, although some members of the consultation paper Working Group consider that the SOPL should only apply to written contracts or those evidenced in writing, as it does in Singapore and Malaysia.

What is next?

The Government has requested comments on the proposals in the consultation paper by 31 August 2015. We will monitor the developments and report on them in our future newsletters.