Hong Kong: New Construction Industry Security of Payment Bill

Introduction

On 17 May 2024, the long-awaited Construction Industry Security of Payment Bill (the Bill) was gazetted.  The Bill, once enacted as an Ordinance (the Ordinance), will prohibit conditional payment provisions in construction contracts, introduce a mandatory adjudication mechanism for speedy resolution of payment disputes, empower unpaid parties to suspend or delay work, and allow an adjudicator’s determination to be enforced in the same way as a judgement of the High Court. A copy of the Bill can be found here.

 

Prohibition of conditional payment provisions

Under the Bill, conditional payment provisions (i.e., pay if/when paid provisions) or any other clauses with the same effect, will be rendered unenforceable between the parties to the construction contract.    

The prohibition not only covers a typical “pay if/when paid” provision, it extends to other provisions that make the liability to pay money owing, or the date on which it becomes payable, contingent or conditional on the operation of any other contract or agreement.  For example, a sub-contract clause that provides retention monies to be released upon practical completion of the main contract is arguably a conditional payment provision for the purposes of the Bill and is potentially unenforceable.

 

Mandatory adjudication mechanism

Adjudication is generally considered a fast and simple process when compared to traditional litigation or arbitration.  The proposed adjudication mechanism under the Bill is no exception.

After a payment claim is validly made, a paying party is required to serve a payment response no later than 30 calendar days (or an earlier date specified in the contract).  A paying party is also required to pay the admitted amount in the payment response no later than 60 calendar days (or an earlier date specified in the contract) after a payment claim is served.

Under the Bill, a payment dispute is regarded to have arisen: (a) if there is a payment claim but the paying party fails to serve a payment response by the deadline, or (b) the paying party, while responding to the payment claim, disagrees with the amount of the payment claimed by the claiming party, or (c) the paying party, while responding and admitting the amount due, fails to pay the admitted amount in full by the deadline.

A claiming party then has 28 calendar days from the date on which a payment dispute arises to initiate the adjudication proceedings, by serving an adjudication notice.  An adjudicator will be appointed by an adjudicator nominating body (ANB) within 7 working days from the service of the adjudication notice. 

The claimant must serve an adjudication submission within 1 working day after it was informed of the adjudicator appointment.  The respondent must then serve an adjudication response within 20 working days thereafter (or a longer period that the adjudicator specifies).  The claimant must serve an adjudication reply within 2 working days thereafter (or a longer period that the adjudicator specifies). The Bill requires an adjudicator to make a determination within 55 working days after the date on which the adjudicator is appointed (or a longer period agreed by the parties).

 

Unpaid parties’ right to suspend or delay work

The claiming party may suspend or delay work, upon serving a written notice to the paying party, if: (a) the paying party has served a payment response in which an admitted amount is stated to be paid but not paid in full, or (b) the paying party has failed to pay the adjudicated amount in full by the payment deadline. 

The claiming party exercising such right to suspend or delay work will not be regarded as a breach of the construction contract and will be entitled to a reasonable extension of time to complete the contract, as well as any loss and expenses reasonably incurred as a result of such delay.

 

Adjudicator’s determination to be enforced as a judgement of the High Court

If a paying party fails to settle the payment claim in accordance with the adjudicator’s determination, the claiming party may make an enforcement application to the High Court.  Unless it is refused on limited circumstances specified in the Bill, the High Court will permit enforcement of the adjudicator’s determination within 7 calendar days after the enforcement application is made.  

An application to set aside an adjudicator’s determination can be made to the High Court, but the applicant must pay into court the unpaid portion of the adjudicated amount as security, pending the final determination of the setting aside application.

 

Scope of application

The Bill will generally apply to construction contracts of value not less than HKD5 million for carrying out construction work and HKD0.5 million for the supply of related goods or services.

The Bill will not apply to: (a) contracts for works on existing private residential buildings (e.g. interior renovation, building maintenance, etc), and (b) contracts for relatively minor works on existing private non-residential buildings, i.e., those works not requiring approval and consent of the Building Authority under the Buildings Ordinance (Cap. 123) (e.g. maintenance and repair of building services installation, shop renovation, etc).

With respect to the adjudication mechanism, it is proposed that the adjudication of payment disputes in relation to the extension of time (EoT) entitlement and the related compensation amount will only be implemented to public sector projects initially.  This arrangement allows the government to evaluate the adjudication mechanism before extending its application in full to private projects.

 

Takeaway

The Bill, anticipated to become operative in early 2025, will introduce significant changes to how payments are recovered under construction contracts and the manner of which payment disputes are resolved and enforced.  Employers and contractors alike have until then to prepare for these changes, such as to update their claim handling procedures and bring their standard form (sub-)contracts in line with the new Ordinance.

Please contact May Ng (Partner) or Marcus Wong (Associate) if you have any questions or would like to discuss this article further.