Hong Kong Construction Industry Security of Payment Bill Passed

Introduction

After over a decade of consultation and debate, the Legislative Council of Hong Kong has finally passed the Construction Industry Security of Payment Bill on 18 December 2024. The Construction Industry Security of Payment Ordinance (the Ordinance) introduces key provisions such as the prohibition of conditional payment clauses, strict deadlines for payment responses, a statutory adjudication mechanism for resolving payment disputes, and the right for claiming parties to suspend or slow down work under certain conditions.

The Ordinance will be gazetted on 27 December 2024 and will come into full operation on 28 August 2025, governing construction contracts entered into on or after that date. For more insights, you can also read our previous publication on the Construction Industry Security of Payment Bill here. The key provisions of the Ordinance are highlighted below.

 

Key Provisions of the Ordinance

1. Prohibition of Conditional Payment Clauses

The Ordinance renders “pay when paid” clauses and similar conditional payment provisions unenforceable. This measure ensures that subcontractors and suppliers receive timely payments, irrespective of whether the main contractor has been paid.

2. Deadlines for Response and Payment

The paying party is obligated to issue a payment response by the earlier of the following dates: the date stipulated in the contract or 30 calendar days following the receipt of a payment claim. Furthermore, the paying party must pay the admitted amount by the earlier of these dates: the date specified in the contract or 60 calendar days after the payment claim is served.

A payment dispute will occur if any of the following conditions are met:

• The paying party does not respond to the payment claim within 30 days;
• The admitted amount is less than the amount claimed; or
• The admitted amount is not fully paid within 60 days.

3. Statutory Adjudication Mechanism for Payment Disputes

A statutory adjudication process is established to provide a swift, cost-effective, and binding interim resolution for payment disputes. This mechanism facilitates the continuation of work without prolonged disruptions due to financial disagreements.

When a payment dispute arises, the claiming party can initiate adjudication proceedings to have the dispute resolved by an independent adjudicator. The adjudicator is required to make a determination within 55 working days of their appointment. A determination is binding on the parties unless it is set aside by the CFI, settled by written agreement, or resolved through court or other dispute resolution proceedings (e.g., arbitration). This process ensures a timely resolution, allowing the project to continue with minimal disruption.

4. Right to Suspend or Slow Down Work

Under the Ordinance, a claiming party is entitled to suspend or reduce the pace of work under the following conditions:

• Non-Payment of Admitted Amount: If the paying party acknowledges the amount due but fails to make the full payment; or
• Non-Payment of Adjudicated Amount: If the adjudicator has issued a determination and the paying party fails to pay the adjudicated amount in full.

To exercise this right, the claiming party must serve a written notice to the paying party, specifying the intention to suspend or slow down work.

5. Scope of Application

The Ordinance governs main contracts for construction work with a value of at least USD5 million, as well as main contracts for the supply of goods (e.g., materials) or services related to construction work with a value of at least USD0.5 million. If a main contract falls under the Ordinance, all subcontracts within the same supply chain are also subject to its provisions, regardless of their value.

The Ordinance applies to both public and private projects. Notably, the Ordinance does not apply to:

• Contracts for work on existing private residential buildings; and
• Contracts for minor work on existing private non-residential buildings that do not require approval and consent from the Building Authority under the Building Ordinance (Cap. 123).

 

Takeaways

With the Ordinance about to take effect, it is crucial for industry players to proactively update their operations to ensure compliance. This involves actions such as reviewing and updating standard contracts and subcontracts to align with the new regulations and revising payment procedures to meet the strict timelines. Key provisions like the prohibition of “pay when paid” clause will impact cash flow management across the supply chain.

To prepare for the Ordinance's implementation, the Government and industry stakeholders will undertake various preparatory activities, with further guidelines and codes expected to be released.

You can access the Government's press release here.