Are you ready? Hong Kong construction sector security of payment regime coming into full effect

The Ordinance does not apply to:

• construction contracts where the consideration payable for the construction work or related goods and services is to be calculated other than by reference to the value of the work or goods supplied;¹²
• construction contracts where a party undertakes to carry out construction work or supply related goods and services as an employee of another party;¹³
• construction contracts that involve construction work carried out outside Hong Kong or related goods and services supplied for such work;¹⁴
• a main private contract or its subcontract if the carrying out of construction work, or the supply of related goods and services, is at a construction site that is:
  • an existing residential unit; or
  • the common parts of a building that contains one or more existing residential units.¹⁵

When the Ordinance is compared with the NSW Act¹⁶, the Singapore Act¹⁷, and the UK Act¹⁸, each has its own series of applicability provisions with some main similarities (such as that each Act applies whether or not the contract is expressed to be governed by the laws of the relevant jurisdiction). In addition, like the Singapore Act¹⁹ and the UK Act²⁰, the Ordinance does not apply to contracts concerning existing residential units.²¹ However, the NSW Act was recently amended to apply to owner-occupier construction contracts entered into with homeowners following a number of high-profile insolvencies in the owner-occupier construction sector.²²

Right to progress payments claimed through payment claims

The Ordinance provides that individuals or companies that carry out construction work or supply related goods and services under a construction contract are entitled to progress payments.²³ A claiming party can serve a payment claim to the paying party that is or may be liable to make payment under their construction contract.²⁴ The claiming party must detail the work done and the amount claimed for assessment by the paying party.²⁵

This statutory entitlement to progress payments claimed through payment claims is the cornerstone of security of payment laws and the Ordinance's provisions are relatively equivalent to those in the NSW Act²⁶ and the Singapore Act.²⁷ However, the Ordinance has implemented the concept of "billing dates" upon which a payment claim may be served by a claiming party. The NSW Act was previously amended to remove the similar concept of "reference dates" on and from which payment claims were to be served to simplify the payment claim process thereunder. The Singapore Act and UK Act also do not expressly refer to "billing dates" or "reference dates".²⁸

Payment responses and consequences for late payment responses

Once served with a payment claim, the Ordinance further provides that a paying party may serve a payment response that states the amount the paying party proposes to pay to the claiming party.²⁹ Any payment response must be served on the earlier of the payment deadline for the progress payment or 30 days after the date on which the payment claim is served (which can be shortened by agreement).³⁰ 

If a paying party fails to serve a payment response by the deadline, the paying party is to be regarded as disputing the unpaid claimed amount and is not permitted to raise any set off in the adjudication proceedings related to the payment claim.³¹

The Ordinance therefore prescribes a default consequence for missing a payment response deadline that is relatively immaterial when compared to the harsh consequences that define the Australian security of payment laws. Under the NSW Act, the default consequence for missing the equivalent of a payment response deadline is that the paying party is to be regarded as not disputing the claimed amount and this amount becomes due and payable (and a claiming party may initiate court proceedings to enforce payment).³²

Payment disputes and the statutory adjudication regime

A payment dispute arises under the Ordinance if the claiming party has served a payment claim and the paying party disputes the claimed amount, fails to pay any admitted amount, or fails to serve a payment response by the payment response deadline.³³ Once a payment dispute arises, a claiming party has 28 days to initiate adjudication proceedings for the payment dispute.³⁴ The claiming party may do so by serving a written notice of adjudication on the respondent, and once an adjudicator is appointed, serving a written adjudication submission on the respondent.³⁵

That only a claiming party may initiate adjudication proceedings reflects Hong Kong's preference for the upstream-only model for the initiation of adjudication proceedings that is a feature of the NSW Act³⁶ and the Singapore Act.³⁷ This stands in contrast to the UK Act, under which either party to a construction contract has the right to refer a dispute arising under the contract to adjudication.³⁸

However, like each of the NSW Act, Singapore Act, and the UK Act, any adjudication determination is "interim-binding" in the sense that it is only binding until it is set-aside by a court, the payment dispute is settled by written agreement between the parties, or the payment dispute is determined in any court or other dispute resolution proceedings.³⁹ Any adjudication determination under the Ordinance may only similarly be set aside by a court on limited grounds: if it was procured through fraud or bribery, if there has been a material denial of natural justice in the proceedings, if the adjudicator has not acted independently or impartially in the proceedings, or if the adjudicator has acted in excess of their jurisdiction in the proceedings.⁴⁰

No contracting out

In generally equivalent terms to the NSW Act⁴¹ and the Singapore Act,⁴² the Ordinance provides that any provision in a contract or agreement is void should it be inconsistent with the Ordinance or have the effect of excluding, modifying or restricting its operation.⁴³

This provision is a common and powerful feature of security of payment laws providing for statutory adjudication; making it mandatory for parties to comply with the payment claim and statutory adjudication processes irrespective of any contractual arrangements to the contrary. Parties therefore cannot contract out of the security of payment laws in Hong Kong, New South Wales or Singapore.

The UK Act also provides that if the statutory adjudication scheme is not present in the parties' contract, the Scheme for Construction Contracts in the UK Act will apply.⁴⁴ Complying adjudication processes must therefore be agreed within the contract in the UK, or the adjudication provisions in the statutory Scheme for Construction Contracts will apply.

Contingent payment provisions

The Ordinance establishes that conditional payment clauses or "paid when paid" provisions in construction contracts are unenforceable and have no effect in relation to payments for construction work or related goods and services.⁴⁵ Parties therefore cannot rely on clauses that would make their obligation to pay money owing contingent on first receiving payment under another contract or on certain terms being met under another contract. Equivalent provisions are included in the NSW Act,⁴⁶  the Singapore Act,⁴⁷ and the UK Act.⁴⁸ However, the UK Act indicates that a contingent payment provision may be effective where the third party payer (upon which the payment is contingent) is insolvent. The Ordinance did not adopt this feature.

No contested extensions of time to be determined for main private contracts or subcontracts – only public contracts

The Ordinance provides that a claiming party under a private main contract or its subcontracts may not initiate adjudication proceedings for a time-related dispute where the amount is to be determined on the basis of an assessment of a claiming party's extension of time entitlement.⁴⁹ An adjudicator will therefore have no jurisdiction to determine a time-related dispute under a private main contract or its subcontracts.⁵⁰ This means that claims for delay/prolongation costs under these construction contracts – which can be very significant on delayed projects – are not capable of being subject to adjudication proceedings under the Ordinance. However, if the claiming party and paying party agree on the extension of time but not the amount payable based on the extension of time, then the claiming party may initiate adjudication proceedings and the adjudicator will have jurisdiction to determine the time-related dispute.⁵¹ The Ordinance's prohibition on pursuing time-related disputes by way of adjudication proceedings notably does not apply to adjudication proceedings concerning public contracts – only main private contracts or their subcontracts.⁵²

That contested extensions of time main private contracts or their subcontracts cannot be determined by adjudicators in Hong Kong reflects a departure from the position under the NSW Act that adjudicators can determine extension of time entitlements when determining adjudicated amounts.⁵³ However, this position is not the position in all States and Territories in Australia. In the Australian State of Victoria, "time-related costs" are excluded from being included in a progress claim and accounted for by an adjudicator when determining an adjudication determination.⁵⁴ However, the Victorian government has recently supported a recommendation to eventually remove the concept of "excluded amounts" from the Victorian security of payment laws (such that the position in Victoria will be made consistent with the NSW Act and other jurisdictions across Australia).⁵⁵ Hong Kong will then be an outlier in prohibiting time-related disputes by way of adjudication proceedings in its security of payment laws.

Right to delay work or supply

Under the Ordinance, if a claiming party has served a payment claim for a progress payment, and the paying party has served a payment response that included an admitted amount, but that is not paid in time, then the claiming party may serve a notice of intention to delay carrying out construction work or supplying goods and services before an intended starting date.⁵⁶ The same right is extended to claiming parties that do not receive adjudicated amounts from respondents by the payment deadline for the adjudicated amounts.⁵⁷

In either case, should the admitted amount or adjudicated amount not be received by the intended starting date, the claiming party may delay carrying out construction work or supplying related goods and services. The claiming party is then:

• not to be regarded as in breach of the construction contract;⁵⁸
• not liable for any loss or damage suffered by the paying party or respondent;⁵⁹
• entitled to a reasonable extension of time to complete the contract;⁶⁰ and
• entitled to recover any loss and expenses reasonably incurred as a result of delaying the carrying out of the construction work or supplying related goods and services.⁶¹

Once the admitted amount or adjudicated amount is received, the construction work or the supply of related goods and services must resume within 5 working days.⁶²

The NSW Act,⁶³ the Singapore Act,⁶⁴ and the UK Act⁶⁵ also provide rights to suspend the performance of construction work or the supply of related goods and services following the non-payment of progress payments. These rights provide significant commercial leverage to claiming parties when seeking to recover amounts owed for progress payments and adjudication proceedings.

Analysis

Despite adding much of its own flair, Hong Kong has adopted many similar provisions that are already established in international security of payment laws (such as providing for a statutory right to progress payments claimed through payment claims, prohibitions on contingent payment clauses, providing for rights to delay work for non-payment, and including express no contracting out provisions).

Informed by experiences in other jurisdictions, parties in the construction sector in Hong Kong should be mindful of the opportunities and risks arising from the application of the Ordinance and take steps to ensure that they are prepared for its significant implications for the sector.

Perhaps most significantly, parties must now consider the strategic implications of the Ordinance for the resolution of construction contract disputes and how these can be utilised to their advantage or disadvantage. The experience in other jurisdictions has been that a statutory adjudication or a number of them have become common place on nearly all contentious construction projects, and can themselves give rise to satellite disputes and litigation.

This means that parties are well-advised to ensure that they are careful to comply with the Ordinance and to implement appropriate, timely, and cost-effective measures to resolve payment disputes going forward, whilst maintaining a broader strategic view of any issues that may give rise to a dispute and prevent the successful delivery of their project.

The Global Construction Disputes Group at Ashurst has extensive experience advising clients in the construction sector on security of payment laws world-wide and is available to advise clients in Hong Kong in relation to the application and implications of the Ordinance.

This article is authored by Luke Carbon (Partner), Sylvia Tee (Partner), Adam Pollock (Senior Associate) and Santiago Morande (Paralegal).

Annexure

Flowchart of Hong Kong's Construction Industry Security of Payment Ordinance

Download the flowchart [PDF 639 KB]