Hong Kong has moved yet another step closer towards implementing a statutory adjudication regime for security of payment in the construction industry.
As readers will know, legislation already exists in the United Kingdom and in six other jurisdictions to enable sub-contractors and other parties in the construction industry to obtain payment for their work and services. The legislation provides a procedure for resolving claims and for the adjudication of disputes. Adjudication produces a temporarily legally binding decision which is enforceable by action in the courts unless within a certain period one of the parties refers the underlying dispute to arbitration or litigation in accordance with what the parties have agreed.
Cashflow (the lifeblood of the industry) and extension of time problems bedevil the industry everywhere and Hong Kong is certainly no exception. This was revealed in a survey conducted by the Development Bureau (DEVB) and the Construction Industry Council in 2011. The survey was followed by a consultancy study and, eventually, the production of framework legislation. The DEVB published guidance for the purpose of public consultation in June 2015. A task force was set up six months later and a revised framework security of payment bill (SOP) was prepared.
In April 2020, DEVB formed a working group for the purpose of bringing public works contracts into line with the SOP framework. On 5 October 2021, DEVB issued Technical Circular (Works) No 6/2021 which sets out:
‘…the policy on the implementation of the Security of Payment Provisions in public works contracts with a view to facilitating timely processing of contract payments and providing an interim mechanism for speedy resolution of payment disputes before the enactment of the Security of Payment Legislation (SOPL)’ (the Circular). The SOP framework is to be found in Appendix A to the Circular.
The Circular is concerned only with the public works sector, whereas the framework SOP legislation applies to parts of the private sector as well as the public works sector.
In order to give effect to the spirit of SOP, the Circular requires all tender invitations for public works contracts (including design and build contracts and term contracts) to incorporate Additional Conditions of Contract (ACC)/ Special Conditions of Contract (SCC) (arranged as appendices B to H to the Circular) from 31 December 2021 in the case of contractors in Groups B and C in the List of Approved Contractors for Public Works, and in the case of other contractors on that list or the List of Approved Suppliers of Materials and Specialist Contractors for Public Works, from 1 April 2022.
The object is that the spirit of SOP should be followed through the incorporation of the two sets of conditions in all public works contracts and that DEVB should revise the SOP framework bill in the light of experience gained, before tabling it in the Legislative Council. It is envisaged that the bill will extend to parts of the private sector as well as the public works sector (see: Security of Payment Legislation for Hong Kong in Appendix A to the DEVB’s Consultation Document of June 2015).
The Circular acknowledges the primacy of party autonomy in agreeing terms for payment and dispute resolution, subject to the following qualifications:
- the paying party should serve a payment response on the claimant within 30 days and pay any amount that is admitted within 60 days from the date of the claim;
- conditional payment or ‘pay when paid’ provisions are ineffective;
- a payment dispute, which is broadly defined, should be referred to adjudication for decision within 55 (working) days of the adjudicator’s appointment. The adjudicated amount should be paid as determined; and
- the claimant may suspend work or reduce their rate of progress if an adjudicated or admitted amount is not received.
Extension of time
Extension of time disputes are a major cause of disruption in construction projects (problems including, more recently, those associated with the disruption caused by Covid-19 bear witness to this). They often have a bearing on claims for loss and expense and on claims for liquidated damages for delay. Apparently, the majority view in the industry favours refinement to allow:
- adjudicator’s jurisdiction to decide time-related costs as part of payment disputes;
- adjudicator’s jurisdiction to decide extension of time claims as part of time-related costs;
- decisions on time-related costs as above, to be binding and enforceable on an interim basis (subject to reference to arbitration or other agreed form of dispute resolution), but decisions on EOT entitlement to be non-binding; and
- that a party should not be liable for liquidated damages if works are completed within the EOT as determined.
The SOP framework requires contractual claim procedures, including claims to EOT associated with payment, to be exhausted (which usually means that a contract administrator’s assessment should be completed) before the parties resort to adjudication.
Inevitably there will be EOT cases where adjudication and prior assessment may produce different results. When this happens, the adjudicated EOT will prevail and the date for completion will be revised accordingly; this should ensure consistency with the payment of the corresponding adjudicated amount. All this will of course be subject to the contractual right to arbitrate or litigate, whichever form of dispute resolution has been agreed by the parties.
The Circular recognises that there are parts of the SOP framework which can only be introduced by legislation, and these include applications to the court to enforce or set aside adjudications and provision for a statutory register of adjudicator nominating bodies.
There will be two types of SOP provisions incorporated into public works contracts through the ACC / SCC provisions mentioned above, namely applicable parts of the SOP framework and other conditions falling outside the SOP framework. Those of the second category will include the following:
- Mandatory sub-contract conditions. The SOP framework should be applied to all sub-contracts, including sub-contracts for supplies and services at all levels (as well as main contracts). Contractors will be obliged to ensure incorporation is agreed, confirm this to the contract administrator and produce supporting documentary records. Compliance will also be verified by the Works Department through technical audit of contractors. Contract administrators will be subject to spot checks.
- Direct payment of unpaid adjudicated amounts at sub-contract level. A key aspect of the SOP provisions (in Annex C of the Circular) is the protection it affords sub-contractors in their efforts to obtain payment of amounts adjudicated to be due and payable to them. Under these provisions a sub-contractor claimant can engage the employer’s assistance by submitting a request to the employer supported by a certified copy of the adjudication together with documentary proof of performance of the work to which the adjudicated amount relates and a declaration by the claimant sub-contractor that the adjudicated amount remains unpaid. (The working assumption is that the claimant’s sub-contract will incorporate the SOP provisions.)
Within 28 days of receipt of the sub-contractor’s request, the employer sends the contractor a request in the form set out in Annex G of the Circular, for documentary proof that the adjudicated amount has been paid to the claimant sub-contractor or that the adjudication has been superseded by an arbitration award or by a settlement agreed between the parties.
In addition, the contractor is required within the same 28-day period to inquire whether any sub-contractor above the claimant sub-contractor has gone into liquidation or been made the subject of a receiving order or entered into an arrangement with its creditors or made an assignment of its interests to them or become insolvent. Upon receipt of evidence of any of these events from the contractor, the employer will not make a direct payment to the claimant sub-contractor.
If on the other hand the contractor produces evidence that a sub-contractor above the level of the sub-contractor respondent to the claim will not be able to recover the amount of the proposed direct payment by deducting it from payments it will have to make under sub-contract with parties at the next lower tier, the contractor may notify the employer accordingly so that the employer can later recover the amount of the direct payment from the sub-contractor respondent after the 28 day period has passed, provided there is no evidence of financial problems.
The employer will make a determination of the amount to be paid directly to the sub-contractor claimant and deduct the amount of the direct payment from any amount owed to the contractor. The contractor and its sub-contractors in turn will deduct the same amount and the process is repeated until the sub-contractor respondent is reached.
- The Circular further requires the project office to display a notice in a conspicuous place on site in the form of Annex H to the Circular to ensure that the SOP provisions are known and implemented under all sub-contracts. It is expected that site notices will encourage sub-contractors to exercise their rights to suspend or reduce rates of progress by notifying the site owner (ie employer), as well as seek direct payment of unpaid amounts determined by adjudication in the manner outlined above.
- The project office is responsible for ensuring that the contractor procures the incorporation of SOP provisions in all sub-contracts and should issue warning notices and require proof of notification where appropriate; it should also record non-compliance in performance reports. Any failure by the contractor to pay amounts admitted or adjudicated under any sub-contracts of the first tier should also be recorded in contractor performance reports. Persistent non-compliance and the effect on the project of any suspension or reduced rates of work should similarly be mentioned in reports. A contractor’s performance may be reported as ‘poor’ or ‘very poor’.
Lastly, a simplified mechanism for the appointment of adjudicators will be used until the DEVB finalises a register of adjudicator nominating bodies and an appointment procedure.
The Circular gives an important boost to the process of consultation and legislation. It is understood that the DEVB revised the draft bill in April 2022. The revision was circulated to interested parties for comment. DEVB is gathering responses now, and when the consultation is completed the DEVB and the Department of Justice will produce a final text of the bill for consideration by the Legislative Council. There is a no timetable, but the process appears to be gaining momentum towards a conclusion fairly soon.
Meanwhile SOP has been the subject of a number of articles. Stakeholders in the industry are well aware of SOP, many having seen it in operation in the UK and other jurisdictions. It will therefore not be taking anyone by surprise when it finally arrives.
After a gestation period of many, many years in Hong Kong, SOP appears to be well and truly on its way. The construction industry landscape of Hong Kong is likely to change significantly as a result of this legislation (when it finally arrives) and there will inevitably be a period of adjustment to its effects – which are hopefully a change for the good for contracting parties in what has historically been a beleaguered industry beset with payment problems throughout the supply chain.