Hong Kong’s incoming Security of Payment Regime

Security of payment legislation to address improper payment practices in the Hong Kong construction industry is a step closer to implementation with the Construction Industry Security of Payment Bill (the “SOP Bill”) being gazetted on 17 May 2024 and introduced to the Legislative Council for its first reading on 29 May 2024. 

The SOP Bill has been developed to meet the specific needs of the Hong Kong construction industry. However, in concept it is broadly similar to established security of payment legislation that has been in effect for some years in other jurisdictions including the United Kingdom, Australia, Singapore and Malaysia. While each jurisdiction’s approach is unique, the legislative frameworks in each were prescribed to combat payment problems in their respective construction industries. 

The SOP Bill aims to address payment problems in the construction industry by:

1. prohibiting and nullifying certain unfair payment terms; and
2. providing an adjudication mechanism for speedy resolution of payment disputes.

The SOP Bill will apply to public and private contracts for the carrying out of construction work where the main contract value is a minimum of HK$5 million and for the supply of related goods and services only where the main contract value is a minimum of HK$500,000.  If the main contract is captured by the SOP Bill then subcontracts along the supply chain will generally be captured. 

The SOP Bill strengthens the contractual right to payment by a range of measures which include:

• prohibiting the use of conditional payment provisions such as “pay when paid” clauses and rendering these unenforceable.
• imposing time limits for the paying party to give a payment response and make payment after a valid payment claim is made.
• providing default payment provisions for how and when progress payments are to be made if the contract does not do so.

The SOP Bill entitles a claiming party the right to initiate adjudication proceedings within 28 calendar days of when a “payment dispute” arises as defined in the Bill.  The Bill provides for the selection of a nominating body and the appointment of an adjudicator which must conduct the adjudication proceedings in accordance with the rules of the nominating body.  The adjudicator must make a determination within 55 working days after appointment unless the parties agree to a longer period.

An adjudication determination will be binding on an interim basis, subject to the parties’ right to refer the payment dispute to litigation or to another dispute resolution forum (including arbitration) provided for in their contract.  Section 48 of the SOP Bill sets out a list of circumstances when an adjudication determination may be set aside by the Court of First Instance. Consistently with the adjudication regimes in other countries, the list includes jurisdictional and natural justice objections as well as fraud and adjudicator bias, but does not permit a merits review.

Part 4 of the SOP Bill empowers the claiming party to suspend or slow down work/services in limited circumstances, e.g. if the paying party has admitted the amount payable but fails to pay it in full by the deadline, or where the adjudicator has made a determination but the paying party fails to pay the full adjudicated amount by the deadline (subject to the claiming party giving the required notice of intent).

While an adjudicator will have jurisdiction to assess the amount payable in relation to an extension of time claim where the extension of time has been agreed, and to determine entitlement to an extension of time, in relation to public contracts (i.e. with government entities), when the legislation comes into effect HK adjudicators will not have the power to determine entitlement to an extension of time in relation to private sector contracts (albeit it is expected that this will happen in due course).

Comparison to other security of payment systems

Security of payment regimes have been in force in a number of other jurisdictions for some time, including the UK, Singapore, Malaysia and each Australian state and territory.

Some notable similarities and differences between the SOP Bill in HK and similar systems elsewhere include:

• The SOP Bill sets a minimum contract value below which it will generally not apply. By contrast, UK, Singaporean, Malaysian and Australian security of payment regimes do not prescribe any minimum contract value (although in Queensland the value of the payment claim will determine the time frames for the adjudication process).
• Conditional payment terms such as “pay when paid” provisions are prohibited in the SOP Bill as well as under the UK, Singaporean, Malaysian and Australian systems.
• All of the systems are very process driven and contain time periods which must be complied with in relation to payment claims and adjudication applications, as well for responses to these. However, there are differences between the different systems that claimants must pay attention to. For example, the SOP Bill provides that a claiming party can commence adjudication proceedings within 28 days of when a payment dispute arises which includes where a paying party disagrees with the amount claimed by a claiming party in a payment response.  By contrast:
  • in New South Wales, if a respondent provides a payment schedule, the claimant has 10 business days to apply for adjudication after receiving the payment schedule; and
  • in Queensland, if the application relates to an amount stated in the payment schedule being less than the amount in the payment claim, the claimant has 30 business days from receiving the schedule to apply for adjudication.
• The SOP Bill is similar to the majority of the  security of payment systems in other jurisdictions, in that it does not empower an adjudicator to disregard contractual and statutory timelines. Conversely, the Western Australian security of payment legislation stands out from other systems for empowering adjudicators to determine that a notice-based time bar in a contract is unfair and to strike it down where compliance with the provision:
  • is not reasonably possible, or
  • would be unreasonably onerous.
• Unlike the Singaporean system, the SOP Bill does not provide for a period for parties to try and settle the payment dispute. The Singaporean security of payment regime prescribes a mandatory 7-day cooling-off period called the “dispute settlement period” after receipt of a payment response before a claiming party is entitled to make an adjudication application, in the hope that parties may take steps to resolve the payment dispute. However, in practice, this period is more commonly used by parties to prepare their respective cases for the eventual adjudication.

Hong Kong’s introduction of a broad security of payment system will be welcomed by participants in the construction industry. Parties will need to ensure that their contracts and their contract administration processes are suitably amended to fit with the requirements of the new legislation, and those higher up the contractual chain will particularly need to ensure claims are responded to in time so that they are dealt with on their merits rather than in a default scenario and to avoid giving rise to an entitlement to suspend.

If you would like to discuss our experience in representing clients in security of payment systems in other jurisdictions in the region, please contact the authors.

References: Construction Industry Security for Payment Bill