Hong Kong is planning to introduce security of payment legislation. A proposed model for it gives an idea what the final reform may look like

Ian Cocking and Sholto Hanvey

Since its UK inception, security of payment legislation (SOPL) has spread across many countries, with Singapore, Malaysia, New Zealand and Australia all enacting their own versions. Hong Kong will soon follow suit, following the government’s Development Bureau’s consultation with key industry stakeholders to determine the form that the legislation should take.

During the consultation process, the Development Bureau issued a proposed model SOPL for Hong Kong, which although only a draft, gives a flavour of what to expect when the bill is presented to the Legislative Council.

Parties involved in construction projects in Hong Kong should keep watch, for the proposals indicate that the Development Bureau intends to draft the legislation very broadly, meaning the SOPL mechanism will cover many aspects of a project, whether or not the work is done in Hong Kong, or whether the parties are based there. The proposals assert that all relevant construction contracts will be subject to the legislation, “whether they are subject to Hong Kong law or another law and regardless of the nationality of the parties” so long as the relevant construction activities are carried out within Hong Kong. Furthermore, contracts for services carried out outside Hong Kong and materials made abroad will be covered by SOPL provided the services and materials are supplied to parties who are procuring or undertaking construction activities in Hong Kong.

Like the UK, the purpose of introducing SOPL is to establish measures to improve payment practices

There’s a broad brush approach to the definition of both “construction contracts” and “construction activities”, albeit with significant carve-outs mooted, such as where the main contract value is below HK$5m (£439,340). However, foreign contractors with contracts in Hong Kong will almost certainly fall under the SOPL, unless particular exemptions apply.

As expected, on-site activities involving the provision of labour, plant or services will be covered, but so will contracts for supply, where the plant/material is going to a Hong Kong construction site. The proposals also cover contracts for services relating to construction activities - covering elements such as design work.

This means, where architectural or engineering design work is outsourced to foreign parties, if the actual construction site is in Hong Kong, SOPL applies. Like the UK, the purpose of introducing SOPL is to establish measures to improve payment practices in construction, specifically with regard to money moving down the contractual chain.

In a number of ways the proposals mirror the UK position: SOPL will give contractual payment claims statutory protection, create a right to suspend works for non-payment, and establish adjudication as a process of rapid dispute resolution.

However, they also differ in key ways, and it will be necessary for contracting parties to familiarise themselves with the SOPL mechanism.

Key points of the proposals are:

  • Payment claims can be made under the contract, or under statute - only the latter activates the SOPL mechanism
  • Parties will be entitled to “progress payments” as contractually entitled, but the final date for payment following the due date may not exceed 60 days for interim payment or 120 days for final payment
  • The right to suspend works comes only after a sum admitted as due remains unpaid, or after an adjudicator’s decision
  • Following “crystallisation” of a dispute, the claimant must issue a notice of adjudication within 28 days - this is one of a number of anti-ambush provisions
  • A further anti-ambush provision would allow the adjudicator to disregard any evidence or submission that ought to have been raised in their “payment claim”
  • The paying party will need to carefully prepare “payment responses” to statutory “payment claims”, as paying parties may not be able to set off or deduct amounts due under a “payment claim” if such details ought to have been included in the “payment response”
  • Adjudication would last 45 days, extendable by a further 10. However, should the parties agree, time can be further extended

The adjudicator can resign if they decide it is not possible to determine the matter fairly in the time available.

It’s evident from the proposals that the Development Bureau is concerned with payment problems being experienced by main contractors, subcontractors, consultants and suppliers so SOPL will be broadly drafted to protect payees throughout the industry.

In what seems like an effort to force payer and payee to actively manage their relationship, there will be high administrative burdens upon them when making payment claims and issuing payment responses, which will frame the nature of an adjudication should a payment claim turn into a dispute.

Any party involved in construction activities in HK is advised to keep abreast of developments, and when SOPL’s enacted - the Development Bureau has indicated its intention to place it before the Legislative Council this year - it’s vital to take advice as to whether your contract falls under the SOPL mechanism, if it’s SOPL compliant, and the implications regarding the timeframes and procedures you will  be operating under.

Ian Cocking is a partner and Sholto Hanvey is an associate at Clyde & Co in Hong Kong