The Development Bureau of the Government of HKSAR issued a Consultation Document (“Consultation Document”) in June 2015 in which the intention of the proposed legislation was stated as being:
It is generally considered that the introduction of SOPL in Hong Kong will enhance cash flow throughout the supply chain of construction projects, by providing a process to claim for payment, respond to claims and respond to disputes.
Requirement for Security of Payment Legislation (SOPL)
In 2011 the Government and the Construction Industry Council conducted a construction industry wide survey in which it found that unfair payment terms in contracts, delays in making payments and disputes were all causing cash flow problems within the industry.
The research identified that payment issues were being experienced across the supply chain by sub-contractors, contractors, consultants and suppliers.
The purpose of the SOPL is therefore to encourage fair payment terms, rapid dispute resolution and improve cash flow at every level of the construction industry.
SOPL in Other Jurisdictions
SOPL has been introduced and used in Australia, New Zealand, Singapore, Malaysia, Ireland, and was initially introduced in the UK as far back as 1996.
The Proposed Hong Kong Process
Draws on the UK and Australian systems and covers construction contracts entered into verbally or orally.
Scope of the Proposed SOPL
It is currently proposed that Hong Kong’s SOPL will apply to:
- All Government contracts;
- Specified statutory and/or public bodies and corporations;
- Private sector contracts for “new buildings” as defined in the Building Ordinance (Cap 123) where the original contract value is more than HK$5,000,000.
- Professional service contracts where the contract value exceeds HK$500,000.
Accordingly, private sector contracts which are not for “new buildings” are excluded as are private sector contracts with a contract value under HK$5,000,000.
Prohibition of ‘Pay when Paid’ and Conditional Payment
A key proposal of the Consultation Document is that ‘pay when paid’ clauses will be rendered ineffective with the introduction of Hong Kong’s SOPL even where the reason for non-payment is insolvency higher in the supply chain.
Whilst ‘pay when paid’ is currently upheld in Hong Kong courts it is widely considered to be unfair and a significant reason for delayed payment throughout the construction industry. The prohibition of the practice will undoubtedly be welcomed by many.
Adjudication of Disputes
The currently proposed timeline for the adjudication of payment disputes is 55 days from the initial referral of the dispute to the decision. By way of a benchmark, in the UK this process is to be concluded in 28 days, which can be extended to 42 days if the referring party requests an extension, or even longer if both parties and the adjudicator agree on an extended time-frame.
An adjudicator’s decision can be enforced in the same manner as a judgment of the court, without set off or deduction by the paying party.
The introduction of SOPL is likely to have a significant impact on the Hong Kong construction industry.
In theory it should speed up the payment process and allow an aggrieved party to a determination on its right to payment within 55 days from the Notice of Adjudication.
How widely the practice will be adopted remains to be seen.