Construction adjudication is one - tentative - step closer in Hong Kong

After a delay of six years since the Hong Kong Development Bureau (DEVB) published its "Report on Public Consultation of Proposed Security of Payment Legislation for the Construction Industry" in April 2016, the Hong Kong government has now taken a further step toward the security of payment legislation (SOPL), which - in this jurisdiction - will likely ultimately mean regulation of construction payment terms, banning "pay when paid" clauses, and the introduction of 55 day statutory construction adjudication.

That April 2016 DEVB report had concluded (see paragraph 145):

"Although the responses to the consultation indicate a divergence of views on some questions of the proposed framework, there is positive support for SOPL. Government intends to proceed with the legislation."

But over the ensuing six years, no legislation was forthcoming. The step Hong Kong has now taken is the DEVB's publication of Technical Circular (Works) No. 6/2021 on 5 October 2021 entitled “Security of Payment Provisions in Public Works Contracts” (the Circular). Since 1 April 2022, this Circular has applied to all contractors on the List of Approved Contractors for Public Works.

However, the key thing to understand is that the Circular is not SOPL legislation in Hong Kong. The Circular is however intended to introduce the principles of SOPL to all new public works contracts in Hong Kong. It does so however by introducing contractual provisions rather than relying on a legislative scheme. As the "Scope" introductory section of the Circular puts it:

“This Circular 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 the speedy resolution of payment disputes before the enactment of the Security of Payment Legislation.”

The fact that the Circular can only introduce such policy via a contractual, not statutory mechanism means that parties winning a contractual adjudication may not be able to rely on easy and effective court enforcement, and are likely instead to have to rely on their contractual rights to suspend or reduce the rate of progress if the adjudicated – or admitted – amount is not paid within 30 days of an adjudicator's Decision. (There are also provisions for direct payment of unpaid adjudicated amounts at the sub-contract level. See Annex C of the Circular.)

Indeed, the Circular expressly acknowledges that there are certain parts of the aspired for Hong Kong SOPL framework that cannot be introduced except by legislation, including:

1. applications to the Court for enforcement;
2. the setting aside of an adjudication decision; and
3. the creation of a statutory register of adjudicator nominating bodies.

Further, the Circular acknowledges the primacy of party autonomy in agreeing payment and dispute resolution, subject to four qualifications:

• The paying party should serve a payment response to the claimant within 30 days, and pay admitted amount within 60 days of the date of claim.
• Conditional payment or “pay when paid” provisions to be ineffective.
• A “payment dispute” can be referred to adjudication for a decision within 55 days of the Adjudicator's appointment.
• A claimant may suspend or reduce the rate of progress if the adjudicated – or admitted – amount is not received within 30 days of the adjudicator's Decision.

It is hoped that the experience gained from implementing the Circular on public contracts will assist when Hong Kong finally implements SOPL legislation - which will apply to both public and private construction contracts.

As paragraph 6 of the Circular puts it:

“This Circular promulgates the implementation of the spirit of the SOPL in all new public works contracts with a view to facilitating the smooth introduction of the legislation through the experience gained in public works contracts.”

However, the Circular does therefore represent a further material - if somewhat tentative - step in Hong Kong's long journey towards full SOPL. It is to be welcomed in this very important Asian construction and infrastructure marketplace. The ultimate aim of SOPL is, as paragraph 4 of the Circular puts it, to:

"promote fair payment and help main contractors, sub-contractors, consultants, sub-consultants and suppliers receive payment on time for work done and services provided".

That change in payment culture is needed in Hong Kong as much as anywhere else in the world where SOPL has been introduced.