The spirit of SOPL in public works in Hong Kong

Hong Kong has moved closer towards implementing a statutory adjudication regime for the construction industry.

Legislation exists for the construction industry in the United Kingdom and in six other jurisdictions to enable sub-contractors and other parties 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 the underlying dispute is referred to arbitration or some other method of dispute resolution agreed by the parties.   

Payment and extension of time problems bedevil the industry everywhere. Hong Kong is no exception, as 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 a guide to which was published by DEVB for the purpose of a public consultation in June 2015. A task force was set up six months later which produced a revised framework security of payment (SOP) bill.  

In April 2020, DEVB formed a working group for the purpose of bringing public works contracts in line with the SOP framework. On 5 October 2021, DEVB issued Technical Circular (Works) No. 6/2021 setting 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.

Whereas the framework SOP legislation prepared for public consultation in 2015 applied to parts of the private sector as well as the public works sector, the Circular addresses only 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 / Special Conditions of Contract (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 intention is that, after these dates, the spirit of SOP will be adhered to through the incorporation of the two sets of conditions in all public works contracts. The experience gained will enable the DEVB to refine the drafting of the SOP framework bill before tabling it in the Legislative Council. It is envisaged that the bill will extend to parts of the private sector and the public works sector legislation (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 four qualifications: 

• the paying party should serve a payment response on the claimant within 30 days and pay any admitted amount within 60 days from the date of claim;
• conditional payment or ‘pay when paid’ provisions are ineffective;  
• should a payment dispute (which is broadly defined) should be referred to adjudication for decision within 55 days of the adjudicator’s appointment; the adjudicated amount should be paid as so determined;  
• the claimant may suspend or reduce their rate of progress if the adjudicated (or admitted) amount is not received.  

It is recognised that extension of time disputes are a major cause of disruption in construction projects. They often have a critical bearing on entitlement to recover loss and expense and also 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;  
• adjudicators jurisdiction to decide EOT claims as part of time-related costs; 
• decisions on time-related costs per (2) 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; 
• 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 a prior assessment produce different results. When this happens the adjudicated EOT will prevail and the date for completion will be revised accordingly; this will ensure consistency with the payment of the corresponding adjudicated amount. All this will of course be subject to the contractual right to arbitrate, mediate or, perhaps more rarely, litigate, whichever course has been agreed by the parties.  

The Circular recognises that there are certain parts of the SOP framework which cannot be introduced save by legislation, and these include applications to the court for enforcement or setting aside of adjudication decisions and the creation of a statutory register of adjudicator nominating bodies.  

There will be two types of SOP provisions incorporated into public works contracts through the ACC / SCC clause 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 and confirm this to the contract administrator and produce documentary records in support. 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 decision, 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 prescribed 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 decision has been superseded by an arbitration award or by a settlement agreed between the parties.  

In addition to this, the contractor is required within the same 28 day period to inquire whether any sub-contractor above the claimant sub-contractor has become bankrupt or gone into liquidation or had a receiving order made against them or entered into an arrangement with creditors or made an assignment of their interests to them or has otherwise 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 sub-contractor respondent to the claim will not be able to recover the amount of the proposed direct payment by deducting it from payments they will have to make under sub-contract with parties at the next lower tier, the contractor will 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 and 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 site notice in the form of appendix H to the Circular in a conspicuous place on the construction site to ensure that the SOP provisions are known and implemented under all sub-contracts. It is expected that site notices will inform and encourage sub-contractors to exercise their rights to suspend or reduce rates of progress by notifying the site owner (ie employer), as well as to 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-contractors, 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. In appropriate cases 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 importance boost to the process of consultation and legislation. It will be interesting to see how the SOP framework bill is eventually amended to take account of experience in the field of public works.

We wish to acknowledge that much of this article is based on the text of the Circular.