Introduction

10.1 Since the United Kingdom introduced statutory adjudication and payment legislation some 20 years ago, many other jurisdictions, including Australia and Singapore, have also implemented security of payment legislation. Hong Kong is now gearing up with its own proposed security of payment legislation.

10.2 In 2012, the Secretary for Development announced the decision to pursue preparatory work for implementing security for payment legislation in Hong Kong. Legal consultants were engaged and a working group of 14 industry stakeholders was established by the Hong Kong Government to evaluate overseas security for payment legislation and to evaluate options for security of payment legislation in Hong Kong.²

10.3 A consultation paper was issued by the working group on 1 June 2015, setting out key aspects of the proposed legislation, with interested parties being invited to give comments by 3 August 2015. The consultation paper set out the issues considered by the working group for each of the key aspects of the proposed legislation.

10.4 The primary aim of security of payment legislation is to address delays in payment of contractors and subcontractors during projects. This was a key problem identified in Sir Michael Latham’s Report in England in 19943 and the Report of Building Industry Royal Commission (also known as the Coles Report) in Australia in 2002. England and Wales, and nearly all states and territories in Australia and New Zealand, have implemented security of payment legislation to address such payment delays.⁴

10.5 In Hong Kong, a comprehensive and industry-wide survey on payment practices in the local construction industry was conducted in 2011. The survey reported that 45% of main contractors and 57% of sub-contractors considered delays in payment as very serious, or serious. The consultation paper asserts that the proposed security of payment legislation is required to address such problems.⁵ Secondly, the aim of the security of payment legislation is to introduce a fast track dispute resolution process to ensure problems are resolved quickly during a project, rather than having disputes dealt with at the end of the project.

10.6 The proposed legislation as set out in the consultation document [Appendix 13] comprises a hybrid between the security of payment legislation in the United Kingdom and the security of payment legislation in the East Coast of Australia, including New South Wales. Since the Western Australian security of payment legislation is based upon the United Kingdom legislation, it is proposed to carry out a comparative analysis of the proposed legislation with the Western Australian and New South Wales security of payment legislation, in order to analyse the issues raised by the proposed legislation.

Scope

10.7 The proposed legislation will apply to contracts related to construction activities carried out in Hong Kong, regardless of the nationalities of the parties or the prescribed governing law.⁶ By way of example, the proposed legislation will apply to fabrication works carried outside Hong Kong as soon as the fabrication works relate to construction activities being carried out in Hong Kong.⁷

10.8 The proposed legislation will apply to:

• .1 All contracts entered into by the Government for procurement of construction activities or related services, materials or plant and sub-contracts of any tier, and
  
• .2 Private sector contracts involving construction activities or related services, materials or plant for a new building,⁸ where the original contract value is more than HK$5 million.⁹

If a private sector main contract is subject to the proposed legislation, then all lower tier sub-contracts will similarly be subject to the proposed legislation and vice versa.

10.9 The proposed legislation will also apply to professional services contracts and supply contracts for materials or plant.10 However, the proposed legislation will not apply to the following types of contracts:

• .1 Employment contracts;
  
• .2 Insurance contracts;
  
• .3 Guarantee contracts;
  
• .4 Loan contracts;
  
• .5 Investment contracts;
  
• .6 Accounting services;
  
• .7 Financial services (other than cost control and quality surveying type services);
  
• .8 Legal services; and
  
• .9 Public relations services.¹¹

10.10 The proposed legislation will apply to oral and partly oral contracts. The proposed position is consistent with legislation enacted in England and Wales, New South Wales and Western Australia.¹² However, some members of the working group consider that the proposed legislation should only apply to written contracts consistent with the Singapore and Malaysia security of payment legislation.¹³ However, the restriction of the security of payment legislation to only written contracts alone does not appear consistent with the overall aim of the proposed legislation, which is to provide cash flow for smaller contractors and sub-contractors, precisely the sort of entities that frequently enter into oral and partly oral contracts for carrying out construction works.

Requirements concerning payment clauses

10.11 Nearly half of respondents to the 2011 survey reported payment problems due to “pay when paid” clauses.¹⁴ Therefore, under the proposed legislation, “pay when paid” clauses and clauses of similar effect, such as pay when certified clauses, will be unenforceable.¹⁵ This is the standard position taken in security of payment legislation overseas.¹⁶

10.12 The consultation paper states that such provisions are not enforceable, even in the special circumstance where the reason for non-payment is insolvency higher up the supply chain. This is consistent with the position taken in the security of payment legislation in the United Kingdom and Ireland.¹⁷

10.13 Parties are free to agree on payment intervals for progress payments, provided that such intervals do not exceed 60 days for interim payments and 120 days for final payments.18 To the extent that the payment intervals for progress payment are longer than 60 days for interim payments and 120 days for final payments, the proposed legislation will ensure that the payment intervals default to 60 days and 120 days respectively. This approach is consistent with the security of payment legislation enacted in Western Australia.¹⁹

Statutory payment claim procedure

10.14 Different régimes set out different requirements for making payment claims. Some régimes (such as New South Wales) prescribe specific requirements concerning the making of payment claims.²⁰ Other security of payment legislation, such as Western Australia, leaves it to the contract to set out the requirements for making payment claims and only implies payment terms into the contract if it is silent on payment.²¹

10.15 Consistent with the position taken in the security of payment legislation in Western Australia,²² both claiming and paying parties are entitled to claim progress payments by way of statutory payment claims.²³ The statutory payment claim procedure is intended to operate in parallel to contractual payment procedures.²⁴ Such a right cannot be excluded by contract.

10.16 The fact that both claiming and paying parties are entitled to claim progress payments may provide a fairer system, whereby paying parties may issue their own payment claims and commence adjudications in relation to their set-offs and counterclaims. For example, if a paying party considers that a claiming party has been overpaid, it could issue its own payment claim and have any dispute arising from such a payment claim adjudicated under the proposed legislation.

10.17 In issuing a statutory payment claim, the proposed legislation provides a distinct and relatively straightforward procedure so that it is apparent to the paying party that statutory adjudication is potentially being invoked by the claiming party.²⁵

10.18 In having a defined procedure for making and responding to payment claims, the statutory payment claim régime avoids jurisdictional challenges based upon the time when payment disputes arise. By way of example, in Western Australia, where the security of payment legislation leaves it to the parties to prescribe payment terms, there had been cases whereby an oral rejection of an informal payment claim was found to be sufficient to generate a payment dispute for the purposes of the legislation.²⁶ The proposed legislation will avoid such problems.

10.19 The proposed document suggests that there will be certain minimum criteria to be met in terms of the content of the payment claim; for instance, details of amount claimed, the relevant work carried out and the basis of calculation.²⁷ It is queried whether compliance with such prescribed minimum requirements would determine the jurisdiction of the adjudicator. In New South Wales, adjudicators have been found to lack jurisdiction when the payment claim did not properly refer to the fact that it was made under the legislation.28 The making of a proper payment claim under the legislation would be a basic and essential criteria for the existence of a valid adjudicator’s determination.²⁹

10.20 Parties will not be able to claim more than they would be entitled to under a contract by issuing a statutory payment claim. For example, if particulars are required to be submitted as a precondition to payment of a prolongation costs claim, a contractor will not be able to sidestep the pre-condition by service of a statutory payment claim. Parties could not also claim payment sooner than provided for under the contract.³⁰

10.21 The paying party must serve his payment response within 30 days of a payment claim. In providing a payment response, the paying party must identify the amount of the payment claim accepted as due, the amounts disputed and the reasons why and any amounts intended to be set off against amounts due and the basis of the set off.³¹

10.22 If a paying party ignores a payment claim, then it:

• .1 Will not automatically be liable to pay the full amount of payment claim; but
  
• .2 Will not be able to raise any set off or counterclaims during an adjudication.³²

10.23 In other words, the paying party could only still raise liability and quantum defences to the payment claim in the subsequent adjudication. For example, the paying party will still be able to argue that the claiming party is not entitled to a variation because no instructions were issued by the engineer, or the claiming party is not entitled to the amount claimed by way of variation because it is valued by way of incorrect rates under the contract. However, the paying party will not able to argue that it is entitled to liquidate damages to the amount claimed by way of set off or counterclaims if it failed to serve a payment response.³³ This position appears to be fairer than the position in Australia, whereby failure to serve an adjudication response will result in the paying party being liable to pay the claimed amount by the due date for payment.³⁴

10.24 The statutory payment claim procedure is essentially the start of the adjudication process and provides respondents with notice of a forthcoming adjudication. The writer considers that the process may be treated as one means by which the proposed legislation seeks to avoid ambushes of the paying party by the claiming party.