Hong Kong SAR set to introduce security of payment legislation to construction contracts

Hong Kong SAR’s Development Bureau, the administration’s agency responsible for urban planning and renewal, recently published the Construction Industry Security of Payment Bill. The Bill was subsequently gazetted and is scheduled for a first reading by the Legislative Council on May 29.

According to Isabelle Chan, a construction law expert at Pinsent Masons, the Bill – which is intended to enable the speedy recovery of payments under construction contracts and enhance cash flow for contractors and subcontractors – will significantly impact Hong Kong SAR’s construction industry once introduced.

“The Hong Kong SAR SOPL has been in the making for years, and the Bill will provide more clarity to the industry so that all parties down the contractual chain can better prepare for it and adjust their mindset to the upcoming changes,” Chan said.

Under the Bill, conditional payment provisions - commonly called ‘pay when paid’ clauses - which are prevalent in Hong Kong SAR construction contracts, will be prohibited. As a result, contractors will not be able to withhold payments to their sub-contractors on the basis that payments further up the supply chain have not yet been made.

The Bill will also place a limitation on the time taken for payments and payment responses – known as certification - to be made, subjecting these to a maximum time limit of 60 days.

In addition, the Bill will provide for the speedy resolution of payment disputes via adjudication and allow contractors and subcontractors the right to suspend works or supply in situations where they have not been paid by their contractors.

The Bill will apply to both public and private contracts for works above HK$5 million (US$640,439). Once the Bill comes into effect, parties entering into applicable construction contracts will be unable to contract out of the new SOP regime.

Bernard Ang, a construction law expert at Pinsent Masons, said: “SOPL will truly change the construction contracting landscape. Prior to this, construction contracts in Hong Kong SAR were never subject to much regulation. The SOPL will require wholesale amendments to construction contracts and lead to a re-allocation of risks in many key instances, in order to comply with the new legislation.”