In our Client Alert dated 26 March 2021, we reported that the Government had released a draft Technical Circular on the implementation of the spirit of Security of Payment Legislation (SOPL) in public works contracts. The draft Circular was provided to stakeholders to comment and the Circular aimed at implementing certain measures of SOPL on public works contracts, term contracts and related subcontracts tendered after July/August 2021.

On 5 October 2021, the Government officially released Technical Circular (Works) no. 6/2021 – Security of Payment Provisions in Public Works Contracts. The Circular sets out the policy on the implementation of SOP 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 SOPL. The Circular is to take immediate effect.

Salient points of the Circular that you should be aware of:

• The SOP provisions will apply to main contracts, subcontracts at all tiers including supplies contracts in public works (collectively “Relevant Subcontracts”).

• The SOP provisions will be incorporated in public works contracts in 2 stages:

• From 31 December 2021 - tenders to be invited from Group B (contracts of value up to HK$400 million) or Group C (contracts of value exceeding HK$400 million) contractors on the List of Approved Contractors for Public Works.

• From 1 April 2022 – tenders to be invited from other contractors on the List of Approved Contractors for Public Works or the List of Approved Suppliers of Materials and Specialist Contractors for Public Works.

• The SOP provisions will be incorporated in the Additional Conditions of Contract for NEC form of contracts and in the Special Conditions of Contract for traditional forms of Government Contracts.

• Overview of payment and adjudication processes under SOP provisions:

• payment response by the paying party has to be served on the claiming party within 30 days and the paying party has to make payment of the admitted amount within 60 days to the claiming party from the date of payment claim served by the claiming party;

• conditional payment provisions such as “pay when paid” or “pay if paid” shall be rendered ineffective and unenforceable;

• the claimant may refer a payment dispute to adjudication. In the adjudication process, the adjudicator has to decide on the payment dispute within 55 working days from the date of his appointment and the adjudicated amount shall be paid as decided by the adjudicator;

• the claiming party / claimant may exercise his right to suspend or reduce rate of progress if admitted amount/adjudicated amount is not received.

• The adjudicator will have the power and jurisdiction to decide the time-related costs forming part of the payment dispute. In deciding the amount of time-related costs, the adjudicator will also have the power and jurisdiction to decide a party’s entitlement to EOT. The adjudicator’s decision on the time-related costs forming part of the payment dispute is binding and enforceable on an interim basis, but the EOT decided by the adjudicator is not binding.

• The parties’ right of mediation or arbitration in respect of a payment dispute (and connected EOT disputes) in the contract remains unaffected.

• The contractual claim handling procedures, as specified in the contract, should be gone through before any claims for additional payment can be submitted for determination by the adjudicator

• Mandatory Subcontract Conditions and SOP Provisions for Relevant Subcontracts are to be provided under a main contract for mandatory incorporation. The Contractor will be required to ensure the incorporation in all Relevant Subcontracts at all tiers and to report all Relevant Subcontracts engaged under the main contract and will be required to provide documentary proof to the contract administrator for the main contract that all Relevant Subcontracts have been incorporated with the SOP Provisions.

• The Project Office will monitor the Contractor’s performance on incorporation of the SOP Provisions in all Relevant Subcontracts. The Contractor could be warned if he fails to ensure incorporation of the SOP Provisions in all Relevant Subcontracts. If the Contractor fails to provide documentary proof of compliance, the Project Office shall give “poor” or “very poor” rating in Item 6.12 in the Contract’s Performance Report (compliance with particulars related to sub-contracting).

• The SOP Provisions also contain a direct payment mechanism to subcontractors for unpaid adjudicated amount. Under the SOP Provisions, a subcontractor claimant may request the Employer to make direct payment for settlement of unpaid adjudicated amount under the Relevant Subcontract.

• The Project Office will specify the Adjudicator Nominating Body (ANB) chosen from the Development Bureau’s Register of ANBs which will appoint a single adjudicator when the claimant serves a notice of adjudication upon it.

As the Circular provides, the purpose of the SOP provisions is to implement the spirit of the SOPL in all new public works contracts with a view to facilitating smooth introduction of the legislation through the experience gained in public works contracts.

SOPL will bring a major change to the construction industry. Whilst the timing of when the SOPL may be enacted remains unclear, through the implementation of the SOP provisions in public works contracts, the local construction industry will have an early taste of the changes that the future SOPL may bring about on the contractors and sub-contractors of all tiers. What is clear, is that the time for handling payment disputes will be short in future. It will therefore be important for employers, consultants, contractors and subcontractors to have an efficient document management system in place for quick and efficient retrieval of relevant documentation for preparing the requisite documents under the payment/ adjudication processes.

In Deacons’ Construction Department, we have lawyers with adjudication qualifications and experience in advising on adjudication claims. Our Construction Department will be able to assist and advise on

• how this new arrangement will affect you;

• what new obligations will be imposed upon you;

• what you should do to protect your rights under the contracts and subcontracts; and

• how subcontracts should be amended to cope with this new arrangement.

We can also provide workshops on this new payment landscape in the construction industry in Hong Kong. Feel free to contact any of the below for further details.