The Proposed Statutory Adjudication in Hong Kong
- In the summer of 2015, the Government of Hong Kong published a consultation paper on the introduction of Security of Payment legislation.
- Currently, there is no such statutory adjudication regime in Hong Kong and the proposed legislation under consultation hopes to fill that gap. Further, adjudication is an important feature of NEC3 contracts which are being introduced into Hong Kong.
- It is important to understand the history behind the impetus for the legislation. A number of surveys were undertaken in 2011 which highlighted the issues down the sub-contracting chain. It was clear that in excess of 10% and in some cases in excess of 20% of overall turnover was being held in, or receipts were being held up, in delayed payment. The average outstanding for main contractors was HK$9.4 billion, with 57% of sub-contractors considering this a very serious problem. These payment issues also impacted on the consulting industry and on consultants. As a consequence, consultant contracts have also been included in the scope of the Security for Payment legislation.
What type of disputes will be covered by the legislation?
- The types of disputes which are covered by the statutory adjudication scheme under the proposed Security for Payment legislation will be disputes over payment for value of works that are, for example, for materials, money claims that are made in accordance with the provisions of the contract to claims for time and for cost, set-offs and deductions, against amounts due under payment claims and time for performance. In summary, payment and extension of time claims.
- The states of Victoria, New South Wales, South Australia, Tasmania and Queensland in Australia have adopted the same model of limiting what can be adjudicated on to payment claims. The advantages of this model have been questioned. The limitations in these Australian states are not altogether popular, and considerable costs can be expended arguing about what is and what is not part of a payment claim. Why not just let the adjudicator deal with all disputes arising out of construction contracts? The converse side is the UK model where arguably, it has been seen to be kitchen sink adjudication: everything bar the kitchen sink can be adjudicated on.
- There will, of course, be complex issues that need to be resolved. There is always the argument that complex issues, such as claims for extension of time where there are concurrent delays and the resulting financial entitlement from that, are too difficult to resolve in a short period of time mandated by statutory adjudication. The response to this is that nobody is pretending that statutory adjudication is going to give you the ‘correct’ answer. What adjudication does give you is a prompt answer which allows the parties to move forward. The evidence from the UK is predominantly that parties would rather get closure and get a resolution, than spend the time, cost and the distraction of getting the right answer a long way down the track.
- Whilst the timetables in adjudication are short which is discussed in more detail below, it is possible, with the correct support, to provide short but sophisticated materials and arguments in order to properly present a case and properly respond to a case.
What is the timetable looking like?
- New South Wales, Australia, has a very aggressive adjudication timetable and lends itself to problems such as ambush. The NSW model can also result in harsh outcomes for employers needing to make payments where clearly there is just no entitlement, but through administrative misfortune, mistake or oversight, they have been required to pay large sums and then wait until the end of the project in order to seek to recover them.
- In the Hong Kong consultation paper, the government has shown an intention that it wishes to provide a lengthier timetable in order to try and avoid some of the harsh consequences that can come out of the potentially aggressive or robust timetables.
- However, the effect of the legislation can be lost if the timetable is extended out so that the parties are no longer addressing issues upon payment, a criticism which has been raised against the UK model.
- Finally, any challenges to the adjudicator’s decision have to be made promptly.
What are the payment terms?
- Firstly, what actually are payment terms? They are the statutory right to progress payment and a statutory default system of payment conditions. The parties are still free to agree the procedure for progress payments in their contract. Both the contract and the statutory scheme run in parallel.
- It is well known that pay when paid and conditional payment clauses are prevalent in Hong Kong and they have a particularly significant impact on nominated sub-contractors. They have been identified as a key constraint to the line of subcontractors being paid, particularly where the main contractor and the client are in dispute.
- Under the proposed legislation, ‘pay when paid’ terms are unenforceable. Equally, payment provisions which are conditional upon something occurring under another contract, for example, a certificate being issued under a main contract in order for a subcontractor to be paid will also be unenforceable under the legislation, should it take the form that is currently suggested in the consultation paper.
- As far as the payment terms are concerned, the proposed statutory right to payment is a right to be paid within 60 days for interim payments, which is the maximum. The parties can of course agree shorter periods and typically in Hong Kong, those periods are a little bit shorter. Final payments must be paid within 120 days. Any payment period exceeding these limits will be unenforceable under the proposed legislation.
- The consultation paper provides that the parties may agree that there will be one progress payment during the course of the contracts. There is the possibility that this is an area which may be open to some abuse.
- The proposed legislation allows parties to agree the method of evaluation of the works or the means, so for example milestone payments.
Can I suspend?
- What is not currently a feature of the proposed legislation is the right to suspend work for non-payment and the right to slow progress which, possibly, has the greatest impact on payment behaviour. Security for Payment legislation in other jurisdictions provides parties undertaking work or providing services, materials or plant with rights to suspend performance for non-payment. This right continues unless and until they are paid. Currently, the consultation paper reviews the position on suspension from both sides, the ability to do so and the ability to do so in very limited circumstances.
- The risk to the projects and to all parties as a consequence of a suspension to the work cannot be underestimated. Employers, with their bargaining power during the contract negotiations, are able to avoid a contractual right for a contractor to suspend work for non-payment. The statutory right cannot be contracted out of and this really focuses the mind of employers and project managers on ensuring that the payment requirements are met. Certainly the observation from research in New South Wales and Singapore is that the employers are most concerned by this provision.
Will the legislation apply to oral contracts as well?
- The proposed legislation will apply not only to written contracts, but also to contracts which are partly written and partly oral. In the UK, when the statutory adjudication regime was introduced, initially it did not apply to oral contracts. However, this was subsequently amended to include partly oral contracts. The simple rationale behind this is that these are actually the types of arrangements that are very common as you go down the tiers of contracting. It is also where the parties to the contract, particularly the subcontractor and the sub-sub-subcontractor are most effected by the cash flow and will need to rely on the statutory rights that are set out in the legislation.
How long will all this take?
- Currently, a key feature of the proposed legislation is that on receipt of a payment claim, the paying party has up to 30 days to serve a response which can either admit the amount or can dispute that amount. In the event that the payment claim is disputed, reasons need to be given in a payment response. In the event that the payment response disputes all the parts of the payment claim, or the response relies on a defence or there is no response, the regime will work so that the aggrieved party will then resort to statutory adjudication.
- One of the interesting features of the proposed Hong Kong legislation is that as far as the employer is concerned, the employer may wish to make deductions for liquidated damages or set off other amounts which may be due. Unlike the legislation in other jurisdictions, in Hong Kong, the employer also has a right to make a claim under the adjudication regime.
- Under the proposed adjudication timetable, there is a maximum 55 day period for the dispute to be resolved. By agreement, this period of time can be extended. The adjudicator does have some flexibility in varying deadlines, particularly the respondent’s time to serve his response. However, it is important to note that unless the parties agree, the time frame cannot go beyond the 55 days.
- If an adjudicator feels unable to resolve an adjudication within the 55 day period, the adjudicator has the ability to resign from their appointment.
How does the disclosure of evidence work?
- There are no strict rules of evidence and there is no formal discovery process. The adjudication process does not allow for the time and/or the costs necessary to undertake a discovery process.
- Depending on the size and quantum of the adjudication dispute, expert evidence may be disclosed but again, this is not strictly provided for under the legislation.
- Adjudicators may meet with the parties if they wish. They will not call for evidence, but they will ask for further details or explanation from the parties about their positions.
How easy will forum shopping be?
- In relation to the appointment of the adjudicator, in their contracts, the parties will be able to agree a nominating body. In the absence of agreement, the default nominating body is proposed to be HKIAC – the Hong Kong International Arbitration Centre.
- Parties will not be able to nominate or agree in their contracts the identity of the adjudicator. The rationale behind that in the consultation paper is that in most major type construction contracts, there is not an equality of bargaining power and it would be against the underlined rationale of the legislation for one party to be in a position to be able to potentially impose a particular adjudicator. The adjudicator is a matter for the parties to agree on, once the dispute arises.
- So, on this basis, there should be no forum or adjudicator shopping.
What about ambush?
- One of the major concerns from other jurisdictions has been that the quick-fire timetable gives rise to the possibility of ambush. The consultation has sought to address that by including the post-provisions, the adjudicator will be entitled to disregard any submission or evidence submitted by a claimant if the responding party was unaware of it at the time the notice of adjudication was served or which could reasonably have been served with a payment claim or before the notice of adjudication.
- The purpose of this is to discourage claimants from deliberately holding back on new submissions or evidence.
And what about my costs?
- The last point is the issue of costs. As is the case under all other statutory adjudication schemes, adjudicators will not have the power to award costs between the parties. Each party is to bear their own costs in an adjudication. The adjudicator will be able to award his own costs or a portion of his own costs.
How can I enforce the decision?
- Adjudicators’ decisions will be enforced in the same way as judgments of the court and they must be enforced without the opportunity for the paying party to make a set-off of or a deduction.
Can I appeal?
- The respondent, or the paying party, will be given a very short period to lodge a challenge. That right will not entail a right to a review of the adjudicator’s decision or to an appeal, other than on the grounds of procedural fairness or want of jurisdiction, i.e. an administrative law type of appeal. In New South Wales there was a very rapid build-up of case law in this area when adjudication was first introduced and in the UK there was around 100 years of case law occurring in about 10 years. It is likely that the same thing will happen in Hong Kong.
Which contracts is the legislation going to apply to?
- There is a distinction between public sector and private sector contracts.
- The proposed legislation will apply to all government contracts and also all specified public and statutory bodies as far as the procurement of construction activities and related services, materials, plant and sub-contracts of any tier.
- The public bodies to which the legislation will apply will include the public utilities, the Airport Authority, West Kowloon Cultural District Authority and the MTR contracts to name but a few. It will cover all significant public infrastructure projects in Hong Kong.
- As far as the private sector is concerned, it will only apply to construction work undertaken for new buildings where the original contract value is $5 million or for professional consultants and for supply contracts in excess of $500,000. This would therefore appear to exclude large scale refurbishment projects.
- Where the main contract is not subject to the legislation, then the sub contracts will not be either.
- There are also specific exclusions for employment contracts, contracts of insurance guarantee, loan agreements and investment contracts. Investment contracts being types of contracts where there is not direct remuneration for construction services.
The construction landscape is going to change forever
- There is no information at the moment of when the legislation shall come into force in Hong Kong and timing is speculation. What is for sure is that it is on its way, and when it does come into force, there will be a sea change in the construction landscape of Hong Kong. Watch this space!
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