[:en]Proposed Security of Payment Legislation for the Construction Industry Public Consultation[:]

2015.08.31

Proposed Security of Payment Legislation for
the Construction Industry Public Consultation

In response to the Public Consultation on the Proposed Security of Payment Legislation for the Construction Industry (“SOPL”), I have pleasure to present my views herewith.

The SOPL is most relevant to the professionals, particularly the Architects and the Quantity Surveyors of the Functional Constituency for Architecture, Surveying and Planning represented by me. The proposed legislation will have profound effect on payment arrangements among contracting parties of construction contracts. Many of our professional members are working with construction contractors, consultants and developers, and quite a number of them are expected also have strong presence during the proposed adjudication.

During the consultation period from June to August 2015, I have attended number of Discussion Forums organized by the Hong Kong Institute of Architects and the Hong Kong Institute of Surveyors, to gather views and opinions of our members. There are also members submit views to me directly. They are incorporated in my submission and listed below.

Coverage

1. I am supportive to the SOPL to apply to all construction contracts entered by the Government, public bodies and designated corporations. However for private contracts, whilst I have no comment on the proposed thresholds of contract amounts to which SOPL will apply, it would be difficult to define what is “new building”. To this it may be desirable to consider if “Alteration & Addition” as well as “Maintenance” works contracts should also be applied. If so, what will be the appropriate thresholds and also, whether the proposed time frames are practical for some cases such as those in which “Incorporated Owners” are involved.

2. The suggested thresholds of contract amounts of HK$5 million and HK$500,000 are acceptable. However to cater for future adjustments that could be done in a timely manner, it is recommended these amounts be regulated by means of subsidiary legislation subject to negative vetting by LegCo.

Oral and Written Contract

3. The construction contracts in Hong Kong could be varied in size and formality, from multi volumes of documents, drawings and contract to the mere oral or partial oral. However, it may not be practical for an adjudicator to hear and consider oral evidences in the stipulated time frames as such would usually involve complicated legal principles of evidence. An oral contract is enforceable unless the intention of contracting is clearly and expressly communicated and understood by the parties concerned. The enforceability of oral contracts under the SOPL would be most effective if there are prescribed requirements by the SOPL.

Payment Claim

4. The form and content of a Payment Claim should be prescribed in the SOPL. The payment claim made from a contract must clearly and expressly state as a claim under a prescribed requirement by the SOPL. The lack of a requirement to expressly identify a claim as Payment Claim from a contract gives rise to confusion. It is important for the contract administrators to understand the various terms under the SOPL, such as progress payment, payment claim, final payment etc, in relation to the defined terms generally adopted by the building industry under various standard forms of contract. However it may not be too easy to define Final Payment as it may by no means be final. At present the standard duration of Defect Liability Period (DLP) is 12 months and if the final payment is to be made within 4 months, the contractors, or subcontractors or its tier may be reluctant to attend the defects for the remaining DLP period.

5. With the reference case from SUNGDO ENGINEERING & CONSTRUCTION (S) PTE LTD V ITALCOR PTE LTD [2010] by Singapore High Court, a payment notice was not made clearly as the intention to expressly communicated to the Paying Party that is made pursuant to the Building and Construction Industry Security of Payment Act in Singapore, which is similar in capacity as the SOPL. The objective of the SOPL is to ensure a speedy resolution to payment issues and the SOPL should serve to protect contractors, sub-contractors and consultants from unscrupulous practice, as well as, unconfused exchange of the intention of Payment Claims.

6. The relevant professionals' attention should be drawn that the contractors could apply for payment without the need for the Architect to certify the work completed or payment prior to the payment claim. It is not clear if a statutory payment claim exists when a contractor makes a payment application or when he presents the Architect's payment certificate or when the time for honoring such certificate expires.

7. The suggestion of adjudicator's decision is to be enforced in the same way as court judgments without set off or deduction needed further deliberation as the concept of court judgment and without set off or deduction are contradicting under current law. It is not clear whether by suggesting adjudicator's decisions to be enforced in the same way as court judgments, it is intended that sums awarded by an adjudicator to be taken as judgment debt, and would be dealt with as such. Further it is not sure if the adjudicated amount could be subjected to open up and review in subsequent arbitration or litigation.

Payment Period

8. In contrast to similar legislations in common law jurisdictions, Singapore provides 21 days for Claimant Serve Payment Claim and Respondent Response to Claim, and New South Wales in Australia prescribes 30 days in Payment Period, the SOPL in Hong Kong allows 60 days for Payment Claim on Interim Progress Payment and 120 days for Final Payment. The aim of the SOPL is to improve cash-flow by helping to speed up payment in the construction industry and a lengthy payment period will go against the aim of the SOPL and that would impose no improvement in the speed of payment and welfare of construction workers, given the fact that high portion of contracts of subcontractors are salaries for workers. The lengthy payment period will affect the salaries paid to workers.

9. The long Payment Period is likely to be abused by some powerful developers and main contractors with in-house legal experts to stretch the payment day as long as they can for the purpose to secure their cash balances at the expense of others in the downward construction chain.

10.On the other hand and on payment response, is it possible to resolve the Extension of Time claim within the current proposed time frame of 55 days if the Employer imposed a Liquidated Damages and set off most of the claimed amount.

11. The period of 5 days for appointing an adjudicator upon commencement of adjudication may be too short. It may be more realistic to give 5 days for parties to agree an adjudicator, and if agreement could not be reached then, the claiming party may seek nomination from the relevant nomination body which will then make an appointment within 5 days. The time frame for the appointment of an adjudicator should be clearly stated.

Architect's Certification

12. The SOPL suggests that when a payment claim is served to the paying party, the paying party would be required to provide response to payment within 60 days for interim Progress Payment or 120 days for Final Payment. In the current practice for construction, the approval or amendments to the payment amount is dependent on the issuance of payment certificate by the Architect. Acting as the contract administrator, the architect will be required to observe not only the statutory duties imposed but also the professional duties and liabilities when administrating the contract.

13. While failure by the architect to issue the payment certificates without grounds may be a breach of the service contract, the issue needed further deliberation is that the adjudicator during the Adjudication would take over the decision on dispute and on the amount of payment due, and may revoke the decision of Architect for withholding payment due to quality or defect issues. In some cases, the architect may also be subjected to personal professional liability if one's decision is different to the adjudicator's final decision.

Standard Contract

14. With the introduction of new payment right and “pay when paid' clause will no longer be enforceable in current form of Standard Contract, it is unclear how the industry will response to the changes and how the new Standard Contract is introduced. The SOPL shall provide guidance to the appropriate amendments to the current form of Standard Contract.

One of the key intentions for introducing the SOPL is to help speeding up payment in the construction industry, and to facilitate rapid resolution of payment disputes while maintaining a balanced legal and working relationship among the Government, developers, main contractors, sub-contractors, and consultants etc. Since the SOPL will have profound impact on the payment arrangement in the construction field, it is important every details should be well considered and the related professionals are supportive prior to the implementation.

Thank you for your attention

Yours Truly

Sr. Hon. Tony Tse Wai Chuen

Legislative Councilor

Functional Constituency for Architectural, Surveying and Planning