Hong Kong passes the Construction Industry Security of Payment Bill – Summary

The long-awaited Construction Industry Security of Payment Bill was passed yesterday (18 December 2024) by the Legislative Council of the Hong Kong SAR.

The Construction Industry Security of Payment Ordinance (the “Ordinance”) is likely to significantly alter the landscape of the domestic construction industry by imposing a statutory payment framework, abolishing conditional payment terms such as “pay when paid” provisions, and providing a speedy statutory adjudication mechanism to resolve payment disputes including enforcement of an adjudicator’s determination by a court and a statutory right to suspend or reduce the rate of progress of work or supply if an admitted or adjudicated amount is not paid on time.

The Ordinance will be gazetted on 27 December 2024, and the main provisions of the Ordinance will commence operation on 28 August 2025, eight months after the gazettal of the Ordinance (the “Commencement Date”).

Scope of application of the Ordinance

The Ordinance will apply to the following contracts entered on or after the Commencement Date:

1. Construction contracts procured by the Government and specified statutory and public bodies;
2. Construction work contracts procured by the private sector with a contract value of not less than HK$5,000,000, and contracts for the supply of goods and services related to the construction work with a contract value not less than HK$500,000, other than predominantly:
   1. works on existing private residential buildings;
   2. works for relatively minor works on existing private non-residential buildings that do not require the approval and consent of the Building Authority; and
3. All sub-contracts, regardless the amount, if the main contract falls under (1) or (2) above.

Major features of the Ordinance

1. Cancellation of “pay when paid” provisions: Conditional payment provisions that make the obligation to pay money contingent upon another contract, such as a “pay when paid” clause, will become unenforceable between parties.
2. Mandatory payment framework: A claiming party can serve a payment claim to the paying party before the billing date (monthly, unless otherwise agreed), and the paying party must respond to the payment claim within 30 days (or shorter, if agreed) and pay the amount admitted within 60 days of the payment claim (again, shorter if agreed). A payment dispute will arise if:
   1. the paying party fails to respond to the payment claim in 30 days;
   2. the amount admitted by the paying party is less than the amount claimed in the payment claim; or
   3. the admitted amount is not paid in full in 60 days.
3. Statutory adjudication: If a payment dispute arises, the claiming party may initiate adjudication proceedings within 28 days, following which the adjudicator will make a determination on the payment dispute within 55 working days (or a longer period agreed by the parties) after his or her appointment. The adjudicator’s determination will be enforceable by the court. However, the adjudication procedure does not apply to time-related payment disputes concerning contracts procured by the private sector until a later date to be announced by the Secretary for Development.
4. Right to suspend or reduce the rate of progress: If (i) the claiming party has duly served a payment claim and the paying party has duly served the payment response but has failed to pay the admitted amount by the payment deadline in full, or (ii) the paying party has failed to pay the adjudicated amount, the claiming party can issue a notice of intention to delay (i.e. to suspend or reduce the rate of progress) the carrying out of the work or supplying of related goods and services at least 5 working days before the intended starting date. If the admitted amount is still not paid in full before the intended starting day, then the claiming party can delay the carrying out of the work or supplying of related goods and services, be entitled to an extension of time together with entitlement to loss and expenses reasonably incurred for the suspension or slow down period, and without constituting a breach of contract.

In view of the wide-reaching effect of the Ordinance to the construction industry, industry stakeholders should start reviewing their existing project payment arrangements, contract documentations and align the practices of all relevant project personnel. We also anticipate that the Government will publish further guidelines and codes on the implementation of the Ordinance (particularly the statutory adjudication regime) in the coming months.

The press release from the Government is accessible here.