Security of payment legislation coming by 2015/16

Security of payment legislation coming by 2015/16

Govt working group to draft legal framework for discussion

Imagine you agreed to do some work for a main contractor on his property project for a certain sum.

Happily you finish a bit earlier with slightly less labour than required, meaning you stand to make a bit more profit.

But when you finally get the cheque from the main contractor, you find that the agreed sum was not paid in full.

Why? Because you used less manpower so you get paid less, the main contractor says.

That was the story related to Construction Post’s correspondent by a relative who works in the renovation business.

The main contractors would pay enough to cover the subcontractor’s costs, if they are lucky, but anymore to make an actual profit would be wishful thinking.

“It is only right that subcontractors should lose money,” was the cynical comment from the relative.

Apparently this happens on development projects of one of the large listed developers in Hong Kong.

Payment problems continue to occur further down the industry pecking order with local newspapers occasionally carrying stories of sub-subcontractors complaining of non-payment from the subcontractor above.

Even main contractors have problems getting paid from the client.

In August Chun Wo Building Construction issued a writ to its client for outstanding payments over additional work and costs at the Guan Yin statue project in Tai Po.

If there is one time-honoured gripe from subcontractors (and main contractors) in the construction industry, it’s getting paid, on time and preferably in full, please.

The Construction Industry Council was sufficiently concerned about it to run a half day seminar on payment legislation in early May this year with Development Bureau deputy secretary for works Enoch Lam Tin-sing deliver a keynote speech on the subject.

After years of half-hearted discussion, the government is finally getting to grips with the problem.

“The government consider it necessary to adopt a legislative approach to address payment problems in the construction industry in a holistic manner,” the Development Bureau said to Construction Post.

As preparation, a government-commissioned survey on 8,100 companies was conducted in early 2012, the Survey on Payment Practice in the Construction Industry.

“The survey revealed that wide-spread payment problems prevailed in the construction industry supply chain and payment problem was most severe in the private sector,” the bureau said.

For main contractors, on average the outstanding payments per annum was HK$4.9 billion, equivalent to eight percent of total business receipts.

Even being a subsidiary of a client is no guarantee of timely payment.

The survey found that outstanding payments due to these main contractors was equivalent to three percent of receipts.

For subcontractors, the amount was almost the same at HK$9.9 billion or equivalent to 12 percent of total business receipts.

Even the consultants are not spared this problem.

The survey found that they were owed HK$1.4 billion or 10 percent of total business receipts.

The government hopes to have security of payment legislation for the construction industry in place by 2015/16   (Danny Chung)

The government has set up a working group to study security of payment legislation for the construction industry (Danny Chung)

A recurring and deeply entrenched practice in the industry was “pay if/when paid”, the survey noted.

“Such provision was either explicitly stated in contracts or adopted as an established practice in the construction industry even though it was not specified in the contracts,” the survey wrote.

In October last year, the bureau set up the Working Group on Security of Payment Legislation for the Construction Industry with representatives from 14 key industry stakeholders.

With an eye on overseas experience on payment legislation, the working group is ploughing through several issues such as scope of application, rights to progress payment, prohibition of conditional payment and rights to suspend works for non-payment.

The United Kingdom was the first country to enact security of payment legislation in the form of the Housing Grants, Construction and Regeneration Act 1996 with various Australian states, New Zealand, Singapore and Malaysia following afterwards with their own legislation.

A 2008 paper in the journal of the Institute of Arbitrators and Mediators Australia noted that after the UK act came into effect in 1996, the number of litigation cases in construction fell from about 2,400 per year in 1996 to about 500 in 2003.

It must be noted though the UK act also stipulated mandatory adjudication, which may partly explain the fall in litigation.

The bureau said a public consultation exercise would be held after the working group comes up with legislative framework for discussion.

“Subject to views collected in the public consultation exercise, we will start the legislative drafting work in with a target of introducing the bill to the Legislative Council in 2015/16,” the bureau said.

However for professionals such as Henry Sherman, a senior consultant at law firm Minter Ellison, the whole matter is simply too slow.

“There are signs however that even this apparently relaxed timetable may already be starting to slip. As matters stand there must be a real risk that, whatever its content, security of payment legislation will not be in force in Hong Kong when it is likely to be most needed – at the height of the current construction and infrastructure boom,” Sherman said.

Danny Chung




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