The Wait is Over: Security of Payment Provisions in Public Works Contracts

The Wait is Over: Security of Payment Provisions in Public Works Contracts

The Wait is Over: Security of Payment Provisions in Public Works Contracts 2560 1706 Cocking & Co

In our previous newsflash dated 18 March 2021, we reported on the circulation of a draft Technical Circular by the Development Bureau targeting the introduction of security of payment provisions (“SOP Provisions”) for all new public works contracts in tenders issued from July/ August 2021.

On 5 October 2021, the Development Bureau issued Technical Circular (Works) No. 6/2021 (“Circular”). Here is what you need to know:

  1. The Circular applies to all public works tenders in two stages. From 31 December 2021, the SOP Provisions will apply to tenders from Group B contractors (for contracts of value up to $400 million) or Group C contractors (for contracts of any values exceeding $400 million) on the “List of Approved Contractors for Public Works”. From 1 April 2022, the SOP Provisions will apply to tenders 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”.
  2. The Circular covers construction subcontractors (“Relevant Subcontracts”) at all tiers for executing any part of the main contract works referred to above. The definition of construction subcontracts is now clarified as subcontracts for carrying out of construction work, but not subcontracts solely for supply of materials, plants or services.
  3. As reported previously, the party’s autonomy to agree on their terms of contract in respect of contract payments and dispute resolution mechanisms is respected except for the Four Mandatory Requirements under the SOP Framework which can be read about here.
  4. With respect to the controversy on whether the scope of adjudication should extend to extension of time for completion of works (“EOT”), it is now confirmed that the adjudicator has power to decide the time-related costs forming part of the payment dispute and in so doing, a party’s entitlement to EOT.
  5. The adjudicator’s determination of the EOT claim should prevail if it is different from the contract administrator’s assessment in order to be consistent with the payment of the associated adjudicated amount as decided by the adjudicator.
  6. Contrary to the Hong Kong Construction Association’s proposal dated 10 May 2021, the Circular maintains that the adjudication decision on the time-related costs forming part of the payment disputes is binding, but the EOT so decided is not binding. However, the parties are entitled to refer the payment disputes (and in connection with which any dispute on EOT) to mediation/ arbitration/ litigation after completion.
  7. The contractual claim handling procedures should be gone through before any claims for additional payment pertaining to the happening of a compensable event can be submitted for determination by adjudicators.
  8. If an admitted amount/ adjudicated amount is not received, the claiming party is required to serve a notice and take reasonable steps to make the Employer and Main Contractor aware of the notice at least 5 working days before the intended starting date of the suspension or slowing down of progress of work.

The timetable for introduction of security of payment legislation (“SOPL”) remains unclear. But one thing is clear: Group B and Group C contractors should immediately start preparing to incorporate the Mandatory Subcontract Conditions and the SOP Provisions for Relevant Subcontracts into all their Relevant Subcontracts. Sub-contractors should also do likewise down the sub-contract chain.

Cocking & Co are advising clients on amending their subcontracts for SOPL and are happy to give your organisation a presentation on the practical implications of SOPL. Please speak with one of our partners to learn more.

By Ian Cocking, Partner

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