Is help on the way for Hong Kong contractors?

In our September 2013 Construction Newsletter, we reported on the recurring problems for Hong Kong contractors in respect of not getting paid by main contractors and the Hong Kong Government’s consultation paper to be published on the introduction of legislation, introducing measures to assist sub-contractors secure payment from main contractors. The consultation paper has not yet been published.

As mentioned in our previous article, although unknown at this stage, it is expected that Hong Kong will follow measures existing in other jurisdictions, such as the UK, Australia, New Zealand, Singapore and Malaysia and:-

1. prohibit “pay when paid” or “pay if paid” provisions in sub-contracts;
2. give statutory rights to sub-contractors to suspend work for non-payment;
3. require main contractors to give prior notice before withholding payment; and
4. introduce a statutory regime for adjudication of payment disputes.

In the UK, there is the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 “(“the UK Act”). The UK Act provides a fast track, temporarily binding, dispute resolution method, namely adjudication, whereby the adjudicator’s decision is binding, until the dispute is finally determined by legal proceedings, arbitration or agreement.

The UK Act contains provisions relating to interim payments to contractors, namely that construction contracts must give a contractor a right to interim payments, which must be paid, in the absence of a Pay Less Notice from its employer i.e. a notice that the employer intends to pay less.

The UK Act sets out circumstances in which a contractor can give (or is regarded to have given) notice to his employer that he considers a sum due and allows the employer to give a Pay Less Notice, in the absence of which, the employer has to pay the notified sum on or before the final payment date.

The UK Act precludes an employer (in the absence of the relevant notice) from contending that all or part of a payment demanded by the contractor is due. The employer retains, however, the right to contend that the work is defective and to recover damages in subsequent litigation or arbitration and the adjudicator can make a provisional order to that effect.

The judgment in R & S Fire and Security Services Ltd (“R & S”) v Fire Defence PLC (“Fire Defence”) of 26 November 2012 provides an example of the application of the UK Act. In that case, R & S employed Fire Defence, as their sub-contractor, to install sprinkler systems at premises. Fire Defence made written applications to R & S for payment for work done, some of which were not paid, and so Fire Defence served a statutory demand on R & S and, subsequently a winding-up petition, as the statutory demand was not complied with.

R & S applied to court to restrain advertisement of the winding-up petition and to strike out the petition on the basis that the debt was disputed and that it had a cross-claim for a greater amount than that claimed in the petition.

Fire Defence argued that by virtue of the UK Act, there could be no dispute about the petition debt as R & S had not given any “Pay Less Notice” to it, as required by the UK Act. The court agreed and held that Fire Defence therefore had the necessary standing to present a winding-up petition against R & S, as the debt upon which it was founded was not open to dispute. The petition was ultimately struck out because R & S was able to establish that it had a genuine cross claim, but the judgment establishes that even without the decision of an adjudicator, there can be no basis for disputing the debt itself in the absence of a Pay Less Notice under the UK Act. Had Fire Defence commenced legal proceedings against R & S, it would have probably been able to obtain summary judgment in its favour.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427