This country-specific Q&A provides an overview to construction law in Hong Kong.
It will cover termination requirements and obligations, permits and licence, procurement, financing and security, and disputes as well as insight and opinion on challenges and opportunities.
This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/construction/
On 1 April 2018, Bryan Cave and Berwin Leighton Paisner combined their legal practices to form Bryan Cave Leighton Paisner. Pending regulatory confirmation of the change of our Hong Kong, Singapore, Beijing and Shanghai registered names, we continue to practise in Asia under the brand names Berwin Leighton Paisner and Bryan Cave. In Hong Kong we practise English and international law through Berwin Leighton Paisner (HK), in Association with Haley Ho & Partners.
Is your jurisdiction a common law or civil law jurisdiction?
Hong Kong is a common law jurisdiction.
Under the Basic Law, Hong Kong’s mini-constitution, all the pre-1997 laws previously in force in Hong Kong, including the common law and rules of equity were retained and maintained, except for any that contravene the Basic Law and subject to any amendment by the Hong Kong legislature.
The Basic Law further provides that the courts of Hong Kong may refer to the precedents of other common law jurisdictions.
What are the key statutory/legislative obligations relevant to construction and engineering projects?
The Buildings Ordinance (Cap. 123) sets out various requirements relating to the planning, design and construction of buildings, such as registration and discipline of contractors, approvals for commencing building works and inspections and repairs of buildings.
Are there any specific requirements that parties should be aware of in relation to: (a) Health and safety; (b) Environmental; (c) Planning; (d) Employment; and (e) Anti-corruption and bribery.
(a) Health and safety
The Occupational Safety and Health Ordinance (Cap. 509) provides for the safety and health protection to employees in workplaces, both industrial and non-industrial. This ordinance stipulates the role that employers, occupiers of premises and employees have to play in creating a safe and healthy workplace. The Occupational Safety and Health Regulation (Cap. 509A) sets down some basic requirements for accident prevention, fire precaution, workplace environment control, hygiene at workplaces, first aid, as well as what employers and employees are expected to do in manual handling operations.
The Factories and Industrial Undertakings Ordinance (Cap. 59) provides for the safety and health protection to workers in the industrial sector. This ordinance imposes general duties on proprietors and persons employed at industrial undertakings to ensure safety and health at work. Under this ordinance, there are 30 sets of subsidiary regulations (including the Construction Sites (Safety) Regulations (Chapter 59I)) covering various aspects of hazardous work activities in factories, building and engineering construction sites, etc. The subsidiary regulations prescribe detailed safety and health standards on work situations, plant and machinery, processes and substances.
The Environmental Protection Department of the Hong Kong Government is the main body that enforces the anti-pollution laws, which include Air Pollution Control Ordinance (Cap. 311), Noise Control Ordinance (Cap. 400), Waste Disposal Ordinance (Cap. 354), Water Pollution Control Ordinance (Cap. 358), and Dumping at Sea Ordinance (Cap. 466).
These laws encourage operators not to pollute, and to provide a framework for offenders to be punished. Penalties generally include fines of up to HK$5 million (approx. US$640,000) and provisions for jail terms.
The principal body responsible for statutory planning in Hong Kong is the Town Planning Board (“TPB”). It is formed under the Town Planning Ordinance (Cap. 131).
Statutory plans known as Outline Zoning Plans (“OZPs”) are prepared by the TPB to show the land use zones, development parameters and major road systems of an individual planning area.
Prior to commencement of development, in order to know whether an application to the TPB is required, a developer must check the land use zone of the site/premises on the relevant OZPs to which the proposed use or development relates and the terms of the OZPs.
(d) The Construction Workers Registration Ordinance (Cap. 583) prohibits unregistered persons from carrying out construction work on a construction site.
A contractor may also be liable to pay wages and compensation to its sub-contractor’s employees.
The Employment Ordinance (Cap. 57) provides the general statutory framework for employment issues. One specific part of the Ordinance relevant to construction protects subcontractors’ employees by providing a mechanism for an employee to claim wages, which its own employer fails to pay within a specified time, from the principal contractor or any superior subcontractor (which that party may then recover from the employee’s employer).
The Employees’ Compensation Ordinance (Cap. 282) provides that when an employee of a sub-contractor is injured at work, the principal contractor is liable for any claim of compensation made by the injured employee. The principal contractor may, however, take action to recover from the sub-contractor any payment which he is required to make.
(e) Anti-corruption and bribery.
The Prevention of Bribery Ordinance (Cap. 201) is the main anti-corruption legislation in Hong Kong; it is enforced by the Independent Commission Against Corruption. This Ordinance outlaws corruption in both the public and private sector. Under this Ordinance:
• It generally is illegal for public servants to solicit or accept any advantage. The offeror of the advantage also is guilty of an offence.
• In relation to public contracts, it is an offence for public servants to solicit or accept any advantage as an inducement to or reward for giving assistance or using influence in matters relating to public contracts. The offeror of the advantage also is guilty of an offence. It also is unlawful to offer any advantage to other persons for the withdrawal of a tender for public contracts or for that other person’s refraining from bidding at any auction conducted by any public body.
• In the private sector, no agent (usually an employee) is allowed to solicit or accept any advantage without the permission of his principal when conducting his principal's affairs or business. The offeror of the advantage also is guilty of an offence.
What permits/licences and other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?
Examples of licenses/permits that are required to be applied for before starting work are as follows:
Who should apply
Penalties for non-compliance
Licence to conduct specified processes
Any owner of premises which is engaged in the conduct of any of the 31 specified processes under the Air Pollution Control Ordinance (Cap. 311).
Examples include quarries, concrete batching plants, asphalt concrete plants, manufacturing plants that involve melting or recovery or metals.
A fine of HK$200,000 (approx. US$25,500) and imprisonment for 6 months. If the offence is continuing, a fine of HK$20,000 (approx. US$2,550) per day.
Notification of Construction Work under the Air Pollution Control (Construction Dust) Regulation (Cap. 311R)
The contractor responsible for a construction site where any notifiable work under the Air Pollution Control (Construction Dust) Regulation is proposed to be carried out.
Examples include demolition and construction of building and road construction work.
A fine of HK$25,000 (approx. US$3,200) on conviction for a first offence and HK$50,000 (approx. US$6,400) for a second or subsequent offence.
Construction Noise Permit (“CNP”) for general works/ prescribed construction works
Any person who intends to carry out construction activities with powered mechanical equipment during restricted hours, or carry out construction work prescribed under the Noise Control Ordinance (Cap. 400) during restricted hours in designated areas.
A fine of HK$100,000 (approx. US$12,750) on first conviction, HK$200,000
(approx. US$25,500) on second or subsequent conviction, and in any case HK$20,000 (approx. US$2,550) for each day during which the offence continues.
CNP for percussive piling
Any person who intends to carry out piling work at the construction site in a percussive manner.
A fine of HK$100,000 (approx. US$12,750) on first conviction, HK$200,000
(approx. US$25,500) on second or subsequent conviction, and in any case HK$20,000 (approx. US$2,550) for each day during which the offence continues.
Approval for establishing a construction waste disposal account under the Waste Disposal (Charges for Disposal of Construction Waste) Regulation (Cap. 354N)
Main contractor who undertakes construction work contract with value of HK$1 million (approx. US$127,500) or above.
Application shall be made within 21 days after the contract is awarded.
A fine at HK$50,000 (approx. US$6,400) and, in the case of a continuing offence, a further daily fine of HK$1,000 (approx. US$130) for each day.
Is tort law or a law of extra contractual obligations recognised in your jurisdiction?
Tort law is recognised under the common law in Hong Kong.
Negligence and occupiers’ liability are the most common types of tort actions. Occupiers’ liability is partly governed by the common law and partly by the Occupiers’ Liability Ordinance (Cap. 314).
Who are the typical parties to a construction and engineering project?
The construction industry in Hong Kong can be divided broadly into three main areas:-
(a) Public housing projects
(b) Other public sector works commissioned by the HKSAR government and quasi-government bodies such as the Mass Transit Railway Corporation
(c) Private sector development projects
The typical parties to a construction and engineering project in Hong Kong may include the following, in a wide variety of possible combinations:-
(b) Main contractor
(c) Sub-contractors and suppliers
(d) Design consultants (architects, engineers, surveyors, etc.)
Most construction projects are set up with two distinct teams: the construction team and the design team. The construction team often is headed by a main contractor, who in turn sub-contracts much of the work to directly employed domestic sub-contractors and also nominated sub-contractors as directed by the employer. There typically are numerous further layers of sub-sub-contractors and suppliers, including for example labour only sub-sub contractors. The design team is usually headed by the architect in building projects and the civil engineer in engineering projects as prime consultant, and include various other consultants such as the quantity surveyor, who maintains financial management during construction, and a structural engineer, who designs a structure that can accommodate all forces imposed on the building. The composition of the project team is tailored to fit each project.
What are the most popular methods of procurement?
The three main procurement methods in Hong Kong, in very broad terms, are:-
(a) Traditional general contracting
(b) Design and build
(c) Management contracting
The most popular form of procurement, and most construction work is currently carried out under, the system of traditional general contracting. This is where design is a separate function from construction – design and construction proceed sequentially, with construction commencing only after the design is complete or substantially completed.
Hong Kong is still at a relatively early stage in its adoption of Public Private Partnerships (PPP). Popular forms of PPPs include Build-Operate-Transfer (BOT), Build-Own-Operate, Buy-Build-Operate, Design-Build-Finance-Operate (also known as the Private Finance Initiative (PFI)) and Design-Build-Operate.
What are the most popular standard forms of contract? Do parties commonly amend these standard forms?
A number of standard form construction contracts have been developed specifically for use in Hong Kong. The most popular standard forms of contract are those published respectively by:
• the Hong Kong Government; and
• jointly by the Hong Kong Institute of Architects, the Royal Institution of Chartered Surveyors (Hong Kong Branch) and the Society of Builders, Hong Kong.
These standard forms range from traditional build-only and design and build contracts, to more specific documents such as a form of tender for capital works and consultancy agreements. There also are standard form sub-contracts, specifically for nominated or named sub-contractors. Significant players in the Hong Kong construction industry also often have their own in-house form, e.g. quasi-government bodies such as the Airport Authority and the Housing Authority. Many developers have their own “standard” form of conditions, and many large main contractor have a standard form set of (usually very onerous) sub-contract conditions.
It is common for employers either to use a design and construct contract or to engage a consultant or architect directly to provide a design and subsequently engage contractors to perform the works. Hong Kong standard forms are frequently preferred, although international standard forms, such as the UK-published New Engineering Contract, also are increasingly adopted. The Hong Kong Government adopted the NEC3 suite in late 2016 as the default procurement route for all major public works and consultancy projects in Hong Kong, on the basis that the NEC3 contracts promoted collaboration, mitigated risks and unleashed innovation.
It is common for developers to supplement the standard forms with various – sometimes voluminous - special conditions amending the risk allocation.
Some developers are adopting less traditional contracting models, such as management contracting. As there are no standard forms published in Hong Kong for this purpose, parties need to agree bespoke contracts or adopt international forms for such less traditional arrangements
Are there any restrictions or legislative regimes affecting procurement?
In Hong Kong, developers generally are free to choose any contractor to carry out construction works for their projects. In the private sector, the primary statutory requirement is that the contractors must have been registered in the appropriate categories of registered contractors under the Buildings Ordinance (Cap. 123). In the public sector, procurement is controlled through administrative rules promulgated by the relevant government departments. For example, the Development Bureau maintains an approved list of contractors as suitable candidates for tendering public sector works in various categories.
In Hong Kong, and as would be expected, a large proportion of work in the construction industry is procured by way of tendering. This either is on a competitive basis or a negotiated basis – or sometimes a combination of both. The methods of tendering commonly used are open competitive tendering, selective competitive tendering and negotiated tendering.
In formal competitive bid situations, to ensure fair and open competitive tendering, it is essential that the tenders submitted by each contractor be based on the identical tender documentation. Once tenders have been opened, comparatively lower tenders are noted, but the award of contract is not necessarily made to the lowest priced bidder. The focus is put on whether the contractor is a responsible bidder, with the necessary technical, managerial and financial capability and integrity to undertake and complete the work in a satisfactory manner. In practice, where tenders are invited, an explicit statement is made that the employer does not guarantee to accept the lowest tender.
The public procurement process is governed by the Stores and Procurement Regulations issued by the Financial Secretary under the Public Finance Ordinance (Cap. 2). These regulations are supplemented by circulars / memoranda issued by relevant Government departments. The procedures laid down in these Regulations and circulars memoranda are fully consistent with the World Trade Organisation Agreement on Government Procurement (WTO GPA), to which Hong Kong has been a signatory since 20 May 1997. Quasi-government bodies such as the Airport Authority, Hospital Authority, Housing Authority and the West Kowloon Cultural District Authority may have a different procurement process and strictly speaking are not bound by the Public Finance Ordinance and the Stores and Procurement Regulations (although the WTO guidelines are regarded by them as being persuasive guides to good practice).
Do parties typically engage consultants? What forms are used?
Consultants typically are engaged. As mentioned in the answer to Question 6 above, the composition of the project team is tailored to fit each project. The consultant team usually ranges from a quantity surveyor who is the specialist on measurement and cost, to consultant civil, structural and mechanical engineers who work with the architect on certain specialised areas of the design. The form used to engage the consultants varies depending on the type of consultant engaged and the corresponding scope of work. The contractual relationship with the consultant may also be tailored depending on the method of procurement selected for that project.
Is subcontracting permitted?
Subcontracting is permitted in Hong Kong and indeed is the usual and wide-spread practice. To a very large extent, main contractors subcontract the direct execution of the construction work to their own choice of domestic contractors for the portion of the work it will not perform with its own workforce; the second-tier sub-contractor often then sub-contracts to a third-tier, and so on down the chain. Under traditional general contracting, the main contractor is responsible for all operations on the site and coordinating other contractors involved in the construction, whether or not sub-contractors have been engaged.
How are projects typically financed?
Construction projects for the Government generally are financed by and through the general revenue. The expenditure for such construction projects charged on the general revenue has to be approved and authorised by the Legislative Council in advance of appropriation.
Construction projects undertaken by non-government public bodies or statutory authorities usually are funded by a combination of revenue generated from commercial activities (such as operation, rental and investment income), additional income specifically generated for the project (such as a surcharge levied on existing users), and loans. Sometimes, statutory authorities may obtain upfront endowments from the general revenue as approved by the Legislative Council to fund the capital costs for construction projects.
Construction projects undertaken by developers in the private sector are financed using some or all of the following ways:
(a) Revenue reserves generated from commercial activities such as sale, rental and/or investment income;
(b) Pre-sale of uncompleted flats. Developers may finance the construction of first-hand residential properties using monies paid by purchasers for the yet-to-be-completed flats; and
(c) Bank loans.
The Hong Kong Monetary Authority places limits on the amount of loan developers are able to obtain from banks, which means that developers invariably have to use a combination of ways in order fully to finance its construction projects.
What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?
In general terms, all of these types of security are common in Hong Kong. Cash retention funds are the norm whereby 5% to 10% of progress payments are held until a reserve is reached of 5% to 10% of the contract sum, but other types of security also are common, as discussed below.
Contractor defaults, if they do happen, are likely to inflict huge financial losses on all parties involved and may hinder the completion of projects. Therefore employers may adopt some or all of the risk management tools described below as security.
At tender stage, a contractor may provide a tender deposit/bond which guarantees the employer that the tender has been submitted in good faith, that the contractor intends to enter into the contract at the tender price if successful, and that it would further provide other required bonds (for example, performance bond and advance payment bond) if it is awarded with the contract. A tender deposit/bond is not normally required in government projects.
A performance bond of usually 5% or 10% of the contract sum commonly is required by an employer from their contractors to protect the employer from the cost of contractor failure. If a contractor defaults on the contract, or in the case of contractor breaches such as defects or delays, the bond can be used to compensate the employer for the losses.
An on-demand or unconditional performance bond, which entitles the employer to call for payment in the absence of evidence of the contractor’s default, may also be used as security to guarantee performance of the contract. On-demand bonds, though available as an option, are not common in construction contracts because of the high premium typically charged by bondsmen, although they are being increasingly common.
An advance payment bond may also be required by an employer when the employer has advanced funds to the contractor ahead of the scheduled project milestones. This is to ensure that the cash advanced is used in accordance with the terms set out in the contract and to provide security for repayment.
These bonds typically are valid until either the date of practical completion or final completion of the construction project. In some contracts, the validity only ends upon the expiry of the defects liability period.
As noted above, in most cases, construction contracts contain terms which provide that certain retention monies would be held by the employer after completion which would only be released to the contractor after the expiry of the defects liability period. In rare occasions where such contractual terms are not in place or when full payment has been made to the contractor following completion, a retention bond may be used to guarantee that the contractor will carry out all remedial works necessary to correct defects during the defects liability period.
An employer may also require personal or parent company guarantee(s) from a contractor as an additional or alternative way of protecting itself from the contractor’s default or non-compliance with the contract.
Is there any specific legislation relating to payment in the industry?
There currently is no specific legislation relating to payment in the construction industry. However, in April 2016, the Development Bureau of the Hong Kong Government published its report on the public consultation on the proposed security of payment legislation ("SOPL") for the construction industry. The report generally supports the proposed terms of the SOPL.
The legislative framework of the proposed SOPL envisages that it will cover both the public sector (i.e. the Government and 31 specified statutory bodies/corporations, including the Housing Authority, Airport Authority and MTRC) and the private sector contain. It is intended that the SOPL will contain the following key obligations and rights:
• Parties can agree payment periods between applications and payments but not exceeding 60 calendar days (interim payments) or 120 calendar days (final payments).
• A right to dispute resolution by adjudication – a rapid procedure under which an adjudicator gives an independent decision on the dispute and the amount of any payment due.
• The right to adjudication arises in the event of non-payment and when there are disputes about the value of work, services, materials or plant and/or disputes about extensions of time and financial claims under the contract.
• The maximum period allowed for adjudications from appointment of an adjudicator to issue of the adjudicator’s decision will be 55 working days unless the parties both agree to a longer period. Straightforward cases should be decided more quickly.
• If either party is unhappy with an adjudicator’s decision, they still have the right to refer to dispute to court or arbitration (if specified in the contract). Any amount the adjudicator decided as due must, however be paid in the meantime.
• Unpaid parties have the right to suspend or reduce the rate of progress of work after either non-payment of an adjudicator’s decision or non-payment of amounts admitted as due.
The next step is for the Government to finalise the actual framework and wording of the legislation and to prepare the bill for submission to the legislature.
Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?
In Hong Kong, there currently is no prohibition on including “pay-when-paid” clauses. It is not usual for these clauses to be included in main contracts entitling employers to withhold payment, but they commonly are included in subcontracts (of all levels) to protect the contractor from having to pay its subcontractors where it is not paid by the employer.
However, whilst such provisions are not unenforceable, Hong Kong courts are reluctant to interpret a “pay-when-paid” clause as being a “pay-if-paid” clause (i.e. condition precedent to a right to payment) unless there are sufficiently clear words to this effect. Without such clear words, the court generally will construe such provisions as limiting the time for payment, rather than making a subcontractor’s right to payment dependent on payment upstream.
However, under the proposed SOPL, pay-when-paid type contractual clauses will be rendered ineffective.
Do your contracts contain retention provisions and, if so, how do they operate?
Yes, retention money is a standard feature of construction contracts of all tiers in Hong Kong.
Retention monies are provided for in the main Government standard contracts. Clause 79(3) of the General Conditions of Contract for Building Works (1999 Ed.), the General Conditions of Contract for Civil Engineering Works (1999 Ed.) and the General Conditions of Contract for Design and Build Contracts (1999 Ed.) provides that the Employer shall pay retention money to the Contractor within 21 days from the issuance of the certificate for the payment of retention money.
The retention rate is usually 10% of each progress payment until the total retained is equal to 5% or in some cases 10% of the contract value. For example, see Clause 67.3 of the General Conditions of Contract – Building and Civil Works (Issue No. 11) and Clause 46.3 of the General Conditions of Contract – Electrical and Mechanical Works (Issue No. 4), both of which are Hong Kong Airport Authority’s standard contracts.
Retention money is used to secure the main contractor’s obligation to complete the works and make good any defects. The employer holds retention money as a trustee for the main contractor but without obligation to invest. Retention money is held until entire performance is complete. The contractor is entitled to payment on a pro-rata basis as the work proceeds, but it is not entitled to the retention money until the work is substantially complete. It is common for half of the retention money to be released on practical completion, with the remaining half released after the expiry of the defects liability period.
Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?
Yes to both questions.
Parties may agree an amount of liquidated damages which is payable on the occurrence of specified breaches. This most commonly is seen as a rate payable by the contractor for failure to achieve completion by the agreed date for completion.
Consistent with other common law jurisdictions, liquidated damages are unenforceable only if the amount specified is considered penal. To be enforceable, the amount must be a genuine pre-estimate of the employer’s loss in the event that the relevant breach occurs. It must not be extravagant or unconscionable compared to the range of losses that could reasonably have been anticipated when the parties entered into the agreement.
If a liquidated damages provision is unenforceable, an employer ordinarily will still be entitled to claim general law damages for breach, but it will need to prove its loss. There is some debate as to whether the specified liquidated damages amount could act as a cap to the general law damages payable in these circumstances, but the generally accepted view is that it does so operate as a cap (as confirmed in a recent Canadian case, which authority would be regarded as persuasive authority in Hong Kong).
An employer’s right to claim liquidated damages also may be curtailed for other circumstances. For example, if an employer has caused delay to completion by the agreed date for completion, and if there is no extension of time provision covering the delay, the “prevention principle” might operate to deny the employer its right to claim liquidated damages for such delay.
Are the parties able to exclude or limit liability?
Yes. In general terms, Hong Kong recognises and upholds, the parties’ freedom of contract including to exclude or limit liability.
The general common law rules regarding unenforceability of contract provisions apply to construction contracts. For example, terms which are insufficiently certain, lack consideration or are an unreasonable restraint of trade may be unenforceable.
The Control of Exemption Clauses Ordinance (Cap. 71) also renders unenforceable certain clauses purporting to exclude or restrict liability for negligence (e.g. for death or personal injury) or under contract (where one of the parties is dealing as a consumer or on the other’s written standard terms of business). It has been held that very short defects liability periods do not satisfy the reasonableness test laid down in the Control of Exemption Clauses Ordinance (Cap. 71).
Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?
A party has a general common law right to terminate a contract where the other party has caused a fundamental breach or has repudiated the contract. In addition to these common law rights, Hong Kong construction contracts often include express additional termination rights relating to specified events, and Hong Kong law recognises such express provisions as enforceable.
The wording of the contract will dictate whether the parties can terminate for convenience and for force majeure. In respect of the latter, under the Standard Form of Building Contract (2006 Edition), the employer or contractor is able to terminate the employment of the contractor where the carrying out of the whole, or substantially the whole of the Works, has been suspended for a continuous period of 120 days or more as a result of force majeure incidents that are covered by insurance.
What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?
The Contracts (Rights of Third Parties) Ordinance (Cap. 623) came into force on 1 January 2016 and enables persons who are not parties to a contract to enforce rights under that contract.
In Hong Kong, the use of collateral warranties is still at an early stage of development, although they are used by many private developer and have been used by Government bodies in large-scale, signature projects.
Do contracts typically contain strict provisions governing notices of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?
Yes, all forms of construction contracts in Hong Kong contain notice requirements. The wording of the contract dictates how the courts will interpret notice provisions, either as condition precedents or mere obligations.
The Hong Kong courts have not entertained the application/extension of the prevention principle that was accepted in the Australian Gaymark case, which would prevent the employer from claiming liquidated damages where the employer’s conduct caused delay, notwithstanding that the contractor had failed to give notice and thereby deprived itself of the chance to secure an extension of time for that delay.
What insurances are the parties required to hold? And how long for?
The contractual terms usually dictate the required insurances.
It is typical for construction contracts, at a minimum, to require (i) contractor all risk insurance (as works generally are at the contractor’s risk until practical completion); (ii) third party liability insurance and (iii) professional indemnity insurance to cover any professional works or services performed (e.g. architecture services). It also is common in Hong Kong to require marine cargo insurance to cover transportation of construction materials by barge.
The only insurances required by statute to be taken out are third party motor vehicle insurance (for vehicles on roads other than those in areas wholly or mainly used for the carrying out of construction work or industry) and insurance under the Employees’ Compensation Ordinance (Cap. 282). The latter requires all employers to effect insurance to provide compensation to employees for bodily injury or death arising out, and in the course, of employment. Specific requirements apply to the amount of insurance which must be taken out by principal contractors to cover their liability to their employees and sub-contractors under the Ordinance and at common law.
How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?
Commonly, construction contracts in Hong Kong will contain a ‘tiered’ dispute resolution process, usually involving discussion and mediation, followed by arbitration. Arbitration is a particularly popular mechanism for resolving construction disputes in Hong Kong, which is home to a leading arbitration centre, the Hong Kong International Arbitration Centre (HKIAC), as well as many skilled legal and non-legal professionals specialising in construction and engineering disputes. Mediation and arbitration have been Hong Kong Government policy for many years. Hong Kong is a pro-arbitration and pro-enforcement jurisdiction.
Arbitrations seated in Hong Kong are governed by the Arbitration Ordinance (Cap. 609) which very closely follows the UNCITRAL Model Law. One of the Arbitration Ordinance’s guiding principles is that, subject to the observance of the safeguards that are necessary in the public interest, the parties to a dispute should be free to agree on how the dispute should be resolved.
The High Court of Hong Kong has a specialist Construction and Arbitration List for hearing construction disputes and challenges to arbitral awards, headed by a dedicated judge.
There currently are no statutorily imposed adjudication processes in Hong Kong which could be compared to those imposed by security of payment regimes in other jurisdictions. The Hong Kong government has discussed potential security of payment legislation (“SOPL”) for the construction industry, but there is currently no indication of when, if at all, this may be passed. See Question 14 above.
However, parties can agree (either in the contract or by later agreement) to use adjudication to resolve disputes. The HKIAC has published a template procedure for this purpose, but parties are free to agree to apply any other rules.
How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?
In general, Hong Kong is a pro-arbitration and pro-enforcement jurisdiction, and there are very limited grounds for resisting enforcement of an arbitration award. Unless the parties have opted in to the right to appeal on grounds of serious irregularity or point of law, there is no right of appeal under the Arbitration Ordinance, although an award may be challenged on procedural grounds. These procedural grounds are identical to those set out in Article 34(2) of the UNCITRAL Model Law, namely:
1 Incapacity of one of the parties, or invalidity of the arbitration agreement under the law of the arbitration agreement;
2 Lack of proper notice of the arbitration, of or the opportunity for a party to present its case;
3 The award deals with matters outside of the scope of the submission to arbitration;
4 The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties; or
5 The subject-matter of the dispute is not capable of settlement by arbitration under the law of Hong Kong; or
6 The award is in conflict with the public policy of Hong Kong.
In any event, both appeals and procedural challenges are subject to strict deadlines (30 days and 3 months, respectively, from delivery of the award).
International arbitral awards readily are enforceable in Hong Kong, as Hong Kong (through China) is a signatory to the New York Convention. China’s ratification of the New York Convention is subject to two reservations. The effect of these reservations is that an arbitral award is only enforceable under the New York Convention if:
7 the award was made in the territory of another contracting State (albeit arbitration awards made in non-contracting jurisdictions are also enforceable at the discretion of the Hong Kong courts); and
8 the dispute giving rise to the award arises out of legal relationships, whether contractual or not, that are considered commercial under the national law (however, the relationship between the parties to a construction dispute would almost universally be considered “commercial”).
In addition, the enforcement in Hong Kong of awards from Mainland China, Macau and Taiwan are governed by separate statutory procedures.
Given the Hong Kong courts’ stance towards arbitration, the enforcement of arbitral awards is generally comparatively swift. If uncontested, an award may be enforced within 2-3 months. However, the time required will always depend on the particular facts of a case and the parties’ approach.
Are there any limitation periods for commencing disputes in your jurisdiction?
Yes. Under s.4 of the Limitation Ordinance (Cap. 347), a party must bring a claim for breach of contract within six years (for contracts not executed under seal), or twelve years (for contracts executed under seal), from the date on which the cause of action accrued, being the date of the breach.
For actions in tort (such as claims for negligence), a party must bring an action within six years from the date the cause of action accrued, subject to exceptions. Notably, this limit is extended where the plaintiff discovered the cause of action after the date that it accrued, which is particularly important where an employer wishes to claim for latent defects. Specifically, a plaintiff may bring an action within three years from the earliest date that it had both the required knowledge and the right to bring the action. This exception is subject to a longstop which bars claims brought more than 15 years after the date of the alleged negligent act or omission (Limitation Ordinance ss.31 and 32).
How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?
It is common for disputes in the industry to involve multiple parties, but given the consensual and contractual basis for arbitration, it is rare for there to be multi-party arbitrations in Hong Kong. Multi-party court actions are more common.
Some Hong Kong standard form construction contracts allow for consolidation of related disputes, or for “name borrowing” (whereby a subcontractor may sue the employer directly in the main contractor’s name). In addition, the HKIAC 2013 Administered Arbitration Rules expressly allow for joinder of additional parties and consolidation of related arbitrations.
It is fairly standard for Hong Kong contracts, where one of the contracting parties is a multi-party unincorporated joint venture, to provide that the members of the joint venture are jointly and severally liable for their contractual obligations.
In apportioning liability between multiple defendants, a court or tribunal generally will have regard to the contract terms and the particular facts of the case. The Civil Liability (Contribution) Ordinance (Cap. 377) allows a defendant who has incurred liability, for which one or more other parties is partly responsible, to recover from those parties according to the degree of responsibility for the liability that each of them bears.
Net contribution clauses are not commonly seen in Hong Kong, although generally the Hong Kong courts prioritise freedom of contract and consequently would be likely to uphold such clauses, subject to the Control of Exemption Clauses Ordinance (Cap. 71). This Ordinance, which is substantially similar to the UK Unfair Contract Terms Act 1977, provides that, where a party contracts on the basis of its own standard terms of business, and a provision of those standard terms purports to exclude or restrict liability for breach of contract or tort, such a provision is only enforceable to the extent that it satisfies the requirement of reasonableness. Between sophisticated commercial parties, it would be uncommon for any such term to be deemed unreasonable.
What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?
Despite being a highly developed economy, there still are an unacceptable number of deaths and injuries in the construction industry in Hong Kong. During the construction of the Hong Kong-Zhuhai-Macau Bridge, for example, 10 workers have lost their lives and a further 600 others have been injured. This has prompted calls for more strict punishment for companies that contravene safety regulations.
Cash flow remains a significant challenge in Hong Kong. “Pay when paid” clauses remain common in construction contracts. A 2011 government survey found that 45% of main contractors and 57% of subcontractors experienced serious delays in receiving payment, and there is little to indicate that the situation has improved markedly. Although the proposed introduction of SOPL may help to alleviate this difficulty, there has not been significant legislative attention given to this issue since a public consultation in 2015.
The number of significant infrastructure projects underway in Hong Kong, paired with restrictions on the use of non-Hong Kong workers, has led to labour shortages in the construction industry, driving wages and construction costs higher. This is compounded by a skills shortage and an ageing workforce (with an estimated 40% of construction workers being over 50). Managing these shortages is likely to be a substantial challenge for the construction industry in the coming years.
What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?
Government spending on infrastructure remains one of the key drivers for the construction industry in Hong Kong, with a significant number of large-scale projects underway. These include the Hong Kong-Zhuhai-Macau Bridge, the Guangzhou-Shenzhen-Hong Kong Express Rail Link, the Hong Kong International Airport third runway, the Tuen Mun-Chek Lap Kok road link, the Central Kowloon Route highway and the Sha Tin to Central MTR link.
Hong Kong has been the subject of consistently high private sector investment in commercial and residential property for many years, with some of the world’s highest rents per square metre for office and residential space. This has driven the development of numerous commercial and residential projects across Hong Kong.
In addition, Hong Kong is seeing significant investment in projects in the culture, leisure and sport sector, with West Kowloon Cultural District, Kai Tak Sports Park and Airport City among the most high-profile of these.
How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?
Despite the large number of substantial construction projects in Hong Kong, the industry has fallen behind other jurisdictions when it comes to technology. In the next five years, Hong Kong has to catch up by implementing BIM, Internet of Things technology and 3D printing across more of its projects. The industry also is seeking to use technology increasingly, to promote safety and reduce the incidence of death and injury during construction activities. Not pushing and succeeding with these various initiatives may impact the city’s future competitiveness in the market and its international reputation. In her maiden policy address in October 2017, the Chief Executive, Carrie Lam, promised that the government would adopt BIM in major government capital works projects that are scheduled to start in 2018. The Government has also pledges that it will work to promote its use in private construction projects in Hong Kong.