Electronic These - A Study of Security of Payment in The HK Construction Industry

Copyright Undertaking
This thesis is protected by copyright, with all rights reserved.
By reading and using the thesis, the reader understands and agrees to the following terms:
1. The reader will abide by the rules and legal ordinances governing copyright regarding the
use of the thesis.
2. The reader will use the thesis for the purpose of research or private study only and not for
distribution or further reproduction or any other purpose.
3. The reader agrees to indemnify and hold the University harmless from and against any loss,
damage, cost, liability or expenses arising from copyright infringement or unauthorized
usage.
IMPORTANT
If you have reasons to believe that any materials in this thesis are deemed not suitable to be
distributed in this form, or a copyright owner having difficulty with the material being included in
our database, please contact lbsys@polyu.edu.hk providing details. The Library will look into
your claim and consider taking remedial action upon receipt of the written requests.
Pao Yue-kong Library, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong
http://www.lib.polyu.edu.hk
A STUDY OF SECURITY OF PAYMENT IN THE
HONG KONG CONSTRUCTION INDUSTRY
FAN LAP KAI
MSc in CONSTRUCTION LAW AND DISPUTE RESOLUTION
THE HONG KONG POLYTECHNIC UNIVERSITY
2009/10
A Study of Security of Payment in Hong Kong Construction Industry 2010
DECLARATION
I declare that this dissertation is entitled to A Study or Security or Payment iD the

Hong Kong Construction Industry. It represents my own work, except where the
acknowledgement is made. and it has not been previously included in any thesis.
dissertation or report submined to this University or to any other institution for a degree.
diploma or other qua1ification.
Fan Lap Kai
IT
ACKNOWLEDGEMENT
I would like to express my deepest gratitude to the following people who have given me
the most valuable advice in this dissertation. Without them, my research could not be
accomplished.
Firstly, I would like to thank my supervisor Mr. Stephen Mau, who has given me
valuable and constructive advice. He has also brought up some challenging questions,
which inspired my thinking. This has proved an effective guidance to further my
understanding on the research topic.
I must thank all the respondents who are kind to spare their precious time to my
interview questions. They offer their help without hesitation and their expert knowledge
is most valuable to the research project. Their kindness will never be forgotten.
• Pro! M.M. Kumaraswamy, Professor, Department of Civil Engineering, Hong

Kong University
• Mr. C. Y. Lam, Partner, Fung, Wong, Ng & Lam, Solicitors & Notaries
• Mr. L.e. Yu, Director, Corporate Legal Consultam & Chief Quantity Surveyor,
Department Manager, China Harbour Engineering Company Ltd
• Dr. Vincent C. W. Ng, Contracts Adviser, Gammon Construction Ltd
• Mr. DonaId Ng, Senior Quantity Surveyor, Kin Wing Engineering Company Lld
• Mr. Ken Kan, Quantity Surveyor, Kin Wing Engineering Company Lld
• Mr. r.M. Fan, Former Assistant Secretary Works Bureau, HKSAR
• Mr. Gary Soo, Former General Secretary of Hong Kong International Arbitration
Centre
• Dr. J. Wu, PhD Student, Department of Civil Engineering, Hong Kong University
Lastly, but not least, I would like to thank the Department of Building and Real Estate,
my friends, and finally to my parents for their endless support.
III
A Study of Security of Payment in Hong Kong ConslrUction Industry 2010
Abstract of dissutarion tmtitlt:d:

A Study of SecurilY of Payment in the Hong Kong Construction Industry
submitted by Fan Lap Kai
for the degree of MSc in Construction Law and Dispute Resolution
at The Hong Kong Polytechnic University in July 2010.
ABSTRACT
Most disputes found in construction projects are due to payment problems. The aim of
this dissertation is to understand what security of payment is and how security of
payment can be improved through legislation or contractual provisions in the Hong
Kong construction industry. The scope of this study is focus on the contractor
perspective. The research has taken view points of academic, practical, and legal aspects
i.e. reviewing literature, conducting a pilot interview and five interviews with
practitioners and researchers , and studying six. payment dispute court cases, respectively.
The Objectives set for study have all achieved.
The first objective is an understanding of payment problems and the 10 causes due late
payment, under payment and non-payment which are found in main contracts and / or
subcontracts,
The second objective is to review the methods for dispute resolution. In practice, it is
commonly used the dispute resolution methods in order of negotiation, mediation and
arbitration. Litigation is least favourable and adopted for settlement of some non -
payment disputes.
The third objective is reviewing contractual and legislative measures for security of
payment in construction projects. Getting the contract right is the most effective
measure. Effective contract administration and documentation control help to agree
project payments and avoid late or under payment. Problems of payment practice in
subcontracts like back-to-back, pay-if-paid, pay-when-paid are found in court cases.
IV
Lastly, recommendations are made for consideration. Generally we can consider

improving contract writing and introducing new legislation to forbid using the terms
such as back-to-back, pay-if-paid and pay-when-paid into any construction contracts.
Hong Kong is a free economy market consideration of contractual provisions is
recommended.
v
CONTENTS
DECLARA TION ........................................................................................................... 11
ACKNOWLEDGEMENT ...........................................................................................111
ABSTRACT IV
CONTENTS VI
Page
CHAP'fER 1 - INTRODUCTION ................................................................................. 1

1. 1 Problem Statement ........... .......... .... .... ... ..... .. .................... ......................................... 2
1.2 Aim & Objectives .......... ............ ............................ ................... ...................... ... .. ... .. 5
1.3 Scope of Study ...... ....... ....... ....... .... ...... ...... .. .. ....... ....... ... ..... ... ...... .. ....... ................. 7
1.4 Research Methodology ... .,............ ,................ "" ....... ,.. ,............................................. 8
1.5 Structure of the Dissertation ....................... ................. ... ..... ... .... ........... ........ 14
CHAPTER 2 - LITERA TURE REVIEW ................................................................... 1(1

2.1 Interpretation & Definiti ons ................................................................. .............. .... 17
2.2 Payment Problems in the Hong Kong Construction Industry ...... ... ............... 20
2.3 Payment Di sputes & Alternative Resolution Methods... ... ......... .......... 25
2.4 Contractual Measures for Security of Payment .............................................. ......... 33
2.5 Legislative Measures for Security of Payment ......... .... ..... ... ...... ..... .... ...... ............. 37
CHAPTER 3 - INTERVIEW FOR DATA COLLECTION ...................................... 40

3. 1 Preliminary Interview Questions ............................................................................ .41
3.2 Interview Questions ..................................................................... .. ............. ........... 45
3.3 Pilot Study ... ....... ......... ................... .................... ........................................ .... ........ 49
3.4 Planning and Conducting Interviews ...................................................................... 52
VI
Page
CHAPTER 4- INTERVIEW RESULTS & DISCUSSION ...................................... 53

4. 1 Payment Problems in the Construction Industry .............. ................................. ........ 54
4.2 Di scussion on Resolving Payment Problems .......................................................... .64
4.3 Di scussion on Measures for Security of Payment. .................................................... 69
4.4 Di scussion on Security of Payment to Constructors and Sub-contractors ................. 72
CHAPTER 5 • COURT CASES STUDIES ..•..................................................•........... 74

5. 1 Pay -when-paid and Pay-if-paid Provisions ..................... .. ...................................... 75
5.2 Different Rulings in Different Common Law Countries ........................................... 79
5.3 Back-to-Back Provision .......................................................................................... 83
5.4 Cases Findings ........................ ............................... ........... ................ ...... ................ 87
CHAPTER 6 • CONCLUSION .................................................................................... 88

6. 1 Understandi ng Payment Problems in Hong Kong Construction Industry ..... ...... ....... 89
6.2 Reviewing Methods for Avoiding and Resolving Payment Disputes ........................ 94
6.3 Examini ng Measures for Security of Payment ......................................................... 97
6.4 Recommendations for Consideration ..................................................................... 101
6.5 Limitation and Further Study .................................. .. ................. .............. . ..... ....... 105
REFERENCE ............................................................................................................... 107
VII
APPENDICES
A-I Interview Questions

A-2 Draft Interview Questions with Supervisor Comments
A-3 Draft Invitation Letter with Supervisor Comments
A-4 Interview Reports (Pilot Interview with Follow-up Meeting)
A-5 Standard Invitation Letter for an Interview
B-1 Interview Report I

B-2 Interview Report 2
FIGURES & TABLES

Page
Table 1.1 Interview Arrangement. ........................................................................................... 10
Figure 1.1 Research Process ..................................................................................................... 13
Table 2.1 Comparison of Methods Used for Dispute Resolution .............................................. 26

Table 2.2 Averaged Utility Factors of Seven Dispute Resolution Methods ......................... ..... 28
Table 3.1 Drafted Structured Questions in Part 1 Based on Key References ............................ 42
Table 3.2 Interview Questions in Part 1 with References ......................................................... 46
Table 4.1 Interview Results of Payment Problems in Hong Kong Construction Industry .......... 55
Table 4.2 Mean of Payment Problems in Hong Kong Construction Industry ............................ 57
Table 6.1 Causes of Late, Under and Non-Payment Problems ................................................. 90

Table 6.2 Payment Problems between Contractor and Employer and Sub-contractors .............. 92
Table 6.3 Dispute Resol ution Methods Use in Hong Kong ............. ... ........... ........................... 95
VIII
A Study of Security of Payment in the Hong Kong Construction Industry 2010
CHAPTER!
INTRODUCTION
Cash flow is essential to contractors and sub-contractors in the construction industry.
Their business viability depends on cash flow rather than profit margins. The
prospects of prompt payment for work done would be an incentive to contractors and
sub-contractors to deliver quality services (CIRC, 2(01). The topic of security of
payment to contractors and sub-contractors has been widely discussed in the past
few years. This dissertation is an in-depth study of this topic. The aim is to
investigate how security of payment to contractors and sub-contractors can be
improved through legislation and I or contractual provisions in the Hong Kong
construction industry.
1.1 Problem Statement
In practice, the payment arrangements in the form of 'pay-when-paid' and 'pay-if-
paid' are commonly used and the payment problems are occurring in Hong Kong
construction industry. Improvements to security of payment to contractors and sub-
contractors are recommended for further consideration. (CIRC, 2001, Cheng, et ai,
2009 and HKlS, 2009)
There was a seminar on Security of Payment in Construction Industry held on the
21 SI November 2007 in Hong Kong. The 104 delegates representing employer
organizations, consulting engineers, architects, quantity surveyors, contractors, sub-
contractors, lawyers, and dispute resolution consultants attended the event. In the
seminar a debate was invited to discuss payment problems.
" ... disputes involving payment are often not resolved until well after project
completion. Cash flow has always been recognized as the lifeblood of the
construction industry yet non-payment continues to place considerable financial
pressure on contractors, sub-contractors and even consultants" (The Lighthouse,
2008)
At the end of the seminar, the general consensus reached in the panel discussion was
Ihat
" ... owing to the current unsatisfactory cash-flow situation and time taken to resolve
contract disputes it was time the construction industry in Hong Kong, as a whole,
should seriously consider introducing contractual or statutory:
2
• security of payment provisions; and
• righllO adjudication/or the resolution o[ disputes ... ..
(The Lighthouse, 2(08)
The findings of the various conferences and seminars have recommended further
consideration on the security of payment and the possibility of adjudication
provisions. The consideration is to be enforced by legislation rather than merely a
contractual provision. The recommendation has pointed out that legislation should
ensure that the security of payment and the provision of adjudication are complied
with, without amendment, enforcing procedures, which are in effect good and
equitable practice. (The Lighthouse, 2008, Kraunsoe, 2009 and Kaplan, 2009)
In Hong Kong, the construction industry is supported as a free market economy
whereby the contract parties can freely negotiate and agree their terms of conditions
in a construction contract. Due to different bargaining powers of the contract parties.
the Hong Kong Institute of Surveyor supports that security of payment should be
promoted by legislation properly in order "to prevent contracting out from the
minimum equitable terms, and provide quick redress for non-compliance with the
agreed terms. " (HKIS, 2009) Parties may write dispute mechanisms into the contract
to help resolve payment disputes. A recent trend is to use legislation (Q intervene
(Chan, 2009). The concern about security of payment has brought up in the past
three years.
3
Cheng (2009) and her study group have presented a comprehensive paper entitled
Security of Payment for Hong Kong Construction Industry Workable Alternatives
and Suggestions and pointed out how much effort is needed to get paid and how
adverse impacts can escalate from payment problems. The article has exhaustively
reviewed the options and alternatives that are possible to be implemented for
securing payment in the construction industry in Hong Kong.
Having reviewed different articles, there are some questions addressed for
investigation:
1. Why contractors and sub-contractors cannot get fair pay as stated in the contract
and what are the rationales of payment disputes?
2. How can contractors and sub-contractors secure their payments in contractual
provisions?
3. Should security of payment be enforced by legislation 10 Hong Kong
construction industry?
4. How can adjudication provisions improve security of payment to contractors
and sub-contractors?
4
1.2 Aim and Objectives
Cash flow is the lifeblood for all industry, especial1y to contractors and sub-
contractors. The Construction Industry Review Committee (20 I0) proposed security
of payment; if the contractors and sub-contractors' project payments can be more
secured they would be motivated to provide quality services. However in Hong
Kong, the legislation does not include any statutory requirement for security of
payment. The right of the contractors is only to stop work and tenninate the contract
if there is a case of non-payment. It is essentially regulated by the ambit of the
common law. (Soo, et ai, 2008)
The aim of this di ssertation is to understand what security of payment is and how
security of payment can be improved to con tractors and sub-contractors through
legislation or contractual provisions in Hong Kong construction industry.
At the beginning of the dissertation, several payment problem issues in construction
project have been reviewed; and the current securi ty of payment in practice is also
reviewed and examined, and ways to improve the practical situation. The findings
aim to provide recommendation to improve the adverse silUation of security of
payment to contractors and sub-contractors in Hong Kong.
5
There are four specific objectives that this research aims to achieve, they are:
1. Understanding problems over project payments (non-payment, under payment,
late payment. and payment di sputes) in Hong Kong construction industry.
2. Reviewing methods for avoiding payment disputes and alternative resolution
methods for settlement of disputes
3. Reviewing and examining contractual and legislative measures for security of
payment in a construction project
4. Considering the improvement of security of payment to contractors and sub-
contractors through legislation or contractual provisions in the Hong Kong
construction industry
6
1.3 Scope of Study
The Government reported a pilot implementation of voluntary adjudication and
di spute resolution adviser system in numbers of designated government projects as
reponed in the paper titled Overall Review of Implementation of Construction
Industry Review Committee Recommendations. presented in April 2007. The paper
has remarked, at least for the public sector projects that security of payment
legislation is unnecessary under local circumstances for the moment relying on the
experience of such pilot schemes in 2005. (Cheng, et ai, 2009)
Leung and Ho (2009) on behalf of The Hong Kong Institute of Surveyors (HKIS)
submitted the ' Position Paper of the HKIS on Security of Payment' to Committee on
Subcontracting Construction Industry Council. HKlS expressed to supporl and
promote security of payment.
"... legislation should deal with not j ust the relationship between the employer and
the main contractor hur should also cover the same between the main contractor and
the sub-contractor because the contract values of the subcontracts can represent
more than 80% of the construction value of the industry."
(Leung and Ho, 2009 and HKIS, 2009)
The stance on secu ri ty of payment from the view points of the employers and the
sub-contractors as described are very different. The scope of thi s study is to focus
from the main contractor perspective. The main contractor is a key player in both the
main contract and the subcontracts.
7
1.4 Research Methodology
This research work can be divided into four stages of (1) initial research, (2)
literature review, (3) data collection by use of face-to-face-interview and court case
studies as well as (4) data analysis, discussion and conclusion.
1.4.1 Initial Research
The initial research work is essential to ensure that the research detennines what has
been researched and what issues are remaining for investigation. Preliminary work
involves searching sources of theory and previous studies to discover the appropriate
bases for the study. (Fellow and Liu, 2008)
The initial study provides the means for detennining the aim and four specific
objectives (section 1.2) to examine on the topic of Security of payment in the
construction industry in Hong Kong under the guidance of my supervisor.
1.4.2 Literature Review
The literature review reports the results of previous research projects (Fellow and
Liu, 2008). The previous research outputs and relevant information from journal
papers, conference papers, newsletters, articles, and e-publications through the
intemet have been reviewed and the findings are reported for this study. The purpose
is to provide sound background knowledge to investigate the first three specific
objectives further through face-to-face interviews. The specific topics for
investigation are:
8
I. Problems of project payments (non-payment, under payment, late payment, and
payment disputes) in the Hong Kong construction industry
2. Methods for avoiding payment disputes and alternative resolution methods for
settlement of disputes
3. Contractual and legislative measures for security of payment
1.4.3 Face·to-face Interviews
One major advantage of interview is its adaptability. The interviewer can follow up
ideas and probe responses. The responses during an interview can be developed and
clarified face-to-face, which the questionnaire can never do (Bell, 2005). The study
topic, security of payment, is a practical problem in the construction industry.
Therefore, interview is adopted to discuss with experienced practitioners and
researchers for specific data collection.
The drafted interview questions based on previous studies have been revi sed under
the guidance of my supervisor. The set of interview questions were tested by use of a
pilot interview and a follow-up meeting to ensure the set of Interview Questions is
feasible to collect relevant data.
Five interviews were arranged between 81h and 21 sI June 2010 as shown in Table 1.1.
Three interviews were conducted with contractor representatives. Other two
interviews were conducted with a solicitor and a team of academic researchers.
9
Date I Interviewees Backgrounds
08 June Contacts Adviser, Contractor
Professional Quantity Surveyor
11 June Director, Contractor
II June Senior / Quantity Surveyor Contractor
15 June Professor and the research team Researcher in
Professional Engineer and Chartered Builder Security of Payment
21 June Partner Solicitor
Solicitor, Mediator, Arbitrator, and Chartered
IBuilder
Table 1.1 - Interview Arrangement
1.4.4 Background of Interviewees
One senior executive is working with an international building and construction
company. The Company, founded in 1958, is based in Hong Kong and provides
construction services in Asia. The range of project types include commercial and
residential properties, industrial facilities, M&E and rail, ports, roads, bridges,
tunnels, and water and wastewater plants. (Gammon, 2010)
10
One senior management IS working with an international civil engmeenng and
construction company. The company, founded in 1980, is a world-renowned
international contractor and has 31 overseas branches and offices with business
activities covering more than 70 countries and areas. The company is currently
employing over 6,000 domestic and international staff to undertake US$ 9.5 billion
worth of projects focused on basic infrastructure construction. In Hong Kong, the
company is focused on Government infrastructure projects and one of its employers
is the HKSAR. (CHEC, 2010)
Two senior executives are working with a specialist construction company. The
company, established in 1994, is one of the major foundation specialist contractors
in Hong Kong. With a total investment of more than HK$360 million in advance
machinery and equipment the company had recruited a team of high calibre,
experienced, committed and professional workforce accountable for each section of
the foundation projects. (Kin Wing, 2010)
A professor is working with a university in Hong Kong. His research team, studying
'security of payment', comprises other members. One is a practicing Barrister and a
Chartered Engineer. He completed Part 1 of Interview Questions i.e. 15 structured
questions. Another is a research student studying on 'security of payment' focusing,
in particular, on Mainland China.
A solicitor is working with a legal firm. He is also a Chartered Builder, an Arbitrator
and a Mediator with extensive practical experience in construction cases.
11
A SlUdy of Security of Payment in the Hong Kong Construction Industry 2010
1.4.5 Court Case Studies
During the interview with the solicitor, we discussed various payment problems and
I consulted him for any relevant court cases that would be benefited to my study.
The solicitor suggested few court cases and used the court case, Wo Hing
Engineering Ltd. v. Pekko Engineers Ltd., as an example to illustrate the payment
dispute in the construction industry.
In order to have an in-depth understanding of payment problems and payment
disputes that cannot be settled by alternative dispute resolution methods such as
mediation and arbitration, the court cases as suggested by the solicitor are selected
for study further. The purpose is to analyse the specific payment problems for
considering the improvement of security of payment.
1.4.6 Process for research
Figure 1.1 shows the process of research for this study. There are three parts of
research: 'literature review' for academic point of view, 'interview of practitioners'
for practical point of view and 'court cases study' for legal point of view.
12
Initial Research
(Chapter 1 - Introduction)
Literature Research
(Chapter 2 - Literature Review)
Data CoUection
Preparing for Interview

(with Pilot Study)
(Chapter 3 - Interview for Data Collection) Court Cases Study
(6 cases)
(Chapter 5 - Court Cases Studies)
Interview
(5 No.)
(Chapter 4 - Interview Result and
Discussion)
Analysed Data
Findings and Recommendations
(Chapter 6 - Conclusion)
Figure 1.1 - Research Process
13
A Study of Security of Payment in the Hong Kong Construction Industry 2Q10
1.5 Structure of the Dissertation
CHAPTER 1 - INTRODUCTION
The first chapter has briefly described the direction of this dissertation. It includes
the initial idea, aim and objectives as well as the methodology that explains how I
would achieve the goals.
CHAPTER 2 - LITERATURE REVIEW
Before making any comments on the existing problems, some literature research
over the topic of security of payment has been made. This a1laws me to study the
previous research outcomes, up-ta-date infonnation and find out what is lacking for
further study.
CHAPTER 3 - INTERVIEW FOR DATA COLLECTION
I have chosen interview as my research method. This chapter shows the development
of the interview questions that I had been used for data collection. I have recorded
down the pilot interview that I did. The results help to plan my interview.
CHAPTER 4 - INTERVIEW RESULTS and DISCUSSION
The interview results are summarised and has been written in this chapter. There are
some valuable practical information and data gathered from the well experienced
interviewees throughout the open discussion in the face-ta-face interviews.
14
CHAPTER 5 - COURT CASES STUDIES
Bt::sides the academic and practical research, there are some lega1 research data
obtained by studying six payment dispute court cases in the construction industry.
There are four local and two international court cases respectively.
CHAPTER 6 - CONCLUSION
The three types of data (academic, practice and legal) have been analysed and
reponed the findings. At the end of the research study I have made some
recommendations for consideration to improve security of payment.
15
CHAPTER 2
LITERATURE REVIEW
This chapter reports the review of literature on security of payment. In the theoretical
part, they include: the terms and conditions of the contracts, the meaning of payment
and security of payment. The practical part includes the existing payment problems
and disputes in the construction industry. Alternative dispute resolution methods
have been reviewed for settlement of payment disputes. Contractual and legislative
measures for improvement the security of payment are examined.
16
2.1 Interpretation and Definitions
There are some terms in relation to contracts, payments and security of payment,
which have been widely used in the construction industry. Those terms are used in
the standard fonn of building contracts:
2.1.1 Contract and SubcontraCt
Standard Form of Building Contracts (SFBC):
This means the Agreement & Schedule of Conditions of Building Contract for use in
the Hong Kong Special Administrative Region published by The Hong Kong
Institute of Architects (HKIA), The Hong Kong Institute of Construction Managers
(HKlCM), The Hong Kong Institute of Surveyors (HKlS), 2005.
Contract:
A contract is an "Article of Agreement, the Appendix, the Form afTender submitted
by the contractor, the employer's letter of acceptance afthe contractor's tender and
any correspondence including the addendum between the parties expressed to form
part of the contract, the special conditions. if any, the conditions, the contract
drawings, the specification therein the contract bills"
(HKlA, HKlCM, HKlS, 2005a).
Employer:
This means one party signed the contract and "named as the Employer in the
Articles" (HKlA, HKlCM, HKlS, 2005a).
17
Contractor:
This means one party signed the cuntract and "named as the Contractor in the
Articles". (HKIA, HKICM, HKIS, 2005a)
Domestic Subcontract:
It is signed between a contractor and a domestic sub-contractor, a person to whom
the Contractor sub-lets any pan of the Works and includes a labour only sub-
contractor. (HKIA, HKICM, HKIS, 2005a)
Nominated Subcontract:
Nominated subcontract is the subcontract signed between the main contractor and a
nominated subcontractor who is nominated by the employer or architect under the
clause 29 of SFBC to carry out work forming part of the Works. (HKIA, HKICM,
HKIS, 2005a)
Interim payment:
It is the amount due to the contractor as stated in the interim certificate issued by the
architect, as described in clause 32.1 of the SFBC. (HKIA, HKICM, HKIS, 2005a)
Retention:
Retention is "the sum calculated in accordance with clause 32.4 and retained by the
Employer from the gross valuation of the Contractor's work in progress included in
an Interim Certificate". (HKIA, HKICM, HKIS, 2005a)
t8
2.1.2 Security of Payment
Construct for Excellence, Report of the Construction Industry Review Committee
(CIRC) has pointed out the need of security of payment in the Hong Kon g
construction industry,
" .. .locally 'pay-when-paid ' and 'pay-if-paid' arrangements are common in the
industry. There is much room for improvement in the area of security of payment to
contractors and subcontractors . ..
(CIRC, 2001 p81 )
Security of payment is a strong incentive to contractors and sub-contractors of
prompt payment for completed work under building contracts or subcontracts in the
construction industry. In Security of Payment Legislation, this is a process, which
establishes adjudication of disputes, designed to ensure cash flow to businesses in
the construction industry, without parties get tied up in lengthy and expensive
litigati on or arbitration. (CIRC, 2001 p81-82)
Security of payment is important to a healthy, professional and competitive
construction industry is to "."secure long-tenn guaran teed arrangements for
payments for work performed or materials supplied... (Cheng, et al. 2009)
In this di ssertation, security of payment used in the Hong Kong construction industry
means progress for prompt payments for equitable amount of payments as agreed in
the construction contracts for work performed by contractors and sub-contractors.
19
2.2 Payment Problems in the Hong Kong Construction Industry
Problems of under-payment and non-payment always caused payment disputes in the
construction industry. Parties may write di spute mechanism into the contract to help
resolve payment disputes. A recent trend is to use legislation to intervene the
payment practice (Chan, 2(09).
The concern of payment problems in the Hong Kong construction industry has
discussed. (Chan, 2009, Cheng, et al 2009. Kraunsoe, 2009. Kaplan, 2009 and The
Lighthouse, 200S)
Pettigrew stales the four possible reasons of payment problems:
J. ''fragmentation of the process of construction,
2. highly competitive market conditions,
3. hierarchical structure of the industry's contractualframework,
4. construction industry is always the first to experience the economic recession
and the last to recover from it."
(Pettigrew,200S)
20
2.2.1 Good Project Payment Practice
CIRC (200 1) Report promotes good practices over project payments In the
construction industry in Hong Kong to be suitably adopted in contracts and
agreements as the following:
1. "project requirements should be clearly defined to reduce payment uncertainty;
2. adequate rules for measurement and valuation should be agreed and observed;
3. pre-pricing of variations, wherever practicable;
4. payments to contractors and sub-contractors should be made within the periods
stated in the contracts;
5. retention should be released at the times specified in the contract;
6. the use of bonds or parent company guarantees should be considered to release
retention monies to sub-contractors where work is completed well before the
completion of the main works;
7. main contractors should only deduct discount when the contract permits it;
8. final account preparation should proceed throughout the contract period and
not be left until completion. 1n any case, it should be within the period given in
the contract;
9. settlement of the final account and payment of monies due should be within the
period given in the contract;
10. sub-contractors' work schedule and co-ordination obligations should be set
having regards to a clear overall programme/or the project; and
J1. obligations regarding the protection of work should be reasonable "
(CIRC. 2001 . p83)
21
2.2.2 Previous Research on Payment Problems
Cheung (2008) and his research group have identified nine payment problems in the
Hong Kong construction industry in their paper, entitled 'Exploring the Influence of
Contract Governance on Construction Dispute Negotiation '. The problems are:
1 "Employer Jails to pay for variations claims
2 Argument on the measurement and valuation of contracted work
3 Delay interim payment from employer
4 Non-payment to sub-contractor by main contractor
5 Argument on the prolongations costs claimed by main contractor
6 Prolongations costs claimed by sub-contractor
7 Late release of retention monies to main contractor
8 Assessment of liquidated and ascertained damages against main contractor
9 Changes of scope due to extra work"
(Cheung, et ai, 2008)
2.2.3 Practical Problems on Payment Practice
In the free market economy, the contract parties can freely negotiate and agree their
contracts. Owing to different bargaining powers of the contract parties, the following
situations have arisen in the construction industry.
22
A Study of Security of Payment in the Hong Kong Construction IndusU)' 2010
1. "Long established payment practice in the standard forms of contract such as
pay-when-paid arrangement cannot be easily changed,
2. Equitable payment tenns in standard fonns of contract have been contracted out
as instructed by the employers against the recommendation of their consultants,
3. Equitable payment terms are not included in ad-hoc contracts,
4. There are no independent certifiers (like the Architect and the QS under the
standard Main Contract and Nominated Subcontract forms) under the domestic
subcontracts to give an independent opinion as to the proper amounts of
payments,
5. Agreed payment terms are not followed, in spite of payment certification by
independent certifiers and valuers,
6. Contra-charges are unreasonably imposed,
7. The redress for breaches of agreed terms is not quick enough to resolve the cash
flow problem so created "
(HKlS, 2009)
2.2.4 Payment Problems in Mainland China
Since the last decade, many Hong Kong construction companies have changed their
focus to Mainland China; they are facing some different payment problems issues
from Hong Kong. which are worth to study. In 2008 Wu and his research group
identified the payment problems in Mainland China in their paper, entitled Payment
Problems and Regulatory Responses in construction Industry: Mainland China
Perspective. There are some relevant problems worth to take reference and
investigate in the Hong Kong construction industry.
23
A Study of SecurilY of Payment in Ihe Hong Kong Construclion Industry 2010
1. "Hierarchical/contractual relationship
2. Deficiency of the credit system
3. Deficiency of the legal system and remedies
4. Supply/demand imbalance of the industry
5. Unfair contract conditions
6. Loose implementation of existing laws and regulations
7. Practicability of existing laws
(WU, et ai, 2008)
24
2.3 Payment Disputes and Alternative Resolution Methods
In general, litigation is a nonnal method to resolve disputes in many cases. However,
in the construction world there are some other alternatives. Nowadays most of the
construction contracts include an arbitration clause, which means the parties agree to
be bound by the decision of the private dispute resolution system. Besides arbitration,
another method commonly used in Hong Kon g for settJing dispute is by mediation
which has a high success rate in achieving settlement. Adjudication used in UK is
possibly more preferable than arbitration. In UK, adjudication has been legislated in
use almost in all construction contracts since 1996, and is compul sory. It is mainly
due to the fact that adjudication in dispute resolution always gives a quick decision
and also binding for only a temporary period. (Speaight, 2004)
2.3.1 Comparison of Payment Disputes Resolution
Negotiation and three other disputes resolutions are commonly used in practice (The
Law Society, 2009). The four methods are compared as shown in Table 2.1.
25
Types Negotiation Mediation Adjudication Arbitration
What is One and the One and the other One and the other One and the other
the other party agree party agree to party appoint party appoint an
how to resolve appoint a neutral someone who is an independent third
method?
the dispute mediator to help to expert to help party to decide the
I agree a solution resolving the outcome of the
dispute. dispute.
-
Method All types of legal All types of legal Almost exclusively All types of legal
used to problems problems in building, problems in particular
construction, and disputes in building
resolve
engineering disputes and construction,
business and
commercial, and
problems at work
I
Use j It can be used It helps to keep lines Some contracts When all parties agree
before a court of communication include an to the process.
claim, or even open and encourages adjudication clause
Mostly used because
after starting the positive discussion. and if this is the case
there is an arbitration
claim and before the adjudication is
It can clarify clause in a commercial
the court makes used and complied
matters, gives one or consumer contract.
its decision with any decision
control over the
made by the
outcome.
adjudicator.
-
Process It is not a formal It can avoid bringing It's a more informal It is a formal process
and proceeding. a court claim, or process than going to in which an impanial
Decision during a court case court. third party with
The decision is
to try to shorten it specialist background
not binding for The decision is a
and resolve the knowledge on the
resolving the temporary binding to
dispute before the nature of one's dispute
dispute resolve the dispute
court makes its hears all parties.
decision.
Arbitration makes a
The decision is not binding decision to
binding resolve the dispute.
Not If the time limit If a party has little It is unlikely to help f The formality of
suitable for making a incentive to enter one if one wish to arbitration makes it
claim is very into the process it is retain control over less suitable for small
close, or if a not suitable, or when the solution to the or simple disputes
legal decision is a legal decision is dispute than for large complex
needed because needed because an cases.
i the law is unclear area of law is
I unclear or untested,
I or an injunction
,I (order from the
I court) is needed
I
Table 2.1 - Comparison of Methods Used for Dispute Resolution
26
1. Negotiation is where one or one's solicitor tries to agree how to resolve the
dispute with the other pany. It is used to resolve all types of legal problems.
2. Mediation can be used to resolve all types of disputes. In mediation one and the
other party agree to appoint a neutral third party to help to agree a settlement
3. Adjudication is where one and the other party appoint someone who is an
expert in the subject to help resolve the dispute. It is used to resolve many types
of legal problems. Most commonly used to resolve disputes about building and
construction disputes.
4. Arbitration, one and the other party appoint an independent third party to
decide the outcome of the dispute. It is commonly used to resolve these legal
problems: building and construction, business and commercial disputes, and
problems at work.
(The Law Society, 2(09)
2.3.2 Previous Research on Dispute Resolution Selection
In 2006 a research on MA UT - Based Dispute Resolution Selection Model Prototype
for International Construction Projects explored some factors about the relative
importance over seven dispute methods. They are litigation, arbitration, adjudication,
mediation, expert-determination, dispute resolution board (DRB), and mini-trial. The
data was collected from 41 experts based in HK, who included project directors,
senior managers, barristers, solicitors, arbitrators and mediators. The results showed
that mediation is a best solution under those nine criteria. (Chan, et al 2(06)
27
A Study of Securil)' of Paymenl in the Hong Kong Construction Induslry 2010
Types
Selection factors
Confidentiality 16.83 86.63 68.41 87.56 91.59 64.27 I 72.68

Third party control on the 95.24 83.90 67.44 70.37 52.56 56.59 63.41
process
Preservation of business 23.05 44.88 50.24 67.68 85.00 60.24 60.61

relationships
Reducing adverse effect due 39.02 60.12 49.63 63.54 81.22 55.49 53.05
to cultural difference
Addressing power imbalance 49.88 58.41 55.00 64.02 70.98 55.37 55.00
Enforceability 91.22 98.17 57.68 63.66 53.17 47.44 55.73

- - - - - - -..~--+.-_+--,f---+---l---f--
Cost reduction 22.80 32.32 53.41 70.37 80.98 60.49 61.10
Speedy in time 22.20 42.44 59.63 78.29 83.66 64.51 65.24
Reducing the adverse effect 40.49 63.66 49.63 67.93 74.39 56.83 55.64
due to different lega1 system
Table 2.2 • Averaged Utility Factors of Seven Dispute Resolution Methods
(Chan, et al 2006)
28
2.3.3 Selection Guideline for Using Different Dispute Resolution Methods
Ms. Carrie Lam, Secretary for Development Bureau, addressed the Alternative
Dispute Resolution Forum on 12 Oct 2009. She said,
"".the Construction Industry Council Committee on subcontracting is about to issue
a guideline on dispute resolution ... The guideline will provide a host of different
ARD methods for employers and contractors in the public and private sectors to
choose ... where dispute may arise." (Development Bureau, 2(09)
There is no single dispute resolution method can be applied to all situations
successfully, and the key for choosing the most suitable and appropriate method,
which depends on various factors, includes the attitudes of both parties and the
nature of the di spute. The Development Bureau has issued a guideline for the public
works' contracts to follow. There are seven dispute resolution methods for different
departments to choose as part of their settlement of disputes clause. They are:
I. Dispute resolution advisor,
2. Dispute resolution panel,
3. Expert determination.
4. Mediation,
5. Adjudication,
6. Local arbitration, and
7. International arbitmtion
(Environment, Transport and Works Bureau Government Secretariat, 2004-).
29
2.3.4 Multi-step for Dispute Resolution
The early uses of a multistep dispute resolution process have been effective in
filtering out the vast majority of problems and disputes at the early project stage. The
industry is moving toward a multistep process to resolve disputes. This shift has
been accompanied by the realization that dispute avoidance and loss prevention are
important to the overall success of the construction process by identifying the root
causes of problems and promoting productive communications among the project
stakeholders. The mu!tistep approach offers the flexibility of a wide range of
approaches that parties can select and blend together for any particular project, large
or small, of usual or great complexity. For example, some projects may be better
suited for a three-step option, negotiation and traditional two-step approach with
voluntary mediation and arbitration. Other projects may require multi-steps (Chau,
2007 and Cheeks, 2003).
Cheeks (2003) proposes the five multi·steps dispute resolution process including:
I. loss prevention and dispute avoidance,
2, direct negotiations,
3. facilitated direct negotiations with preselected standing neutrals,
4. issue specific outside neutral facilitated negotiations, and
5. binding adjudication
30
A Study of Security o f Payment in the Hong Kong Construction Industry 2010
During the past decade, the Hong Kong Government has implemented a mediation
clause as an alternative mode for settlement of construction disputes. Chau (2007)
proposes the prospect of the multi-step mediation, adjudication, and then arbitration
mechanism with particular reference to the construction industry in Hong Kong.
The success of the adjudication now practiced in the United Kingdom may suggest
that there is a place for another process of dispute resolution, which may help
improve the situation.
2.3.5 Adjudication in Construction
Adjudication is a kind of mixture between mediation and arbitration. It is a process
to resolve the di spute with temporary binding and "all parties are given a statutory
right to it through legislation without the consent of the other. .. (Chau, 2(07)
" ... adjudication is a summary process by which disputes between the parties to a
contract are decided by a third party adjudicator. "
(Bartlett and Franklin, 2(04)
Adjudication was introduced into Si ngapore through legislation, under the Building
and Construction Industry Security of Payment Act of 2004, focusing on the
payment disputes in the construction industry. Singapore is the seventh country to
adopt adjudication, after the United Kingdom, Australia in the states of New South
Wales, Queensland, Victoria, and Western Australia, and New Zealand. Based on the
statistics, it appears that Singapore has enjoyed some success thus far in achieving its
policy objectives of expediting payment and improving cash flow within (he
construction industry. (Teo, 2(08)
31
In the UK statutory right to adjudication provides an interim remedy. There is no
time limit for saymg the right moment to go to adjudication, some cases would still
be valid even after the projects have finished. The victims of mistakes usually will
recoup the losses by subsequent arbitration or litigation, and possibly even by
another adjudication. There is an Act in UK giving the right to a party to give notice
for 28-day adjudication to settle disputes over payment at any time. The adjudicator
is required to resolve the dispute within 28 days of the appointment by focusing on
essential issues and hearing the evidence. (Cottam, 2002)
32
2.4 Contractual Measures for Security of Payment
Construction activities are regulated by contracts that define obligations and rights of
the contracting panies. As project complexities increase, contracts have evolved to
deal with, the perfonnance, changes, payment, approval, and dispute resolution. A
clear contractual framework and measures are the keys to enhance security of
payment effectively. (Cheng, et aI, 2(09)
2.4.1 Contractual Provisions for Payments to Contractors and Sub-
contractors
For the clear definition of the method to ascenain interim and final payments under
SFBC there should be payment provisions in main or subcontracts to cater for fair
and timely payments for the amount of works completed; clear and equitable
arrangements on identification, valuation and payment for variations to main or
subcontract works; early settlement of final account; the rights of contractor or sub-
contractor in case of non-payment or late payment, such as suspended execution of
works and referral to adjudication, mediation and arbitration; and percentages of
payment to be deducted as retention money, which should be released ful1y upon
fulfilment of obligations under the subcontracts. The commitment by main
contractors or sub-contractors to make timely payment of wages to their workers and
sub-contractors in lower tiers should define clearly. (Cheng et al 2009, Don 2005,
500, 2008 and Wu. 2(07)
33
A Study of Security of Payment in the Hong Kong Constructi on Industry 2010
2.4.2 Getting the Subcontract Right
Many sub-contractors in Hong Kong. especially ~hose at the lower tiers in a multi-
layered subcontracting system, do not enter into formal subcontracts with the main
contractors or sub-contractors. The contract may only be partially written and may
engage some unclear arrangements, for ex.ample, back-to-back withoUl specific
definition being given. Some subcontracts may even be made orally. This practice
poses difficulty for certainty of the payment amount at the right time. The matters
are further complicated by the incorporation of pay ~ when-paid or pay-if-paid
arrangements in subcontracts and by the incorporation of arbitration clauses of the
upper-tier contracts into subcontracts. (Cheung 2000 and Cheng, et aI , 2009 and Wu ,
200?)
2.4.3 Milestone Payment
Milestone payments are different from the traditional payment method, interim
payments, which require the taking of interim measurements as the basis to effect
interim payments in order to reimburse the contractor for the work performed. 1t also
helps for " .. .better planning and enhances predictability of cashflow for both the
contractor and the employer at all stages of the project. " (Cheng, et al. 2009) The
contractors can adopt a target with provisions for retention moneys, and leading to a
better quality of work.
34
The CIRC (200l) Report recommends the Government and other major employers to
consider the wider adoption of the milestone payments approach. In Hong Kong
public sector a number of major works contracts are aJready in use with this payment
method, include the Hong Kong Mass Transit Railway Corporation and the airport
core programme contracts (Cheng, et ai, 2009). In UK 'Guide to Best 'Pair Payment'
Practices' considered that " ... should be greater use of well-defined milestone
payments ... This would lead to greater certainty of payment, lower financing
charges and reduced transaction costs. Variations would be dealt with separately. "
(OGC, 2007 p7)
2.4.4 Surety Bond and Parent Company Guarantee
The surety bond would protect and indemnify the employer by the contractor in case
the works has not been constructed in accordance with contract requirement or due
to the insolvency of the contractor.
Within the Standard Form of Building Contract 2005, clause 33.1 (I) states that
"The Contractor shall obtain the guarantee of an insurance ... due performance of
the Contract under the terms of a surety bond. "
35
Parent company guarantees are often required as a condition to submitting a tender if
a contractor is a subsidiary or a jOint-venture company of a large group of companies
that hence confidence in the financial viability of the parent company. Parent
company guarantees, like perfonnance bonds. are to provide security to the employer
in relation to the due perfonnance by contractors. (Cheng, et ai, 2009)
2.4.5 Payment Bonds
Payment bond is an agreement by a surety towards a contractor that the surety will
pay to the contractor the amount of works done under the construction contract, up to
the bonded amount or a percentage of the price of the works done, in case the
employer defaults in its payment obligations. Usually a bank or an insurance
company is being the surety who agrees to provide such a bond in return for a
premium paid. (Cheng, et ai, 2(09)
This type of bond is provided by a contractor to secure payment obligations by the
employer, which also can be used to protect payments from a contractor to its sub-
contractors and suppliers. (Cheng, et ai, 2009 and Wu, et ai, 2008)
36
2.5 Legislative Measures for Security of Payment
The CIRC 2001 Report has promoted improvement to security of payment aiming to
make progress of claims for payment to contractors against employers, sub-
contractors against contractors, suppliers of materials against purchasers, and
architects, engineers and others consultants against employers. The provisions of
Security of Payment legislation include:
(a) "banning 'pay-when-paid' and 'paY-i/-paid' clauses;
(b) providing/or prompt adjudication of disputes over progress payments;
(c) requiring security for disputed amounts following adjudication; and
(d) allowing suspension of work for non-payment or failure to provide security
after adjudication."
(CIRC, 200 I p82)
The purpose of security of payment legislation enables progress claims for payments
in construction contracts. Provisions for prompt adjudication of disputes over
progress payments allow suspension of works for non-payment or failure to provide
security after adjudication, and outlawing conditional payment provisions in
construction contracts. (Cheng. et al. 2009 and Kraunsoe, 2(09)
Other countries have adopted security of payment legislation; the first of the security
of payment legislation was the UK Housing Grants. Construction and Regeneration
Act 1996 and the others are:
37
I. In Australia, the Building and Construction Industry Security of Payment Act of
1999 in New South Wales, of 2002 in Victoria, of Queensland in 2004, and the
Construction Contracts Act 2004 in Western Australia
2. In New Zealand, the Construction Contracts Act 2002
3. In Singapore, Building and Construction Industry Security of Payment Act
2004
4. In Malaysia, a legislative move towards the enactment of the Construction
Industry Payment and Adjudication Act 2007 being finalized .
These legislative measures are intended to ensure that money flows down the
contracting chain by banning pay-if-paid and pay-when-paid clauses. These clauses
alIow contractors or sub-contractors to share the risk with their sub-contractors or
sub-sub-contractors and to avoid paying for work done in case they are not paid
under the main contracts or subcontracts respectively.
Currently there is no statutory framework for adjudication in the Hong Kong
construction industry. The subcontracting community is willing to see the
development of adjudication in Hong Kong . The HKSAR government had
introduced adjudication in some public work contracts on a trial basis. The provision
of adjudication was the contractual agreement, without statutory duty. (Hill and Wall ,
2(08)
38
A Study of Security of Payment in the Ho ng Kong Construction Industry 20 10
The di scussion on the provision of security of payment and adjudication should be
enforced by legislation rather than merely a contractual provision. Legislation would
ensure the security of payment and adjudication provisions are complied with,
without amendment, enforcing procedures, which are in effect good and equitable
practi ce. (Cheng, et ai, 2009, The Lighthouse, 2008 and Don, 2005)
Whether to push forward the provision of adjudication through legislation in
construction contracts in Hong Kong, may it be in public contracts, private sector
contracts, or subcontracts, to make it mandatory, it should really depend on reaching
consensus of the stakeholders in the Hong Kong construction industry.
39
A Study of Securi ty of Payment in the Hong Kong Construc tion Industry 2010
CHAPTER 3
INTERVIEW FOR DATA COLLECTION
The preliminary interview questions are based on literature review and they have
been revised in accordance to the comments made by my Supervisor. It consists of
structured, semi-structured and open questions. A pilot study has also been tested to
refine the questions and the overall structure prior for conducting the formal
interview. Consequently, a set of interview questions has been amended for
conducting interview (Appendix A- I).
40
3.1 Preliminary Interview Questions
The preliminary interview questions consist of two parts. Part I is a set of structured
questions designed to examine the payment problems in Hong Kong construction
industry. They are easy to answer by ticking in the relevant box besides the questions.
Part 2 is a set of open and semi-structured questions designed to examine methods
adopted to resolve payment problems and what contractual and legislative measures
are recommended to secure payments in practice
3.1.1 Drafting Interview Questions - Part 1
The first draft of questions in Part I is by means of taking reference to the
publication of Construct for Excellence, Report of the Construction Industry Review
Committee (CIRC. 2001) and the article of Exploring the Influence of Contract
Governance on Construction Dispute Negotiation (Cheung. et. aI, 2008). Few
payment problems would be relevant to the Hong Kong situation and are adopted
from the article of Payment Problems and Regulatory Responses in the Construction
Industry: Mainland China Perspective, (Wu, et al, 2(08).
The 18 statements have been drafted for examining any problems over project
payments i.e. non -payment, under payment and late payment in Hong Kong
construction industry. The drafted structured questions are shown in Table 3.1.
41
Structured Questions - to examine any problems over project Reference

payments in Hong Kong construction industry
J. Payment requirements clearly defined to reduce payment uncertainty ClRC2001
2. Adequate rules for measurement and valuation be agreed ClRC2001,
Cheung, et. al , 2008
3. Pre-pricing of variations, wherever practicable ClRC 2001
4. Payments to contractors made within the periods stated In the ClRC 2001
contracts
Cheung, et. al, 2008
5. Payments to sub-contractors made within the periods stated in the ClRC 2001
contracts Cheung, et. ai, 2008
6. Retention released at the times specified in the contract ClRC 2001
Cheung. et. a1 , 2008

7. Use bonds or parent company guarantees to release retention monies ClRC 2001
to sub-contractors where work is completed well before the
completion of the main works
8. Setdement of the final account and payment of monies due withi n the ClRC 2001
period given in the contract
9. Employer pays for variations! claims on time Cheung, et. ai, 2008
10. Adequate assessment of liquidated and ascertained damages against Cheung, et. ai, 2008
main contractor
IJ. Argument on the prolongations costs claimed by main contractor Cheung, et. al , 2008
12. Fair hierarchica1/ contractual relationship Wu, et ai, 2008

13. Fair contract conditions in main contract Wu, et ai, 2008
14. Fair contract conditi ons in sub-contractor Wu, et al, 2008
15. Any deficiency of the legal system and remedies? Wu , et ai, 2008
16. Any supply/demand imbalance of the construction industry (low Wu, el al. 2008
tendering price)?
17. Any loose implementation of existing Jaws and regulations? Wu, et ai, 2008
18. Any problems in practicability of existing laws and regu lations? Wu , et ai, 2008
Table 3.1 - Drafted Structured Questions in Part I Based on Key References
42
3.1.2 Drafting Interview Questions - Part 2
Two open and semi-structured questions have been drafted in Part 2 for further
examining the most serious payment problems in the construction industry. They are:
1. Please identify the 5 most serious payment problems in the construction
industry in your view that always cause payment disputes.
2. Discuss at least 3 out of those you mentioned in QI in details and identify
which of the problems are (a) between the employer and contractor, (b) between
the contractor and sub-contractors or (c) in construction workers. What are the
causes of such problems, any examples? For such problems, what methods do
you suggest for dispute resolution?
For understanding methods for resolving payment problems and the measures for
security of payment in a construction project, four questions have been drafted,
1. Discuss the possibility of resolution measures in security of payment for the
above three problems. What contractual measures should be taken to improve
written contract and how? Please give comment on:- milestone payment,
payment bonds as used in Mainland China, security of payment legislation such
as in Singapore.
2. Please comment on dispute resolution methods in solving payment disputes in
the industry and how effective is.
3. Has adjudication been used in the projects (a) between the employer and
contractor and (b) between the contractor and sub-contractors?
43
A Study of Security of Payment in the Hong Kong Construction Industry 201 0
3.1.3 Comments from Supervisor
I have invited my Supervisor to comment on the drafted interview questions. His
feedback is enclosed at Appendix A-2. His va1uable comments have been carefully
analyzed and considered for the improvement of the interview questions. In addition,
my Supervisor has also provided valuable comments on the drafted 'Invitation Letter
for an Interview' which is enclosed at Appendix A-3.
3.1.4 Pilot Interview
The pilot interview was adopted to test the drafted interview questions and
monitored the time for conducting an interview. A pilot interview was conducted on
6th June 2010 to test the drafted interview questions. The pilot interviewee is a
professional engineer with substantia1 working experience in the industry. He was
the former Assistant Secretary with Works Bureau, HKSAR Government between
200 I and 2007 responsible for monitoring the progress of all public projects. The
result of the one hour pilot interview has proved very useful to refine the interview
questions further.
3.1.5 Follow-up Meeting
A new set of interview questions was then developed with reference to my
Supervisor's comments and the result of the pilot interview. The follow-up meeting
was held with the pilot interviewee on 8th June 2010 to ensure that the revised
interview questions were feasible to collect data meaningfully.
44
3.2 Interview Questions
The interview questions used for interviews consist of two parts. Part 1 started with
15 structure questions and four open and semi-structured questions. With the
additional sub-questions they are included in Part 2. The interview questions enclose
at Appendix A-I
3.2.1 Part 1 - Structured Questions
This part of study is to examine payment problems in the construction industry. The
meaning of payment problems is clearly defined as non-payment, under payment and
late payment. The respondent is asked to tick against the relevant boxes provided by
each of the 15 statements. to reflect the practical ~ituation of the construction
industry as shown in Table 3.2.
The first ten statements have been revised from the first draft. The additional five
statements related to sub-contractors' payment problems have been added for
investigation.
For data analysis, a weighing system is adopted to evaluate the level of 'situation '. If
the interviewees consider the statement is at the level of 'no problem' then the
weighing is '0'. In case the statement is considered as a 'mild problem' then the
weighi ng is '5' and if the statement is considered as a 'serious problem' then the
weighing is '10'. The ndati vely serious and relatively less serious problems can be
identified by use of the common measurement of the mean .
45
Do the following statements reflecting practical situation Reference

of the construction industry?
1. Payment requirements not clearly defined to increase CIRC, 2001

payment uncertainty in contract
2. Rules for measurement and valuation inadequately CIRC, 2001,
agreed Cheung, el al, 2008
3. Inadequate pre-pricing of variations, wherever I CIRC, 2001

practicable
4. Payments to contractors not made within the periods CIRC, 2001 ,
stated in the contracts Cheung, el al, 2008,
HKIS 2009
5. Payments to sub-contractors not made within the periods CIRC, 2001,

stated in the contracts Cheung, el al. 2008,
HKIS 2009
6. Retention released not at the times specified in the I CIRC, 2001,

contract Cheung, el al, 2008
7. Settlement of final account and payment of money not CIRC, 2001

due within the period stated in the contract
8. Employer pays for variations / claims not on time Cheung, el aI, 2008
--_.-
9. Inadequate assessment of liquidated and ascertained Cheung, el aI , 2008
damages against main contractor
10. Supply I demand imbalance of the construction industry Wu , el aI, 2008
affecting the tendering price
11. Payment practices in subcontracts such as pay-when-paid HKlS 2009
or pay-if-paid arrangement not equitable. , _____.___.__
12. Agreed paymenllerms not followed in spile of inle~ HKIS 2009
~~~ I
13. Equitable payment terms in a main contract not included HKlS 2009
in subcontracts
14. There is no independenl certifier (archilecl or QS) under HKIS 2009
the domestic sub-contracts to give opinions as to the
proper amounts of payments
15. Contra-charges are unreasonably imposed HKIS 2009
Table 3.2 . Interview Questions in Part 1 with References
46
3.2.2 Statistical Measure
The statistical measure for the 15 statements in Part 1 is used the measurement of the
mean. The arithmetic mean of each statement is to express mathematically as:
a=
n
Keys:
a = arithmetic mean of each question

n = number of responses
a = the weighing of the situation of each question (0 = no problem, 5 = mild problem
and 10 = serious problem)
As the result, the maximum arithmetic mean of each statement = 10 and the
minimum arithmetic mean of each statement = O.
47
3.2.3 Part 2 - Open and Semi-structured Questions
The four open and semi-structured questions in Part 2 are combined and developed
from the six questions in the draft. Those questions are intended to ask interviewees
to discuss payment problems in-depth. They are:
1. Please identify the three most serious problems in the construction industry in
your view that always cause payment disputes. (Not limited to Part J
statements) and identify which of the problems are Ci) between the employer
and contractor or Cii) between the contractor and sub-contractors or Ciii) in
construction workers. What are the causes of such problems, any examples?
For such problems what methods do you suggest for dispute resolution?
2. Please comment on some of above dispute resolution methods in solving
payment disputes in the industry. How effective is?
3. Discuss the possibility of resolution measures In security of payment in
particular the above three mentioned problems. What contractual measures
should be taken to improve written contract and how? Please give comment on:
milestone payment, bonds or parent company guarantees to release retention
money to sub-contractors, payment bonds as used in Mainland China. Please
give comment on security of payment legislation such as in Singapore.
48
3.3 Pilot Study
The outcome of pilot study is considered very useful and satisfactory. It is reported
in detail in the Interview Report (Pilot) as enclosed at Appendix A-4.
3.3.1 Payment Problems in the Construction Industry
The results of Part 1 consist of
• Three serious problems;
• Seven mild problems and
• Five not problems
The three most serious problems in the construction industry always caused payment
disputes were identified as the following;
I. Payments to sub-contractors not made within the periods stated in the contracts
(item 5)
2. Settlement of final account and payment of money not due within the period
stated in the contract (item 7)
3. Payment practices in subcontracts such as pay-when-paid or pay-ij-paid
arrangement not equitable (item 11)
The situation of settlement offinal account and payment of money not due within the
period stated in the contract (item 7) always occurs between the employer and
contractor. While the problems of payments to sub-contractors flat made within the
periods stated in the contracts (item 5) and payment practices in subcontracts such
49
as pay-when-paid or pay~if~paid arrangement not equitable (item 11) occur between
the contractor and SUb-contractors.
The causes of late payment may be taking long time to process the variations, claims,
etc. The example is Settlement of final account and payment of money not due within
the period stated in the contract. Another example is Payments to sub-contractors
are not made within the periods stated in the contracts. The causes of under payment
may be the practice of pay-when-paid, poor workmanship, and liquidated damages.
The example is Payment practices in subcontracts such as pay-when-paid or pay-if-
paid arrangement not equitable. Non-payment is a very serious problem and the
causes may be due to the bankruptcy of the contractor.
3.3.2 Payment Problems and Dispute Resolution Methods
The pilot interviewee has given his comment on selection of dispute resolution that
is by means of the least-litigation method, which is damaging to all parties in a
construction project. Negotiation is the most effective method by comparing with
other disputes resolution methods, and should be used as far as possible. Mediation,
DRA and adjudication are the second best. Adjudication is good, in particular, in
handling large contracts. Arbitration will be used if the payment problem cannot be
avoided. Litigation is less effective. If possible avoid litigation as far as practicable
because there is no winner but all losers.
50
A Study of Security of Payment in the Hong Kong Construclion Industry 2010
3.3.3 Measures for Security of Payment
In order to secure payment on time, the pilot interviewee has expressed the need of
the time span in 'security for payment clauses' in a construction contract, said, the
time span used in making adjudicator's decision. The decision is binding, both sides
should agree to the decision. Milestone payment is a best method and logical. Bonds
or parent company guarantees cost extra that a certain amount of money is firstly
spent to buy the bond and to appoint a third party to handle the money. Other
measure is of good communication with all parties in a construction project.
Partnering is effective to establish good relationship with stakeholders in a project.
Security of payment legislation should be considered because there are many good
examples as experienced by construction stakeholders in many overseas countries.
51
3.4 Planning and Conducting Interviews
Interviews are time consuming and relatively a small number of people is planned to
be interviewed within the limited timeframe (Bell, 2(05). To ensure the interview
will be conducted effectively, an Invitation Letter for an Interview (Appendix A-5)
detailed the background of the research project enclosed with a set of Interview
Questions has been e-mailed to the individual interviewee in advance.
Five interviews were conducted to collect data and information. The backgrounds of
interviewees are contractors, researchers, and solicitor. Three interviews are
representing contractors' view point and other interviews are representing those of
the researcher and a solicitor. They are:
1. A Senior Executive working in an international building and construction
company
2. A Senior Executive working in an international civil engineering company
3. A Senior Executive working in a local specialist contractor
4. A Professor working in a Hong Kong university
5. A Solicitor working in a law firm with construction background
52
CHAPTER 4
INTERVIEW RESULTS AND DISCUSSION
Five interviews were conducted in June 2010. Each interview meeting was at least
one hour, discussing payment problems and related resolution methods as well as
how payment could be secured through contractual and legislative measures. The
results of the interviews are essential for understanding the practical situation. The
five individual interview reports are enclosed at Appendix B-1 - B-5.
53
4.1 Payment Problems in the Construction Industry
At the beginning of the interview individual interviewee was asked to evaluate the
] 5 statements reflecting the practical situation of the construction industry in Hong
Kong as a 'serious'. 'mild', or 'no' problem in practice. The overall result is detailed
below:
Contractors (4 No) 2.75 (average) II (in total) serious. 7.5 (30) mild, and
4.75 (19) no problems
Researcher (I No) nine serious, six mild, and 0 no problems
Solicitor (1 No) seven serious, three mild, and five no problems
Individual respondent has his own opinion. The variation in points of view may be
due to the nature of projects, for example, experience from building or civil
engineering projects, and different experience gained from the private sector or the
public sector projects. The results are summarised in Table 4.1. The symbols of 'C',
'R' and 'L' represent individual contractors, the researcher and the solicitor
respecti vel y.
54
Payment Practice ID Hong Kong Construction Serious Mild No

Industry
1 Payment requirements not clearly defined to increase R CC CCL
payment uncertainty
2 Rules for measurement and valuation inadequately to R C CCCL

be agreed
3 Inadequate pre-pricing of variations, wherever C RCC CL

practicable
4 Payments to contractors not made within the periods L RC CCC

stated in the contracts
5 Payments to sub-contractors not made within the CL RCCC

periods stated in the contracts
6 Retention released not at the times specified in the L RCC CC

contract
7 Settlement of final account and payment of money not RCCL CC

due within the period stated in the contract
8 Employer pays for variations claims not on time RCC CCL

9 Inadequate assessment of liquidated and ascertained L RC CCC
IQ Supply/demand imbalance of the construction industry CCL RCC

affecting the tendering price
11 Payment practices in subcontracts such as pay-when- R CCL CC

paid or pay-if-paid arrangement not equitable
12 Agreed payment tenns not followed in spite of interim R CCC CL

certificate
13 Equitable payment terms not included in subcontracts RCC C CL

14 There is no independent certifier under the domestic R CCCCL
sic to give opinions as to the proper amounts of
payments
15 Contra-charges are unreasonabl y imposed LRC CC C
Table 4.1 - Interview Results of Payment Problems in Hong Kong Construction
Industry
55
4.1.1 The Mean
The weighing system is adopted. If the statement is assessed as a serious problem =
10, a mild problem = 5 and no problem = O.
The measurement of the mean is used as statistical measure for the 15 statements as
shown in Table 4.2. By use of the formula the mean of statements can be calculated.
The higher mean score shows the problem is relatively significant while the lower
mean score the problem is relatively less significant. The maximum is 10 and the
minimum is O. The arithmetic mean of each statement is to express mathematically
as fellow:
Where,
A= a = arithmetic mean of each statement
n n = number of responses
a = the weighing of each statement
(0 =no problem, 5 =mild problem, 10 =serious problem)
Results shown in Table 4.2 are the mean score of 15 statements. The 15 statement
with different level of significance can be classified into two groups. One is relative
significance (mean value 5.0 and above). Another group is less significance (mean
score is less than 5.0). As a result, seven statements are significant with mean over
5.0. The mean of four statements is 4.17 and other four statements are less than 4.0.
In order to compare the contractor's point of view with the general, column 3 is the
mean of all six respondents representing the general view while column 4 is the
mean of four respondents representing contractor's point of view. The contractor's
score is similar to the general view.
56
Payment Problems in Hong Kong Construction Industry General Contractor

(maximum = ID, mild = 5, minimum = 0) view view
7 Settlement of final account and payment of money 8.33 7.5

not due within the period stated in the contract
8 Employer pays for variations/ claims not on time 7.5 7.5
10 Supply/demand imbalance of the construction 7.5 7.5

industry affecting the tendering price
5 Payments to sub-contractors not made within the 6.67 6.25

periods stated in the contracts
13 Equitable payment terms not included in subcontracts 5.83 6.25
15 Contra-charges are unreasonabl y imposed 6.67 5.0
14 There is no independent certifier (architect or QS) 5.83 5.0

under the domestic subcontracts to give opinions as
to the proper amounts of payments
3 Inadequate pre-pricing of variations, wherever 4.17 5.0

practicable
12 Agreed payment terms not followed tn spite of 4.17 3.75

interim certificate
6 Retention released not at the times specified in the 4.17 2.5

contract
11 Payment practices in subcontracts such as pay-when-paid 4.17 2.5

or pay-if-paid arrangement not equitable
1 Payment requirements not clearly defined to increase 3.33 2.5

payment uncertainty
4 Payments to contractors not made within the periods 3.33 1.25

stated in the contracts
9 Inadequate assessment of liquidated and ascertained 3.33 1.25

2 Rules for measurement and valuation inadequately 2.5 1.25

agreed
Table 4.2 - Mean of Payment Problems in Hong Kong Construction Industry
57
The seven statements reflecting the payment problems in the Hong Kong
construction industry were identified by the interviewees. Three of them are
relatively significant from contractor's point of view. They are:
1. Settlement offinal account and payment of money not due within the period
2. Employer pays for variation claims not on time (item 8)
3. Supply / demand imbalance of the construction industry affecting the tendering
price (item 10)
Other four are also identified as problems in practice. They are:
4. Payments to sub~contractors not made within the periods stated in the contracts
(item 5)
5. Contra~charges are unreasonably imposed (item 15)
6. Equitable payment tenns not included in subcontracts (item 13)
7. There is no independent certifier (architect or QS) under the domestic
subcontracts to give opinions as to the proper amounts of payments (item 14)
The sample size for data collection is very small but the results represent views of
respondents representing different backgrounds. In~depth discussion is reported in
the next section.
58
4.1.2 Serious Payment Problems
During each interviews, the interviewees have been asked (Q identify three most
serious problems in the construction industry that always cause payment disputes,
The results are reported as below.
The seven most serious problems identified by the group of contractor
representatives are:
1, Employer pays for variations/ claims not on time (item 8) identified by two
contractors.
2. Supply/demand imbalance of the construction industry affecting the tendering
price (item 10) identified by two contractors
3. Settlement of final account and payment of money not due within the period
stated in the contract (item 7) identified by a building and construction
contractor
4. Equitable payment terms not included in subcontracts (item 13) identified by a
contractor
identified by a building and construction contractor
6. Inadequate pre-pricing of variations, wherever practicable (item 3) identified
by a specialist contractor
7. Contra-charges are unreasonably imposed (item 15) identified by a specialist
contractor and the researcher
59
Additional two most serious problems identified by the researcher with relati ve low
mean value (4.17) are:
I. Payment practices in subcontracts such as pay-when-paid or pay-ij-paid
arrangement not equitable (item 11)
2. Agreed payment terms are not followed in spite of interim certificate (item 12)
The solicitor agreed with the practitioners' view on most of the discussed serious
problems. The cause of problem due to payment practices in subcontracts such as
pay-when-paid or pay-if-paid arrangement was deeply discussed with the solicitor
because the view of practitioners and researchers are very different. This problem
may cause coun cases but it is not frequent.
4.1.3 Problems Occurred between a Employer and Contractor or a
Contractor and Sub-contractors
The contractor is a key player in a construction contract, a party in the main contract
as well as a party in all subcontracts. Payment problems discussed with the
respondents were firstly identified where the problems occurred from the main
contract between the employer and contractor or from the subcontracts between the
contractor and sub-contractors.
60
Employer and Contractor
Payment problems involved between an employer and contractor were identified by
at least one interviewee, Among them the first three problems were evaluated as
relatively serious problems (mean> 7.0) and other four were less serious (4.17 >
mean> 6.67).
2. Employer pays for variations/ claims not on time (item 8)
3, Supply and demand imbalance of the construction industry affecting the
tendering price (item 10)
4, Inadequate pre-pricing of variations, wherever practicable (item 3)
5, Agreed payment tenns not followed in spite of interim certificate (item 12)
6, There is no independent certifier (architect or QS) under the domestic
subcontracts to give opinions as to the proper amounts a/payments (item 14)
7. Contra-charges are unreasonably imposed (item 15)
Contractor and Sub-contractors
Payment problems involved between the contractor and sub-contractors were
identified by at least one interviewee. Among them the first one problem was
evaluated as relatively serious problems (mean> 7,0) and others are less serious
(4.17> mean> 6.67).
6J
1. Employer pays for variations! claims not on time (item 8)
2. Equitable payment terms not included in subcontracts (hem 13)
5. Inadequate pre-pricing of variations, wherever practicable (item 3)
6. Payment practices in subcontracts such as pay-when-paid or pay-ij-paid
arrangement not equitable (item 11).
7. Agreed payment terms not followed in spite of interim certificate (item 12)
4.1.4 Types of Payment Problems
Interviewees were asked to identify the causes of payment problems due to late
payment, under payment or non-payment. It is found that non-payment problem is
not common in practice. Different types of payment problems i.e. late payment,
under payment and non-payment were identified and discussed in the interviews.
62
Late Payment
Payment should be on time. The causes of late payment was found in most main
contracts and subcontracts due to:
stated in the contrtlct (item 7)
2. Payment practices such as pay-when-paid or pay-ij-paid arrangement not
easily changed (item 11)
3. Agreed payment terms not followed in spite of interim certificate (item 12)
4. Equitable payment terms not included in subcontracts (item 13)
subcontracts to give opinions as to the proper amounts o/payments (item 14)
Under Payment
The causes of under-payment situations were also discussed in the interviews. They
are:
1. Inadequate pre-pricing of variations, wherever practicable (item 3)
2. Settlement affinal account and payment of money not due within the period
3. Employer pays for variations claims not on time (item 8)
4. Equitable payment terms not included in subcontracts (item 13)
63
4.2 Discussion on Resolving Payment Problems
There are different types of methods for di spute resolution discussed in the literature.
In this study, a specific question was the interviewees to comment on the effective
use of alternati ve resolution methods i.e. negotiation, mediation, arbitration, dispute
resolution advisor, dispute resolution panel, expert determination, adjudication, and
litigation. Following the general comment they were asked to explain individual
methods used lO resolve the specific serious problems identified by them.
4.2.1 Negotiation
It is agreed by all respondents that negotiation should be used as far as possible. In
practice. this method is used most frequently and most effective to resolve problems
and avoid paymen t disputes.
Many payment problems can be effectively resolved between the employer and the
contractor by negoti ation. Some examples were discussed in the interviews :
• Settlement offina l account and payment of money not due within the period
• Employer pays for variations claims nOl on time (item 8)
• Inadequate pre-pricing a/variations, wherever practicable (item 3)
64
Similarly, negotiation is also effective in resolving payment problems between the
contractor and sub-contractors, for examples,
• Equitable payment terms not included in subcontracts (item 13)
• There is no independent certifier (architect or QS) under the domestic
Negotiation is not suitable, if a party has little incentive to enter into the process or
when a legal decision is needed because an area of law is unclear. (The Law Society,
20(9)
4.2.2 Mediation and Arbitration
Both mediation and arbitration are stated in the SFBC for settlement of disputes. In
practice disputes are to resolve in the order of negotiation, mediation and arbitration.
Mediation is preferable to use than arbitration. Arbitration is the final option to be
used for resolving most disputes, although, in theory, it could be brought up to
litigation, if both parties could not agree to the arbitration award.
An example using mediation to resolve problem with the employer is 'employer pays
for variations! claims not on time'. Sometimes, arbitration is used for 'settlement of
final account and payment of money not due within the period stated in the contract'.
Another example is if it is a serious case on 'equitable payment terms not included in
subcontracts' arbitration is selected to resolve payments disputes.
65
The use of mediation is a favourable method for payment disputes. The previous
research indicates that the favourable factors for the selection of mediation are:
• "confidentiality,
• preservation of business relationship,
• reducing adverse effect due to cultural difference,
• addressing power imbalance,
• cost reduction, speedy in time,
• reducing the adverse effect due to different legal system"
(Chan, el al, 2(06)
The use of arbitration is due to its formal process in which an impartial third party
with specialist background knowledge on the nature of disputes. The arbitrator hears
all parties and makes a binding decision to resolve the dispute (The Law Society,
2009).
4.2.3 Adjudication
Adjudication is well promoted in other countries. This method is a good resolution
method in particular in handling large contracts and is widely used in UK, Singapore,
Australia, and New Zealand construction industry to resolve payment disputes.
However, some interviewees have pointed out that adjudication is not popular in
Hong Kong and even some interviewees express that they are not familiar with this
method.
66
In general, interviewees representing contractor perspective are agreed that there is
no need to add another dispute method such as adjudication in the s SFBC. The
methods for settlement of disputes are sufficient by means of mediation and
arbitration which are common in practice. Besides, the number of qualified
adjudicators practising in Hong Kong is the concern. As a result, it is not popular to
use adjudicator in construction practice.
There are different VIew on the use of adjudication between the contractor
perspective and the academic perspective. The academic interviewee agreed that
adjudication should be included in the SFBC for dispute resolution in order to secure
payment on time. The view is supported by the pilot interview representing the
employer. They agree that adjudication should be entering the time span in the
security for payment clauses in a contract, for example, the time span for an
adjudicator's decision. The decision is binding, both sides should agree to the
decision.
The results of previous research indicate that adjudication is faster and cheaper than
arbitration and more enforceable than mediation. (Chan, et ai, 2006)
4.2.4 Dispute Resolution Advisor (DRA)
DRA plays an important role as a natural character and can prevent or settle some
arguments throughout the construction period. DRA as an individual person, his
advice always be fairer and always acceptable by both parties in a contract. It is a
good practice adopted in government projects to appoint DRA for payment disputes.
67
However, it is not common In private sector due to additionaJ cost to individuaJ
comract.
4.2.5 Dispute Resolution Panel and Expert Determination
These are used for special cases and not popular in most of constructi on and building
projects. Hence, there is not discussed in details with the interviewees
4.2.6 Litigation
The general comment on the selection of dispute resolution methods is to use the
least-litigation method, because it is damaging to all parties in a construction project.
Once the disputes are to be resolved in court, the contractors or subcon tracts may
lose the opportunity of future collaboration. Litigation is less effective and less
favourable to resolve payment disputes. It is the last resort to use as far as practicable
because there are no winners but all losers.
If a legal decision is needed and the terms in the main contract or subcontract is
unclear litigation is to be used. The court process is formal and the judgement is
enforceable. (Chan, et ai, 2006)
There are court cases due to payment disputes discussed with the solicitor during the
interview. The legal decision is needed because the unclear tenns in the contract are
the clauses of back-to-back and pay-when-paid.
68
4.3 Discussion on Measures for Security of Payment
There are contractual and legislative measures for security of payment introduced in
the literature. Interviewees were asked to discuss the possibility of resolution
measures in security of payment in particular in those serious problems identified by
them. They discussed the serious problems as follows:
• improving written contract
• provisions of milestone payment, bonds or parent company guarantees, and
payment bonds
• provision of security of payment legislation
4.3.1 Improving Written Contract
In general all interviewees are agreed the ex isting construction contracts are well
establi shed. In practice. some development and construction companies have their
own conditions of contract for the main contract and subcontracts respectively.
Different projects can have different conditions entered in the contracts, For example,
the clause of payment terms stated in the main contract are not necessary to be
included in subcontracts , due to different responsibilities and interest of the main
contractor and sub·contractors. The c1auses in the subcontracts are not necessary
similar to the main con tract.
69
Public works projects which are undertaken by the government are always more in
transparency and equity than the private sector, in terms of the managing system and
the contractual measure. In the private sector some clauses in the main contract or
subcontracts could be erased, for example, EOT is granted under adverse weather
condition in public works contract. Another example, the clauses of pay-when-paid,
pay-if-paid and back-to-back are entered in the subcontracts. In Hong Kong, it is free
to agree any clauses in the construction contract. However, these clauses would
create payment disputes in practice. It is helpful to define the details in a written
contract or a subcontract.
4.3.2 Provision of Milestone Payment
Milestone payment is effective for security for payment and considered logical. It is
suitable for large infrastructure projects and also beneficial to deal with the employer
for any variations claims not paid on time. This payment method is to save time for
valuation of work done when the construction is under steady progress. The stages of
work must be well defined before signing (he contract. The main contractor should
control the cost by progress of work. The advantage is to receive payment on time
while the disadvantage is it cannot resolve payment problems on variations e.g. due
to change in design; or difficult to certify work performed if the project is of
complicated nature.
70
4.3.3 Provision of Bonds or Parent Company Guarantees
The provision of bonds cannot assist payment to the lower tier of supply chain but to
protect the upper tier i.e. the employer. It is needed to protect the contractual parties
for entering a high value project. It is an insurance relied on the thjrd party for
payment protection. Bonds or parent company guarantees cost ex.tra, in that an
additional amount of money is spent to buy the bond and to appoint a third party to
handle the money.
4.3.4 Provision of Payment Bonds
Payments bonds are a type of conditional bonds which protect the contractor from
the employer and protect the sub-contractor from the contractor. Payment bonds are
not common in Hong Kong.
4.3.5 Security of Payment Legislation
Legislative measure is effective to the private sector projects. In general, Hong Kong
is running as a free market where the government would have less interference
unless it is very critical. Some disputes discussed in the interviews may only be
prevented by legislation, for example, the problem is due to Payment practices in
subcontracts such as pay-when-paid or pay-ij-paid arrangement (item 11).
71
4.4 Discussion on Security of Payment to Contractors and Sub-
contractors
In general the practitioners agree that good relationship and effective communication
with all parties in a construction project are needed. It can help to conduct
negotiation effectively for resolving payment problems. Partnering is effective to
establish good relationship with all stakeholders in a project.
Well preparing documentation is important and is effective to secure payment for
variation orders while poor documentation fiJing will cause most disputes in any
variation claims.
The appointment of independent certifiers by the government should be considered
in supporting the private sector to deal with the payment problem between the
employer and the contractors or between the contractor and the sub-contractors.
Some payment problems can be resolved promptly such as the agreement to settle
the final account.
In general, individual interviewees have fairl y similar views on how to resol ve
practical problems to secure payment. Late payment and under payment are
commonly found in any construction projects. In case of non-payment, it is a very
serious problem however it is uncommon in Hong Kong construction industry.
72
There are different views on the issue of payment practice in subcontracts Le. back-
to-back, paid-when-pay and paid-if-pay arrangement as analyzed in this Chapter.
From the contractor's point of view this is not a problem. Other respondents have
very strong different views. Although disputes due to this payment practice can be
resolved by alternative resolution dispute methods, there are still many coun cases
due to this payment practice. This matter had been discussed in detail in the
interview with the construction legal advisor. Further investigation in this area is
reponed in Chapter 5.
73
CHAPTERS
COURT CASES STUDIES
From the interview findings in Chapter 4. litigation is not a favourable dispute
resolution method for resolving payment disputes. This process requires a
considerable amount of time and resources. During the interview, some particular
non-payment court cases were discussed in detail with the solicitor. There are four
local and two international court cases having been studied. These cases are due to
uncertain payment clauses in subcontracts and sub-subcontracts i.e. pay-when-paid,
pay-if-paid or back-to-back arrangements.
74
5.1 Pay-when-Paid and Pay-if-Paid Provisions
Two forms of contingent payment clauses usually appear in the subcontract, one is
pay-when-paid and the other is pay-if-paid. The main difference between them is,
under a pay-when-paid provision, the sub-contractor will be paid when the
contractor is paid by the employer within an agreed time frame, whereas under a
pay-if-paid provision the sub-contractor will be paid only if the contractor is first
paid by the employer. (Beggs, et aI, 2005)
In fact the pay-when-paid clause only deals with the timing of payment. Ideally after
the employer has paid the contractor, then the contractor has a duty to pay the sub-
contractor within a reasonable time. Whether the contractor has received the actual
payment from the employer or not, the contractor should pay the sub-contractor
when the obligation of the sub-contractor is completed. (Beggs, et ai, 2005)
The pay-if-paid clause includes a condition, only if the 'condition' is succeeded then
the contractor would pay the sub-contractor. However" .. .the risk of an owner's non-
payment is shared by the contractor and the subcontractor. " (Beggs, et aI, 2005)
75
5.1.1 Case 1 - Wo Hing Engineering Lld v. Pekko Engineers Lld [1998)
During the interview with the solicitor discussing the topic of pay-when-paid dispute,
he referred to Wo Hing Engineering Ltd v. Pekko Engineers Ltd. The solicitor was
engaged in the litigation proceeding appearing for Pekko Engineers Ltd (Defendant).
After this case, there is a direct authority on the construction of a 'pay-when-paid'
clause in Hong Kong.
The Defendant was a sub-contractor and the Plaintiff, Wo Hing, was its sub-sub-
contractor. In the sub-subcontract the relevant clauses are based on back-to-back
basis including payment terms.
The court had to decide whether the above-mentioned payment terms, payment of
the final balance should be pay to the Plaintiff when:
• After the Defendant received payment from the main contractor (Defendant
view), or
• The Defendant was entitled to pay the Plaintiff after a reasonable time after the
completion of the works (Plaintiff view).
Justice Suffiad had referred to a number of similar cases in United States, Australia
and New Zealand! and concluded that:
1 Smith and Smith Glass Ltd v. Winstone Architectural Cladding Systems Ltd [1992] 2 NZLR 473
76
"... when having to construe a clause in a subcontract that the sub-contractor will
only be paid when the main contractor is paid, commonly called a 'pay-when-paid'
clause, sufficiently clear words will have to be used before a court will be prepared
to construe that such a clause imposes as a condition payment to the main
contractor which had to be fulfilled before the sub-contractor had the right to be
paid as opposed to a clause limiting the time for payment, 2"
The court concluded that the Plaintiff was entitled to get pay after his works were
completed within a reasonable time, rather than wait until the Defendant received the
pay first by the employer.
5.1.2 Case 2 - Schindler Lifts (Hong Kong) Ltd v. Shui On Construction Lld
(1984]
Schindler Lifts was the sub-contractor engaged on a subcontract with Shui On
Construction, the main contractor. The Plaintiff, the sub-contractor, was claiming the
non-received payments under two certificates. The main contractor relied on clause
11(b) in the sub-contract.
"(b) Within fourteen days of the receipt by the Main Contractor of payment from the
Employer against any certificate from the Architect the Main Contractor shall notify
and pay to the Sub-Contractor the total value certified therein in respect of the Sub-
Contract Works ... 3",
2 Wo Hing Engineering Ltd \I. Pekko Engineers Ltd [1996] HCA 5561
] Schindler Lifts (Hong Kong) Ltd \I. Shui On Construction Ltd (1984] CA 134
77
... to contend that they had not actually received the money from the employer due
LO the employer claimed liquidated damages for the delay. However the delay was
not caused by the Plaintiff which led to the interpretation of the word 'receipt' within
the above clause I I (b), and its intention meaning became a key issue in this case.
The Defendant applied for a stay of proceedings to enforce the arbitration agreement,
as the arbitration agreement had been stated in the sub-contract. Mr. Wailer for the
Defendant referred to a similar court case, Hong Kong Teakwood Works Ltd. v. Shui
On Construction Co, Ltd, [1984] and the Judges accepted that the word 'receipt'
within the clause I 1(b) should read as the main contractor's actual receipt of the
amount which certified in the certificate from the employer. The appeal allowed and
the Court of Appeal set aside judgment, and the proceeding stayed in favour of
arbitration.
Although the sub-contractor had not successfully claimed the payment in this appeal
court case, however. it should not be regarded that the court agrees with the pay-
when-pay provision.
78
5.2 Different Rulings in Different Common Law Countries
In Hong Kong the Schindler Lifts and Hong Kong Teakwood Works Ltd cases did
not provide a clear view in the intention of pay-when-paid and pay-if-paid provision
clauses. However, the judge of the New Zealand High Court, Master Towle defined
the pay-when-paid and pay-if-paid terms in the case of Smith and Smith Glass Ltd v.
Winstone Architectural Cladding Systems Ltd [1992].
S.2.1 Case 3 - Smith and Smith Glass Lld v. Winstone Architectural Cladding
Systems Lld [1992]
The court was considering with following subcontract clause:
"We will endeavour (this is not to be considered as a guarantee) to pay these claims
within 5 days after payment to Wins tOne Architectural Limited of monies claimed on
behalf of the sub-contractor. 4 "
After analysed the decisions in similar cases from different common law countries
Master Towle concluded that:
" ... 1 accept that in certain cases it may be possible for persons contracting with
each other in relation to a major building contract to include in their agreement
clear and unambiguous conditions which have to be fulfilled before a sub-contractor
has lhe right to be paid, allY such agreemem would have to make il clear beyund
· See Footnote 1
79
doubt that the arrangement was to be conditional and not to be merely governing the
time for payment. I believe that the contra proferentem principle would apply to such
clauses and that he who seeks to rely upon such a clause to show that there was a
condition precedent before liability to pay arose at all should show that the clauses
relied upon contain no ambiguity. 5 "
It stated that the condition while using the term of pay-if-paid has to be clearly
clarified with the sub-contractor before the contract has signed. Also the pay-if-paid
clause should not mix up with the time for payment.
"For myself I believe that unless the condition precedent is spelled out in clear and
precise tenns and accepted by both parties, then clauses ... do no more than identify
the time at which certain things are required to be done, and should not be extended
into the "if' category to prevent a sub-contractor who has done work from being
paid merely because the party with whom he contracts has not been paid by someone
higher up the chain6 "
The court considered the clause was not sufficiently clear to allow the main
contractor to withhold payment from the sub-contractor. Besides, the tenn of pay-if-
paid should not be an extra clause that to hold back the payment to the sub-
contractor payment when his duty of work is completed.
S As Footnote I
6 As Footnote I
80
5.2.2 Case 4 - Wm. R. Clarke Corp. v. Safeco Ins. Co. [1997]
The employer of a commercial building in Los Angeles entered into a contract with
Keller construction Co. Ltd. Keller obtained a payment bond from Safeco Insurance
Company of America. Afterwards Keller entered into a subcontract with Wm. R.
Clarke Corporation. The subcontract contained a pay-if-paid provision. However,
during the construction period the employer declared bankruptcy, the owner did not
pay Keller, and Keller did not pay the sub-contractor. Clarke filed a lawsuit and
claimed against Safeco to recover on Keller's payment bond and recorded a
mechanic's liens.
The key issue of this case was about the pay-if-paid provIsIOn which held the
payment on both main contractor and payment bond surety. The trial court came up
with a similar decision with the New York Court of Appeals under the case of West-
Fair Elec. Contractors Y. Aetna Cas. & Sur. CO [2005J, both ruled that pay-if-paid
clause is against the respective states' public policy. The pay-if-paid provision
allows the non-payment risk from the main contractor to be shifted to the sub-
contractor, and it interferes with the sub-contractor's constitutional right to enforce a
mechanic's lien.
Safeco appealed to the Court of the Appeal of the State of California, but the Court
of Appeal agreed with the trial court decision that "the manner in which Sa/eco
exercised its right to an offset was not equitable. 7"
7 Wm. R. Clarke Corp. v. Safeco Ins. Co. (2000] Super. Ct. No. BC046221
81
5.2.3 Pay-wben-paid Clauses in UK
In UK, the Government introduced the statutory code that pay-when-paid clauses
were banned when section 1] 3 of the Housing Grants Construction and Regeneration
Act 1996 came into force. (Kaplan, 2009 and Turner, 2010)
The above act provides that pay-when-paid clauses became unenforceable, except
one situation, only if the employer becomes insolvent. Alternatively, "if the
employer became insolvent before the contractor was paid, a pay-when-paid clause
could, in theory, be valid and come to the contractor's rescue." (Turner, 2010)
Under the circumstance, the sub-contractor would not be paid by the main contractor
even if the sub-contractor has completed the work in accordance with the
subcontract. (Turner, 2010)
82
5.3 Back-to-Back Provision
Back-te-back provision is an agreement which links or transfers wholly or partly the
contractual terms and conditions from a main contract to subcontract or from
subcontract to sub-subcontract. (Hon, 2009a) If the provision was written vaguely
and the problem did not resolve before signing then wi1l become a serious problem.
There are two court cases in which the back-to back provision has been entered into
the contract documents between the contractor and the sub-contractor as well as
between the sub-contractor and the sub-sub-contractor. It is because of the unclear
and uncertainty in the meaning, as commented by the court judges, it causes
confusion and disputes. The court cases are discussed below.
5.3.1 Case 5· Jardine Engineering Corp Lld & Others V Shimizu Corp [1992]
Shimizu Corporation, the main contractor, undertook the work for the Queen Mary
Hospital Extensions and Improvements Stage Two. lardine Engineering was his
nominated sub-contracLOr, for the provision of the complete medical gas, the steam
services installation, the air-conditioning system, the electrical system and the fire
services system.
One of the main issues was whether a sub-contractor, who has been glven an
extension of time (EOT) for a delay, which was not caused by him, could also claim
against the main contractor for the losses and expense .
83
As the Defendant (main contractor) had been awarded EOT and successfully claim
from the employer, the Plaintiff argued that he had the same right to claim the
Defendant by the Implied Term B from the main contract into sub-contract. The
Implied Term B said,
"That the Subcontractor should have equivalent rights to payment for complying
with or as a consequence of an Architect's Instruction or other event as the
Contractor has under the Main contract. 8"
Justice Kaplan disproved Jardine's claim that the main contract's relevant clause
provisions had been implied into the subcontract, and said, "although the mam
contract and the subcontracts were clearly connected contracts, they were
nevertheless separate and integral contracts. It would set a dangerous precedent to
countenance a construction which allowed the relevant conditions of the main
contract to be incorporated in the subcontracts. 9"
Justice Kaplan went on to comment that if it created a true back-to-back contractual
relationship, all clauses from main contracts should be incorporated into subcontracts,
likewise, from subcontracts to sub-subcontracts. This would avoid any uncertainties
and ambiguities to avoid future arguments. It is inevitable that the contract document,
between main contractor and sub-contractor should be clearly and unmistakenly
written to intend the complying agreement. (Hon, 2009a)
8 lardine Engineering Corporation Ltd & Others v. Shimizu Corp 11992] HCCT 1
9 As Footnote 8
84
5.3.2 Case 6 - WH-SCG JV Ltd. v. Hong Kong Construction (Holdings) Ltd.
[20061
This case was about the sub-contractor, WH-SCG (Plaintiff), claimed that certain
amounts were due under its subcontract with the main contractor, Hong Kong
Construction Ltd (HKC). the Defendant. HKC denied the claim and tried to stay
WH-SCG's file action to arbitration. The court needed to decide whether HKC
should have the right to do so by reviewing several clauses in the subcontract.
In subcontract clause I, Particular Conditions stated:
"{WH-SCG}. being the Sub-Contractor, shall assume, perform and comply with all
obligations and liabilities a/the Main Contract between AP Ciry (the Employer) and
[HKC} (the Main Contractor) ... Wherever the term Main Contractor is used in the
Contract Document between the Employer and the Main Contractor, it shall refer to
{WH-SCG} ... IO ..
The above clause required that the Plaintiff should perform all obligations and
liabilities of the Main Contract, for that reason the Defendant contended that the
dispute should follow the Condition clause 35, arbitration agreement, under the main
contract.
10 WH-SCG JV Ltd. v. Hong Kong Construction (Holdings) Ltd [2006] CFI HCcr 48
85
The Judge disagreed with the Defendant and he considered that "... back-ta-back is at
be.H a vague expression. It is neither a legal nor a technical term ... back-to-back can
mean many things. It may simply mean, for example, that it was envisaged that WH-
SCG would undertake, back-ta-back all HKC's performance obligations and
liabilities under the Main Contract. Use of the expressions does not necessarily
imply that the arbitration agreement in Condition cl. 35 was intended to apply
between HKC and WH-SCG H "
It is implied that in order to incorporate successfully what specific terms under the
main contract into the subcontract, it is better to have clear and precise words to be
incorporated to the subcontract as what terms and conditions are agreed to.
Even back-to-back provisions has been deemed incorporated, it will be subject to the
clear and un mistaken terms written in the back-to-back provisions. In this case,
back-to-back provision was only applied to those terms of 'obligations and
liabilities', but not others.
11 As Footnote 10
86
5.4 Cases Findings
The si, court cases shown that the pay-when-paid. pay-if-paid and back-lo-back in
the subcontracts have caused payment disputes. Their meanings have been subject to
interpretations and arguments because of their controversial intention as found in the
contract documents.
Pay-when-paid and Pay-if-paid Clauses
Although in different countries the court judgment on the paid-if-pay clause are n01
the same, however, it appears now that after the court in Hong Kong ruled in the
case of Wo Hing Engineering Ltd v. Pekko Engineers Lld that it requires that a clear
wordings written in the con tract. The attention is also drawn whether the intention is
to determine the time when the payment will be made. or to determine under what
condition 'if payment will be made.
Back-ta-back Clauses
The court cases point out that the clause of back-ta-back is a vague expression, and
the expression could not define the true intention. This would lead into doubts and
ambiguities in the contract.
In practice. the back-ta-back provision attempts to incorporate all or panicular terms
and conditions from the main contract into the subcontract, or the subcontract to the
sub-subcontract. Before signing the contract, all of the referring terms and conditions
should be precisely stated and the sub-contractor or the sub-sub-contractor is
expected to understand the intention requirements.
87
A Study of Security of Payment in (he Hong Kong Construction Industry 2010
CHAPTER 6
CONCLUSION
Nowadays. due to some reasons or another, there are still quite a few contractors or
sub-contractors in the Hong Kong construction industry cannot receive the full
payment for the completed work despite the tenns and conditions have already been
agreed and entered into the contract. This dissertation provides an opportunity for me
to review several practical payment problems and to investigate any alternative ways
and measures that can improve the practical situation. By focusing on the main
contractor perspective, it allows me to oversee both main contract and subcontract
aspects.
ss
A Study of Security of Payment in the Hong Kong Conslruction InduslrY 2010
6.1 Understanding Payment Problems in Hong Kong
Construction Industry
Most of the payment problems can be summarised into three types, they are: 'late
payment', 'under payment'. and 'non-payment'. If these problems cannot be solved
at the early stages. they could become a payment disputes and require a longer time
and effort to settle.
6.1.1 Causes of Payment Problems
The causes of late payment and under payment have been presented in chapter 4 and
the analysed data can be classified into four categories as shown in Table 6.1.
1. Group X - includes five problems which are not classified as payment problems
and usually not raised to payment disputes in practice.
2. Group YI - includes two relatively less serious problems which always cause late
payment. If they are nO( properly managed payment disputes may be raised.
3. Group Y2 - includes one relatively less serious problem which always cause
under payment. If it is not properly managed payment disputes may be raised.
4. Group Z - includes seven relativel y serious payment problems which always
cause under payment and late payment. These payment problems always raise to
payment disputes.
89
Group Yl " Mild problems due late Group Z " Serious problem due under I
payment late payment
• Payment practices such as pay-when-paid • Settlement of final account and payment of

or pay-if-paid arrangement not easily money not due within the period stated in the
changed (item 11) contract (7)
• Agreed payment terms not followed in • Employer pays for variations claims not on
spite of interim certificate (item 12) time (8)
• Supply/demand imbalance of the construction
industry affecting the tendering price (10)
• Payments to sub-contractors not made within
the periods stated in the contracts (5)
• Equitable payment tenns not included in
subcontracts (13)
• There is no independent certifier (architect or
QS) under the domestic subcontracts to give
opinions as to the proper amounts of
payments (14)
• Contra-charges are unreasonably imposed
( 15)
Group X " Not classified as payment Group Y2 " Mild problems due under
problems in practice payment
• Payment requirements not clearly defined • Inadequate pre-pricing of variations,

to increase payment uncertainty (I) wherever practicable (3)
• Rules for measurement and valuation
inadequately to be agreed (2)
• Payments to contractors not made within
the periods stated in the contracts (4)
• Retention released not at the times
specified in the contract (6)
• Inadequate assessment of liquidated and
ascertained damages against main
contractor (9)
Table 6.1 " Causes of Late, Under and Non·Payment Problems
90
From the main contractor perspective, the three most serious problems which cause
under payment and late payment are:
• Settlement of final account and payment of money not due within the period
slated in the contract (item 7)
• Employer pays for variations claims not on time (item 8)
• Supply/demand imbalance of the construction industry affecting the tendering
price (item 10)
6.1.2 Payment Problems between Employer and Contractor I Contractor and
Sub-contractors
The ten causes of payment problems have been examined that they occur in most of
the main contracts and / or subcontracts as shown in Table 6.2.
The Problems in Main Contract
The two main reasons of causing serious payment problems (under payment and late
payment) between the employer and the main contractor are:
• Settlement of final account and payment of money not due within the period
stated in the contract (item 7), and
• Supply / demand imbalance of the construction industry affecting the tendering
price (item 10).
91
Causes of Payment Problems found between: Employer Sub-

Contractor and contractor
7 Settlement of final account and payment of money not
due within the period stated in the contract "
8 Employer pays for variations I claims not on time
10 Supply / demand imbalance of the construction

" "
---
industry affecting the tendering price "
5 Payments to sub-contractors not made within the
-
periods stated in the contracts "
Equitable payment terms not included in subcontracts
13
14 There is no independent certifier (architect or QS)

"
under the domestic subcontracts to give opinions as to " ./
the proper amounts of payments

15 Contra-charges are unreasonably imposed
3 Inadequate
..
pre-pnclng of variations •
-
wherever
,
" "
practicable " "
11 Payment practices in subcontracts such as pay-when- ./
paid or pay-if-paid arrangement not equitable
12 Agreed payment terms not foHowed in spite of interim
certificate " "
Table 6.2 • Payment Problems between Employer and Contractor and I or Contractor
and Sub-contractor
92
A Study of Security of Payment in the Hong Kong Constructio n Industry 2010
The Problems in Subcontract
There are different views among the interviewees. From the contractors' point of
view, the three causes of payment problems in subcontracts are relatively less serious.
However the academic interviewee considers those causes of payment problems are
serious, in particular, Payment practices in subcontracts such as pay-when-paid or
pay-ij-paid arrangement not equitable (item 11). This payment problem has been
discussed deeply with the solicitor interviewee. The legal judgements of the relevant
court cases have been examined and discussed with reference in Chapter 5.
The Problems in Main Contract and Subcontract
The most serious problem between the five causes of payment problems within the
main contract and subcontract is related to variation works, Employer pays for
variations / claims not on time (item 8). Variations always happen in construction
projects no matter in main contract or subcontract works. It is timely to agree the
price for variation after the commencement of work.
93
6.2 Reviewing Methods for Avoiding and Resolving Payment
Disputes
" ... the last thirty years in Hong Kong have evidenced a revolution in dispute
resolution. Arbitration has been established as a prime dispute resolution
mechanism ... mediation in Hong Kong as a new process but... has equally ancient
antecedents as arbitration".
(Kaplan, 2009)
Recently the Civil Justice Refonn in Hong Kong has introduced mediation as a first
legal procedure in resolving civil disputes. At the same time it has drawn many
positive feedbacks from the construction stakeholders who favour the adoption of
mediation in solving the payment disputes.
In practice, payment disputes due to late payment and under payment always occur
in the main contracts and subcontracts. The contractors believe negotiation is an
effective method use to resolve the payment problems at the early stage, but some
payment disputes are only able to settle by mediation and / or arbitration. In the
construction projects any disputes frequently occurred and always not be settled by
negotiation can be classified as serious problems.
Table 6.3 has identified the different causes of payment problems could be settled by
which type of dispute resolution methods in practice.
94
Negotiation Deal with late and! or under payment problems at the

early slage, for examples
Most disputes would start to .. Inadequate pre-pricing of variations, wherever practicable (3)
resolve by negotiation . .. Payments to sub-contractors not made within the periods stated in
Normally a ll parties would like the contracts (5)
to resolve any problem as soon • Settlement of final account and payme nt of money not due within
as possible and with the lowest the period stated in the contract (7)
cost. .. Employer pays for variations! claims not on time (8)
• Payment practices in subcontracts such as pay- when-paid or pay-
if-paid arrangeme nt not equitable ( 11 )
.. Agreed payment terms not followed in spite of inlerim certificate
(12)
.. Equitable payment terms not included in subcontracts ( 13)
• Contra-charges are unreasonably imposed (IS)
Mediation
After 10th J anuary 2010 all

civil disputes should first ly go Deal late and! or under payment disputes if not be
on to mediation. The process settled by negotiation, for examples
can be fast and cost cheaply to
achieve a new settlement. .. Settlement of fina l account and payment of money not due within
the period stated in the contract (7)
.. Employer pays for variations claims not on time (8)
Arbitration • Payments to sub-contractors not made within the periods Slated in
the contracts (5)
In the SFBC have stated .. Equitable payment terms not included in subcontracts (13)
arbitration is the dispute .. Contra-charges are unreasonably imposed (15)
resolution for final binding. The
clauses are unlikely to be
erased by the signing parities as
they believe arbitration should
able to solve most of the
disputes.
Litigation Deal with under-payment and non-payment dispules
Disputes cannot be resolved by .. Litigation is enforceable.

other resolution methods
Table 6.3 . Dispute Resolution Methods Using in Hong Kong
95
The SFBC states arbitration as the di spute resolution for final binding and the
clauses are unlikely to be erased by the signing parities. The contractors believe
arbitration is capable of solving most of the payment disputes, which makes
litigation less preferable.
In the past 15 years, the DRA has been appointed in many government projects for
resolving payment disputes. It is supported by the interviewees as the approach of a
neutral advisor to assist parties in predicting, avoiding disputes and aiming to resolve
them as soon as they arise.
96
6.3 Examining Measures for Security of Payment
During the interviews, discussions were made by targeting the two possible
measures for security of payment, which are in contractual and legislative measures.
In general all interviewees opine that the existing SFBC are well written. However,
some developers and constructors would have modified them by adding their own
clauses and / or erase some particulars. It is common that in construction industry
various contracts would have some specific clauses in order to share the risk with
other contract parties.
6.3.1 Contractual Measures
Hong Kong is a free economy city therefore the contract parties are free to agree and
modify any clauses in a contract. It is necessary to have a well written contract with
clear definition of the intention in those modified or newly added clauses. The
clauses must be precise and un mistaken in order to avoid any ambiguities that lead to
possible arguments. In the study of court cases, it found most payment disputes were
arisen from the ambiguous clauses.
I agree with Kaplan (2009) that
"It is not always easy to encapsulate in contractual language what it is the
businessman desires to achieve. Furthennore, the contract drafter cannot foresee
everything ... "
97
To produce a well written contract is not a simple task. Time and experience are
required. In Hong Kong the new version of SFBC has been introduced in 2005 but
many building constructs are still using the previous version. In accordance to the
interviewees it is because most of the employers and main contractors are familiar
with the last version of the SFBC.
The implications learnt from the six court cases also point out that a well written
contract is important to avoid disputes, especially on the payment terms. The vague
tenns such as pay-when-paid, pay-if-paid and back-to-back within the subcontract or
sub-subcontract may directly cause serious payment disputes.
6.3.2 Provision of Milestone Payments
The milestone payment is the payment "which has been pre-agreed by the contract
parties ... to be paid only when work has reached a certain stage" (CIRC, 2001). In
general, the provision of milestone payment in a construction contract is supported
by the interviewees in particular implemented in the mega infrastructure projects.
This payment method helps to promote work progress adhering to the work schedule
and save the resources in preparing measurement and valuation for interim payments.
98
6.3.3 Provision of Bonds
The provision of surety bonds is a guarantee by a bank or an insurance company to
the employer that a contractor will perform the obligation or pay the suh-contractors
or suppliers as stated in the hond. It is a good practice in the Hong Kong construction
industry and is well supported by the interviewees.
There is another type of bonds that commonly used called Payment bonds. It is a
form of guarantee by a bank or an insurance company that an employer or a main
contractor will commit the payment to the main contractor and sub-contractors
respectively. It is not common in the Hong Kong construction industry but a practice
in the Mainland construction industry. This practise is supported by the interviewees
in particular bidding the high risk overseas construction projects, where the
employers may delay or withhold payment due to some risks not known by the
contractors that may occur in those countries.
6.3.4 Legislative Measures
In this study, individual interviewees have been invited to give comments on the
recommendations of the provisions of security of payment legislation. (eIRe, 200 I)
(a) "banning 'pay-when-paid' and 'pay-ij-paid' clauses;
(b) providing for prompt adjudication of disputes over progress payments;
(c) requiring security for disputed amounts following adjudication; and
(d) allowing suspension of work for non-payment or failure to provide security
after adjudication."
99
The contractors' perspective about entering the clauses of pay-when-paid and pay-if-
paid in subcontracts is not a serious problem. They also believe the use of
adjudication as an alternative dispute resolution is not popular in the Hong Kong
construction industry as a whole. However, there is a different view point from the
academic interviewee where he supports the introduction of security of payment
legislation. From the legal point of view. the six court cases which are analysed in
Chapter 5 indicate that the legislative measure is necessary to secure the prompt and
equitable amount of payment by "banning 'pay-when-paid' and 'pay-if-paid '
clauses".
100
6.4 Recommendations for Consideration
After anal ysing the data collected from academic, practical, and legal view points,
the possible measures for security of payment are recommended for consideration
would be in two categories, ContractuaJ and Legislative improvement.
6.4.1 Contractual Improvement
Good Contracl
The vague back-to-back, pay-if-paid. and pay-when-paid clauses should not be
entered in the subcontract documents, and a clear and unmistaken written contract
should aJways be accomplished and agreed by the contract parties before signin g.
The merit of milestone payment can promote the progress of work on time and
secure payment to contractors. The provision of milestone payments is
recommended.
The provision of surety bonds is a guarantee to perform the contract successfully
while the provision of payment bonds is a guarantee to contractor's payment. The
provisions of surety bonds and payment bonds are recommended to be included in
contract documents.
101
Adoption of Adjudication
In addition to mediation and arbitration for settlement of disputes, the provision of
adjudication is recommended to be considered as an additional alternative dispute
resolution method in the contract. An adjudicator is an appointed person to operate
the dispute resolution process and the role is to specify whether the dispute is right to
exist and should it be enforced. The contract must provide that the decision of the
adjudicator is binding until the dispute is finally determined by legal proceedings, by
arbitration or by agreement.
Appointment of DRA
The benefit of DRA is claim avoidance. It is a non-binding alternative dispute
resolution process in which a neutral third party known as DRA is appointed at the
contract commencement until contract completion. DRA is to assist the contract
parties to identify potential problems, and advise on the means of resolving disputes,
which unless resolved may turn into fonnal disputes. Owing to the success in dispute
resolution in public projects, DRA is recommended to be used in private sector to
help in dispute resolution
102
A Study of Security of Payment in the Hong Kong Construclion Industry 2010
Appointment of Independent Certifier
It is the fact that sealement of the Final I Variation Accounts always takes the
process of long negotiation. Lack of the experience and skill would have negative
effect on the progress and outcome. The settlement of the Final ! Variation Accounts
is equivalent to settle some of the payment disputes. In the private sector project, the
appointment of an Independent Certifier to be responsible to prepare and settle the
Final! Variation Accounts in the process of negotiation would have better outcome
in settlement of the Final! Variation Accounts,
6.4.2 Legislative Improvement
In this study the findings indicate that the 'contractors favour the current practice but
there are different viewpoints from academic and legal findings.
Banning pay-if-paid and pay-when-paid
In principle, it is an equitable approach by banning pay-if-paid and pay-when·paid
clauses in contracts. It is because the clause of pay-if-paid or pay-when-paid "places
a heavy burden of risk upon the sub-contractor... not only of the employer not paying
the main contractor because he is bankrupt or in breach of the main contract, but
also... due to some extraneous complaint by the employer against the main
contractor unrelated to the subcontract... " (Molloy. 1999)
103
In Ihe Hong Kong construction industry, the CIRC (2001) Report recommends
"banning pay-when-paid and pay-if-paid clauses" but (he contractors do not support
this recommendation as reported in section 6.3.4.
There are some payment disputes in the Hong Kong construction industry settled by
the litigation due to the provisions of pay-when-paid or pay-if-paid clauses in
subcontracts. In view of this the issue of 'banning pay-if-paid and pay-when-paid
clauses' is recommended to the legislators for their consideration to make it statutory.
Adjudication through legislation
There are many successful cases reported in UK, New Zealand, Australia and
Singapore for resolving payment disputes and expediting the disputed payment by
use of adjudication through legislation in the construction industry.
The CIRC (2001) Report introduces adjudication and recommends as a dispute
resolution method for security of payment. Again, the contractors do not support this
recommendation as reported in this dissertation.
104
A Study of Security of Payment in the Hong Kong Construction InduslrY 2010
6.5 Limitation and Further Study
The above conclusion is based on my research findings which were di scussed in this
dissertation within a limited timeframe. Beside the time limit there are some factors
may affect the above findings such as the specific sample of the interview and the
court case studies.
The study of security of payment herein is mainly focusing in the Hong Kong
construction industry. The contractual and legislative measures for security of
payment have been investigated in particular from the contractor's perspective.
However, the review in the Hong Kong construction sector has not been compared
with the other experienced countries where security of payment legislation has been
well establi shed. for example, the United Kingdom, Singapore and New Zealand
The method for data collection is by face-lo-face interview and it is appropriate for
thi s study. I have discussed my study topic deeply with the experienced practitioners.
The interviewees have given their opinion from academic, legal, and practi cal points
of view. Although I have onl y conducted six interviews (one pilot interview and five
interviews), the results may not able to represent the general spectrum in the Hong
Kong construction industry; nevertheless the results show the direction s for the
improvement of the payment disputes si tuation .
105
The court cases study is essential in order to understand the legal perspective about
the previous construction payment disputes. The judgments indicate the problems
occur from the unclear terms in contracts. The six payment di sputes court cases
simply provide some guidance to the legislative measures in the practical situation.
Further investigation is recommended for consideration on Security of Payment
Legislation in Hong Kong by the means of:
• Reviewing the effect of Security of Payment Legislation in the construction
industry in other countries.
• Reviewing the relevant court cases related to the provisions of pay-when-paid,
pay-if-paid, and back-ta-back provisions in the past 25 years in Hong Kong.
• Public consultation with construction stakeholders to be conducted 10
understand any difficulties in its practical implementation.
106
REFERENCE
• Bartlett A. and Franklin K. (2004), Adjudication, Architect's Legal Handbook-
The Law for Architects, 8th Edition, Elsevier
• Beggs, T.W., Kalson, R.D., Saxe, R.W. (2005), Pay-When-Paid, Paid-If-Paid,
A Huge Difference, Foundalion Drilling Magazine, November, ADSC: The
International Association of Foundation Drilling [http://www.adsc-
iafd.comli4a/pageslIndex.cfm?pageID~34981 (Accessed on 25106/2010)
• Bell, J. (2005), Doing Your Research Project, A Guide for First-time
Researchers in Education, Health, Social Science, Open University Press
• Chan, E.H.W., Suen H.C.H., and Chan C.K.L. (2006), MAUT-Based Dispute
Resolution Selection Model Prototype for International Construction Projects,
Construction Engineering and Management, 132(5),444-451
• Chan, P. (2009), Free Seminar on Managing Payment Disputes through
legislation and contract - a comparative analysis, Hong Kong The Chartered
Institute of Building. [http://www.ciob.org.hklevents/view/280] (Accessed on
2110612010)
107
A Study of Security of Payment in the Hong Kong ConSlruction Industry 20ID
• Chau K. W. (2007), Insight into Resolving Construction Disputes by
Mediation/Adjudication in Hong Kong, Journa1 of Professional Issues in
Engineering Education and Practice, 133(2), 143-147
• CHEC (2010), Corporate Overview, China Harbour Engineering Company
[http://www.chec.bj.cnltabidl67IDefauILaspx] (Accessed on 20/06/2010)
• Cheng, T, Soo, G, Kumaraswamy, M, Wu, J (2009), Security of Payment for
Hong Kong Construction Industry Workable Alternatives and Suggestions
[http://www.building.com.hklforuml2009_0630security.pdf] (Accessed on
05106/2010)
• Cheung K.K. (2000), Pay-When-Paid: What Does It Mean? Part I. Deacons,
[http://www.deacons.com.cn/englknowledgelknowledge_109.htm ] (Accessed
on 0510712010)
• Cheung K.K. (2001), Pay-When-Paid: What Does It Mean? Part 2, Deacons,
[http://www.deacons.com.hklenglknowledgelknowledge_IIO.htm ] (Accessed
on 05/0712010)
• Cheung, S.O., Wong W.K., Yiu T.W., Kwok, T.W. (2008), Exploring the
Influence of Contract Governance on Construction Dispute Negotiation, 10urnal
of Professional Issues in Engineering Education and Practice 134 (4) 391-398
108
• Construction Industry Review Committee (CIRC, 2001), Improved Security of
Payment to Contractors and Sub-contractors, Construct for ExceJlence, Report
of the Construction Industry Review Committee, 81-83, HKSAR
• CoUam, G., O'Reilly, M., and Ryan, E. (2002), "Statutory Construction
Adjudication: Four years on." Proc. Inst. ofCiv. Eng. (UK), ISO (2), 7S-80.
• Cox R. K. (2009), Pay-if-Paid Clauses: Sometimes A Defense, Sometimes Not,
Watt, Tieder, Hoffar & Fitzgerald, LLP, [http://www.wthf.comlnewslPay-if-
Paid-Clauses:-Sometimes-A-Defense,-Sometimes-Not] (Accessed on
OS/07120 10)
• Development Bureau (2009), Wider Adoption of Dispute Resolution Advisors
in Public Works Projects, HKSAR Government,
[hUp:llwww.devb.gov.hklenlsdev/press/index_id_S6S0.htmll
• Environment, Transport and Works Bureau Government Secretariat (2004),
Reference Guide on Selection of the Procurement Approach and Projects
Delivery Techniques (Ref. ETWBW506/30101 dated 21 Oct., 2004), HKSAR
Government,
[hUp:llwww.devb.gov.hklfilemanager/technicalcirculars/enlupload/49/1/C-
2004-01-32-l.pdf]
• Fellows R. and Liu A. (2008), Research Methods for Construction 3rd Ed,
Wiley-Blackwell
109
A Study of Security of Payment in the Hong Kong Construction Industry 20]0
• Fortney M. (2009), Pay When Paid or Pay if Paid Provisions, T Fortney &
K1ingshim, [http://www.f1daborlaw .comlarticleslPay-When-Paid-or-Pay-i f-
Paid-Provisions. html] (Accessed on 05/0712010)
• Gammon (20 I0), Introduction, Gammon Construction Limited,
[http://www.gammonconstruction.comlhklenglabout.....gammonlintroduction.htm
I] (Accessed on 0510712010)
• Hill T. and Wall C. J. (2008), Adjudication: Temporary Binding and Tiered
Dispute Resolution in Construction and Engineering: Hong Kong Experience,
Journal of Professional Issues in Engineering. Education and Practice 134(3)
306-308
• HKCA (1994), Standard Form of Domestic Subcontract, The Hong Kong
Construction Association (HKCA)
• HKJA, HKICM, HKJS (2005), Agreement & Schedule of Conditions of
Building Contract for use in the Hong Kong Special Administrative Region The
Hong Kong In stitute of Architects (HKIA), The Hon g Kong Institute of
Construction Managers (HKJCM), The Hong Kong Institute of Surveyors
(HKJS )
• HKIA. HKICM. HKJS (2005). Agreement & Schedule of Conditions of
Nominate Subcontract for Use in Hong Kong Special Administrative Region
HKJA , HKICM, HKIS
]]0
• HKlAC (200S), HKlAC Appoints Gary SOO as its New Secretary-General ,
lhttp://www.hkiac.orglnewspdfnl.pdf] (Accessed on 0510712010)
• HKlS (2009), Position paper of the Hong Kong Institute of Surveyors on
Security of Payment, Hong Kong Institute of Surveyors,
[http://www.hkis.org.hklhkislhtmLqsdlnewsroom_chairman_detail .jsp?id=56]
(Accessed on 0510612010)
• Hon, L.C.Y. (2009a), Surveying Practice - "Back-to-Back" Provisions in Hong
Kong's Building Contracts - Points to Note from Some Recent Hong Kong Court
Cases Pan I . Surveyor Times, 34-37,
[http://www.hki s.org.hklhkislgeneral/stl20090 II2009stO IS_pra.pdf] (Accessed
on 05107/2010)
• Hon, L.c.Y. (2009b), Surveying Practice - "Back-to-Back" Provisions in Hon g
Kong's Building Contracts - Points to Note from Some Recent Hong Kong
Court Cases Part 2, Surveyor Times, 31-34,
[http://www.hkis.org.hklhkis/generallstl200902l2009st02_S_pra.pdf] (Accessed
on 05107/20 10)
• Kaplan N. (2009), Security for Payment presented at Conference on The New
Economic Reality: Implications for the Construction Industry in Hong Kong.
2S-29110/2009, Hong Kong,
[http://www.hkca.com.hklseminars/200911 02lsp3 _Neil Kaplan.pdf] (Accessed
on 0510712010)
lit
A Study of Security of Payment in the Hong Kong ConSlrUction Industry 2010
• Kin Wing (2010). Introduction. Kin Wing Engineering Co .• Ltd.
[http://www.kinwing.com.hklJndex.htrnlJ (Accessed on 05/07/2010)
• Kraunsoe N. (2009). Security for Payment. presented at Conference on The
New Economic Reality: Implications for the Construction Industry in Hong
Kong. 28-29/10/2009. Hong Kong.
[http://www.hkca.com.hklseminarsI2OO9II 02lsp4_NielsKraunsoe.pdf)
(Accessed on 05/06120 I0)
• Last W.e. (2010). The California Supreme Court Declares Apay If Paid@
Clauses Are Void. Last & Faoro Attorneys At Law. [http://www.adsc-
iafd.comli4a/pages/lndex.cfrn?pagelD=3498] (Accessed on 05107/2010)
• Leung F and Ho D. (2009), Security of Payment Guidelines for Dispute
Resolution Version I May 2009 (CIC/SBCIP/014/09 for discussion). Letter
dated 12 June 2009 to Committee on Subcontracting Construction Industry
Council (CIC).
[http://www.hkis.org.hklhkis/generaII2OO9agmlSecurity%200f%20Payment.pdf)
(Accessed on 05/0612010)
• Melnnis J. A. (1996). Recent Developments In Construction Law.
sunzi.lib.hku.hklhkjo/viewIl411400178.pdf (Accessed on 0510712010)
• Molloy J .B. (1999), Pay-When-Paid Provisions. Surveying News letter.
February. Hong Kong Institute Surveyor
tl2
A Study of Security of Paymenl in the Hong Kong Construction Industry 2010
• OGC (2007), Guide to hest 'Fair Payment' practices, Office of Government
Commerce,
[http://www.ogc.gov.ukldocuments/CPOIS9FairPaymentPractices.pdf]
(Accessed on OS/071201O)
• Oon C.K. (200S), Pay-When-Paid Clauses in Subcontracts, International Forum
on Construction Industry Payment Act and Adjudication organized by
Construction Industry Development Board, Malaysia and The Institution of
Surveyors, Malaysia on 13 - 14 September 200S at Kuala Lumpur,
[http://ckoon-law.com!PaperIPAY%20WHEN%20PAID%20CLAUSES-
AN%200VERVIEW.pdf] (Accessed on OS/071201O)
• Pettigrew, R. (2005), Payment Under Construction Contracts Legislation,
Thomas Telford
• Randolph, P.R. (1997), Construction Law; Sub-contractors; Waivers of Claims,
Daily Development extracted from Quarterly Report on Development in Real
Estate, AEA Section on Real Property, Property, Probate and Trust Law,
[http://dirt.umkc.eduldds/dd97/ddI22497.htm) (Accessed on OS/07/201O)
• Soo, G., Kumaraswamy, M. and Wu, J. (200S), Contractor's Right to Stop Work
on Non-Payment: A Comparative Perspective from Hong Kong, Proceedings of
International Conference on Building Education and Research (BEAR)-
Building Resilience on II-IS February 200S, University of Salford, United
Kingdom, [http://www.irbnet.de/daten/icondalCIBI13S7.pdf] (Accessed on
05/06/20 I0)
113
A Study of Security of Payment in the Hong Kong Construction Industry 20ID
• Speaight A and Stone G. (2004), Architect's Legal Handbook - The Law for
Architects, 8th Edition, Elsevier
• Teo P. J. P. (200S), Adjudication: Singapore Perspective, J. Journal of
Professional Issues in Engineering Education and Practice, 134(2),224-230
• The Law Society (2009), How to solve disputes, The Law Society,
[http://www.lawsociety.org.uklchoosingandusingihowtosolvedisputes.page]
(Accessed on 05/06/2010)
• The Lighthouse (2008), Security of Payment in Construction Industry, The
Lighthouse - Spring 200S S-11,
[http://www.lighthouseclub.com.hklNewsletterslLighthouse%20CIub%20-
%20Spring%20200S%20-%20Final_IOO55577_I.PDF] (Accessed on
05/06/2010)
• Turner, c.K. (2010), 'Pay-when-paid' clauses unenforceable, except on

insolvency, Thomoson Snell & Passmore, {http://www.ts-
p. co. uklknow1edgelpubli cati on s/arti c Ies/pa y-when -paid -cl auses-unen forceab le ]
(Accessed on 05/0712010)
• Wu, B.S.C (2007), Pay-when-paidlPay-if-paid - Under the Standard Form of
Building Contract 2005, Surveying Practice 38-40, Surveying Practice,
[http://www.hkis.org.hklhkislhtml/uploadINewsletter/nwsI798_0.pdf)
114
• Wu, J; Kumaraswamy, M. and Soo, G. (2008), Payment Problems and
Regulatory Responses in the Construction Industry: Mainland China
Perspective, ASCE JournaJ of Professiona1 Issues in Engineering Education and
Practice, 399-407
Court Cases
• Jardine Engineering Corporation Lld & Others v, Shimizu Corp [1992J HCCT I
• Schindler Lifts (Hong Kong) Ltd v. Shui On Construction Ltd [1984J CA 134
• Smith and Smith Glass Ltd v. Winstone Architectural Cladding Systems Ltd
[1992J 2 NZLR473
• Wm. R. Clarke Corp. v. Safeco Ins. CO. [1997J of Amer, 938 P.2d372
• Wm. R. Clarke Corp. v. Safeco Ins. Co. [20ooJ Super. Ct. No. BC046221
• WH-SCG JV Ltd. v. Hong Kong Construction (Holdings) Ltd [2oo6J CFI HCCT
48
• Wo Hing Engineering Ltd v. Pekko Engineers Ltd [1996J HCA 5561
115
The Hong Ko ng Polytechnic University
Department of Build ing and Real Estate
Master Degree Dissertation for MSc in Construction Law and Dispute Resolution
Appendix A -I
INTERVIEW QUESTIONS
A STUDY OF SECURITY OF PAYMENT IN HONG KONG CONSTRUCTION INDUSTRY
Fan Lap Kai
June 2010
The aim oJ this study is to investigate what is security oJ payment and how security of payment to contractors and subcon tractors call be improved
through legislation aruJ/or contractual provisions in Hong Kon g construction industry
----_._----_._--------------_._._._-----'....._._.-_._----
A Study of Security of Payment in Hong Kong Construction Industry 1 2010
Part 1 - Examine Payment Problems in the Construction Industry
Do the following statements reflect the practical situation in Hong Kong construction industry?
,---
I Serious j
-,-
Mild I No
i
I
( Please -.J in the boxes where you think appropriate) , problem ... p,:oblen'.... J roblem ~
_ 1_. __P_aY" ment requirements not c learly defined and increase paym~,~~ncertain~y~n_,~on':~c:._ L__ -11- ___ I~ ____ I
Rul~s!~~measurement and valuation inadequately to be agree~______. .~ _____. _______. _~~_ l----l

2.
3.
4.
lna~:~u~e pre-pricing of variations, wherever practicable
Payments to contractors not made within the periods stated in the contracts
_______ ...
-1
H-__
L 1
. -L----l
i
--- .- --j
5. Payments to subcontractors not made within the periods stated in the contracts
--- I ---- I
--
6. Retention released not at the times specified in the contract
I
.J.---- I
7. Settlement of final account and payment of money not due within the period stated in the contract I r-- ] ___
8. Client pays for variations! claims not on time
I .
--
9. Inadequate assessment of liquidated and ascertained damages against main contractor
10. Supply!demand imbalance of the construction industry affecting the tendering price
._---
11.
12.
13.
Payment practices in subcontracts such as pay-when-paid or paY-if-paid arrangement not equitable
- .
Agreed payment terms not fo llowed in spite of interim certificate
.---
Equitable payment terms in a main contract are not included in subcontracts
F1-- i
I,
--
14. There is ~o independent certifier (architect or QS) under the d~mesti~~b-con tracts to give opiniom. as to the ---1"
1- ---. " ..-
15.
-------_._-
Contra-charges are unreasonabl y imposed
- - ---.-----
..
+--- - ---41'--1I
I
Source: (CIRC, 2001) item 1-7, (ChwlIg, et ai, 2008) item 2,4,5,6,8,9, (HKIS 2009) Item 4, 5, 11-15 and (Wu, et ai, 2008) item 10
Payment problems in this study means nOlI-payment, under-paymelJl, ami late payment
Fan Lnp Kai

A Study of Security of Paymellt in Hong Kong COll structioll Industry 201 0
1
Part 2 - Examine Dispute Resolution and Measu res for Securi ty of Payment
I. QI Please identify the 3 most serious problems in the construction industry in your view that always cause payment disputes. (Not limited to Part I
statements)
(a) Ident ify which of the problems are (i) between the client and contractor or (ii) between the contractor and subcontractors or (i) in construction
workers
(b) What are the causes of such problems? Any examples?
(c) For such problems what methods do you suggest for di spute resoluti on?
• negotiati on, med iation, arbitration, dispute reso lution advisor, dispute resolUlion panel, expert determination, adjudication, litigation
Q2 Please comment on some of above di spute resolution methods in solvin g payment disputes in the industry. How effecti ve is?
Q3 Di scuss the possi bility of resolution measures in security of payment in particular the above 3 mentioned problems
Contractual measures
(a) What measures should be taken to improve written contract and how?
(b) Please gi ve comment on
• mi lestone payment
• bonds or parent company guarantees to release retention money to subcontractors
• payment bonds as used in Mainland China
Legislative measu res

• Please give comment on security of payment legislation such as in Singapore
• Other measures
F(l1I Lap K(li

A Study of Security of Payment in Hong ._
________________ .Kong Consr-ruction.______________________
_______ Industry ~
I 2010
______ .---1.'_ _ _ __
Supplementary Questions
To HKU researchers
I. Any deficiency of the legal sys tem and remedies?
2. Any loose implementation of existing laws and regulations?
3. Any problems in practicability of ex isting laws and regu lations?
To Solicitor and Arbitrator

I. Does Arbitration conduct at the en d of project only? Any arbitration cases conduct throughout the project?
2. Is it possible to suspend (stop) work if MC cannot get payment within 2 mon th s (2 interim certificate periods)? Is there any legal risk?
3. Discuss pay-when-paid, pay-if-paid, and back-tc-back arrangements in the subcontracts
Fan Lap Ko;

Appsndix-A-2
Part I - Examine payment problems
Are the following problems found in HK construction industry?
Are they found in the studied ~ ase? fKeith: how do you know that t he interviewees will be
familiar w ith this case?]

O Re Report (ORe 2001) 01 ·8
(Cheung, Wong, Yiu, Kwok, 2008) 02, 4, S, 6, 9-11

IW u, et aI, 2008) 12-18
Do you agree with the following statement? Strongly

agree
Agree Not
agree
Strongly
not agree
1. payment requirements dearly defined to reduce payment uncerta inty
2. adequate rules for measurement and valuation lQ..be agreed
3. pre-pricing of variations, wherever practicable
4. payments to contractors made within the periods stated in the contracts
S. payments to subcontractors made within the periods stated in the contracts
6. retention released at t he times specified in the contract
7. use bonds or parent company gua rantees to release retention ~money to subcontractors
where
work is completed well before the completion of the main works
8. settlement of the final account and payment of ~money due within the period given in the
contract
9. cl ient pay for variatio ns claims on time
10. Adequate assessment of liq uidated and ascertained damages against main contractor
11. Argument on the prolongations costs claimed by main contractor
12. Fair hierarchical/-contractual relationship
13. Fair contract conditions in main contract
14. Fair contract conditions in subcontractor
15 . Any deficiency of the legal system and remedies?
16. Any supply/demand imbalance of the construction industry (Iow tendering price)?
17. Any loose implementation of existing laws and regulations?
18. Any problems in practicability of existing laws and regulations?
Part 11 - Examine the resolution measures
01 Please identify ~ 5 most serious payment problems in the construction in du stry--+fte.y-.

~'t9L1r vIew that always cause payment disputes.
Problem 1
Problem 2
Problem 3
Problem 4
Problem 5
(problems are not limited in the listed 18)

02 Discuss at least 3 out of those you men tioned in Q 1 in details
Identify whicl1 of the problems are
(a) between the clie nt and contractor or
(b ) between the co ntractor and subcont ractors or
(c) t&i!:Lco nstruction workers_
What are the causes of such problems? Any examples?
rFormatted: Font' Calibri

~For su<..:h problems. W~ hat a~ methods do you suggest for disp ute reso lution,
negotiation, mediation, arbitration
03 Discuss the possibil ity of resolution measures in security of payment for the above 3
problems
W0at measures should be taken +10 improve writte n contract and how?
Please give comment on
Milestone payment
Payment bonds as used in M ainland
Other measures
Legislative measures
Please give co m ment o n
Security of payme nt legislatio n suc h as Singapore
Other measures
04 GWePleas e comment on disp ute resolution methods in solving payment disputes in the
industry
How 11 r e t Re)! e ffective~
negotiation,
mediation,
arbitration
any other methods
Is it necessary to
Q5 Has adjudication been used in the proj ec t s? CSR"1FAent

S!l between the client an d contractorl
and
h between the contract or an d subcon t ractorsl
Q6 Give comment on the measures to secure payment to construction workers
- End of interview -
AIJPCI!djA' A-3
. . ,. ~ ~ l FonuIttd: F~ 806d, , , ,, U~
...- - -{ FcInMttad: Left
nvjt:ttion &etar an fn tefvt~
r:,1==.:;=::----.-
FormIIted: Undtlfne
I FormIte.d~ Centltted
.
tml;~ t l:-WdfeS$ If Formal Businffi Letter!
.
i F _ ' ..........
- { FOil"illtW: EngIIsn (l./nMd Kingdom) 1
. ir;;;.....d7Foot (,..,,) p~, (ANn)---'
'~~Lill!! Fan Lap Kai. ~a AfMaster~ ilQegree student in MSc Construction Law and Di5p~et . C*-t (TradiIIonIt. Hong Kong s..A.A.)
Resolution-lL _ .
~~jytf*" at (:'Of' Ocpilr1meot of Building and Real Estate t>e,ao:HlAH!At hlID ~ Honc Kong Polytechnic
University. I am now
conducting a research project for my MSc dissertation entitle(t "A Study of Sewrity of Payment in Hong
Kong Construction Industry'". The aim of my research is to study what -Hrsecurity of payment .!l..iN'Id how
riM- it ~be improVfli between dlents and the contractors, <.oA4-or betwe>:'n the contractors and
subcontractors
throuJh le&islatlon or contractual provisions in Hong Kong construction industry. My (jisSM all9R
~1t:It:IP , oiS8fdissertatjon o;upervisor is Mr. Stepl"ten Q...Mau al~9 from thft: Department of Buildinsand Real
Est.t",!".h. , 'HI•• @............ h~l(em.iI; SlcQhcn.D .M 3U('!' ~ - , I \ FomIMIod: Del... p~ FotlI. FM"
(Def-*) TII'I'IM .... RornIn, 12 pt
"#L" tOll .Q.t;.ein& an active ~xperienced tl". tU~ij9 "1'1£ Qra(tltio~r in the construction , _,F_(_} P~. ("""}
1 C _ t r _. Hong KongSA R )
industfY,lwould~ike toinvite. ... ___ .A ., .. _ _ . ____ _
you for an intervieW. I eelllf'pd :t fS my rutlirt that your professional knowledge would be essenti-al to my
(Hearcn.
. _ ' Font (_) ~. (.....,)
The t!ft lte~le:Aea~ questions are attachf!d fOfyour ~~lefe ren(e. l c~ tr!!""'<>"". Hong Kong SAA .} ._
All inf<>rrtl4ltion and data collected will be only u5ed for research purposes and ~kept in the strictest
, :,fiaa M..,;ic2n~dfn NUWce.
Plea!!.!:" hod t he attached interview 9IJettions (Part 1) and w o uld like to dl~ cuss some ()pen questions (Part
.2l...,ithm 30-...5 mm.
Thank you for your guidance and kind assisunce.
Yours I'incerely,
Fan lap Kai
Email:
Mobil~
klkfan@l
,9122)
. /0<)67. -i F~: Oetd PatagRlph Fort, Font
(Detallt) rlf'l'leS New Roman. 12 pC
•
-----.J
The Hung Kong Polytci,: hn ic University
Dcpartment o f Building and Real Estate
Master Degree Dissertation for MSc in Cun struction Law and Dispute Resolution
Appendix A-4
INTERVIEW REPORT (PILOT)
A STUDY OF SECURITY OF PAYMENT IN HONG KONG CONSTRUCTION

INDUSTRY
Interviewer: Fan Lap Kai
Interviewee:
Former Assistant Secretary, Works Bureau, HKSAR
Interview on 06 June 2010

Follow-up meeting on 08 June 2010
A Study of Sc('urin' of PClYlll ent ill 1-/0IIg K(m,~ COllstruction Il/du.~ Ir_\' 20 10
---- -.--
Part 1- Examine Payment Problems in the Construction Industry
Do the following statements reflect the practi cal sit uation in Hong Kong construction industry? Serious Mild No
problem problem problem
( Pleau .,J in the boxes wh ere you think appropriate)
1. Payme nt requirements are clearly defined and increase payment uncertainly in contract
2. Rules for measurement and valuation inadequately to be agreed

--
3. Inadequate pre-pricing of variations, wherever practi cable
4. Payments to contractors not made wi thin the periods stated in the contracts
5. Paym ents to subcontractors not mode within the periods stated in tile contracts
6, Retention released not at the times specified in the contract
7. Sell/ement offinal account and paym ent of money not due within the period stated in the contract
8. Clie nt pays for vari ations! claims are not on ti me

-- -~'---- ------
10. Supply/demand imbalance of the construction industry affec ting the tendering price
11. Payment practices in subcontracts such os pay-when-paid or pay-iJ-paid arrangement not

equitable.
- - --'- - - -.---- _ . -
12. Agreed payment terms not followed in spite of interim cen.ifi cate
13. Eq uitable payment tenns in a main contract not included in subcontracts ~

-- -
14. There is no independent certifier (architect or QS) under the domestic sub-contracts to give opin ions ~
as to the proper amounts of payments
15. Con tra-charges are unreasonab ly imposed

Source: (CIRC. 2001) item 1-7 (Cheul1g. et 0/, 2008) item 2, 4, 5,6, 9. ( HKIS 2009) item 4, 5, 11 · 15and ( Wu. er ai, 2008) item JO
Paym ent problem s ill this study mealls non-I)(lymellt, under·paymellt. and late payment
A Study of St'('llfi IY of Payment ill N Oli /( Km,}: Cm/JI r /l ct;OIl IlIdu,fln ' 2010
- - - - - - ---,-----_.- --'-
Part 2 • Examine Dispute Resolution and Measures for Security of Payment
I. Please identify the 3 most seri ous problems in the construction Item 5
industry in your view that alw ays cau se payment di sputes. (Not
Item 7
limited ro Part I statements)
fl em I I
(a) Please identify whi ch of the problems are Problems of

(i) between the client and contractor or Items 7
(ii ) between the contractor and subcontractors or Items 5. I I
(iii ) in construction workers
(b) What are the causes of such problems? Any examp les? • Late payment due ro lon g time to process th e VOs. claims.
• Under payment due to the practice of pay-when- paid, poor
workmanship, alld liquidated damages
• Non -paymellt usually due to the bankruptcy of the contractor
(c) For such problems what methods do you suggest for dispute • General comment : Us e the least-litigation method which is
resolution? damaging to all parties
(negotiation, mediation. arbitration, dispute resolution • Negotiation - Best use as fa r as possible
advisor. dispute resolution panel. expert determination,
• Mediation - Second best
adjudication, litigation)
• Arbitration - If cannot avoid, use it.
• Adjudication - Second best
• DRA - Second best
• Utigatioll - Avoid it as far as practicable, because there are no
winners bal all losers.
A SlIIdy of Secllrity of Payment ;11 '-I/!IIK Kml f( Construction /m!r4stry 2()JO________
-- -------- - -
______________iL-
2. Please com men t on some of above dispute resolut ion methods

• Negotiation is the besl - MOSl effective. no hard feeling
in solv ing payment di sputes in the indu stry. How effective is?
• Mediation - Very effective, no hardfeeling
• Arbitration - Effective. hard feel ing
• DRA - Effective
• Litigation - Less effective, time and money consuming, very
hard feeling
3. Discuss the possibility of reso lution measures in security of

• Negotiation is the best method, very effective amOflgst al/.
payment in particular the above 3 mentioned problems
• Mediation and adjudication are second best to follow.
• Adjudication is good also ill particuLar in handling large
contracts.
(a) What measures shou ld be taken to improve written • Litigation ;s less effective. no winners.
contract and how?
Cb) Please give comment on • Enter the time span in completing the security for payment
clauses, say, time used in making adjudicator's decision.
• milestone payment
• bonds or parent company guarantees to release • His decision is binding, both sides should agree to his decision.
retention money to subco ntractors
• This is the best method. and logical.
• Cost extra, have to spend a certain amount of money first to
buy the bond and to appoint a third party to handle the money.
• Not common in HK conslmction i"dustry, but feasible in
Mainland and overseas.
--_.--_._-
A Slu{/r vf St'CllrilY of P{lymc lIl ill HO/IS KOllg COm"lr/lf'I;oll ImlU.fIrv 20/0
_ _ _ _ _ _ _ _ _ _ _ _ _ . _____.<.1_
(a) Please give comment on securi ty of payment legislation suc h • Should legislate it, because there are many good examples as
as in Singapore experienced by their construction stakeholders.
(b) Other measures • Nil
• Managemenf a"d adm in istrative measures:
• Good communication
• Par/nering
- End of Interview-
Appendix A-S
[Address]
June, 2010
Dear [name of individual],
Invitation for an Interview
I am Fan Lap Kai . a Master's Degree student in MSc Construction Law and Dispute
Resolution at the Department of Building and Real Estate of The Hong Kong Polytechnic
University. I am now conducting a research project for my MSc dissertation entitled "A
Study of Security of Payment in Hong Kong Construction Industry", The aim of my research
is to study what security of payment is and how it can be improved between clients and the
contractors, or between the contractors and subcontractors through legislation or contractual
provisions in Hong Kong construction industry. My dissertation supervisor is Mr. Stephen D.
Mau also from the Department of Building and Real Estate (email:
Stephen.D.Mau @ , ),
With you being an active and experienced practitioner in the construction industry. I would
like (0 invite you for an interview . It is my belief that your professional knowledge would be
essential to my research. The scripted questions are attached for your reference. All
information and data collected will be only used for research purposes and will be kept in the
strictest confidence .
Please find the attached interview questions (Part 1) and would like to discuss some open
questions (Part 2) around 45 minutes.
Thank you for your guidance and kind assistance.
Yours sincerely.
Fan Lap Kai
Email: klkfan@ 10967

Mobile: 9122
A Study of Security of Payment in Hong Kong ConstructiOIl Industry 2010
Appendix B·1
INTERVIEW REPORT 1
Interviewee: 1

A Study of Secu rity of Paymellt ill Hong Kong Construction Industry 2010
Part 1- Examine Payment Problems in the Const~uction Industry
Do the following statements reflect the practical situation in Hong Kong construction industry? Serious Mild No
( Please..J in the boxes where you think appropriate) problem problem problem
1. Payment requirements not clearly defined and increase payment uncertainty in contract
"
2. Rul es for measurement and valu ation inadequately to be agreed
"
3.
4.
Inadequate pre-pricing of variations. wherever practicable
Payments to contractors not made within the peri ods stated in the contracts "
----~------------------------------------------------
6. Retenti on released not at the times specified in the ~c::o:::.n::tr-=a:::
c t:... ______________________________
7. Settlement offinnl account and payment o/money not due within the period stated in the contract
----
8. Client pays for variationsl claims not on time
10. Supply/demand imbalance 0/ the construction industry affecting the tendering price
\ 1. Payment practices in subcontracts such as pay-when-paid or pay-if-paid arrangement not equitable
12. Agreed payment terms not followed in spite of interim certificate
13. Equitable payment terms in a main contract not included in subcontracts
14. There is no independent certifier (architect or QS) under the domestic sub-contracts to give opinions as to
the proper amounts of payments
15. Contra-charges are unreasonably imposed
SOllrce: (CIRC, 2001) item J-l (Cheung, et aI, 2008) item 2, 4. 5, 6, 9, (HK1S 2009) item 4, 5, IJ· J5 and (Wu, et ai, 2008) item JO,
Payment problems in this study means non-payment, under-payment, and late payment
ii
1
Part 2 - Examine Dispute Resolution and Measures for Security of Payment

I. Please identify the 3 most serious problems in the construction • Items 7, /0 and 14
• Item 7, is documentation problem, (Good management is
(Not limited to Part 1 statements)
critical)
• ltem 10, is corporate decision i.e. company problem
• Item 14, may cause under payment
(a) Identify which of the problems are • Item 7 & 14 related to the client and contractor
(i) between the client and contractor or
• Item 10 is at the client level
(ii) between the contractor and subcontractors or
(ii i) in construction workers
(b) What are the causes of such problems? Any examples? • Item 7 & 14 are mostly under payment problems,
• Late payment due to time for processing under payment
• Items 7 & 14 can be found in most projects
• Item 10- projects in Mainland China
(c) For such problems what methods do you suggest for dispute • Negotiation is the most popular method f or item 7 & 14
resolution?
• Arbitration sometimes adoptedfor item 7
(negotiation, mediation, arbitration, dispute resolution
advisor, dispute resolution panel. expert detenninalion, • DRA - adopted in government projects only. It is not common
adjudication, litigation) to private sector due to an additional COSI
• Litigation is less favourable
~~d_:_.o_if_S_,_c_"r_;_ry_o_if_P_o_)'_",_e'_"_;_n_H_O_"_g_K_O_n_8~~~ldus_,ry______________________________________________________~1~2_0_'_0__________
2. Please comment on some of above di spute resolution methods • Negotiation is used most frequently and an effective method
in solving payment disputes in the industry. How effective is?
• Arbitration can be used/or payment dispute throughout the
contract (not only at the end)
• Suspension (tennination) a/work/or non-payment when/ail to

pay 2 months (2 interim certificates)
3. Discuss the possibility of resolution measures in security of

(a) What measures should be taken to improve written • The existing contracts are well established
contract and how?
(b) Please give comment on
• milestone payment • Pro: on time (promptly progress)
• Cons: (J) not assist On payment; (2) payment problems due to

variations e.g. change design; or certified work peiformed if
project is complicated
• bonds or parent company guarantees to release • Not assist payment to lower tier of supply chain (protect upper
retention money to subcontractors tier only) i.e. the client
• No comment
A Study of Security of Payment in Hong KOllg Construction In dustry 2010
1
(a) Please give comment on security of payment leg islation such
• No specific commenJ
as in Singapore
(b) Other measures • For item 7 & 14 - Independent certifier appointed by the
government (against appointed by the cLient)
• For item 10 - main contractor to be first debtor but may create

other probLems
Management and administration measures
• Good documentation control is needed

• Good communication is needed
• Good reLationship is needed
- End or Interview 1 -
v
A study ofSecll rit)' of Payment in HOllg KOllg COllstruction Industry 2010
-----------------------------------------------------~-------
Appendix B-2
INTERVIEW REPORT 2
Interviewee: 2

A Study of Securit), of Paymenl ill Hong Kong Construction Industry 2010
1
( Please .J in the boxes where you think. appropriate) problem problem problem
I. Payment requirements not clearly defined and increase payment uncertainty in contract
--~~------~---------------------------------
2. Rules for measuremen t and valuati on inadequately to be agreed
3. Inadequate pre-pricing of variations, wherever practicable

4. Payments to contractors not made wi thin the periods stated in the contracts
6. Retenti on released not at the times specified in the contract

7. Settlement of fi nal account and payment of money not due within the period stated in the contract
8. Client pays Jor variations/ claims not on time

10. Supply/demand imbalance oJ the construction industry affecting the tendering price
11 . Payment practices in subcontracts such as pay-when-paid or pay-if-paid arrangement not equitable
12. Agreed payment terms not followed in spite of interim certificate
14. There is no independent certifier (architect or QS) under the domestic sub-contracts to give opinions as to the
SO /lrce: (CIRC. 2001) item }· 7 (Cheung. et al. 2008) item 2. 4. 5. 6, 9. (HKIS 2009) item 4. 5. 1I -}5 mid (Wu, et ai, 2008) item 10,
(Payment problems in this study means Non-Payment. Under-Payment &: lAte Payment)
vii
A S tudy of Security of Payment in HOllg KOllg Constructiolllndustry 20JO
1
--------.--------.-------------------------------------~.-------
I. Please identify the 3 most seriou s problems in the construction • Items 8, 10 & 13
industry in your view that always cause payment disputes. • Item 10, is corporate decision i.e. company problem. Different
(No t limited to Part J statements) procurement methods affect the tender price.
• Item 13, MC has different roles and more responsibility to se
(a) Ident ify which of the problems are • Item 8 appears in both between client & contractor and
I. Between the cl ient and contractor or contractor & subcontractors
n. Between the contractor and subcontractors or • Item 10 is at the client level
ill. To construction workers • Item 13 is between the COnlraClOr and subcontraClOrs
(b) What are the causes of such problems? Any examples? • Item 8 is under payment problem due to different point of views
• Item I D, in HK the tender documents ha ve stated clearly
• Item 13 is the problem of late payment affecting the cash flow
(c) For such problems what methods do you suggest for di spute • Negotiation is popular method/or item 8 & 13
resolution? • Mediation would be involved for item 8
(Negotiation, Mediation, Arbitration, Dispute Resolution Advisor, • Item 13, if it is a serious case it could go to Arbitration
Dispute Resolution Panel, Expert Determination, Adjudication, • DRA, adopted in government projects only. His advice could
Litiga tion ) prevent or settle some arguments.
• Litigation is less favourable
viii
A Study oJ Security of Payment in HOIlg Kong COllstrllclion Industry 2010
1
2. Please comment on some of above dispute resolution methods in • DRA as an individual person, his advice would be fair and
solving payment disputes in the industry. How effective i acceptable by both parties
3. Di scuss the possibi lity of resolution measures in security of payment

in particular the above 3 mentioned problems
(c) What measures should be taken to improve written contract and • The existing contracts are well established
how? • Some organizations have their own conditions of contract
• Item J3, different projects have different conditions inputting
into the contract
(d) Please give comment on
• Mi lestone payment • Beneficial to deal with item 8
• Good to large project, less time/or preparation a/valuation/or
interim payment, and steady progress.
• The stages should be well defined before the commencement 0/
project.
• Bonds or parent co mpany guarantees to release retention • It is needed in a high value project.
money to subcontractors • Protect the parties.
• Payment bonds as used in mainland China • No comment
;,
A Study of Security of Paymt llT in Hong Kong Con::::~t_;o_"_I_n_d_us_,'l_'_ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _...1.1_2_01_0_ _ _ __
(a) Please give comment on security of payment legislation such as • Unnecessary to add another dispute method.
in Singapore • It is enough with mediation & arbitration stated in the contract
• Adjudication used on ACB 1997 project. Beller time control
• Legislative measure is affective on private sector projects
- End of Interview 2-
x
SI_~_:~e_cu_"_i0_'o_if_p_a)_'''_''n_'_i"_H_O_n_g_KO_"_g_c_O"_'_"_uc_tw_"_I_"d_u_"_,y__________________________________________ ~1~2_0_IO_________
_A__
Appendix B-3
INTERVIEW REPORT 3
A STUDY OF SECURITY OF PA YMENT IN HONG KONG CONSTRUCTION INDUSTRY
Interviewees: 3 (two respondents completed Part I and discussed in the interview)
xi
A Stud}' of Security of Paymellf ilt Hong Kong COllstru ctiOIl Industr), 2010
----------------------
Part 1- Examine Payment Problems in the Construction Industry (by Interviewee A - in charge private sec/or projects)
1
Do the followin g statements reflect the practical si tuation in Hong Kong construction industry? Serious Mild No
( Please ..J in the boxes where you think appropriare) problem problem problem
1. Payment requ irements not c learl y defined and inc rease payment uncertainty in contract ..J
2. Rules for measurement and valuation inadequately to be agreed
3. Inadequate pre.pri.cing of variations, wh erever practicable
4. Payments to contractors not made within the periods Slated in the contracts
5. Pay ments to subcontractors not made within the periods stated in the contracts
7. Settlement of fina l account and pay ment of money not due withi n the period stated in the contract
8. Client pays Jor variations/ claims not on time
10. Supply/demand imbalance of the construction industry affecting the tendering price
11 . Payment practices in subcontracts such as pay-when-paid or pay-if-paid arrangement not equitable
12. Agreed payment terms not fo llowed in spite of interi m certificate
13. Equitable paymen t terms in a main contract not included in subcontracts
Source: (CIRC, 2001) item 1-7, (Cheung, et al, 2008) item 2. 4, 5, 6, 9, (HK1S 2009) item 4, 5, 11-15 and (Wu, et at, 2008) item 10,
(Payment problems in this study means Non · Payment, Under-Paymem &: Late Payment)
xii
A Study of S~curity of Payment in Hong Kong ,_C_o_"_"_'"_'_"_'O_"_'"_d_"-'_''Y_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _JI_2_0_I_O_ _ _ __
Part 1- Examine Payment Problems in the Construction Industry (by Interviewee B in charge public sector projects»
( Pleos~ .,J in /h~ boxes wher~ you rhink appropriou) problem problem problem
I. Payment requirements not clearly defined and increase payment uncertainty in contract
2. Rules for measurement and valuation inadequately to be agreed ~
3. Inadequate pre~p ri c in g of variati ons, wherever practicable ~
4. Payments to contractors not made with in the periods stated in the contracts
7. Settlement of final account and payment of money not due within the period stated in the contract
8. Client pays for variations! claims not on time
10. Supply/demand imbalance of the construction industry affecting th e tendering price

11. Payment practices in subcontracts such as pay-when~paid or pay-if-paid arrangement not equitable
12. Agreed payment terms not fo ll owed in spite of interim certificate
15. Conlra-charges are unreasonably imposed
Source: (eIRC, 2001) item 1-7" (Cheung, et al, 2008) it~m 2, 4,5,6,9, (HKIS 2009) item 4, 5, 1l· J5 and (Wu, ~tal, 2008) item JO
(Payment problems in this study m~ans Non- Paymult, Under- Paym~nt & Lare Payment)
xiii
A Study of Securit), of Paymenl in Hong Kong Cons /ru clion Industry 20 / 0
1

(Payment problems in this study means Non.Payment, Under· Payment & La/e Payment)
I. Please identify the 3 most serious problems in the construction
industry in your view that always cause payment disputes. • Items 3, 8 & 15
(No r limited to Part / statements)
(a) Identify which of the problems are • Both item 3 & 8 appear in both (i) & (ii)
i. Between the client and contractor or • Item / 5 is at the subcontractor level
11 . Between the contractor and subcontractors or
Ill . To construction workers
(b) What are the causes of such problems? Any examples? • Item 3, 8 & 15 are mainly dealing with under payment
(c) For such problems what methods do you suggest for di spute • Item 3, 8 & 15 will first proceed negotiation
resoluti on? • Mediation could provide an additional cost to M C
(Negotiation. Mediation, Arbitration, Dispute Resolution Advisor, • Arbitration, final to most of the disputes
Dispute Resolution Panel, Expert Determination, Adj udication, • DRA, important role as an natural character
Litigation ) • Poor documentation filin g cost most of the dispute in variation
claim
• Well preparing throughout the proj ect could reduce v.o.
2. Please comment on some of above di spute resolution methods in • Mediation is effec five f or gelling an agreement between parties
so lving payment disputes in the industry. How effecti ve is?
IC iv
A Srudy 01 Security of PaYllltmt in Hong Kong Construction IlIdustry 2010
1

Contr actual measures

(a) What measures shou ld be take n to improve written contract • The existing contracts are well established
and how? • In private sector some clauses in Standard Form. of Contract
may be erased, e.g. EOT for weather
(b) Please give comment on
• Milestone payment • MC could control the cost by time (progress of work)
• Bonds or parent company guarantees to release retention • Rely on 3rd parties for payment protection
money to subcontractors
• Payment bonds as used in mainland China
Please give comment on security of payment legislation such as in • No comment, not familiar
Si ngapore
4. Supplementary Question • Pay-when-paid in used would be stated in the contract

• Comment on pay-when-paid & pay-if-paid • Civil engineering works would be more transparency and
inequity
End ofInt..view 3 -
A Study of Security of Paymetlf in Hong Kong COllstruction Industl)' 20 10
1
Appendix B-4
INTERVIEW REPORT 4
Interviewees: 4 (two respondents in the interview)
)(vi
A Study of Security of Paymellt in Hong Kong Construction Industry 2010
' ' ' ' -_ _ n .. 1
Part 1- Examine Payment Problems in the Construction Industry (by Interview C)
( Please .J in the boxes where you think. appropriau) problem problem problem
I. Payment requirements not clearly defined and increase payment uncertainty in contract ~
2. Rules for measurement and valuation inadequately to be agreed ~
3. Inadequate pre-pricing of variations. wherever practicable ~
4. Payments to contractors not made within the periods stated in the contracts ~
5. Payments to subcontractors not made within the periods stated in the contracts ~
6. Retention released not at the times specified in the contract ~
7. Settl ement of final account and payment of money not due within the period stated in the contract ~
8. Client pays fo r variations! claims not on time ~
9. Inadequate assessment of liquidated and ascertained damages against main contractor ~
10. Su ppl y/demand imbalance of the construction industry affecting the tendering price ~
11. Payment practices in subcontracts such as pay.when~paid or pay-i/-paid arrangement not equitable ~
12. Agreed payment terms notfoUowed in spite of interim certificate ~
13. Equ itable payment terms in a main contract not included in subcontracts ~
14. There is no independent certifier (architect or QS) under the domestic sub-contracts to give opinions as to the ~
15. Con/ra-charges are unreasonably imposed
Source: (CIRC, 2001) item 1-7, (Cheung, et ol, 2008) item 2, 4, 5, 6, 9, (HKIS 2009) itelll4, 5, /1 · 15 and (Wu, et ai, 2008) item /0,
(Payment problems in this study means Non-Payment, Under-Payment & Late Payment)
xvii
A Study of Security of Payment in lio/Ig KOlIg Construction Industry 2010
1

(Payment problems in this study means Non-Paymem, Under-Payment & LAte Payment)
I. Please identify the 3 most se rious problems in the construction

• Items ll , 12 & 15
(Not limited to Part J statements)
(a) Identify which of the problems are
1. Between the client and contractor or • Item JJ is between the contractor and subcontractors
11 . Between the contractor and subcontractors or • Item 12 & J5 occur both between the client & cmllractor and
Ill. To construction workers the contractor & subcontractors
(b) What are the causes of such problems? Any examples?
• Item I J due to late payment
• Item 12 due to late payment
• Item 15 due to under payment
(c) For such problems what methods do you suggest for
dispute resolution? • Negotiation is effective and is usedfor most disputes
(Negotiation, Mediation, Arbitration, Dispute Resolution • Follow the ladder for mediation & arbitration
Advisor. Dispute Resolution Panel, Expert Detennination, • DRA, depends on the advisors himself
Adjudication, Litigation)
2. Please comment on some of above di spute reso lution methods • As above

in solving payment disputes in the industry. How effective is?
xviii
Se_,_"_n_·o_'_of_,P_O_Y_'"_'_"_'_i'_'H_O_,,_g_K_O_n_~,C~~r_u_'_tw_n__' ''_d_u_S'_ry______________________________________________________LI_2_0_'O___________
A S.'_"_d_y_of__

payment in particular the above 3 menti oned problems
a. What measures shou ld be taken to improve written contract • Good to define all the details
and how ? • Adjudication is worth to be included in standard/arm of
contract
b. Please give comment on
• Milestone payme nt • Milestone payment, bond and guarantees are important for
• Bonds or parent company guarantees to release payment security
retention money to subcontractors
• Payment bonds as used in mai nl and China • Payments bonds is a conditional bonds, which protect the MC
from the client and the se from MC
(a) Please give comment on security of payment legislation • Hong Kong is a free market term, where the Government
such as in Singapore should have less interference. Therefore it would be difficult 10
change the law.
• For some disputes that come from the contract only legislation
(b) Other measures could prevent such as 1J and 12
xix
A Study of Security of Paymenr in Hon g Kong Construction InduslIY 2010
1
Supplementary Questions
I. Any deficiency of the legal system and remedies? • Increase punishment to the unmoral payers
2. Any loose implementation of existing laws and regu lations? • Not many parties would totally follow the existing laws and
regulations.
3. Any problems in practicability of existing laws and • Once the disputes go on arbitration or court, the contractors or
regu lations? subcontracts will lost the opportunity offu ture collaboration
- End of Interview 4 -
A Stu.dy of Secu.rit)' of Payment in Hong Kong ConstructiOIl Industr), 2010
. ~ ." 1
Appelldix B-S
INTERVIEW REPORT 5
Interviewees: 5

A Study of Securil), of Payment in Hong Kong Construction Industry 2010
( Please ..j in the boxes where you think appropriate) problem problem problem
I. Payment requ irements not clearly defined and increase payment uncertainty in contract ,J
2. Rules for measurement and valuation in adequately to be agreed ,J
3. Inadequate pre-pricing of variations, wherever practicable ,J
4. Payments to contractors not made within the periods stated in the contracts ,J
5. Payments to subcontractors not made within the periods stated in the contracts ,J
6. Retention released not at the times specified in the contract ,J

7. Settlement of final account and payment of money not due within the period stated in the contract ,J
8. C lient pays for variationsl claims not on time ,J
9. Inadequate assessment of liquidated and ascertained damages against main contractor ,J
10. Supply/demand imbalance of the construction industry affecting the tendering price ,J
11 . Payment practices in subcontracts such as pay·when· paid or pay-if·paid arrangement not equ itable ,J
12. Agreed payment terms not followed in spite of interim certificate ,J
14. There is no independent certifier (architect or QS) under the domestic sub--contracts to give opi nions as to the "
Source: (C/RC, 2001) item 1-7, (Cheung, et aI, 2008) item 2, 4, 5, 6. 9, (HKIS 2009) item 4, 5. ll -J5 and (Wu, et al. 2008) item 10,
(Payment problems in this study means Non- Payment, Under-Payment & Late Payment)
XlCii
A Stud), oJ Sew,-;!)' 0/ Pa),mel1l ill Hong Kong Construction lndustr), 2010
1
Part 2 - Exa mine Dispute Resolution and Measures fo r Security of Payment

(Payment problems in tltis study means Non-Payment, Under-Paymefll & Late Payment)
t_ Please identify the 3 most serious problems in the conslruction

industry in your view that always cause payment disputes. • The most serious problem is non -payment
(No t limited 10 Part 1 statements) • Item 8, V.O. problem is in two ways: Design & EOT Most
problem is about EOT
• For such problems what methods do you suggest for dispute

resolution? • Arbitration & Litigation are enough
(Negotiation, Mediation, Arbitration, Dispute Resolution Advisor,
Dispute Resolution Panel, Expert DetermitUllioll, Adjudication,
Litigation)
2_ Please comment on some of above dispute resolution methods in

solvi ng payment disputes in the industry_ How effective is? • More dispute resolution methods added into a contract; the
longer time or delay could be m.ade for resolution.
xxiii
A S tudy of Secllrity of Payment ill Hong Kong Consfrllcriolllndustly 12010
I

a. What measures should be taken to improve written • The standard forms are clearly defined except those modified version.
contract and how ?
b. Please give comment on • No comment

• Milestone payment
• Bonds or parent company guarantees to release
retention money to subcontractors
• Payment bonds as used in mainland China
Please give comment on security of payment legislation • Govemmenl should not interfere in the f ree market in Hong Kong so
such as in Si ngapore m uch
Supplementar y Questions • Dispute resolution, Arbitration within Main Contract and Subcontract
• Discuss ADR. arbitrati on in main! and subcontract
• Right to suspension & contract tennination within Main Contract,
• Discuss the right of 'term ination '
Subcontract and nominated subcontract
• Discuss on pay-when-paid and pay-iF-paid practice in HK
• Discuss non-payment and court cases • Court Case - Wo Hing Engineering Ltd v. Pekko Engineers Limited
- End of Interview 5 -
xxiv

Electronic These - A Study of Security of Payment in The HK Construction Industry

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Electronic These - A Study of Security of Payment in The HK Construction Industry

Uploaded by

Copyright:

Available Formats

This thesis is protected by copyright, with all rights reserved.

FAN LAP KAI

MSc in CONSTRUCTION LAW AND DISPUTE RESOLUTION

THE HONG KONG POLYTECHNIC UNIVERSITY

I declare that this dissertation is entitled to A Study or Security or Payment iD the

Fan Lap Kai

• Pro! M.M. Kumaraswamy, Professor, Department of Civil Engineering, Hong

Abstract of dissutarion tmtitlt:d:

The Objectives set for study have all achieved.

Lastly, recommendations are made for consideration. Generally we can consider

DECLARA TION ........................................................................................................... 11

CHAP'fER 1 - INTRODUCTION ................................................................................. 1

CHAPTER 2 - LITERA TURE REVIEW ................................................................... 1(1

CHAPTER 3 - INTERVIEW FOR DATA COLLECTION ...................................... 40

CHAPTER 4- INTERVIEW RESULTS & DISCUSSION ...................................... 53

CHAPTER 5 • COURT CASES STUDIES ..•..................................................•........... 74

CHAPTER 6 • CONCLUSION .................................................................................... 88

REFERENCE ............................................................................................................... 107

A-I Interview Questions

B-1 Interview Report I

FIGURES & TABLES

Table 2.1 Comparison of Methods Used for Dispute Resolution .............................................. 26

Table 6.1 Causes of Late, Under and Non-Payment Problems ................................................. 90

Cash flow is essential to contractors and sub-contractors in the construction industry.

sub-contractors to deliver quality services (CIRC, 2(01). The topic of security of

investigate how security of payment to contractors and sub-contractors can be

improved through legislation and I or contractual provisions in the Hong Kong

1.1 Problem Statement

In practice, the payment arrangements in the form of 'pay-when-paid' and 'pay-if-

construction industry. Improvements to security of payment to contractors and sub-

2009 and HKlS, 2009)

There was a seminar on Security of Payment in Construction Industry held on the

21 SI November 2007 in Hong Kong. The 104 delegates representing employer

organizations, consulting engineers, architects, quantity surveyors, contractors, sub-

seminar a debate was invited to discuss payment problems.

construction industry yet non-payment continues to place considerable financial

pressure on contractors, sub-contractors and even consultants" (The Lighthouse,

should seriously consider introducing contractual or statutory:

• security of payment provisions; and

• righllO adjudication/or the resolution o[ disputes ... ..

(The Lighthouse, 2(08)

consideration on the security of payment and the possibility of adjudication

provisions. The consideration is to be enforced by legislation rather than merely a

In Hong Kong, the construction industry is supported as a free market economy

in a construction contract. Due to different bargaining powers of the contract parties.

to help resolve payment disputes. A recent trend is to use legislation (Q intervene

Security of Payment for Hong Kong Construction Industry Workable Alternatives

securing payment in the construction industry in Hong Kong.

and what are the rationales of payment disputes?

2. How can contractors and sub-contractors secure their payments in contractual

3. Should security of payment be enforced by legislation 10 Hong Kong

4. How can adjudication provisions improve security of payment to contractors

1.2 Aim and Objectives

of payment; if the contractors and sub-contractors' project payments can be more

secured they would be motivated to provide quality services. However in Hong

if there is a case of non-payment. It is essentially regulated by the ambit of the

common law. (Soo, et ai, 2008)

security of payment can be improved to con tractors and sub-contractors through

legislation or contractual provisions in Hong Kong construction industry.

At the beginning of the dissertation, several payment problem issues in construction

aim to provide recommendation to improve the adverse silUation of security of

payment to contractors and sub-contractors in Hong Kong.

1. Understanding problems over project payments (non-payment, under payment,