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The changing landscape of construction law in Hong Kong

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Hong Kong is a dynamic and innovative city, identifiable by its skyline dominated with densely packed skyscrapers. It is known for its expertise in construction of high-rise buildings and complex projects and is increasingly in demand to export its expertise to overseas markets.

In this blog post I look at the legal developments that are moulding the construction landscape in Hong Kong, and providing continued support to growth in this sector.

Third party funding of arbitration

Hong Kong has moved closer to allowing third party funding of arbitration, reinforcing its position as a pre-eminent global arbitration centre.

On 12 October 2016 the Law Reform Commission of Hong Kong (LRC) published a report, discussing the responses received to its consultation paper and setting out its analysis and final recommendations on third party funding of arbitration. The report recommends that:

  • Hong Kong’s Arbitration Ordinance (Cap 609) is amended to allow for third party funding of arbitration in Hong Kong.
  • The common law principles of maintenance and champerty should not apply to arbitration and associated proceedings under the Arbitration Ordinance. Third party funding provided by a person practising law or providing legal services would continue to be prohibited.
  • Clear standards for third party funders operating in Hong Kong are developed, with a “light touch” regulatory regime to apply for the first three years following the legislative change.
  • Third party funders should be required to comply with a Code of Practice  that will establish standards and practices that third party funders must include in any third party funding agreements, such as:
    • accepting responsibility for complying with the Code;
    • ensuring that any promotional material relating to its arbitration funding is clear and not misleading;
    • taking reasonable steps to ensure the funded party receives independent legal advice on the terms of the funding agreement; and
    • clearly setting out and explaining the key features, risks and terms of the funding agreement.

During the first three years of enforcement, an advisory body will monitor the conduct and implementation of the Code. After three years, that advisory body will issue a report of recommendations to update the ethical and financial standards.

Maintenance and champerty will continue to apply to litigation in Hong Kong, prohibiting third party funding, as both a tort and criminal offence, unless:

  • A third party has a legitimate interest in the outcome of the litigation.
  • Third party funding affords a party access to justice.
  • The case falls within a recognised category of other proceedings, including insolvency cases.

However, the report recommends that the continued application of maintenance and champerty to mediation in Hong Kong needs to be re-considered.

Security of payment and statutory adjudication

In April 2016, following a public consultation, Hong Kong’s Development Bureau issued a report summarising the views submitted by the local construction industry and supporting the introduction of security of payment legislation in Hong Kong. The legal framework is currently being finalised with the aim to submit a bill to Hong Kong’s parliamentary body, the Legislative Council, in 2017.

The proposed legislation will make “pay when paid” and “pay when certified” contractual provisions unenforceable, introduce statutory adjudication for disputes arising in relation to payment claims and will apply to construction contractors and sub-contractors of any tier. The consultation indicated a divergence of views on some questions, including the type of private sector contracts that would fall within the ambit of the new legislation and the duration of the statutory adjudication process. These issues are currently being considered as part of the exercise of finalising the legislation and so it is not clear how they will be finally resolved.

In an environment dominated by arbitration, an adjudication regime, entitling parties to resolve disputes in a relatively short time-frame (currently proposed to be a maximum of 60 days from commencement, or longer if the parties agree), could have a material impact on parties’ choices and use of forum for dispute resolution within the construction sector in Hong Kong.

Competition

Hong Kong’s Competition Ordinance, Cap 619 (CO) came into force on 14 December 2015, introducing a cross-sector competition regime prohibiting a range of anti-competitive practices, complying with international best practice. The CO provides for two “conduct rules” that prohibits undertakings either making or giving effect to agreements or, where the undertaking has a substantial degree of market power, from abusing that power by engaging in conduct, in each case with the object or effect of preventing, restricting or distorting competition in Hong Kong.

The first conduct rule identifies four serious anti-competitive behaviours:

  • Price fixing.
  • Restricting the output of goods or services.
  • Sharing markets, territories or customers.
  • Bid rigging.

The construction sector often sees competitors sharing capabilities and bidding jointly, forming joint-ventures to share risk or resources and participating in industry meetings. It is also a sector with a limited number of large players at the contractor level, meaning that those participants may hold “substantial market power”. These factors make the construction sector an easily identifiable target for competition regulators. The influence of the CO on businesses operating in the construction industry will see a change in business practices that include:

  • Increased care to make independent decisions.
  • Treating suppliers and tenderers equally.
  • Being mindful of suspicious behaviour from suppliers (such as unexpectedly high prices, similar pricing and usual tenderers not bidding on a job).

Third party rights under contract

The Contracts (Rights of Third Parties) Ordinance, Cap 623 (CRTPO) came into force on 1 January 2016. It provides an exception to Hong Kong’s previously strict application of the doctrine of privity of contract. Under the CRTPO, a third party can enforce a term of the contract, if the contract expressly provides for this, or if, on the proper construction of the contract, the term purports to confer a benefit on the third party. It is worth noting the reference to “a term” and the potential breadth of the scope of the second limb.

For the CRTPO to apply, the third party must be named in the contract, be a member of a class identified in the contract or answer a particular description provided in the contract. The third party need not be in existence at the time the contract was entered into. Parties may select specific terms which they intend a third party to be able to enforce, with the other terms reserved as only being enforceable by and between the contracting parties.

The CRTPO only allows benefits to be conferred on a third party, not burdens. Therefore, a party to a contract cannot enforce a term of the contract against a third party. Parties can opt out of the application of the Ordinance, as is common practice in England and Wales.

However, such exclusion clauses will need to be carefully drafted where there is an intention that a right, even a limited right in respect of a specific term, is conferred on a third party. In a sector populated with group companies and subsidiaries, this drafting may need to provide for exceptions to accommodate a group company’s ability to enforce an indemnity under the contract, while simultaneously preserving limitations preventing the assignment of rights or restricting remedies available to third parties.

The CRTPO does not apply to specific types of contract: bills of exchange, promissory notes, negotiable instruments, covenants in relation to land, deeds of mutual covenant, letters of credit, contracts of carriage and a company’s articles of association and does not apply to contracts entered into before the CRTPO came into force.

Practitioners in England and Wales will be familiar with these principles and concepts as the Contracts (Rights of Third Parties) Act 1999 operates in a very similar way.

A final word

A number of these changes will already be familiar to practitioners experienced in international construction projects. By implementing these measures, Hong Kong, already established as a premier arbitral destination, should continue to strengthen its position as a key base of operations for future projects and a location of choice for dispute resolution.

 

This blog post was first published on PLC Construction Blog, 19 October 2016.

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