Construction 2024 Comparisons

Key Legislation

The principal legislation governing building works in Hong Kong is the Buildings Ordinance (Cap 123) and its subsidiary legislations.

Site safety is primarily governed by the Factories and Industrial Undertakings Ordinance (Cap 59) and its subsidiary legislation, including key regulations such as the Construction Sites (Safety) Regulations (Cap 59I).

The key legislation governing the protection of the environment in Hong Kong includes the Air Pollution Control Ordinance (Cap 311), Waste Disposal Ordinance (Cap 354), Water Pollution Control Ordinance (Cap 358), Noise Control Ordinance (Cap 400) and the Environmental Impact Assessment Ordinance (Cap 499).

Other legislation that may be relevant to the operation of employers/contractors includes the Competition Ordinance (Cap 619), Immigration Ordinance (Cap 115), Employment Ordinance (Cap 57) and the Employees’ Compensation Ordinance (Cap 282).

Common Law

Aside from the key legislation and regulations, the principal laws governing the construction industry in Hong Kong are derived from the common law of contract and tort and the rules of equity.

Standard form contracts (usually with amendments) are frequently used in the construction industry in Hong Kong.

Public Works

The Hong Kong government has endorsed the use of the NEC suite of contracts for all public works since around 2016. According to the Practice Notes for the New Engineering Contract (NEC) – Engineering and Construction Contract (ECC) for Public Works Projects in Hong Kong, published by the Development Bureau (updated in March 2024), the application of the NEC has been extended to public works project procurement after 2016 and the decision and justification as to whether or not to adopt the NEC in capital work contracts should be documented and endorsed by public officials. More than 90% of large-scale public works projects (ie, those with contract value of more than HKD400 million) commenced in 2022 have adopted the NEC form.

For projects commenced before 2016, the Hong Kong government’s own standard forms, the Government of Hong Kong General Conditions of Contract (1999 edition) and the various versions covering civil engineering works, building works and electrical and mechanical works, design-and-build contracts and term contracts were commonly used for contracts with contractors, while the Government of the Hong Kong Special Administrative Region Subcontract for Building Works (2000 edition) was commonly used for contracts between the contractor and the subcontractor.

For railway projects, the MTR Corporation Limited has its own set of contract documents.

Private Works

For private works, the Standard Form of Building Contracts (published by the Hong Kong Institute of Architects and the Hong Kong Institute of Surveyors) and the Standard Form for Domestic Subcontract (published by the Hong Kong Construction Association) are frequently adopted to govern employer–contractor and contractor‒subcontractor relationships.

Some contractors prefer to use their own standard forms available in the local Chinese language, particularly for contracts with local subcontractors/suppliers.

International Projects

The International Federation of Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils, or FIDIC) standard forms of contracts are widely used in construction projects involving international elements and are used in many construction projects in mainland China involving Hong Kong parties.

Employers in Hong Kong

The largest employer for construction projects in Hong Kong is the Hong Kong government. The construction market in Hong Kong is also driven by projects initiated by listed local developers as employers.

Employers’ Rights and Obligations

Employers’ rights and obligations are generally governed by the contracts entered into between employers with their contractors and/or consultants.

In general, the employer’s obligations in a typical construction contract in Hong Kong usually include:

• giving possession of the construction site to the contractor on or before the agreed date;
• obtaining the required statutory approvals for commencement of works according to the agreed terms of the construction contract;
• providing information, approvals and instructions to the contractor according to the agreed terms of the construction contract;
• making payments to the contractor according to the agreed payment mechanisms and timetable (eg, upon issuance of payment certificates, final accounts);
• effecting and maintaining the insurance policies against the building and/or the employer’s works according to the agreed terms of the construction contract; and
• making payments to the contract upon termination of the construction contract according to the agreed terms of the contract.

The employer’s rights in a typical construction contract in Hong Kong usually include:

• the right to recover loss and damages for the contractor’s failure to perform or execute the construction works, including liquidated damages for delay subject to extension of time provisions under the agreed terms of the construction contract;
• the right to receive security bond/guarantees/ warranties according to the agreed terms of the construction contract; and
• the right to terminate the construction contract in accordance with the agreed terms of the construction contract or upon repudiation by the contractor.

Relationships Between the Employers and Other Parties

In most construction projects in Hong Kong, architects/designers, engineers and/or quantity surveyors would be engaged by the employers for the administration and supervision of the construction contracts with the contractors.

Employers do not generally enter into direct contractual relationships with the subcontractors unless separate warranties/guarantees are executed by the subcontractors and some subcontracts may give rights to the employer for making direct payment to the subcontractors if payments have been withheld by the contractors.

Contractors in Hong Kong

Contractors working on public works in Hong Kong are required to be listed on the approved list of contractors maintained by the Development Bureau. The contractors are classified into different categories according to their experience and capabilities and many of the public works projects require the contractors, or at least one of the contractors in a joint venture submitting a tender to the project, to be in a certain category to qualify.

For private works, the contractors must be registered in the appropriate categories of registered contractors under the Buildings Ordinance (Cap 123) in Hong Kong.

Contractors’ Rights and Obligations

Contractors’ rights and obligations are generally governed by the construction contracts between employers and contractors.

In general, the contractor’s obligations in a typical construction contract usually include:

• carrying out and completing the works in accordance with the requirements specified in the construction contract and exercising the skill, care and diligence of a competent contractor;
• carrying out the construction works regularly and diligently and completing the works within the agreed completion date, subject to extension of time provisions under the agreed terms of the construction contract;
• co-ordinating the carrying out of the works by subcontractors;
• preparing, submitting and updating programmes, drawings, payment applications, notices and applications (for extension of time, as well as additional payment), final accounts and other project documents, etc, according to the agreed terms of the construction contract;
• complying with instructions from the architect or other authorised consultants engaged by the employer (including instructions for variations, delay recovery measures, defect rectifications, etc);
• effecting and maintaining the employees’ compensation insurance, contractors’ all-risks insurance and other liability insurance according to the agreed terms of the construction contract;
• complying with all applicable statutory requirements; and
• delivering security bond/guarantees/warranties according to the agreed terms of the construction contract.

The contractor’s rights in a typical construction contract in Hong Kong usually include (but are not limited to):

• the right to receive interim and final payment according to the agreed terms of the construction contract;
• the right to apply and receive extension of time for listed events;
• the right to claim for additional payment arising from qualifying events such as instructions for variations, acts of prevention by the employer, etc; and
• the right to determine employment in accordance with the agreed terms of the construction contract.

Under the Security of Payment (SOP) regime introduced by the Development Bureau in 2021, from 1 April 2022 all public works tenders to be invited from contractors or suppliers on the approved list are required to incorporate SOP provisions, including the contractual rights to refer payment disputes to adjudication and to suspend or reduce progress of work if the admitted amount or adjudicated amount is not received.

In May 2024, the Development Bureau published the Construction Industry Security of Payment Bill (the “CISOP Bill”). The CISOP Bill, once enacted as an Ordinance (which is anticipated to be in early 2025), will introduce provisions to improve contractual payment terms (including prohibiting “pay-when-paid” clauses), establish an adjudication mechanism to resolve disputes quickly, and grant unpaid parties the right to suspend or slow down the progress of work or services under the circumstances specified in the legislation, in order to ensure that all stakeholders can get their entitled payment in a timely manner. The CISOP Bill will generally apply to construction works contracts of value not less than HKD5 million and HKD500,000 for contracts for the supply of related goods or services, subject to certain exceptions under the legislation.

Relationships Between the Contractors and Other Parties

A typical construction contract generally requires the contractor to comply with the instructions of the architect/designer/engineer or other consultants appointed by the employer.

Relationships between the contractors and the subcontractors are typically governed by the relevant subcontracts between the contractors and the subcontractors. The subcontracts very often will provide that the subcontractor is bound to the terms of the subcontract and the main contract and that payment to the subcontractor is contingent upon payment to the contractor by the employer. However, for public works to which the SOP regime applies, any conditional payment provisions in a subcontract (such as a “pay-when-paid” clause) will be ineffective and unenforceable. The CISOP Bill, once enacted as an Ordinance, will prohibit conditional payment provisions in certain contracts for public and private works.

Under the Employment Ordinance (Cap 57) every principal contractor and superior subcontractor are jointly and severally liable for the first two months’ unpaid wages of an employee who is employed by the subcontractor.

Subcontractors in Hong Kong

Subcontractors in Hong Kong are typically smaller local companies specialised in a particular nature or trade of works.

Subcontractors’ Rights and Obligations

A subcontractor is typically required to execute the subcontract works in accordance with the requirements under the main contract between the contractor and the employer and to suit the contractor’s programme. The subcontractor is typically entitled to receive payment after the contractor has received payment from the employer.

For subcontracts of public works to which the SOP regime applies, it is mandatory to incorporate SOP provisions, including contractual rights to refer payment disputes to adjudication, to suspend or reduce progress of work if the admitted amount or adjudicated amount is not received and to request the government as employer to make direct payment for any unpaid adjudicated amounts.

Relationships Between the Subcontractors and Other Parties

The relationships between the contractors and the subcontractors are typically governed by the relevant subcontracts between the contractors and the subcontractors.

There are usually no direct contractual relationships between the employers and the subcontractors unless the subcontractors are required to execute separate warranties with the employer. The subcontractors are, however, very often bound to both the subcontract and the main contract under the terms of the subcontracts and many subcontracts give rights to the employer for making direct payment to the subcontractors if payments have been withheld by the contractors.

Financiers in Hong Kong

Financiers in Hong Kong are typically commercial banks or institutional investors.

Financier’s Rights and Obligations

The financier is not usually a party to the construction contract. However, a financier may require the employer to submit the relevant construction contracts for its approval to ensure there are sufficient safeguards to control the time and costs incurred for the construction project.

Relationships Between the Financier and Other Parties

The relationships between the financiers and the employers are typically governed by the relevant loan/facility agreements and securities executed by the employers. There are normally no direct contractual relationships between the financiers and the contractors or the subcontractors, subject to any step-in rights that may allow the financier (or other beneficiary of such rights) to “step in” the relevant contract in place of the employer, usually in the event of insolvency or default of the employer.

Designers in Hong Kong

Designers in Hong Kong are typically international or local architectural consultancy and engineering firms.

Consultants and engineers working on public works in Hong Kong are required to be listed on an approved list maintained by the Architectural Services Department. The consultants and engineers are classified according to their expertise, number of professional staff and years of establishment. Consultants or engineers are required to be registered on the approved list of a prescribed category before they are qualified to tender for public works projects.

For private works, the consultant and engineer must be registered in the appropriate categories of building professionals under the Buildings Ordinance (Cap 123) in Hong Kong.

Designers’ Rights and Obligations

Designers’ rights and obligations are generally governed by the consultancy agreements between employers and designers or between contractors and designers, as well as derived from the common law of contract and tort and implied by legislation.

In general, the designer’s obligations in a typical design consultancy agreement usually include:

• carrying out the design in accordance with the requirements specified in the consultancy agreement and exercising the reasonable skill, care and diligence of a competent designer experienced in the provision of like services for a project of a similar size, scope and complexity to the project;
• ensuring the design will be fit for the purpose required by the consultancy agreement;
• furnishing necessary drawings and details in time, which will enable the contractor to comply with the obligation to progress and complete the work in accordance with the construction contract;
• the design must be buildable by those likely to be employed to build and in the conditions that can be foreseen;
• taking reasonable care in the design to assess and eliminate reasonably foreseeable risks;
• employing and utilising in the performance of services key personnel specified in the consultancy agreement;
• continuing duty to check that the design will work in practice and to correct any errors that may emerge;
• the employer/contractor shall become the absolute and exclusive owner of the design and all IP rights subsisting therein free from all encumbrances;
• effecting and maintaining professional indemnity insurance and public liability insurance according to the agreed terms of the consultancy agreement;
• complying with all applicable statutory requirements;
• delivering security/bonds/guarantees/warranties according to the agreed terms of the consultancy agreement;
• for a lead consultant, co-ordinating the design of subconsultants/specialists; and
• for design-and-building procurement, consenting to novate all rights and obligations of the consultancy agreement from the employer to the contractor.

The designer’s rights in a typical consultancy agreement in Hong Kong usually include (but are not limited to):

• the right to receive payments according to the agreed terms of the consultancy agreement typically under a schedule of fees;
• the right to claim for additional payment arising from delays during the performance of services provided that the delays are not attributable to the default of the designer; and
• the right to terminate the consultancy agreement in accordance with the agreed terms of the construction contract.

Relationships Between the Designer and Other Parties

Under a build-only contract, the design is carried out by the architect or engineer on behalf of the employer. Under a design-and-build contract, contractors sometimes engage an independent consultant or engineer to fulfil their design obligations to the employer.

A typical consultancy agreement generally requires the consultant to comply with the instructions of the employer or contractor (as the case may be).

Relationships between the consultant and the subconsultants are typically governed by the relevant subconsultancy agreement between the consultant and the subconsultants. The subconsultancy agreement very often will require the subconsultant to conform with the requirements of the consultancy agreement and that payment to the subconsultant is contingent upon payment to the consultant by the employer.

The scope of works in a construction contract is typically set out in the general and technical specifications and the relevant drawings (or the employer’s requirement for a design-and-build contract) forming part of the construction contracts, and as amended and supplemented by the architect/engineer appointed by the employer.

Scope for Variations

The scope for variations is typically determined by the instructions or confirmation of oral instructions issued by the employer and/or the architect. By way of example, the Standard Form of Building Contracts published by the Hong Kong Institute of Architects and the Hong Kong Institute of Surveyors (2005 edition) (“HKIA/HKIS Standard Form 2005”) provides that the instruction requiring a variation must describe the change required to the design, quality or quantity of the works or the imposition of (or change to) any obligation or restriction on the contractor.

Price for Variations

The price of variations is typically determined by reference to agreed contractual rates and in the absence of such agreed rates at fair rates or daywork. For instance, the HKIA/HKIS Standard Form 2005 provides that:

• additional work that can be properly valued by measurement or work that is the subject of provisional quantities, provisional items or provisional sums shall be valued:
1. according to the contract bills with fair adjustment for difference in conditions or quantity for work in same or similar nature; or
2. at fair value if the work is not the same as or similar in character;
• additional work that cannot be properly measured and valued may – with prior consent of the architect – be carried out as daywork and valued at prime cost, comprising labour, materials, goods, plant and equipment plus overheads and profits; and
• omissions shall be valued according to the contract bills plus fair adjustment if the contractor has reasonably incurred expenses.

Variations Requested by Contractors

The construction contract would typically provide that the contractor shall not carry out work involving a variation without a written instruction from the architect/the employer or confirmation of an oral instruction except in the event of emergency.

Depending on whether the contract between the employer and the contractor is a design-and-build contract or a build-only contract, the division of design responsibilities among the employer, the architect/designer, the contractor and other consultants will vary depending on the terms of the relevant construction contract and consultancy agreements.

In a design-and-build contract, the contractor’s design obligation is usually more extensive and the contractor will be required to ensure that the design and works are reasonably fit for purpose. By contrast, for a build-only contract, the contractor is usually only required to follow the instructions of the employer, architect/designer or other consultants on the design and its design responsibilities may be limited to designing the temporary structures, preparing shop drawings and co-ordinating works.

The Employer, the Architect and the Authorized Person

The employer usually enters into a contract with an architect/engineer to plan and design a project and to co-ordinate with the contractor and other consultants such as the designers, engineers and surveyors. The architect/engineer often plays an important role in the administration of a construction project, with the responsibility to issue instructions/variations/certificates for and on behalf of clients/employers and for inspection and acceptance of work, etc.

An “authorized person” who is an experienced building professional registered under the Buildings Ordinance (Cap 123) has to be appointed for submission of the building proposals to the Building Authority for approval. The appointed “authorized person” is responsible for supervising the carrying out of the building works and notifying the Building Authority for any contravention by the approved plan of any building regulations.

The Contractor and Subcontractors

The main contractor is usually responsible for completing and delivering the works according to the contractual requirement and co-ordinating the work of subcontractors to ensure satisfactory and timely completion of the works. The subcontractors are responsible for completing and delivering the subcontract works according to the subcontracts with the main contractor.

The responsibilities for the status of the construction site are generally determined contractually by the parties.

The risk of unforeseen ground conditions is usually borne by the contractor. By way of example, the Hong Kong Government’s General Conditions of Contract for Civil Engineering Works provides that the contractor is deemed to have examined and inspected the site and its surroundings and to have satisfied themselves – before submitting the tender – with regard to the roads or other means of access to the site, the nature of the ground and subsoil, the form and nature of the site, the risk of injury or damage to property, the nature of materials to be excavated, etc.

Most standard form contracts also provide that the contractor is responsible for complying with statutory requirements, including the relevant legislation regarding pollution.

Archaeological finds and discoveries of antiquities are, however, usually considered as events that are the fault/responsibility of neither of the parties and may be a ground for the contractor to apply for extension of time (eg, the HKIA/HKIS Standard Form 2005).

Prior approval and consent from the Building Authority are generally required for construction projects in Hong Kong, subject to certain exceptions provided under the Buildings Ordinance (Cap 123) and other legislations. Other approvals may also be needed from other government departments depending on the nature of the construction works – for example, from the Fire Services Department, the Water Supplies Department, the Drainage Services Department, and the Electrical and Mechanical Services Department.

The “authorized person” is responsible under the Buildings Ordinance (Cap 123) for submitting the building proposal to the Building Authority for approval. The construction contract usually also provides that the contractor must co-operate with and assist the employer in obtaining all necessary permits for the project.

The contractor is typically responsible for the care and maintenance of the works during the construction period and until the end of the agreed defects liability period. Upon completion and the end of defects liability period, maintenance works are typically governed by separate maintenance contracts and/or warranties.

The landlords or building owners have duties to maintain their properties under legislation and common law. The duty for maintenance may also be found in the deed of mutual covenant, the Building Management Ordinance (Cap 344) and other legislation for fire, water, electrical and other utilities installations.

Employers in Hong Kong do not usually intervene with the operation and finances of their contractors or consultants but construction contracts in Hong Kong typically contain express clauses prohibiting transfer or assignment of building. Employers may require contractors to submit a valid business registration certificate and financial statements at tender stage.

All new buildings are required to obtain an occupation permit (OP) before completion.

To obtain an OP, the registered building contractor has to submit to the “authorized person” for endorsement a completed and signed form to certify that the building has been constructed in accordance with the Buildings Ordinance (Cap 123) and the drawings and plans have been approved by the Building Authority. Inspections will be arranged and the Building Authority will decide if an OP can be issued and, if not, what work has to be done before it can be issued.

The tests required for certified completion of the works are determined by the terms of the construction contract. Typically, the contractor is required to provide all vouchers, test certificates or other evidence to satisfy the employer/architect that the materials and goods comply with the contract specifications and to carry out all tests and inspections specified in the construction contract or instructed by the employer/architect to satisfy the employer/architect that the works have been practically/substantially completed.

Practical completion means that the works are fully completed to a state that permits the employer to enter into full beneficial occupation save for very minor items of work left incomplete. Substantial completion is completion to a state that permits the employer to enter into functional or operational occupation save for minor outstanding works to be completed in the maintenance period.

The architect/engineer will certify for practical/substantial completion if they believe that the works can be considered practically/substantially complete, which permits the employer to take possession of the works and marks the beginning of the defects liability period. The contractor is then considered to have delivered the works and its liability to pay for liquidated damages for late completion may cease.

Length of Defects Liability Period

The length of the defects liability period depends on, and is generally agreed upon, in the terms of the construction contract between the employer and the contractor. The defects liability period usually ends in 12 to 24 months after substantial completion of the project (or a relevant part). For the HKIA/HKIS Standard Form 2005, the defects liability period will be 12 months from substantial completion if it is not agreed and stated otherwise in the appendix.

Remedies for Defects During Construction

If defective work or design is discovered before practical/substantial completion, the construction contract may provide the right for the employer/architect to order further testing and inspection, to direct removal or replacement of the defective work or design, to vary the work or to engage a third party to rectify the defective work or design and make an adjustment/set-off to the contract price.

Remedies for Defects After Practical Completion

After practical/substantial completion, the contractor is required to rectify the defects, which are usually listed in the defect list that accompanies the certificate of practical/substantial completion, and the employer is usually entitled to call for the contractor to return to the site to repair or to make good defects that were discovered during the defects liability period.

The employer is entitled to claim for the cost of making good and repair for defects in the works or in the design, as well as consequential damages such as compensation for loss of use or liabilities incurred towards third parties.

Remedies for Defects After Final Certificates

Most standard form contracts provide that the architect/engineer will issue the defects rectification certificate or making-good certificate upon the expiry of the defects liability period when they are satisfied that the contractor has satisfactorily completed all unfinished works and all defects have been rectified.

The architect/engineer will typically be required to issue the final certificate after the issuance of the defects rectification/making-good certificates and the signed final account. The final certificate will generally indicate that the employer has accepted and is satisfied with the quality of work concerned save for latent defects or omissions not reasonably discoverable at the time of the defects rectification/making-good certificate. By way of example, the HKIA/HKIS Standard Form 2005 provides that the final certificate is conclusive evidence that the materials, goods, workmanship and work were provided or carried out to the architect’s satisfaction.

The employer may therefore not be able to claim for defects or omissions after the final certificate unless they are latent defects or omissions not reasonably discoverable.

Notification of Defects

According to the Limitation Ordinance (Cap 347), the limitation period for a contractual claim founded upon a simple contract (ie, not under seal) is six years from the date of accrual of the cause of action (or 12 years if the contract was created by deed).

The limitation period in respect of a simple contractual claim for defects usually runs from the date of practical/substantial completion of works, except for limited circumstances where the limitation period is extended (such as acknowledgement, if the action is based upon the fraud of the defendant, deliberate concealment, mistake, etc). If the employer did not commence action for defects within six years, its contractual claim for defects may be time-barred.

The limitation period for actions of tort is six years from the accrual of the cause of action but actions in respect of latent defects can be brought within three years from the date of knowledge, subject to a maximum long stop date of 15 years from the date of accrual of the cause of action.

Lump Sum Contract

For this type of contract, the contractor will carry out works based on the plans, drawings and specifications for an agreed price. The agreed basis on which the agreed lump sum will be subject to adjustments ‒ for example, due to variations instructed by the employer/architect and or fluctuations.

Measurement Contract

A measurement contract allows the interim payments and the final contract sum to be ascertained by measurement and valuation by reference to the bills of approximate quantities or a schedule of rates agreed under the contract.

Cost-Reimbursement Contract

This type of contract provides that the cost will be paid based on actual cost incurred, including for materials, labour, plants and equipment plus an agreed percentage for overheads and profits. The contractor may be required to submit regular cost estimates and reports on cost incurred to avoid excessive and unreasonable expenditures.

Most standard form contracts commonly used in Hong Kong provide an option for the contract sum to be adjusted upwards or downwards to take into account fluctuations in the cost of labour and materials in accordance with provisions set out in the contract. By way of example, the Hong Kong Government’s General Conditions of Contract for Civil Engineering Works provides that the sum payable certified as being due shall be increased or decreased in accordance with changes in the “Index Numbers of the Costs of Labour and Materials used in Public Sector Construction Projects” compiled by the Census and Statistics Department.

The actual risk allocation in respect of price fluctuation is negotiated and agreed upon by the employer and the contractor. It will typically depend on the uncertainties of the cost of labour and materials, contract duration and the contractor’s ability to assess and manage the risk. In a typical lump sum fixed-price contract, the contractor bears the entire risk of labour and material costs fluctuation, and it may mitigate this risk by including an additional premium in the tender price.

Most standard form contracts specify the timeframe for the employer to make payment to the contractor (usually upon issuance of a certificate by the architect/engineer) and provide the contractor with the right to terminate the contract if the employer fails to make payment in accordance with the contract. Some contracts may provide that the contractors are entitled to charge interest at an agreed rate for late payment.

Interim payments or milestone payments are provided in most standard form contracts and are generally used. Advanced payments and delayed payments are less commonly seen but not unheard of.

Contractors are typically required to submit applications for interim and final payments along with supporting documents to the architect/engineer/quantity surveyor for assessments and certifications.

Role of Employer, Contractor and Other Parties

The main contractor is typically responsible for co-ordinating with the subcontractors and consultants and submitting and updating a master programme, relevant method statements and shop drawings for the construction works in order to ensure timely completion of the construction work.

The architect/engineer appointed by the employer is typically responsible for monitoring the contractors’ progress of work.

Planning Safeguards

In most standard form contracts, the employer is entitled to impose liquidated damages if the contractor fails to deliver its work by the completion date. Although not commonly seen, the contract may also provide an incentive bonus for early completion.

Interim payments are typically made based on the amount of work done certified by the architect. Some contracts, depending on the nature of the work, may also provide for milestones and milestone payments.

If the event of delay is one of the specified events in which extension of time can be granted by the architect/engineer under the contract, the duty to set in motion the extension of time procedures usually rests with the contractor by giving notice of delay.

The architect/engineer receiving the notice of delay is required to decide whether the delay is an event specified under the construction contract, for which the contractor is entitled to an extension of time and the overall extension of time that they consider the contractor to be entitled to.

In the event of delays caused by the contractor’s own action and/or inaction (eg, failure to secure sufficient labour, material or equipment), the contractor is not entitled to extension of time or damages from the employer and the contractor should carry out delay recovery measures or otherwise risk liability for liquidated damages for delayed completion.

Most standard form contracts also entitle the employer to terminate the contractor’s employment if the contractor fails to proceed with the works regularly and diligently.

Most standard form contracts commonly used in Hong Kong require the contractor to give a notice of delay to the architect/engineer, stating the cause and identifying the listed event specified in the construction contract, the estimated length of the delay and any material circumstances as the first step in a request for an extension of time, as well as to mitigate delay to the progress of the works. The contractor is then typically required to make further submissions at specified intervals in order to give further substantiations and updates to the effect of the delaying event.

The contractor is typically required to submit such notices of delay within a certain time upon the occurrence of the event of delay. By way of example, the HKIA/HKIS Standard Form 2005 requires the contractor to submit the first notice of delay within 28 days of the commencement of an event likely to cause delay to the completion of the works and to give a second notice within 28 days of the first notices and further submissions at intervals not exceeding 28 days until the delay ceases.

Many construction contracts will further provide that it shall be a condition precedent that the notices of delay be submitted within the specified timeframe for any extension of time requests by the contractor.

The term “force majeure” is used to describe situations where an unforeseeable event, generally outside the control of the parties, makes execution of the contract impossible (or almost impossible) during the contract period. However, the term has no established meaning under Hong Kong law and each force majeure clause must be examined individually based on the facts of each case and the terms of construction contract to determine its meaning.

It is possible to contractually limit or exclude certain circumstances from being qualified as force majeure by clear wording and clear definitions of what constitutes a force majeure event.

An unforeseen circumstance or event that renders the construction contract physically or commercially impossible to perform, or that transforms the obligation to perform into one radically different than envisaged at the time of contracting, may frustrate the construction contract. However, it is a narrow doctrine and is applied strictly in limited circumstances.

Whether the construction contract has been frustrated is to be established according to common law. The consequences of frustration are set out in section 16 of the Law Amendment and Reform (Consolidation) Ordinance (Cap 23).

Most standard form contracts commonly used in Hong Kong allow the contractor to recover loss/expense associated with disruption to the progress of works caused by certain events. By way of example, the HKIA/HKIS Standard Form 2005 allows the contractor to claim additional payment for direct loss and/or expense because the progress of the works has been or is likely to be delayed or disrupted by a listed event. In practice, it is commonly divided into two heads of claim ‒ namely, disruption claims (eg, loss of productivity and idling of labour, plant and equipment) and prolongation claims (eg, site overheads and site running costs). However, disruption has no established meaning under Hong Kong law.

The contractor is typically required to identify the contractual basis and provide substantiation to prove its entitlement. The method of assessment is normally to compare productivity of undisrupted activity with that of the disrupted activity, where they are similar in nature. The task of ascertaining the amount of a contractor’s entitlement normally rests with the architect/quantity surveyor on behalf of the employer.

According to the Control of Exemption Clauses Ordinance (Cap 71) (CECO), liability for death or personal injury resulting from negligence cannot be contractually excluded or limited. The exclusion or restriction of liability for other loss or damage resulting from negligence must satisfy the requirement of reasonableness.

According to the Misrepresentation Ordinance (Cap 284), any contract term excluding or exempting liability or any remedy for misrepresentation must also satisfy the same test of reasonableness stated in the CECO.

The concepts of wilful misconduct and gross negligence exist in Hong Kong and the interpretation of such terms in a contract is governed by applicable case law.

It is possible for the parties to contractually limit their liability subject to the statutory control set out in 6.1 Exclusion of Liability.Limitation of liabilities are more commonly seen in contracts for smaller projects or for agreements between the employer and its consultants and are generally limited to the amount of the consultancy or service fees paid by the employer.

Indemnities are common provisions used and negotiated by parties to limit risk. The most common types of indemnities found in standard form contracts are indemnities against the injury or death of any person and injury or damage to real or personal property and claims by third parties for breach of IP rights.

Surety Bonds

The contractor is typically required to obtain a guarantee from an insurance company or a bank approved by the employer/architect for the due performance of the construction contract under the terms of a surety bond. The surety bond is procured by the contractor by paying a premium.

The surety bond is typically an undertaking from the insurance company or bank to pay the employer up to a stated limit if the contractor fails to discharge its contractual obligations under the construction contract.

The surety bond can be:

a conditional bond, which may require the employer to establish the default and/or the damages occasioned by the breach of the construction contract; or

an on-demand bond, for which the employer may only be required to make a written demand to the bondsman without proof of default by the contractor.

Payment Bonds or Parent Company Guarantees

The contractor may also request for a payment bond or a parent company guarantee to guarantee that the employer will make payment according to the terms of the construction contract, especially where the employer is a special purpose vehicle established for the purpose of the construction project only.

Similarly, the employer may also request a parent company guarantee from the contractor to guarantee performance of the construction contract if the contractor is a small subsidiary of an established contractor.

The contractor is typically required to and will effect and maintain:

• employees’ compensation insurance in accordance with the Employees’ Compensation Ordinance (Cap 282) to cover liabilities arising from bodily injury to – or disease or death of – the contractor’s or any subcontractors’ employees; and
• contractors’ all-risk insurance to cover liability in respect of personal injuries or deaths and/or injury or damage to real or personal property arising out of ‒ or in the course of, or caused by the carrying out of ‒ the construction works.

The designer and professional consultants are typically required to effect and maintain professional indemnity insurance for a minimum amount until a certain number of years from the date of notification of completion as stated in the consultancy agreement.

If the construction works involve the erection of a new building or the alteration of an existing building, it is common for the employer to effect and maintain insurance against the building.

In most standard form contracts commonly used in Hong Kong, insolvency of the employer or the contractor usually entitles the other party to terminate the construction contract. The termination clause typically gives the employer a right to enter the site and to use plant and materials left over for the completion of the works.

The NEC suite of contracts now commonly used in contracts for public works allows the employer and the contractor to share the risk of any delay caused by a “compensation event”, which is an event that can affect the cost to the employer/client of the work being carried out, the time when the works will be completed, or both. Typically, they will be events that are at the employer/client’s risk, including:

• an instruction or other change of the project manager or supervisor;
• a failure by the employer/client, the project manager or supervisor to take an action that the contract requires them to do; and
• a supervening event that is so unlikely that the risk of such will generally be allocated to the employer/client.

The target cost contracts of the NEC suite of contracts allow the risk to be shared between the employer and the contractor further. Under these types of contracts, the contractor gains a bonus if the actual cost is below the target cost but shares the cost if it goes above the target costs.

Other common standard form contracts typically define and specify the perceived risks and allocate responsibilities to either the employer or the contractor. The risks that are typically agreed to be shared between the employer or the contractor are usually events that are faults of neither parties (eg, force majeure or inclement weather).

Most standard form contracts, such as the HKIA/HKIS Standard Form 2005, require that the contractor’s site management team to have appropriate qualifications, seniority and experience to properly organise, manage, plan supervise and co-ordinate the carrying out of the construction works.

Appointment of key management and technical positions may require the approval of the employer/architect and the employer/architect may be entitled to instruct the contractor to replace any incompetent personnel.

The construction contract may require the contractor to obtain the employer’s written consent before engaging all domestic subcontractors or for certain specialist trades of works. The contractor may also only object to the employer’s nomination of subcontractor on grounds such as poor safety record, financial standing or technical competence.

The contractor is typically required to pay the cost of all royalties and licence fees for the design and the use of IP in respect of any materials, goods, plant and equipment used and to indemnify the employer against all claims for any infringement of IP rights in the contractor’s design or use of materials, goods, plant and equipment.

For design-and-build contracts, the contractor may retain the IP rights of the design of the project, as well as know-how generated throughout the course of the project.

The usual remedy for breach of construction contract is an award of damage to compensate the innocent party for damage, loss or injury suffered as a result of the breach. Damages may also be awarded for losses consequential upon the breach.

Where a breach is repudiatory, the innocent party may choose to accept the repudiation and rescind the construction contract and claim for damages or to continue with the contract.

Specific performance may be available to the innocent party. However, the court will not normally grant such equitable relief where damages will adequately compensate the claimant or where the court cannot properly supervise performance.

Injunctive relief may also be available in some circumstances ‒ for instance, for breach of confidentiality obligations, to the employer for evicting the contractor from the site upon termination of the contract, or to the contractor to restrain the employer from exercising the power to terminate, evict the contractor or call on security, etc.

Depending on the terms of the construction contract, other remedies such as suspension of work or determination of the contract upon notice may also be available.

The standard form contracts commonly used in Hong Kong do not typically contain standard clauses limiting remedies available to a party.

Sole remedy clauses are not commonly used in construction contracts in Hong Kong.

Most standard form contracts (eg, the HKIA/HKIS Standard Form 2005) typically provide that the contractor may only claim for direct loss and expense for disruption/prolongation claims ‒ ie, they do not include indirect or consequential loss or damages.

Retention and suspension rights are not generally contractually excluded in construction contracts in Hong Kong.

Retention Rights

The standard form construction contracts commonly used in Hong Kong usually expressly provide for the employers’ rights to retain payment at the agreed percentage such that the employers may have recourse to it for payment of any amount they are entitled to under the construction contracts. There is no statutory obligation on employers to establish retention money trust accounts.

Suspension Rights

The standard form construction contracts commonly used in Hong Kong also usually expressly provide for the employers’ rights to suspend the building works. However, the contractors may be entitled to extension of time and/or to determine the construction contract if the suspension has continued for a certain period of time.

The standard form construction contracts commonly used in Hong Kong usually contain an express right for both parties to terminate the contract. By way of example, the HKIA/HKIS Standard Form 2005 provides that upon serving a notice of default specifying the default and stating that notice of determination may be served if the default continues for a further 14 days, the innocent party may terminate the contract upon expiry of the prescribed time. A right to terminate also exists in common law in situations where one party has repudiated the contract by evincing an intention to no longer be bound by the agreed terms.

The typical contractual consequences of such termination include the contractor returning possession of the site to the employer, assigning all warranties and guarantees to the employer, and the employer employing other persons to complete the works. The architect will normally certify the final account amount in accordance with the contract. If a party terminates a contract, it is likely that it will seek to recover additional costs that flow from the breach of the defaulting party that led to the termination.

District Court

The District Court in Hong Kong has jurisdiction to hear civil disputes (including construction disputes) of a value over HKD75,000 but not more than HKD3 million. Disputes over HKD3 million should be submitted to the Hong Kong Court of First Instance.

Court of First Instance

The Construction and Arbitration List was established within the Hong Kong Court of First Instance to facilitate the disposal of cases concerning:

• civil or mechanical engineering;
• building or other construction works; and
• claims by or against engineers, architects, surveyors and other professional persons or bodies engaged in matters relating to the construction industry.

Construction disputes are typically commenced under this list ‒ although a party or the judge in charge may request a case to be transferred in and out of the list.

Mediation

Mediation is encouraged in all civil litigations in Hong Kong. Parties in litigation have to follow Practice Direction 31 issued by the Hong Kong Judiciary to file mediation notices, responses and certificates to the Hong Kong Court and may face cost consequences if they refuse to mediate without cause.

The Mediation Ordinance (Cap 620) provides a regulatory framework in respect of certain aspects of mediation.

Expert Determination

Some construction contracts in Hong Kong also provide a mechanism for parties to submit the disputes for determination by a third-party expert appointed by the parties.

Adjudication

In Hong Kong, construction adjudication – as it currently stands – is contractual rather than statutory. For public works, the contractual adjudication regime was introduced by the Development Bureau in 2021, which incorporates mandatory SOP provisions into all new public works contracts and subcontracts.

The CISOP Bill, once enacted as an Ordinance (which is anticipated to be in early 2025), will introduce a mandatory adjudication mechanism. The CISOP Bill will generally apply to construction contracts of value not less than HKD5 million for carrying out construction work and HKD500,000 for the supply of related goods or services, subject to certain exceptions under the legislation. The CISOP Bill requires an adjudicator to make a determination within 55 working days after the date on which the adjudicator is appointed (or a longer period agreed by the parties).

Arbitration

The standard form contracts commonly used in Hong Kong typically contain an express agreement to arbitrate disputes arising from building works. Most construction disputes in Hong Kong, including public works and larger-scale projects, are resolved by arbitration.

The principal legislation governing arbitration in Hong Kong is the Arbitration Ordinance (Cap 609). With the amendments to the Arbitration Ordinance that took effect in 2019, third-party funding in arbitration and ancillary court proceedings is now permitted in Hong Kong.