Codifying Retention Money Dispute in the Scope of Adjudication

The rationale behind the Hong Kong proposed security of payment legislation in construction industry has been aimed at:

1.   Imposing a minimum standard for good payment practices;
2.   Preventing paying parties from unreasonably extending payment periods;
3.   Reducing the impact of other aspects of security of payment legislation such as rendering ‘pay when paid’ provisions ineffective;
4.   Allowing rapid resolution of disputes through adjudication;
5.   Supporting and encouraging effective cash flow down the contractual chain; and

The scope of adjudication, likewise in some other jurisdiction includes disputes arising out of payment claims whether it is an interim payment or final payment. A progress payment normally contains, inter alia, the values of work done and other sums of money such as retention money, sums arising under valuations, claims and supplementary agreement. An unpaid party submitting a payment claim should ensure the entirety of the payment claim is governed by the security of payment legislation.

In The Rintoul Group Limited v Far North District Council [2019] NZDC 7305, the Council withheld payment to Rintoul of retention sums held by the Council as it said that repairs were necessary to the work carried out under the contracts between the parties. In one of the contracts, the Council submitted that there were defects with the works and as Rintoul failed to return to the site and rectify the defects, the Council had to authorise another contractor to do the work with cost exceeded the retention money held by the Council.

Although no payment schedule was served by the Council in response to the payment claim in January 2017, the Council noted that there were no cashflow issues as the work was conducted in 2014 and the payment claim was not lodged until three years later in 2017. It argued that the dispute on retention money must be resolved by way of arbitration.

The court found that in Williams Investment Group Limited v Kings New Developments Limited, DC Tauranga, CRI-2007-070-001323, it was commented that the considerations applicable to retention money were different to those applicable to other progress payments. The court that held “Given the length of time between the work completed and the issue of the payment claim for the retention monies there was clearly no cashflow issue.” Since there was an arbitration agreement in the conditions of contract, the parties shall take the retention payment dispute to arbitration instead of adjudication.

In the proposed Hong Kong legislation, the scope of adjudication should be specific to avoid jurisdiction issues arising in the adjudication. From the Canadian experience, legislation on prompt payment in Ontario came into force through amendments to the Construction Act (formerly the Construction Lien Act). Part II.1 of the Ontario’s Construction Act introduces the interim adjudication regime, where section 13.5 specifies a party to a contract may refer to adjudication a dispute with the other party to the contract respecting any of the following matters:

1.   The valuation of services or materials provided under the contract;
2.   Payment under the contract, including in respect of a change order, whether approved or not, or a proposed change order;
3.   Disputes that are the subject of a notice of non-payment under the “prompt payment” provision;
4.   Amounts retained under “set-off by trustee” or under “lien set-off”;
5.   Payment of holdback;
6.   Non-payment of holdback;
7.   Any other matter that the parties to the adjudication agree to, or that may be prescribed.

Of particular interest is the payment of holdbacks specified in Part IV of the legislation. A holdback means a sum in prescribed percentage of the price of the services or materials as they are actually supplied under a contract or subcontract is retained by the owner until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under the legislation. A person who supplies services or materials to a construction has a lien upon the interest of the owner in the premises for the price of those services or materials. This lien arises and takes effect when the person first supplies services or materials to the construction. At the end of day, the owner may refuse to pay some or all of the holdback under certain conditions and that may create a dispute. Since a holdback shall be released by the owner once the lien period is expired, this is analogous to retention money with respect to the repayment time that is normally in a late stage of the construction period. Arguably, the supplier may not have a cashflow problem in that late stage and the applicability of the security of payment legislation is questionable, unless the matter is specifically included in the scope of adjudication.

Jurisdictions: 

Hong Kong Institute of Construction Adjudicators