Dispute resolution in the new NEC4 ECC Hong Kong Edition

Key Points

• NEC ECC Hong Kong Edition launched in July 2023 is based on NEC4 Engineering and Construction Contract (ECC) but treats dispute resolution differently.
• It abandons the standard W1–W3 dispute resolutions and introduces a unique W4 dispute resolution option consistent with local security-of-payment provisions.
• There are separate tiered resolution processes for contract disputes and payment disputes, including adjudication, mediation and arbitration.

NEC contracts have been the Hong Kong Development Bureau’s preferred means of public works procurement since 2015. Beyond public works, organisations within Hong Kong’s utility services and public facilities sectors, such as the Hong Kong Airport Authority and MTR Corporation, have also shown an increasing preference for using NEC for major infrastructure projects.

The Development Bureau launched a localised standard version of the NEC4 Engineering and Construction Contract (ECC) in July 2023 called the NEC ECC Hong Kong Edition. This article focuses on the key features of HK NEC form’s unique W4 dispute resolution option. It incorporates a tailored multi-tiered dispute resolution mechanism consistent with the Development Bureau’s security of payment provisions in public works contracts, which are set out in Technical Circular (Works) No. 6/2021.

Alternative dispute resolution mechanism

The overall structure of the HK NEC form is similar to the standard NEC4 ECC. Two of main differences are the HK NEC form’s introduction of a unique W4 dispute resolution option and abandonment of the standard W1–W3 dispute resolution options.
Although there are three sets of tiered dispute resolution clauses available under the standard NEC4 ECC, namely clauses W1, W2 and W3, the HK NEC form has not adopted any of them. Instead, the HK NEC form provides a multi-tiered alternative dispute resolution clause, known as Option W4, that incorporates an interim step for adjudication of ‘payment disputes’.

Under the Development Bureau circular, a ‘payment dispute’ is broadly defined to include situations where (i) a payment claim is wholly disputed, (ii) the amount admitted as due is less than the claimed amount, (iii) set-off or withholding of all or any part of the claimed amount is raised, (iv) the paying party fails to pay the admitted amount within the stipulated time and/or (v) the paying party fails to serve a payment response and pay the claimed amount in full within the stipulated time.

A close examination of Option W4 shows that there are now separate tiered dispute resolution processes for: 

• a dispute between the parties arising under or in connection with the contract, which dispute may include a payment dispute (as defined in the circular) that has not already been determined by an adjudicator in accordance with the circular; and 
• a payment dispute.

This means that for any payment dispute the contractor can choose to have it determined by either the project manager within four weeks of it arising, or by an adjudicator within 55 working days from the date of the adjudicator’s appointment in accordance with security of payment provisions specified in the circular.

The contractor can raise a payment dispute under both processes, but the project manager will not determine the matter if the adjudicator has already made their decision before the project manager makes their decision known. The adjudicator’s decision will be binding and enforceable until the parties settle the payment dispute by written agreement, or the payment dispute is determined by arbitration or litigation.

The project manager’s decision is also final and binding unless it is revised or replaced by an agreement in writing between the parties, or a decision by the adjudicator or the arbitrator. The purpose of this separate mechanism for swift resolution of payment disputes is to facilitate cash flow through prompt payment to the contractor.

Note that under Hong Kong law, such conditions precedent in tiered dispute resolution clauses are strictly enforced and non-complying parties risk their claims being struck out. Unless expressly agreed otherwise (and in the HK NEC form it is not), whether the referring party has duly complied with the condition precedent is as a matter of admissibility rather than jurisdiction. This means that the arbitral tribunal’s decision on non-compliance with conditions precedent at each stage is a matter that is not subject to appeal (see C v. D [2023] HKCFA 16, [11], [55], [66], [77], [90])

Mediation

The HK NEC form provides that attempting to resolve the dispute through mediation is also a precondition to arbitration.

For a dispute referred to the project manager, a party can refer the dispute to mediation within four weeks (or a longer period agreed between the parties) of receipt of the project manager’s decision if it is dissatisfied with the decision, or within four weeks (or a longer period agreed between the parties) of the date when the project manager was required to give their decision on the dispute but, for whatever reason, did not.

Similarly, for a payment dispute referred to the adjudicator, a party can refer to a mediation within four weeks of the date of the adjudicator’s decision if it is dissatisfied with the adjudicator’s decision. Notably, there is no express provision entitling a party to refer a dispute to mediation where the adjudicator has failed to provide its decision within 55 days.

In reality the situation would rarely arise, but if it did, the adjudication will be treated as being terminated under the circular and a party’s recourse would be either to initiate a new adjudication for that dispute or refer the same matter to the project manager for determination instead, in which case the mechanism and timing for the project manager’s determination referred above would apply.

Arbitration

A party may refer a dispute to arbitration within 13 weeks from the date of (i) the referral to mediation if there is no response from the other party, (ii) the counterparty’s refusal to mediate, (iii) termination of the mediation without settlement or (iv) the expiry of the four-week period for mediation in circumstances where neither party has referred the dispute to mediation.

This is similar to the position under the Hong Kong General Conditions of Contract for Design and Build Contracts, whereby either parties may refer the matter to arbitration within 90 days ‘if the matter cannot be resolved by mediation, or if either of the parties do not wish the matter to be referred to mediation’.

W4.1(1) of the HK NEC form provides that the provisions of schedule 2 of the Hong Kong Arbitration Ordinance (HKAO) – which are the rules governing arbitration in Hong Kong – apply to arbitration brought under that clause. The benefit of schedule 2 is that it provides additional avenues to challenge an arbitral award. It allows a party to apply to the court for a decision on a preliminary question of law arising in the course of the arbitral proceedings, to challenge the award for serious irregularity, and to appeal against an arbitral award on a question of law.

Finally, while a reference to arbitration can be made during the course of the works, the arbitration cannot be progressed until completion of the whole of the works. HK NEC form expressly provides that the client’s issuing of a completion certificate is not a condition precedent that needs to be met before taking any steps in the arbitration. This prevents the client from holding up any contractor’s reference to arbitration by delaying the completion certificate in circumstances where the contractor has already completed the works.

Conclusion

The HK NEC form dispute resolution Option W4 incorporates local law requirements into the standard NEC4 ECC.

On top of the NEC benefits of clarity and simplicity, emphasis on proactive project management, encouragement of collaborative risk management and equitable risk allocation, it is expected that the facilitated cash flow under the new W4 payment dispute adjudication may further encourage both public and private users alike in Hong Kong to choose the HK NEC ECC as their go-to standard procurement form in future.

Acknowledgement

This article was co-written by Kingston Yeung, associate at Pinsent Masons in Hong Kong.