CONSTRUCTION

LAW
HONG KONG
LECTURE 2
 General Information
▪ The opinions expressed at or through this Presentation are the
opinions of the Presenter and may not reflect the opinions of the
Organizer or General Community at Large.
▪ This presentation is for educational purposes only.
▪ The Presenter made reference to a variety of articles and
Publications in compiling these slides.
▪ The Presenter would also like to take this opportunity to
acknowledge the references made within this presentation.
 WHAT ARE THE MAIN SOURCES OF LAW THAT GOVERN AND
REGULATE CONTRACTS FOR THE DESIGN OR CARRYING OUT
OF BUILDING WORKS?

▪ Hong Kong is a common law jurisdiction, meaning that the law derives from judges' decisions and is
developed by the courts. In Hong Kong, there is also legislation governing issues relating to
construction safety and building works. In Hong Kong, construction law is made of five main bodies
of law:
▪ Contract law – governing agreements between the parties.
▪ Tort law – during the construction process, events may occur that affect people and/or their property
and economic interests outside the ambit of other relationships such as contract. Tort law is the law
which addresses, and provides remedies for, civil wrongs not arising out of contractual obligations.
▪ Legislation – various ordinances and subordinate legislation (i.e. regulations) which govern the
carrying out of construction operations.
▪ Law of restitution – this area of law is concerned with the award of remedies which have one
common function – to deprive the defendant of a gain, rather than to compensate the claimant for
loss suffered. It is not uncommon to see claims being made on the basis of quantum meruit (the
amount deserved) and/or the prevention of unjust enrichment.
▪ Criminal law – sanctions are imposed for acts and omissions which constitute criminal activity.
 WHAT OFFICIAL PERMISSIONS, LICENCES OR CONSENTS ARE
REQUIRED BY A BUILDING OR ENGINEERING CONTRACTOR
BEFORE IT CAN START WORK?

▪ Under the Buildings Ordinance (Cap. 123 of the Laws of Hong Kong), the carrying out of large-scale building works or
works of a very simple nature (such as the erection of drying racks on the external walls of household apartments) are
governed by the same set of controls, including the requirements to obtain prior approval and consent from the Buildings
Department before commencement of works and to appoint Authorized Persons (APs) (architects, engineers and surveyors
registered under the Buildings Ordinance), and registered professionals to design and supervise the works as well as
registered contractors to carry out the works.
▪ The approval of plans takes approximately two months.
▪ Any person who intends to carry out building works is required by law to appoint an AP, and where necessary a registered
structural engineer and, if building works at any stage involve geotechnical elements, a registered geotechnical engineer, to
prepare and submit plans for the approval of Buildings Department under the Buildings Ordinance.
▪ Consent for commencement of work takes approximately 28 days.
▪ Consent to commence building works is required from the Buildings Department before the works start and the Buildings
Department will monitor sites with works in progress and inspect sites regularly, particularly at critical stages, for safety
assurance and for compliance with statutory requirements under law.
▪ The requirements of the above system are too stringent for minor works which are of a smaller scale and pose a lower level
of risk, so as a result the Hong Kong SAR Government introduced the Minor Works Control System, facilitating members of
the public to carry out minor works in private buildings lawfully through simplified procedures and thereby improve the
building safety in Hong Kong.
 RULES RELATING TO HEALTH AND
SAFETY ON CONSTRUCTION SITES?
In Hong Kong, the following legislation is important regarding construction site safety:
• Factories and Industrial Undertakings Ordinance (Cap. 59 of the Laws of Hong Kong);
• Construction Site (Safety) Regulations (Cap. 59I of the Laws of Hong Kong);
• Factory and Industrial Undertakings (Safety Officers and Safety Supervisors) Regulations (Cap.
59Z of the Laws of Hong Kong);
• Factories and Industrial Undertakings (Safety Management) Regulations; and
• Occupational Safety and Health Ordinance (Cap. 509).
▪ These rules mainly relate to health and safety during the construction process and not the use of
the development after construction is completed.
▪ Statutory duties give rise to criminal liability which means that an offender can be prosecuted by
the enforcement agencies and brought before the courts to answer criminal charges in addition to
civil liability in tort (i.e. the law that addresses, and provides remedies for, civil wrongs not arising
out of contractual obligations).
 WHAT TYPE OF LEGISLATION EXISTS DEALING WITH
ENVIRONMENTAL ISSUES AFFECTING BUILDING WORKS
AND WITH PROMOTING SUSTAINABLE DEVELOPMENTS?
There is Government control via:
• Licensing mechanisms e.g. noise control permits, discharge sciences;
• Town planning and building laws; and
• Criminal offences prosecuted by government authorities (e.g. Police, Environmental Protection Department, Labour Department).

The main Ordinances are:

• The Ozone Zone Layer Protection Ordinance (Cap. 403 of the Laws of Hong Kong) which controls the production, import and
export of products containing ozone depleting substances
• The Dumping At Sea Ordinance (Cap. 466 of the Laws of Hong Kong) which regulates the marine dumping and related loading
operations
• The Hazardous Chemicals Control Ordinance (Cap. 595 of the Laws of Hong Kong) which regulates the import, export,
manufacture and use of non-pesticide hazardous chemicals that have harmful effects on the environment
• The Air Pollution Control Ordinance (Cap. 311 of the Laws of Hong Kong) which regulates the emission of air pollutants from a
polluting process
• The Noise Control Ordinance (Cap. 400 of the Laws of Hong Kong)
• The Waste Disposal Ordinance (Cap. 354 of the Laws of Hong Kong) which regulates chemical waste, illegal dumping and
livestock waste
• The Water Pollution Control Ordinance (Cap. 358 of the Laws of Hong Kong) which regulates pollution in the waters of Hong
Kong
• The Environmental Impact Assessment Ordinance (Cap. 499 of the Laws of Hong Kong) which provides for the assessment of the
environmental impact of 'designated projects' as prescribed under the ordinance.
INFRASTRUCTURE AND UTILITIES

▪ What arrangements are usually made with the local authorities and
utility suppliers in relation to infrastructure (new roads, sewers etc..) to
support a new development?
▪ Arrangements are usually made with the Hong Kong Police Force and the
Transport Department which are the agencies through which transport policy is
enforced.
▪ Developers also work closely with other departments such as the Water Supplies
Department, Drainage Services Department, Civil Engineering and Development
Department, Buildings Department, etc.., regarding roads and associated drainage.
▪ In performing building development works adjacent to public roads, developers
also have frequent and close contacts with the utility operators.
 ARE ANY TERMS AND CONDITIONS IMPOSED OR IMPLIED BY
LAW OR MANDATORY IN CONTRACTS FOR THE DESIGN OR
CARRYING OUT OF BUILDING WORKS? [SLIDE 1 OF 2]

▪ Every contract must include an adequate mechanism for determining what payments become due, when they
become due and a final date for payment. A party is also entitled to payment by instalments, stage payments or
other periodical payments. Finally, a party also has the right to suspend performance for non-payment. If the
contract does not make adequate provision, the provisions of a statutory scheme will automatically apply to it.
▪ The Development Bureau of the Government of Hong Kong Special Administrative Region is consulted on an
important new legislation for the construction industry known as Security of Payment Legislation (SOPL).
The SOPL will apply to all contracts and sub-contracts for public sector works including maintenance and
renovation. In the private sector, SOPL will only apply to the procurement of new buildings at a cost over
HK$5 million or related consultancy services costing over HK$0.5 million. Private sector repair, maintenance
and renovation will not be covered.
▪ Under the proposed SOPL, parties will remain free to agree when claims for payment can be made for works,
services or supplies. Parties will also be free to agree how payments are valued. However, SOPL will prohibit
fundamentally unfair payment practices, including ‘pay when paid’ clauses (where a main contractor
withholds payment to a sub-contractor until the main contractor has been paid by the client) or unreasonably
long payment periods.
▪ The consultation stage of SOPL was completed on 31 August 2015 and the Report on Public Consultation was
issued in April 2016. In conclusion, there is positive support for SOPL and the Government intends to proceed
with the legislation.
 ARE ANY TERMS AND CONDITIONS IMPOSED OR IMPLIED BY
LAW OR MANDATORY IN CONTRACTS FOR THE DESIGN OR
CARRYING OUT OF BUILDING WORKS? [SLIDE 2 OF 2]

▪ The Contracts (Rights of Third Parties) Ordinance, Cap 623, which came into force on 1
January 2016, also applies to construction contracts. Under this Ordinance, 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.
▪ As far as the works themselves are concerned, the contractor must do the work with all
proper skill and care. Breach of this duty includes the use of materials containing patent
defects. There is also an implied warranty that the contractor will use materials that are
reasonably fit for the purpose for which they are to be used (whether or not that is a
purpose for which the materials are commonly supplied) and of good quality. If a contract
is silent in relation to liability for design, there is an implied term that the services will be
carried out with reasonable skill and care. The burden of proof falls on the party claiming
that the supplier of the service (design and build contractor, design sub-contractor or
consultant) has failed to use reasonable skill and care. These terms will be implied only if
the contract is silent on the issues; express terms are required to displace the implication
of these terms.
 INDUSTRY FORMS OF AGREEMENT
Institutional standard forms are issued by public and local authorities and sanctioned by the
construction institutions.
Examples include the:
• Agreement and Schedule of Conditions of Building Contract for Use in Hong Kong – Standard
Form of Building Contract (Private Edition), issued under the sanction of the Hong Kong Institute
of Architects / Hong Kong Institute of Surveyors ("HKIS");
• Joint Contracts Committee (JCC);
• Standard Form of Building Contract (JCT);
• Institute of Civil Engineers (ICE) Conditions of Contract Measurement Version;
• ICE Design and Construct Conditions of Contract;
• ICE New Engineering Contract; and
• International Federation of Consulting Engineers – Conditions of Contract for Building and
Engineering works designed by the Employer
 PARTIES TO A CONSTRUCTION
OR
ENGINEERING CONTRACT
[PART1 OF 3]

The main parties involved in a construction project are:

Employer/client
▪ This is the party procuring the work (usually a land developer). With respect to building contracts, this entity is usually
referred to as the 'employer'. In relation to the contracts of engagement of professional consultants, this party is usually
referred to as the 'client'.
Main contractor / subcontractors
▪ The employer will usually enters into a contract directly with the main contractor, who will then be responsible directly
to the employer for building the project in accordance with the plans, specifications, and the laws. Main contractors
seldom employ a large standing workforce. Instead, they subcontract separate parts of the construction works to
different subcontractors.
Professional team
The team of professional consultants usually appointed are as follows.
Authorized Person (AP)
▪ The role of an AP is governed by the provisions of the Buildings Ordinance (Cap. 123 of the Laws of Hong Kong). An
AP may be an architect, engineer or surveyor by profession. An employer who wishes to carry out building works or
street works must appoint an AP as the co-ordinator of such works. All plans submitted to the Buildings Department for
approval must be prepared and signed by the AP.
 PARTIES TO A CONSTRUCTION
OR
ENGINEERING CONTRACT
Professional team [PART 2 OF 3]
The team of professional consultants usually appointed are as follows.
Registered Structural Engineer (RSE)
▪ The role of an RSE is also governed by the provisions of the Buildings Ordinance. An RSE must be a structural engineer. An
employer who wishes to carry out building works or street works, must also appoint an RSE for the structural elements of such
works. Plans relating to foundation or containing structural details or calculations are usually prepared and signed by the RSE.
Architect
▪ Any person in Hong Kong involved in the design construction or fitting out of buildings and describing himself as an ‘architect’,
‘registered architect’ or ‘RA’ must be registered under the Architects Registration Ordinance (Cap. 408 of the Laws of Hong
Kong). As well as being responsible for the design of the work on an ongoing basis, the architect is often also appointed under
many standard forms of building contract, as contract administrator. Frequently, the architect is also the authorized person who
has to ensure compliance with planning requirements and building regulations, and to supervise and monitor works.
Engineer
▪ A person is not entitled to describe himself as a ‘registered professional engineer’ or to use the initials ‘RPE’ with or without a
qualifying discipline unless he is registered under the Engineers Registration Ordinance (Cap 409 of the Laws of Hong Kong).
The nature of the construction contract will determine which area of specialization or discipline the engineer will require (e.g.
structural, electrical and mechanical or geotechnical) and the manner in which he is employed (e.g. independently by the
employer or as a consultant to the architect).
 PARTIES TO A CONSTRUCTION
OR
ENGINEERING CONTRACT
[PART 3 OF 3]
Professional team
The team of professional consultants usually appointed are as follows.
Quantity surveyor
▪A person is not entitled to describe himself as a ‘registered professional surveyor’ or to use the initials ‘RPS’ with or
without qualifying divisions unless he is registered under the Surveyors Registration Ordinance (Cap 417 of the Laws
of Hong Kong). A quantity surveyor’s role has traditionally involved measuring and valuing work, both prior to the
commencement of construction (i.e. assembling bills of quantities for the employer or pricing bills of quantities for
the contractor) and during the course of construction. The surveyor’s role has now also been extended under some
contracts to advise architects or engineers on the amount payable under interim or final certificates.
Project manager
▪Where a project manager is appointed in a large construction project, his role is to organize and coordinate the
activities of the contractor and the professional team (i.e. architect, engineer, quantity surveyor, etc..). The precise
scope of these obligations will depend upon the terms of his appointment and the nature of the construction project.
Funder
▪This is the term used to describe the banks and other institutions and parties (for example, government or charitable
organizations in the case of urban regeneration, infrastructure and cultural/sports projects) who provide finance to the
employer towards the development
 ALLOCATION OF RISK
What risks in a construction or engineering contract are normally borne by the contractor?
To what extent is force majeure relevant in such contracts?
Risks borne by the contractor in a construction contract are usually in relation to failure to
build, defective work or delay.
• Failure to build: failure to complete by the contractor entitled the employers to damages (i.e. the
difference between the contract price and the amount it would cost the employer to complete the contract
work as it was originally intended).
• Defective work: a contractor will be liable to the damages to the employer in respect of the defects and
omissions in the construction works.
• Delay: if the contractor fails to complete the construction works within the time stipulated within the
contract, or within a reasonable, he may be liable for damages to the employer arising from a contractual
claim.

The term ‘force majeure’ is used with reference to all circumstances independent of the will of
man and which are not in his power to control. Unlike most industry forms, the Standard
Form of Building Contract often used in Hong Kong do contain a force majeure clause
allowing the contractor additional time to complete the works. The term ‘force majeure’ must
be construed as a whole with the rest of the contract and with regard to the nature and other
terms of the contract.
 COVID-19 AND FORCE MAJEURE

▪ The term ‘Force Majeure’ is not used in all the commonly used standard forms
of construction contract, perhaps reflecting the fact that it is not an established
concept in many common law jurisdictions.
▪ However, the standard form contracts do all contain provisions that deal in one
form or another with the impact of unforeseen and exceptional events such as
Covid-19.
▪ These provisions are included to provide a mechanism for controlling the effect
of unforeseen supervening events, such as Covid-19.
▪ The parties, however, frequently amend standard form Force Majeure clauses,
meaning contracts must be considered individually. A common amendment, for
example, is to include an exhaustive list of force majeure events, or to perhaps
exclude the impact of a Force Majeure event on labour or other resource
availability.
THIS TABLE ON THE NEXT SLIDE CONSIDERS HOW:

- UNAMENDED FIDIC 1999 YELLOW BOOK;

- NEC4; AND
- JCT DB 2016

FORMS OF CONTRACT PROVIDE FOR FORCE MAJEURE TYPE

EVENTS.
 IS COVID-19 A FORCE MAJEURE EVENT?
▪ The parties, however, frequently amend standard form Force Majeure clauses, meaning contracts
must be considered individually. A common amendment, for example, is to include an exhaustive
list of force majeure events, or to perhaps exclude the impact of a Force Majeure event on labour or
other resource availability.
▪ Accordingly, and whilst fact specific, for contracts concluded before Covid-19 first became known,
the virus outbreak is likely to qualify as a Force Majeure event under unamended standard form
contracts.
▪ The issue becomes less clear for contracts entered into during 2020. At what point was it reasonable
to foresee that Covid-19 would cause delays, costs and disruption? Who could have foreseen the
unprecedented lockdowns and restrictions on social movement that followed? To illustrate: was
Covid-19 ‘reasonably foreseeable on’:
• 4 January 2020: when the World Health Organisation (WHO) reported a cluster of pneumonia cases in Wuhan,
with no deaths?
• 30 January 2020: when the WHO declared Covid-19 an international public health emergency?
• 11 March 2020: when the WHO declared a global pandemic?

▪ For contracts which have yet to be entered into Covid-19 is no longer ‘unforeseeable’ and as a result
it will not be a Force Majeure event (save perhaps for JCT contracts which do not contain a
foreseeability test for force majeure). For future contracts it is therefore essential to expressly
provide for the time and cost risk of Covid-19 in the contract.
THE PRACTICAL IMPLICATIONS OF
COVID-19 AS A FORCE MAJEURE
EVENT FOR CURRENT PROJECTS
THE PRACTICAL IMPLICATIONS OF
COVID-19 AS A FORCE MAJEURE
EVENT FOR FUTURE PROJECTS
 COVID-19 AND CHANGE IN LAW
▪ Whilst contractual provisions dealing with Force Majeure are an obvious place to
begin when considering entitlement for the impact of Covid-19, there may be scope
for a contractor to argue that other contract provisions are relevant – particularly those
dealing with Change in Law, variations or suspension. Some contracts grant
additional time, but not costs, for Force Majeure – but will grant both forms of relief
for a Change in Law. Future bulletins will return to variations and suspension in
relation to Covid-19, but this bulletin focuses on the relief available for Change in
Law.
▪ Covid-19 is such an unprecedented threat that it has led to the introduction of a raft of
governmental actions (i.e. ‘advice’ or ‘recommendations’) as well as new legislation
around the world. There is therefore a strong possibility that the Covid-19 impact on
projects may trigger Change in Law entitlement under many construction contracts.
As is the case with Force Majeure, the concept of a Change in Law and the available
contractual relief is dealt with in different ways under the major standard-form
constructions contracts.
▪ As with Force Majeure provisions, it is likely that the standard form contracts will have been heavily amended in
terms of applicable change in law provisions. It is therefore important to check each contract carefully. For example, a
common amendment is to allocate the risk of reasonably foreseeable changes in law to the contractor.
▪ In practice, whether a contractor is entitled to additional costs due to a Change in Laws will be fact specific and
decided on a contract-by-contract basis. 
▪ Where the Government has introduced legislation to require the closure of construction sites, contractors may be entitled to rely on the relief available for a
Change in Law. 
 PUBLIC PROCUREMENT

▪ An increase in pressure on government finances has made the HKSAR

Government to explore other financing options, such as Public-Private
Partnership (PPP) schemes, as part of its Private Sector Involvement
("PSI") initiative, for the delivery of public services and infrastructure.
The construction industry, having suffered a downturn over the last few
years, is also keen to explore with the Government the development of
PPPs.
▪ The Hong Kong International Exhibition Centre project is a landmark PPP, where
the private sector contributed 15% of the investment.
 FIXED PRICE CONTRACTS
Is it possible for parties to enter into a construction contract where the price to be
paid to the contractor is fixed?
▪ It is possible and indeed quite common for the parties to enter into a lump sum
contract, i.e. a contractor will receive payment of a fixed sum which has been
agreed in advance upon completion of the whole contract works. Under this
system, the design would be completed and the work would be quantified when a
contractor submits its tender to the employer. This would have the benefit of
ensuring uniformity and accuracy in the description of works.
▪ However, if the scope of work under a lump sum contract is varied, the contractor
will be paid an extra sum according to the contractual provisions in the contract
(if any). In practice, the employer will usually pay more than the fixed amount
stated in the contract to the contractor. This will happen if there are variations or a
direct loss and expense claim due to the disturbance of regular progress of the
works, or if there are fluctuations in the quoted rates. Usually, both employer and
the contractor will want to have such flexibility built into the contract.
 INSURANCES
What insurances need to be put in place by law or under a typical construction contract?
Different types and levels of insurance will be obtained by different participants of a construction project.
These will generally include insurance of the works, third party liability insurance and professional indemnity.
Insurance of the works
▪ The Agreement and Schedule of Conditions of Building Contract for Use in Hong Kong – Standard Form of
Building Contract (Private Edition) (HKIS) provides for the contractor to obtain insurance against loss or
damage by fire, etc., in the joint names of the employer or contractor.
Third party liability insurance
▪ The HKIS Form imposes an obligation on the contractor to indemnify the employer against any liability for
personal injury or death or damage to property arising out of the carrying out of the works, and to maintain
(and cause any subcontractors to maintain) insurance to cover for such liability of the contractor.
▪ Professional indemnity
▪ This is taken out by architects, engineers, quantity surveyors and other consultants to cover liability for their
negligent acts, errors or omission in respect of their professional work.
 SECURITY DOCUMENTS
Apart from the contract are any other documents commonly entered into by way of security – such as a
guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?
Different types of security will be entered to guarantee performance of obligations by the parties to a
construction contract. These include bid bonds, payment bonds and performance bonds.
Bid bonds
▪ Contractors will be required to provide a bid guarantee when bidding for a project. The owner may want some
recourse if the lowest bidder fails to enter into the contract.
Payment bonds
▪ A payment bond is a guarantee by the surety that it will pay the contractor's bill for labour and materials
incurred in the project. Labour and materials are defined as whatever is necessary to be used in the
performance of contract.
Performance bonds
▪ Performance bonds guarantee the contractual obligation of the contractor will be met, protecting the owner
from possible losses if the contractor breaches the contract or defaults. Performance bonds can be classified
into conditional and on-demand bonds. Conditional bonds require the employer to prove the contractor has
failed to perform his contract. An on-demand bond, on the other hand, requires no such evidence.
 PAYMENT
How are payments to contractors, design consultants and subcontractors normally structured?
Methods of payment vary according to the works. The four main types of payment are:
• Lump sum: a pre-agreed sum that the contractor(s) will be paid to carry out the scope of works stated in the
contract (subject to the terms and conditions of the contract which provide for adjustment of payment under
certain circumstances).
• Measurement: the work is measured and valued according to an agreed schedule or formula.
• Prime cost: payment is made for the costs of the labour and materials used.
• Cost plus: payment is by prime cost plus an additional percentage as profit.

▪ Payment is usually made when the works are completed. However, it is common for the
contractor to have the right of payment by instalment or interim payment in the progress of the
construction as it gives the contractor funding for the performance of works and supply of
materials during construction.
▪ As an alternative to the interim payment, a lump sum contract may provide for milestone
payment. The employer will make periodic payments to the contactor by reference to certain
stages of the work or stated intervals. In other words, the milestone payment approach makes
interim payments subject to achievement of predetermined progress milestones.
 DELAY
Is it possible for the parties to a construction contract to agree that the time/date for completion of the
works is to be fixed? How would delay be dealt with?
Date for completion
▪ Most construction contracts provide a date or stipulate a period for the contractor(s) to complete the
works. The failure to achieve completion by the date or within the stipulated period is a breach of
contract.
Ways to deal with delay
EXTENSION OF TIME
▪ Clauses for extension of time for completion can be inserted into the contract. Most construction contracts set out a
mechanism for the architect to award extensions of time. Under the Agreement and Schedule of Conditions of Building
Contract for Use in Hong Kong – Standard Form of Building Contract (Private Edition) (HKIS), it is for the
contractor(s) to first give notice of delay, and then for the architect to assess, in his opinion whether there was any
actual delay caused by the events as specified. These events include, inter alia, inclement weather, variations, and late
receipt of instructions or drawings.

CLAIMS FOR DAMAGES

▪ An employer may also claim for damages for delay caused by the contractor(s). These are often referred to as liquidated
damages and relate to where the parties have pre-determined the amount payable by the contractor to the employer as
damages for any delay. This genuine pre-estimate of loss dispenses with the employer's need to prove actual loss which
may result in a considerable saving of costs.
 VARIATIONS
How are variations to the specification for engineering or construction works normally dealt with?
▪ All forms of standard contracts commonly used in Hong Kong provide for the architect/contract
administrator to order variations. In general, instructions to the contractor to carry out works
which fall within the scope of works as set out in the contract will not constitute a variation and
are part of the contractor's contract price.
▪ Most standard form contracts contain complex mechanisms for valuation of and payment for
variations. The Agreement and Schedule of Conditions of Building Contract for Use in Hong
Kong – Standard Form of Building Contract (Private Edition) (HKIS) provides for variations to
be valued in accordance with the prices in the contracts bills (namely, bills of quantity) for
"work of similar character executed under similar conditions". Therefore, as long as the varied
works are similar to works which are priced in the contract bills, the prices (or rates) as
contained in the contract bills must be used, even if the result would be unduly profitable or
unprofitable for the contractor. This is because the rates or prices are agreed by the parties and
they are not entitled to vary them unilaterally.
▪ However, if the subject of variation is not within the scope of the bills of quantity, the parties
may have to agree on the price of such works. Failing which, the price may be determined by a
neutral third party who will then fix a reasonable and fair price for such works.
 VARIATIONS
▪ During the contract administration process, you cannot avoid situations
of variations. This is why this term is more popular among the
construction professionals.
▪ Variations in construction contracts play a major role in construction
cost management. It affects the final cost. These cost impacts can be in a
way of addition or omission, but it changes the final contract sum.
▪ Therefore variations play an important role in construction
administration process which include identifying variations, issuing
instructions to proceed, submission of variation claims and valuation.
 WHAT ARE VARIATIONS IN CONSTRUCTION CONTRACTS?

There are many causes for variations in construction projects. Below are some of the reasons for variations.
However for specific projects, you should refer the contract document to find specific terms and clauses
that are relevant to your project.
▪ Variations can be due to,
• Addition or omission from the scope of works
• Changes to the quantity of work in the form of increase or decrease
• Change of dimension, level or position of the works that affect the construction cost.
• Changes to the construction quality including material quality changes.
• Removal of part of the scope or demolition of part of the work scope by the Employer which affects the
total scope of work.
Due to changes in the schedule of completion. That is, if there is a necessity arises to complete the work or
part of the work earlier than the agreed Time for Completion, then it affects the work completion. As a
result, variations to the contract may occur.

Simply, variation to the contract means any changes to the original scope of work which can be in the form
of addition or omission and such changes can create impact on project cost and completion time.
 WHAT IS A VARIATION ORDER?

▪ Variation order is a common and popular term in construction projects. I

have experience that most of the time the terms variation order or VO
are more popular to introduce any variations to the contract. However
variations to the contract are the changes to the contract as we discussed
at the beginning of this post.
▪ Then what is a Variation order in construction contracts?
▪ A variation to be valid, it must be in writing. Only the authority person
to the contract can issue such instructions. Such instructions issued by
the authority person are known as a variation order to the
 WHO CAN ISSUE A VARIATION ORDER?
[PART 2 OF 2]

▪ The authority person can be architect, superintending officer or contract

administrator who has the power to issue instructions. In your contract
agreement you can find a clause that mentions the authority person.
▪ If the contractor receives verbal instructions to carry out some extra
work in the way of addition or omission, he should write it to the
Architect or superintending officer to get approval in order to make it a
valid variation order.
▪ At the same time, if contractor finds any extra work to do which is not
stated in the contract document or scope, he should write to the Architect
or authority person within the stipulated time frame in the contract.
▪ This is where contractors should have proper understanding on the
variation clause in his contract agreement.
 HOW TO PERFORM VALUATION OF VARIATIONS
[PART 2 OF 2]

▪ Below are the most common practices in valuation of variations. However, it is necessary to refer your
contract agreement and related variation clauses for exact details. Contractual provisions are different in
different countries. It also can be different according to your contract agreement. Therefore below is a
guideline only to understand how valuation is done.
▪ Usually Valuation of Variations is carried out as below.
• If the variation work is an omission, then the rate or amount mentioned in the contract is used to evaluate the omitted amount.
• If the variation work is an addition, below are the methods for valuation of variation.
• If the variation of work is due to the changes in quantity of similar work which is under the contract scope, then the same rate in
contract is used for valuing of the variation.
• If there is a similar work to the variation work is in the contract scope, however the variation work is carried out in different
conditions then the rates in the contract for similar character work is considered as a basis of valuation.
• However there should have fair allowances added to the different conditions which the variation work occurred.
• If any of the above situations are not met, then it is necessary to check market rates. It is necessary to obtain at least 3 quotations
to establish the fair market rate for the variation work. In this situation, contractor needs to submit quotations from few different
suppliers and contractors to the consultants to evaluate. He needs to submit his quotations together with his variation claim.
• If the parties to the contract cannot come into a decision of fair valuation using any of the above methods, then it is necessary to
evaluate actual material, machinery and labour costs needed to carry out the work.
• For such evaluation, it is necessary to use all the necessary site records including labour hours and machinery hours used for the
work. After the valuation is done using resources used at site, it is necessary to add a reasonable overhead and profit percentage
in order to compensate the contractor for his time on supervision.
 SUBMISSION OF VARIATION CLAIM

▪ When there is a variation to the works and once it is instructed in writing, the contractor needs
to carry out the work as per instructions.
After the work is completed, he needs to submit his variation claim at the time when he
submits the progress claim. Together with his claim, it is necessary to submit the necessary
documents and details to support his claim.
▪ There may have situations which contractor receives instructions to carry out the work under
daywork. In such times, contractor should inform the Contract administrator, superintendent
officer or the respective clients representative of the time the work being carried out.
▪ It is necessary for the contractor to keep signed day work records in order to submit with his
claim.
In general, this is how to conduct valuation of variations. Also it is contractor’s responsibility
to submit his variation claim with all necessary details in order to get the payment certified
within a reasonable time period.
▪ These conditions and method of evaluation of claim can be different depending on your
contract.
 HOW TO PERFORM VALUATION OF VARIATIONS

▪ When there is a variation and it is instructed as a written instruction, the

contractor is required to submit his proposal for the consultants or client for
evaluation. This contractor’s variation claim should include all cost
implications in detail including supporting documents such as quotations and
relevant details from the drawings and site records.
▪ Once the variation claim is submitted, then valuation is done by the consultant
Quantity Surveyor or the responsible cost consultant.
▪ Valuation of variations plays an important role in variation claim procedure. At
this stage, it also can be a dispute for the contract.
However, if the contractor understands the procedure of variation claim
preparation and submission and if he also understands the provisions for
variation claims in his contract agreement, variation claim procedure is not
much difficult.
 COMPLETION
Does the law state what has to be achieved before 'completion' of the
building works can be certified and, if so, can this be overridden by specific
terms in the contract? Who would certify completion of building works
carried out in accordance with a construction contract?
▪ Hong Kong law does not explicitly state what has to be achieved before
‘completion’ of the building works can be certified, and this is a
commercial term to be agreed between the parties.
▪ Completion is usually described as practical completion or substantial
completion and is reached when the architect/contract administrator issues
a certificate to that effect. Practical completion means that the building
should be ready for all practical purposes so that it can be used for the
purposes intended by the parties immediately upon completion. That does
not mean that there might not be defects or imperfections provided that
those did not interfere with the beneficial occupation and use of premises
for its intended purposes.
 LIMITATION PERIOD
During what period of time following execution of a construction contract may
a party to that agreement bring a claim in the courts for breach of contract?
▪ In Hong Kong, limitation periods are imposed by statute, primarily the
Limitation Ordinance (Cap. 347 of the Laws of Hong Kong). There are
different limitation periods for different types of cause of action. For
example, the limitation period is six years for a normal contract claim, but
twelve years if the contract was created by deed (this is a special way of
executing a contract and most building contracts are executed in this way).
▪ In a contract claim, the limitation period will run from the date when the
contract was breached. It will thus be necessary to determine whether or not
the limitation period has expired. If it has, the claimant may be barred from
bringing a claim against the alleged wrongdoer. By the same token, if a
claim is brought out of time, the defendant will be able to plead the defence
of limitation.
 DEVELOPER'S LIABILITY TO END USER
▪ To what extent would a person who procures or carries out building works
have liability for any physical damage or economic loss suffered by the end
user(s) of the completed development?
▪ Can such liability be excluded in any way?
▪ Usually, the developer will limit his liability for the design and construction of the
works to a stipulated period after completion of the works under the agreement
between the developer and the end users (usually ending on the expiry of the defects
liability period under the building contract for the development, but depending upon
the developer, the nature of the project and the stage in the economic cycle).
▪ Such liabilities may also be excluded by contract with the end users. However, such
exclusion clauses are subject to the Unconscionable Contracts Ordinance (Cap. 458
of the Laws of Hong Kong) and the Control of Exemption Clauses Ordinance (Cap.
71 of the Laws of Hong Kong). The Control of Exemption Clauses
Ordinance prohibits the exclusion or restriction of liability for death or personal injury
resulting from negligence and requires all exclusion or restriction of other liability for
negligence to satisfy the requirement of reasonableness.
 OTHER LIABILITY TO END USER
▪ To what extent would an architect, another designer, the building
contractor or any subcontractor have liability for any physical damage or
economic loss suffered by the end-user(s) of a completed development?
▪ Can such liability be excluded in any way?
▪ As engineers, architects and surveyors have no contractual relationship with end
users, their liability arises under the general law of tort. Any duties which an
architect/contract administrator may owe to an end user will be derived from the
particular circumstances of the project.
▪ Such liability is generally limited to a liability in respect of physical damage,
including personal injury, where the accident can be shown to result from a negligent
permanent design or in the unusual situation where the architect has positively
intervened or designed or controlled the contractor's work.
▪ If the end-user has a reasonable opportunity to carry out an inspection and thus
discover the existence of any defects likely to cause damage, the architect/contract
administrator may not be held liable for these defects. However, liability could attach
where the defects were unlikely to be discovered upon inspection
 RIGHTS OF PURCHASERS, TENANTS AND BANKS
▪ How are third parties who are not parties to the construction contract –
such as purchasers, tenants and lending banks providing finance towards the
development – afforded protection and given rights against the original
designers and contractors involved in the design and construction of the
project?
▪ A collateral warranty is an agreement which is related to another primary contract. It is
entered into by the person engaged or appointed under the primary contract in favour
of a third party beneficiary who is not a party to the primary contract but who has an
interest in the construction project.
▪ Collateral warranties are gaining popularity in today's construction industry to fix
liability for third parties who otherwise have no legal standing to claim over the works
in issue. Developers, financing institutions, employers, contractors and professional
team members can all be increasingly involved in the giving or receiving of warranties.
▪ In Hong Kong, the use of collateral warranties is still at an early stage of development.
This may due to the different approach in the financing of construction projects and the
bargaining powers of the ultimate purchasers or tenants of premises in Hong Kong and
the other parts of the world.
 DISPUTE RESOLUTION IN THE COURTS
Which courts specialize or deal with construction disputes? Can decisions be appealed?
▪ The Hong Kong courts of civil jurisdiction have inherited an adversarial system where the parties
themselves initiate the proceedings and decide what issues of fact and law are put forward for the decision
of the court.
▪ Most construction litigation over a project of normal size comes under the jurisdiction of the Court of First
Instance of the High Court of Hong Kong (CFI) which has jurisdiction of unlimited financial value.
▪ A Construction and Arbitration List exists within the CFI to facilitate the disposal, by the designated judge
in charge of the list, of the specialized classes of litigation concerning matters of civil or mechanical
engineering, building or other construction work, claims regarding professionals or besides specializing in
practice related to the construction industry and arbitration.
▪ On appeal, the disputes will be dealt with by the Court of Appeal and, if necessary and allowed, by the
Court of Final Appeal which is the highest court in Hong Kong. Appeals conducted by the Court of Appeal
are at present by way of rehearing. It is open to the Court of Appeal to re-assess the facts, albeit generally
only on the basis of documentary record rather than by rehearing oral evidence afresh.
▪ In construction litigation, the prospective appellant faces added dimensions of difficulty. The appellant court
may be reluctant to intervene or change the findings of fact of the trial judge, particularly if the trial judge
had the benefit of inspecting the site of the subject matter in dispute.
 ARBITRATION
Is it common for construction disputes to be referred to arbitration? If so, how does arbitration compare with litigation through
the national/federal courts?
Advantages of arbitration
INTERNATIONAL RECOGNITION OF ARBITRAL AWARDS
▪ Arbitral awards enjoy much greater international recognition than judgments of national courts. About 160 countries or
places have adopted the New York Convention, which facilitates enforcement of awards in all contracting states including
Hong Kong.
SPECIALIZED COMPETENCE OF ARBITRATORS
▪ Judicial systems do not allow the parties to a dispute to choose their own judges. In contrast, arbitration enables the parties to
have their disputes resolved by people who have specialized competence in the relevant field.
CONFIDENTIALITY
▪ Arbitration is not public, and only the parties themselves receive copies of awards.
FINAL, BINDING DECISIONS
▪ In arbitration, the arbitral award may be overturned only in very limited situations, other than default by the arbitrator or a
defect in the process.
SERVICE OUT OF JURISDICTION
▪ Unlike litigation, leave from courts is not required for serving documents out of jurisdiction (e.g. the People's Republic of
China) in arbitration proceedings. It saves the parties to an arbitration a great deal of time and cost.
 ALTERNATIVE DISPUTE RESOLUTION PROCEDURE (ADR)
Is it common for construction disputes to be referred to ADR – such as adjudication, determination by an expert, mediation or conciliation? Is a form of ADR
required by law, perhaps as a mandatory first step in the dispute resolution procedure?
▪ ADR refers to any method of resolving disputes other than by traditional litigation such as adjudication, mediation, etc.. In recent years, the construction
industry has been in the frontline of the innovative development and novel use of ADR and it is probably one of the largest users of ADR services among all the
business sectors.
Adjudication
▪ Adjudication may be defined as an accelerated and cost-effective form of dispute resolution that, unlike other means of resolving disputes involving a third
party intermediary, the outcome is a decision by a third party which is binding on the parties in dispute. In Hong Kong, there is yet no scheme for statutory
adjudication or, indeed, noticeable movement toward one. Adjudication, when adopted in construction contracts, is usually only available as one of the multi-
tier processes of dispute resolution. The New Engineering Contract 1993, and the Government of Hong Kong ACP contracts provide for adjudication. It is also
available in the ICE Conditions of Contract (7th Edition), but is optional. Adjudication is facilitated by the Hong Kong International Arbitration Centre
(HKIAC). The HKIAC published its adjudication rules in September 2008 based on consideration of English resources and Hong Kong resources (including the
Airport Core Programme Adjudication Rules, the Conditions of Contracts Sub-Committee Paper on ADR for public works and the Construction Adjudication
Rules 2013 published by the Hong Kong Government.
Mediation
▪ Mediation is the process in which the parties to a dispute, assisted by a neutral third party i.e. the mediator, identify the issues, develop options, consider
alternatives and endeavour to reach an agreement to settle.
▪ For the construction industry, the use of mediation has steadily grown over the last ten years. Under the Civil Justice Reform, parties to a dispute have to
explore the possibility of mediation before pursuing litigation. Unreasonable refusal by a party to mediate will risk adverse costs orders. The Mediation
Ordinance (Cap. 620 of the Laws of Hong Kong) was enacted in June 2012 and came into operation on 1 January 2013 to provide a proper legal framework for
the conduct of mediation in Hong Kong without hampering the flexibility of the mediation process. The aim of the Mediation Ordinance is to promote,
encourage and facilitate the resolution of disputes by mediation, and to protect the confidential nature of mediation communications. The Mediation Ordinance
applies to any agreement to mediate if such mediation is wholly or partly conducted in Hong Kong, or if the agreement to mediate specifies that the laws of
Hong Kong are to be applied, regardless of whether the mediation is conducted before, on or after the commencement date of the Mediation Ordinance.
Expert determination
▪ For purely technical disputes, the parties can agree to appoint an expert to determine a matter of fact (more common) or law in a final and binding manner. It is
a private and confidential method of dispute resolution.