Secretary for Development's speech at Alternative Dispute Resolution Forum (English only)

Following is the speech by the Secretary for Development, Mrs Carrie Lam, at the Alternative Dispute Resolution Forum today (Oct 12):

Good afternoon, ladies and gentlemen,

It gives me great pleasure to welcome you all to this forum on Alternative Dispute Resolution (ADR) organised by Development Bureau, with the support of the Construction Industry Council. I am also pleased to see so many leading members of the Hong Kong construction industry who are able to make your time here. I am sure the forum today will provide an excellent opportunity for us to update each other and exchange views on the ADR processes and to explore how best we could take them forward for the benefit of Hong Kong's construction industry.

To recap, in April 2000, the Chief Executive of the HKSAR appointed a Construction Industry Review Committee (CIRC) chaired by Mr Henry Tang to review comprehensively the state of the construction industry and to recommend improvement measures. In January 2001, the committee completed this task and submitted a report entitled "Construct for Excellence" to the Chief Executive. The report outlined a total of 109 improvement measures covering a wide spectrum of construction activities with a view to raising the quality and ensuring cost-effectiveness of the industry. Over the past few years, good progress has been made in implementation of those recommendations, notably with the establishment of a statutory CIC and the successful merging of the former Construction Industry Training Authority with CIC. I take this opportunity to thank the CIC and all involved in taking us thus far.

Today's forum is to address another set of key recommendations in the report, that is, adopting a proactive approach in resolving claims and disputes, training of project teams on dispute resolution and using proactive and collaborative dispute resolution methods in settling disputes in the construction industry. I am glad that CIC has, in partnership with Development Bureau, organised this forum with a view to furthering the implementation of these recommendations.

As disputes between contracting parties inevitably arise from or are related to money matters, may I start by updating the audience on the recent measures Development Bureau has taken on this front.

Cash-flows are particularly important to a contractor. The Development Bureau is mindful of the difficulties faced by contractors during the economic downturn. Shortly after last year's financial tsunami, we promptly promulgated a package of measures to alleviate the difficulties faced by our public works contractors. Let me summarise progress made to date:

To institute in all existing contracts which do not contain an Interim Payment provision such an arrangement. Without this, payment will be made only upon completion of the works. Up to end August 09, a total of 162 contracts have benefitted. Two more contracts will be included in the near future. A total of $258 million was settled and $105 million will be settled over the next three to four years.

To release early a portion of the Retention Money after a lapse of half of the maintenance period, which is normally 12 months. Up to end August 09, a total of 87 contracts have benefitted. 29 more contracts will be included in the near future. A total of $47 million was settled and $43 million will be settled over the next one to two years.

For term contracts in which the maximum amount of interim payment is capped below 90% of the estimated value of the works upon completion of a works order, the payment level is now raised to 90%. Up to end August 09, a total of 54 contracts have benefitted. Two more contracts will be included in the near future. A total of $153 million was settled and $36 million will be settled over the next three to four years.

For those contracts with works completed over three years, Works Departments will strive to finalise the accounts as early as possible. Up to end August 09, a total of 36 contracts have benefitted and $90 million was settled.

For those contracts using "milestone payment" method, advanced payment is made when materials or construction plant, e.g. Tunnelling Boring Machine, are delivered to the site. Up to end August 09, four contracts have benefitted. A total of $706 million was settled and $634 million will be settled in the next one to 2.5 years. Five more contracts will be included in the near future.

In aggregate terms, the five measures have covered a total of 376 contracts, involving contract payments of about $2.07 billion, out of which $1.25 billion had been paid and $800 million will be paid in accordance with the works progress. The Development Bureau will review the effectiveness of the above measures by the end of 2009.

Coming back to the topic of "Disputes" today, this matter is gaining significance as the Government is embarking on a major public infrastructure programme. The delivery of these projects on time and within budget would depend on the collaboration of every party in the industry. No doubt, as the Employer, the Development Bureau and our Works Departments will continue to play a key role. Despite all good intents and purposes, disputes occur from time to time in business relationships. The construction industry is of no exception. In Hong Kong, the conventional way of resolving construction disputes sometimes would end up with adversarial litigation. This process is costly, lengthy and will impose disproportionate time and financial burdens on all parties involved. It will be far more time-efficient and cost-effective if disputes could be avoided in the first place.

As with many other problems, prevention is better than cure. So the best way to handle disputes is not to let it happen in the first place. The CIRC Report recommended wider adoption of a partnering approach and the integration of a partnering approach into a new form of contract. In fact, non-contractual partnering was introduced in public works contracts back in 1997. For contractual partnering, Works Branch is piloting contractual partnering using New Engineering Contract (NEC), which is a contractual partnering form of contract launched in 1993 by the Institution of Civil Engineers in UK. The first trial government contract using NEC was recently awarded in August 2009 and more trial contracts will be let out in the years to come.

In Hong Kong, before 1980s, arbitration was the only means for dispute resolution in public works contracts. Since early 1990s, Government introduced mediation to the General Conditions of Contracts in public works. In the Airport Core Programme projects, Government has added adjudication as an alternative dispute resolution means. The concept of employing Dispute Resolution Advisors (DRA) in minimising contractual disputes was practised by the public sector in early 1991. The Architectural Services Department adopted the DRA system in 66 building works contracts since December, 1991. This was subsequently extended to civil engineering works in 2005 when a total of 17 civil engineering works contracts have been selected for the trial use of DRA.

Based on an interim review in 2007 and an experience sharing session conducted amongst Works Departments in April 2009, the DRA system is considered helpful in minimising disputes and thus the wider use of DRA is recommended. Having consulted Hong Kong Construction Association, we have decided that an addition of 15 upcoming contracts, which is equivalent to about 50% of all upcoming major contracts to commence between mid-2009 and early 2010, and two existing contracts,by means of supplementary agreements, will adopt DRA. With a view to expediting contract finalisation, we have also extended the tenure of DRA to cover the Maintenance Period.

The wider adoption of DRA naturally calls for a greater supply of experienced advisors. To ensure a sufficient supply of good quality DRAs to meet the possible future demand, we discussed with the Hong Kong International Arbitration Centre in June 2009 and invited them to help organise training courses for potential DRAs to promote and encourage enlisting of potential candidates. In this regard, I would like to thank Teresa Cheng and Gary Soo for their enthusiasm and support.

We have also reviewed the current system in enlisting DRA, and decided to expand the current assessment panel and to devise means to attract more able construction experts to enlist in the system.

I have no doubt that dispute resolution is an evolving subject and the construction sector must move with times, or better still, ahead of the trend. Government encourages a wider use of the partnering approach and DRA system in public works contracts, with an aim to encourage the resolution of all differences in opinion before formal disputes arise. Once disputes arise, Government is keen to see them being resolved in a speedy manner so that justified payments to contractors can be secured in the shortest time possible. To support this work, I am glad that the CIC Committee on Subcontracting is about to issue a guideline on dispute resolution. As I understand, the guideline will provide a host of different ADR methods for employers and contractors in the public and private sectors to choose from in order to cater for different scenarios where disputes may arise. I pay tribute to the CIC for taking forward this highly worthwhile initiative.

I encourage every participant at this forum to share experience in implementing the various ADR techniques and be open to consider whether these techniques will be suitable in resolving dispute cases or even to prevent them from arising in the first place.

Thank you.

Ends/Monday, October 12, 2009
Issued at HKT 16:59