When I write articles on construction law, I tend to focus on contemporary issues and trends as reflected in recent court decisions. Up until this month, these court decisions have always been domestic — either state or federal courts or some other adjudicating authority, such as the Armed Services Board of Contract Appeals.

This month, we turn our attention to Hong Kong, where the Court of Appeal of the High Court considered the interpretation and enforceability of terms in a commercial construction contract. These issues are equally significant to contractors in the United States as to those doing business in Hong Kong.

In Sze Fung Engineering Ltd. v. Trevi Construction Co. Ltd., [2025] 2 H.K.L.R.D. 545 (C.A.), 2025 WL 12005 (CA), a sub-subcontractor (SF) brought a payment action against a subcontractor (Trevi) in connection with a construction project to build a new combined gas turbine unit at a Hong Kong power plant. The subcontract was valued at HK$77.24 million, or approximately $9.9 million in U.S. dollars. 

The parties’ payment dispute focused on a specific clause: “Payment is based on [‘back-to-back’] principle and to be released to [SF] within [three] days upon receipt of same from Client.” Sze Fung, 2 H.K.L.R.D. at 549.

The Hong Kong trial court held that the clause was a “pay when paid” clause. In other words, SF would be paid if the client paid Trevi for the work in question. Since this did not occur, SF was unpaid for specific work, and that gave rise to the instant legal dispute.

Relying on standards of contract interpretation, the Civil Court of Appeal cited the language in the underlying judgment:

“… Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. To ascertain the intention of the parties[,] the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as known to the parties.” (Citation omitted.) Sze Fung, 2 H.K.L.R.D. at 550.

This explanation led the Court of Appeal to the heart of the problem: What does the term back-to-back mean? The court noted that it is not a “term of art.” Moreover, the court found the term to be ambiguous:

“It can mean that the timing of payment to SF should follow the payment received by Trevi … . Conceivably, [back-to-back] can also mean that apart from the timing of payment, SF’s entitlement to payment also depended upon Trevi getting paid. In other words, there was a condition to SF’s payment entitlement. These meaning[s] represent the opposing construction advanced by the parties. In light of its ambiguity, the meaning of [this term] will have to be ascertained from the context and factual matrix.” Sze Fung, 2 H.K.L.R.D. at 551.

This view was contrary to that of the lower court, which found the meaning of back-to-back to be plain and unequivocal. The lower court sided with Trevi, finding the clause to be a paid-when-paid clause. Sze Fung, 2 H.K.L.R.D. at 552-53.

In reviewing the lower court’s decision, the Court of Appeal analyzed the “factual matrix” of the matter — i.e., the parties’ conduct, experience and sophistication in the construction industry, and familiarity with the contract clauses and their definitions. Notably, the Court of Appeal found that the parties were sophisticated and could have used pay-when-paid language in their agreement instead of back-to-back. Sze Fung, 2 H.K.L.R.D. at 555.

Since it was unclear what back-to-back meant in the parties’ contract, the Court of Appeal looked at other aspects of the factual matrix to determine “whether there was evidence that SF had assumed the risk of not getting paid by Trevi if the latter was not paid by the contractor higher up the chain.” Sze Fung, 2 H.K.L.R.D. at 556.

Finding no such evidence that SF had assumed this risk, the Court of Appeal allowed the appeal and set aside the judgment entered by the lower court. The Court of Appeal remanded the matter to the court below for a determination of SF claims (including its claim for lost profits).

Takeaways

The main lesson to be learned from the SF/Trevi case is to be careful with the wording in your contracts. Use unambiguous terms. Understand the ramifications of terms of art in construction contracting, such as “pay-when-paid” and “pay-if-paid” in your particular jurisdiction. (Or, at the very least, engage an experienced construction lawyer who does understand such terms.) The enforceability of payment clauses — and the limits of such enforcement — varies widely by jurisdiction. 

Pay-when-paid clauses typically delay payment only for a reasonable period, not indefinitely. Therefore, even if an owner fails to pay the contractor, the contractor may still be obligated to pay the subcontractor after a reasonable period. Pay-when-paid clauses affect timing — not the obligation to pay. 

Pay-if-paid clauses, by contrast, create a condition precedent to payment. The subcontractor is not paid until the owner pays the contractor. In most jurisdictions where such clauses are enforceable, the express language must be unambiguous to ensure that there is no doubt that the lower-tier contractor assumes the risk of nonpayment further up the chain. In other words, the lower-tier contractor is assuming the risk that it will never get paid at the end of the day.

As you can plainly see, the operative payment clause has significant ramifications for the parties. As subcontractors who are owed money know, there is a substantial difference between waiting indefinitely for a contractor to receive payment from an owner and waiting a “reasonable” time. At the very least, the latter is a finite amount of time, and after all, a later payment — though not optimal — is still better than no payment at all.

Disclaimer

 This article is for informational purposes only and not for the purpose of providing legal advice. Nothing in this article should be considered legal advice or an offer to perform services. The application and impact of laws may vary widely depending on the specific facts at issue. Do not act upon any information provided in this article, including choosing an attorney, without independent investigation or legal representation. The opinions expressed in this article are the opinions of the individual author and may not reflect the opinions of his firm.