+27 11 648 9500   +27 31 764 0811
 

A case of one step forward and two steps back?

25 October 2017

During the course of 2015, the then Minister of Public Works published for comment regulations (“the Regulations”) to the Construction Industry Development Board Act 38 of 2000 (“the Act”).

The Regulations proposed, among other things, prohibiting ‘pay-when-paid’ provisions, creating a statutory right to interim payments and providing for the speedy resolution of disputes between contracting parties, by way of statutory adjudication.

For adjudication to have the required impact, as a dispute resolution mechanism, it has to be compulsory, preventing employers and main contractors, who hold the greater bargaining power, from simply removing adjudication clauses from the sub/contracts concluded. The proposed Regulations were a clear recognition of the importance of adjudication as a mechanism to resolve disputes in an efficient and cost-effective manner. The obligation to make interim payments and prohibition of ‘pay when paid’ provisions would have ensured that the interests of parties in unequal contract relationships were protected and sub/contractors would be paid what was lawfully due to them.

Although criticism can be levelled at the Regulations, in that that they encroached on the ‘right to freedom of contract’, they were generally welcomed. As regulations to the Act, the Regulations would be applicable to all construction projects (barring certain exclusions) and also compulsory.

Two years later, however, following extensive public comment, the Regulations have still not come into force, and it appears that they may fall by the wayside altogether. In terms of Section 33 of the Act the Minister is empowered to publish draft regulations for public comment and thereafter gazette them in terms of this section. A protracted period has passed since the publishing of the Regulations for comment, however, and to date, the minster has not gazetted them into law.

While the uncertainty relating to the Regulations persists in the industry, the Construction Industry Development Board (“CIDB”) recently circulated draft standards dealing with prompt payments and adjudication (“the Standards”) for construction contracts. The provisions appear to be the same or similar to those of the proposed Regulations.

The difficulty with the Standards, however, is, firstly, that they will not have the force and effect and binding nature that the Regulations would have had on contracting parties. Secondly, the application of the standard relating to prompt payments will be largely confined to parties who voluntarily elect to contract on this basis. For the standard on prompt payment it is proposed that the provisions, if agreed, would be incorporated into the tender data and contract. For the standard dealing with adjudication, it is intended that these would apply to contracts which do not provide for adjudication procedures similar to those of the adjudication standard.

Although the Standards appear to largely reflect the objectives of the Regulations insofar as proposing prompt payment mechanism and an efficient and cost-effective dispute process, they fail to achieve the main aim of the Regulations, which is to be of legal force and effect and settle the issues plaguing the construction industry and emerging contractors once and for all. They are not of compulsory application and as such do not sufficiently deal with the unequal power dynamics between contracting parties in the construction industry.

Since the end of apartheid, the South African government has focused on providing adequate infrastructure for the previously disadvantaged majority, and the inclusion of this group of people and enterprises into the formal construction sector. [1] These objectives formed part of South Africa’s Reconstruction and Development Plan Policy Framework also commonly referred to as the RDP. Broadly speaking, the RDP is an integrated, coherent socio-economic policy framework which seeks to mobilise all people and the country’s resources toward the final eradication of Apartheid and the building of a democratic, non-racial and non-sexist future [2]. Within the context of the construction industry, the purpose of the RDP was to address the basic human need for infrastructure by providing adequate housing and leveraging this need to develop and sustain small to medium sized enterprises.

In pursuit of this objective, South Africa’s Department of Public Works (“the Department”), published a Green Paper in 1998, titled ‘Creating an Enabling Environment for Reconstruction, Growth and Development in the Construction Industry’. This was followed by a White Paper of the same name in 1999. The Green Paper was the government’s defining document in its attempt to understand the construction industry. Among its objectives was to create an enabling environment in which the objectives of the RDP were achieved, enhance industry performance and achieve growth of small and medium enterprises. The White Paper reaffirmed the proposals put forward in the Green paper and the actions needed to address the issues. These documents in part propose that this can be achieved by the promotion of alternative dispute resolution (“ADR”) mechanisms by the public sector, which are efficient and cost effective, streamlining payment processes to support emerging contractors and the establishment of the CIDB.[3]

Both these papers, firstly, identified that traditional dispute resolution processes are costly and time consuming, which can be prejudicial to contractors with limited resources. As such, proposals including fair and effective ADR mechanisms are called for, to strike a balance with the competing interests of producing quality goods and equitable treatment of contractors. Secondly, the papers identified that contractors were susceptible to cash-flow constraints, which would be limited by the introduction of uniform and streamlined payment processes.

In 2004 and 2005 the CIDB, now established, published best practice guidelines dealing inter alia with payment procedures and ADR in construction contracts. [4] For the former the guideline proposed at the outset was that conditions of subcontract should be regulated by fair terms and conditions, as an example to mitigate the risk of non-payment due to pay-when-paid and/or right of set off provisions.[5] For the latter, the CIDB released a guideline focusing on adjudication and the need to ensure this option remains available to disputing parties, and not to have contracts only advocating arbitration and litigation which are time consuming and costly.

It is accepted that the principles of the Standards are similar to those of the Regulations, and are consistent with solutions proposed by industry stakeholders when it comes to payment procedures and adjudication for construction contracts. If the draft Standards are published in their present form, however, they will only be binding in limited circumstances, and may not fully advance the proposals of the Green and White Papers.

It is clear that over the last 10-15 years the construction industry has had an opportunity to understand the issues faced by sub/contractors, especially small and medium sized enterprises, mainly due to the unequal contractual arrangements. The CIDB may view the Standards as a way to deal with the above issues while the Regulations are in limbo. If true, such a decision may be open to criticism, as engaging with the minister to understand the limited action regarding the Regulations would have been more proactive. To deal with the issues facing the industry one needs measures that are firstly binding on all.

It is not clear why the Regulations have not yet been gazetted, but the draft Standards are little progress on matters which have been at the centre of the construction industry for a while. A case of ‘one step forward and two steps back’, I wonder!. We shall have to wait and see where this leads.

  1. Reconstruction and Development Programme (RDP) A Policy Framework, Paragraphs 1.3.6, 1.4.3 and 4.4.7.1
  2. Reconstruction and Development Programme (RDP) A Policy Framework, Paragraph 1.1.1
  3. Green Paper and White `Paper: Creating an Enabling Environment for `Reconstruction, Growth and Development in the Construction Industry, Chapter 7, January 1998, Paragraphs 3.1.5.4, 5.5.7 and 7.2.1 and 4,15.2, 6,5.7
  4. Michelle Kerr, Statutory Adjudication: A necessary Transfusion for the South African Construction Industry? Dissertation submitted in part fulfilment of an MSc degree in Construction Law & Dispute Resolution, King’s College London, September 2017, as yet unpublished
  5. CIDB Construction Procurement – Best Practice Guideline #D1, Adjudication; March 2004

Author: Tsele Moloi, Associate