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Do the dispute resolution provisions of a contract survive the termination of the contract?

We have recently dealt with a case where an NEC3 contract was terminated by the Employer. Our client then invoked the provisions of Clause 93.1 [Payment on termination] and referred the matter to adjudication. The Employer then tried to argue that since the contract had been terminated, they were no longer bound by the dispute resolution provisions in the Contract.

Which then begged the question, do the dispute resolution provisions of a contract (the NEC3 in this instance) survive termination of the contract? What are the effects or consequences of termination of the contract?

This issue was discussed in the case of Heyman v Darwins Limited: HL 1942. The court in this case found that an arbitration clause will survive a repudiatory breach. The court held that:

If one party to a contract repudiates it and that repudiation is accepted, then “By that acceptance he is discharged from further performance and may bring an action for damages, but the contract itself is not rescinded.’ The primary obligations under the contract may come to an end, but secondary obligations then arise, among them being the obligation to compensate the innocent party. The original rights may not then be enforced. But a consequential right arises in the innocent party to obtain a remedy from the party who repudiated the contract for his failure in performance.

In some construction contracts, termination is often expressed as termination of the contractor’s employment under the contract as though to emphasize that the contract itself is not terminated and that some of its provisions, particularly those for assessing amounts due and dispute resolution, remain in force. What is in fact “terminated” is the future performance of the contract – that is, the primary obligations of the parties that have been partially performed at the time of termination and those that would have fallen due for performance had the contract not been terminated.

This is also the case with Clause 90.1 of the NEC3 which states that:

Clause 90.1

90.1 If either Party wishes to terminate the Contractor’s obligation to Provide the Works he notifies the Project Manager and the other party giving details of his reason for terminating. The Project Manager issues a termination certificate to both Parties promptly if the reason complies with this contract [my emphasis].

The clause is expressed in terms of the termination of the Contractor’s obligation to “provide the works”. “To provide the works” is defined in Clause 11.2(13) as to do the work necessary to complete the Works in accordance with this contract and all incidental work, services and actions which this contract requires.

In terms of common law, what obligations survive termination of a contract?

While termination puts an end to the primary obligations of each party, there are other obligations which may survive termination. Those obligations could be:

  • Obligations that arise when there is a breach of contract. If the contract is terminated in those circumstances, the parties’ primary obligations are substituted by a secondary obligation that is imposed on the party in default which requires it to pay compensation to the other party. This secondary obligation to pay compensation survives termination of the contract.
    • For example, in the construction context, upon termination of the contract by either party, the contractor is relieved of its primary obligation to carry out and complete the works. If, however, the contract was terminated as a result of the contractor’s default, the law imposes a secondary obligation on the contractor requiring it to pay compensation to the owner. That compensation will usually comprise any additional cost incurred by the owner in completing the works that is over and above the contract price.
  • Obligations that are ancillary to the main purpose of the contract. These may be of a substantive or procedural nature. Examples of this type include an agreement to refer differences or disputes to arbitration, an obligation not to disclose confidential information and an agreement as to the choice of forum.

Therefore, even though the contract is terminated, the following obligations would still survive termination:

  • Dispute resolution provisions
  • Assessing of amounts due; and
  • Confidentiality provisions

A party cannot claim that since the contract has been terminated, they are discharged from all obligations in terms of the contract, including the secondary obligations that come into effect after termination.

Author: Nombuso Shange, Associate.

Business Rescue: An Employer’s Guide to Weathering the Storm

The insolvency of a contractor on a construction project has long been a threat to the timely and cost-effective completion of the works. Over time, the standard form contracts have evolved to minimise the risk of the insolvency of such contractor, to the employer, allowing the employer to bow out of such agreements with the vestiges of its dignity intact.

With the introduction, by Chapter 6 of the Companies Act No. 71 of 2008 (the Act), of business rescue proceedings into the South African business landscape, however, employers may be forgiven for wondering what protections, if any, are still available to them. The purpose of this article is to provide a quick reference guide for employers wanting to understand their rights when their contractors enter business rescue.

What is Business Rescue?

The Act defines business rescue as proceedings to facilitate the rehabilitation of a company that is financially distressed.

These proceedings can be initiated (provided that there appears to be a reasonable possibility of rescuing the company) by a resolution of the board of the financially distressed company, or by way of an application to court by a person affected by the company’s financial difficulties. The management of the company’s affairs, business and property are then placed under the temporary supervision of a business rescue practitioner, who develops and implements a rescue plan.

Only a shareholder, creditor, registered trade union representing employees of the company or its employees themselves, may challenge this resolution or the appointment of the business rescue practitioner, or bring an application for the institution of business rescue proceedings. This means that the employer to a contract, who is not owed money by the contractor, will have no say in the matter.

What are the Consequences of Business Rescue?

Business rescue proceedings are intended to last 3 months, or such longer period determined by the court, on application by the business rescue practitioner. Once business rescue proceedings have commenced:

  1. There is a temporary moratorium on the rights of claimants against the company, and no legal proceedings may be commenced or proceeded with, while the company is under business rescue;
  2. Despite any provision of a contract to the contrary, the business rescue practitioner may suspend, entirely, partially or conditionally, for the duration of the business rescue proceedings, any obligation of the company that arises under an agreement to which the company was a party when the proceedings commenced; and/or
  3. Despite any provision of a contract to the contrary, the business rescue practitioner may apply to a court to entirely, partially or conditionally cancel (on any terms that are just and reasonable) any obligation of the company arising under such an agreement.

The other party’s only remedy for such suspension or cancellation is damages (which would render the other party a claimant, subject to the moratorium on legal proceedings).

Employers’ Rights under a Construction Contract

Business rescue proceedings do not automatically mean that a contractor will default on its obligations in terms of a construction contract, and it is by no means a given that the business rescue practitioner will decide to suspend or cancel any obligations under the contract. If this does transpire, however, the employer has a few options available to it:

  1. Reciprocal Obligations – The Act does not address an employer’s duty to proceed with its own obligations in terms of the contract, where the contractor elects to suspend performance. As such, the common law principle of exceptio non adimpleti contractus applies, allowing the employer to suspend performance of its reciprocal obligations to the contractor [BP Southern Africa (Pty) Ltd v Intertrans Oil SA (Pty) Ltd and Others 2017 (4) SA 592 (GJ)].
  2. Security – The moratorium on enforcement proceedings is a personal right afforded to a company by the Act. It does not extend to security provided by others on the company’s behalf [Investec Bank Ltd v Bruyns 2012 (5) SA 430 (WCC)].

Should a contractor breach the terms of the contract entitling the employer to call upon the contractor’s security, the Act does not prevent the employer from doing so.

  1. Cancellation – The Supreme Court of Appeal has determined that cancellation does not constitute enforcement action. Cancellation of an agreement with a company which is in business rescue would, therefore, be valid [Cloete Murray and Another NNO v Firstrand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA)].

An employer would, however, still need to demonstrate an entitlement to cancel or terminate in terms of the agreement e.g. due to a material breach. The suspension of obligations by the business rescue practitioner would constitute such a material breach entitling the employer to cancel the contract [BP Southern Africa (Pty) Ltd v Intertrans Oil SA (Pty) Ltd and Others 2017 (4) SA 592 (GJ)].

Once the contract is cancelled, the employer will be at liberty to employ another contractor to complete the works. Recovery of any additional costs occasioned thereby, together with the damages incurred due to the cancellation of the contract, will, however, once again, place the employer in the position of a creditor in the business rescue proceedings.

Author: Michelle Kerr, Senior Associate.

What is Building Information Modelling or else known as BIM?

 

This year I had the privilege to attend the Construction Law Summer School that was held at the Gonville and Caius College, Cambridge, UK. On the last day of this ‘course’, one of the speakers, Mr. Joseph F. Moore, from the law firm HansonBridget LLP in San Francisco, California, presented its talk on “The Legal Obligations and Risks of Building Information Modelling”.

As you would have noted from the title and the above, “BIM” stands for ‘building information modelling’.[1]

This was in particular a very interesting presentation to me, and I am ashamed to admit it, but until then, the term and abbreviation were unfamiliar to me and it never crossed my path in the few years that I have practised as an Attorney in South Africa. Upon my return from the UK, I did some further searching into BIM and out of interest, wanted to establish if there were companies in South Africa who has knowledge and expertise on the use of BIM who can assist the construction industry players of South Africa or even beyond borders. By surprise, I noticed that there are a few companies already, with even a BIM Institute who has their offices located in Cape Town, in the Western Cape Province.

When you search videos on BIM, it gets even more interesting and fun. The instruments and system structure of this technology and how it can inter alia be utilised and be developed during a construction project, is in my view a game changer. There are daily various technological advancements around the world, and the aim of the majority of them (or at least in my view), is to make your life less complicated. However, there are always some negatives attached to it and people will have different views when it comes to technology.

An example of a possible less complicated life on site, is that BIM models can digitally generate and store the information electronically which is usually obtained from documents that are written and stored in hard copy, such as drawings, schedules and specifications[2] to name a few.

The use of BIM is also supported by the new NEC4 contract. Secondary Option X10, deals with “INFORMATION MODELLING”. Looking at the definitions, it inter alia defines “The Information Model” as “the electronic integration of Project Information and similar information provided by the Client and other Information Providers and is in the form stated in the Information Model Requirements”.

The “Information Providers” is defined to be “the people or organisations who contribute to the Information Model and are identified in the Information Model Requirements”. By reading this, it already raises some questions with regards to inter alia information or intellectual property ownership. This however, will be a separate topic that I will investigate and explain later in more detail with my further articles on BIM.

In quoting the authors, Peter Barnes and Nigel Davies who authored “BIM in Principle and in Practice[3], and in particular, the introduction on BIM, they inter alia state, “There can be little doubt that BIM is here to stay”. Further, “When applied correctly, BIM is intended to make substantial cost savings throughout the whole life cycle of a building, from design, through construction and maintenance, to regeneration and eventual disposal or recycling

It is also viewed that the use of BIM on projects, can positively contribute in advancing collaboration between the relevant project players. Barnes and Davies[4] states “Another major aspect of BIM is the potential full collaboration of the entire project team – the employer, the architect, the engineers, the consultants, the contractor and the specialist contractors – in developing the project design.

The most important outcome to this is that such full collaboration “not only allows for increased speed of project delivery, enhanced economics for the project and true lean construction all at levels but also the potential to change the relationships between the participants in the construction industry, from the more traditional contracts based on obligations and rights to the more modern partnering associations based on fair allocation and sharing of risks and liabilities.”[5]

Considering that and in conclusion, there is no doubt that projects are more successful when it is managed by parties who are willing to collaborate and seek to maintain a positive, collaborative and good partnering relationship with each other.

  1. See “BIM in Principle and in Practice”, authored by Peter Barnes and Nigel Davies and published by ICE Publishing, pp 1-2.
  2. Ibid.
  3. Published by ICE Publishing
  4. See “BIM in Principle and in Practice”, authored by Peter Barnes and Nigel Davies and published by ICE Publishing, pp 2
  5. Ibid

Author: Barry Herholdt, Senior Associate

The effect of business rescue on adjudication

As many construction companies are currently facing serious financial distress and are increasingly entering into business rescue proceedings, if you have a contract with a company that has been placed under business rescue, you may be wondering what effect this will have on adjudication proceedings, either already progressing or yet to be referred.

In terms of section 133 of the Companies Act, 71 of 2008 (the “Act”), during business rescue proceedings, no “legal proceeding” may be commenced or proceeded with in any forum. The Act lists certain exceptions to this rule including where written consent of the practitioner has been obtained or with leave of the court.

In 2015, the Supreme Court of Appeal, in Chetty v Hart[1], was faced with a challenge regarding the interpretation of section 133. Chetty and TBP Building and Civils (Pty) Ltd (“TBP”) had agreed to refer a contractual dispute between them to arbitration. Shortly before argument took place and the arbitrator’s award was made, TBP was placed under business rescue. Chetty (and the arbitrator) had not been aware that TBP was in business rescue and thus had not sought the consent of the practitioner to proceed with the arbitration. Chetty subsequently sought to invalidate the award in its entirety on the basis that the arbitration award was precluded by the moratorium on legal proceedings against companies under business rescue. Hart (the liquidator and respondent in the matter) contended that the moratorium only applied to legal proceedings and not to arbitrations.

The SCA considered whether arbitration fell under the term “legal proceeding”. In its interpretation of this term, the SCA considered the purpose of the moratorium, namely to give the practitioner breathing space to get the company’s financial affairs in order.[2] Arbitrations, like court proceedings, also involve several resources and may hinder the effectiveness of business rescue proceedings.[3] The SCA thus concluded that a narrow interpretation of “legal proceeding” so as to only include court proceedings defeats the purpose of the Act and leads to insensible and impractical consequences.[4]

Having reached this conclusion, the SCA went on to consider whether the failure by Chetty to seek and obtain the practitioner’s consent before continuing with the arbitration was fatal to its outcome and for this reason should be invalidated.

Again, the SCA considered the purpose of the moratorium in coming to its conclusion. The moratorium is there to prevent the practitioner from being inundated with legal proceedings without enough time within which to consider whether or not the company should resist them and also to prevent a company that is financially distressed from being dragged through litigation while it tries to recover from its financial woes.[5] The SCA considered that obtaining the practitioner’s consent is not supposed to serve as a shield behind which a company not needing protection may take refuge to fend off legitimate claims.[6] The SCA concluded that non-compliance with the requirement for the exception does not necessarily lead to a nullity or invalidate legal proceedings.[7] Furthermore, the exception is there to protect a company in business rescue and is not a defence available to a creditor.[8]

Although there has been no court pronouncement on whether adjudication falls under the term “legal proceedings”, a party seeking include adjudication will have a persuasive case given the SCA’s decision in Chetty v Hart in respect of arbitrations, and the reasoning behind it. Therefore, depending on the circumstances, a moratorium may be applicable to any adjudication proceedings currently underway between you and a party that is placed under business rescue or to adjudication proceedings you wish to refer against such party.

  1. (20323/14) [2015] ZASCA 112 (4 September 2015).
  2. Para 35.
  3. Para 35.
  4. Para 35.
  5. Para 39.
  6. Para 40.
  7. Para 41.
  8. Para 43.

Author: Kelly Stannard, Associate

Retention and the current state of the construction industry

A retention is a percentage of the contract payment value which is held by the Employer as a security for the quality of the workmanship and materials. That is why, usually, half of the retention is released at achievement of practical completion, when the work is finished, and only patent defects are to be rectified.

The old BIFSA (Building Industry Federation South Africa) “white form” contract provided for a retention fund to be held by the Employer as a guarantee for the completion of the contract. The retention was held in an interest-bearing account and such interest accrued to the benefit of the Contractor.

When the JBCC was adopted, this arrangement was abandoned.

A relatively recent development is the adoption of the provision of a retention guarantee which is usually provided as an alternative to a cash retention. This is attractive for the employer because it means at day one, he has security for the full value of the retention and will not have to wait until most of the work is done before he gets a meaningful security against defective work.

However, some employers consider that “cash is king” and prefer a cash retention. The following issues are associated with how cash retentions work in practice:

  • Late payment or release of the retention; and
  • Non-payment of retention monies
  • Insolvency of the holder of the retention money

Late and/or non-payment or release of the retention

Unjustified late and non-payment of retention monies is a significant cause of issues associated with the practice of holding cash retentions within the construction sector.

Unfortunately, retention have also been used as a poor excuse to withhold or avoid paying contractors and are now viewed by many as an unfair and potentially problematic arrangement and currently, there are no measures in place to tackle the issues.

The late or non-payment usually results in cashflow issues for the contractor or the subcontractor.

It is therefore important for the employer, or the contractor in relation to sub-contracts, to ensure that they comply with contractual provisions, not only in the deduction of retention monies, but also their release.

How to protect yourself

Knowing your rights as a contractor (or subcontractor) will help to ensure that you get paid on time by looking out for the following issues;

  • The Subcontractor should seek to ensure that the release of their retention is not tied to the completion of the main contract and/or the release of the retention fund under that main contract;
  • Ensure that the deduction made is in accordance with the contract, in the right amount and that the right percentage is deducted;
  • Retention monies are held in trust or insisting on a retention guarantee.

What happens to retention monies when the party holding the monies is insolvent?

In the event of the holder of the retention being placed under business rescue, the retention monies will be mixed with other sums and or monies in the business. The business rescue practitioner would be entitled to use the money to try and rescue the business or company. The retention monies will be subsumed with the rest of the money and can, effectively be lost.

Should business rescue proceedings fail, and the business rescue practitioner applies for the company to be placed in liquidation, the contractor or subcontractor is a concurrent creditor and not a secured or preferred creditor. This means that the contractor or the subcontractor is left to stand in line with all the other creditors for a share of the distributable assets.

As a result, a large proportion of retention monies are lost due to the holder of the retention being insolvent.

International move towards “No retention policy” or retention money trust account

There has been a move aimed at doing away with the negative effects of the holding of cash retention in the construction industry.

In 2011, a “No Retentions Policy” was launched in Scotland designed to help contractors resist cash retention policies.

In Australia, a trust account scheme for subcontractor’s retention money held by main contractors commenced on the 1st of May 2015 as a part of security of payment of the retention monies.

The purpose of the trust is to ensure that in the event that the party holding the retention is insolvent, those monies are not mixed with the other sums and can easily be identified and paid in terms of the contract.

South African context and conclusion

It is advisable for the parties to a construction contract to include a provision for a retention guarantee, in lieu of the cash retention. Alternatively, the parties can include a clause for a retention fund held by the Employer as security and providing for any interest on such fund to accrue to the Contractor upon completion of the work.

The protection in respect of the release of retention money is crucial to ensure and secure certainty of cashflow which is very crucial in the current state of the South African construction industry.

Author: Nombuso Shange, Associate.

Reciprocity and Construction Contracts

In the case of Lorraine Du Preez v Tornel Props (Pty) Ltd heard during 2014 in the Supreme Court of Appeal, the court was called upon to consider if the Defendant (Respondent in the application) was justified to withhold its performance under the contract and thereafter cancel the contract with the Plaintiff.

The facts in this case are that the Defendant appointed the Plaintiff to complete construction works, subsequent to the liquidation of the previous contractor initially appointed to execute these works. The facts leading up the liquidation of the first contractor are not material and will not be discussed in this case note.

In terms of the Plaintiff’s appointment, the relationship was governed by a partly written and partly oral contract. The written portion of the contract included the building contract and annexures originally entered into. The building contract included a provision providing that payments would be made according to a schedule of progress payments until the works were completed. During the currency of the contract the Plaintiff issued an invoice for a progress payment. Despite the term of the contract regarding progress payments, the Defendant’s attorneys disputed that payment was due. On the contrary the Defendant alleged that payment for works was only due on completion. In addition, the Plaintiff was prohibited from suspending the works for reason of non-payment. Notwithstanding the Plaintiff’s correspondence, the Plaintiff suspend the works. In reply the Defendant alleged, and accepted, the repudiation of the contract by the Plaintiff. The present application was instituted by the Defendant against the order of the court a quo’s decision that the Defendant’s failure to pay, amounted to a repudiation, as the Defendant had a reciprocal duty to make payment under the contract. Although the court upheld the application in part, regarding the issue of a repudiation by the Defendant for not paying, and the Plaintiff withholding its performance as result thereof, the court found against the Defendant.

Several construction disputes turn on the failure of a party – employer or contractor – to pay a party for works completed. Such disputes are always dealt with in terms of the contractual provisions for non-payment. Unfortunately, not all standard form contracts provide for a withholding of performance due to non-payment, and where such do, the drafters usually elect to delete or amend such provisions to curtail the innocent party’s right to withhold performance. Similarly, it is a trite that construction contracts are examples of reciprocal contracts where one party is expected to fulfill his obligations (i.e. execute the work) with the other party reciprocating and fulfill its obligations (i.e. by making payment).

The South African common law recognises the principle of ‘exceptio non adimpleti contractus’ also described as the situation where a party enforcing his contractual right has not himself performed, there is a valid ground for the opposing party to withhold his performance. As such, and unless the contract specifically stipulates otherwise, common law remedies are available to a party and apply as consequence of our law. Accordingly, the common law principle of ‘exceptio non adimpleti contractus’ is applicable to all reciprocal contracts. To change the operation of the common law principle the contract would have to expressly state this. In the present case, the court confirmed the principle of withholding performance, by accepting that the Plaintiff’s termination of the contract pursuant to it accepting the repudiation, was valid. The court stated that the Defendant’s decision to treat the withholding of performance by the Plaintiff as an act of repudiation was unjustified. The Plaintiff was entitled to rely on the failure to make payment to suspend or cancel the contract. Although the contract expressly provided for progress payments, it did not include as an alternative the remedy of suspending the works (or withholding performance).

The NEC contract is an example of a contract which does not expressly provides for the withholding of performance due to non-payment. Under this contract, if the above legal position/principle is to apply, unless the contract expressly changes the common law principle, the common law remedy to withhold performance remains available to an innocent party. To determine if the common law has been changed, it must be expressly stated or, it may be determined on the reading of the contract (i.e. the requirement to give a prescribed period of notice to terminate whereas the common law requires a ‘reasonable’ period). It is common for employers and contractors alike to argue that the contract does not provide for a withholding of performance. Although correct, as the contract does not state this expressly, it appears that the innocent party may still have recourse in terms of the common law.

Our courts are bound by the provisions of the contract and must not be seen to step into the contractual matrix and change the contract, unless it would be unreasonable to do so. In this case, the court does not deal with question of the general application of the common law remedies in construction contracts but rather shows in part that the common law remedy of withholding performance is well established in our legal system and it is for employers and contractor to enforce this principle, where it is clear that there are reciprocal obligations. Anything to the contrary could constitute an act of repudiation.

Author. Tsele Moloi, Associate

Employer and Project Manager One and the Same – a Breach of Contract

A project manager’s independence is often a sensitive subject for contractors and even more so where an employer appoints a project manager from within its organization (including from either its subsidiaries or its parent company).

In the case of Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd[1] the Technology and Construction Court of England and Wales provides some guidance on the legitimacy of doing so.

Imperial Chemical Industries LTD (“ICI”) and Merit Merrell Technology Ltd (“MMT”) entered into a NEC3 Engineering and Construction Contract for works associated with the construction of a new paint manufacturing facility for ICI. The independent Project Manager appointed under the contract was Projen, who subsequently resigned. Thereafter, ICI appointed Mr Boerboom, an employee of its parent company AkzoNobel, as Project Manager. Mr Boerboom came into the project towards the end of its completion with the obvious task of reducing the cost.[2] Mr Boerboom chose to achieve this outcome by revisiting almost everything that MMT had done and paying no attention to the contract and legal rights of MMT.[3] At about the same time Mr Boerboom was appointed, ICI simply stopped paying MMT.[4] It became clear that Mr Boerboom had made the decision that no more payments would be made to MMT and the reasons to justify this were then searched for.[5] MMT challenged the validity of the replacement Project Manager.

NEC3 makes provision for a third-party entity to act as Project Manager. One of the duties of the Project Manager is to act as decision-maker on matters where the contractor and the employer have opposing interests.[6]

In determining the validity of the replacement Project Manager, Justice Fraser considered the cases of Balfour Beatty Civil Engineering Ltd. v. Docklands Light Railway Ltd[7] and Scheldebouw BV v St. James Homes (Grosvenor Dock) Ltd.[8]

It is extremely unusual and rare for the employer under any construction contract to also be the decision-maker. In the Balfour Beatty case, the contract contained an express term that the employer should be the certifier. The Court of Appeal clearly had misgivings about the contract but gave effect to its express terms.

Relying on the Scheldebouw case, Justice Fraser held, “It is contrary to the whole way in which the contractual mechanism is structured, and intended to work, to have the employer seek to appoint itself (or one of its employees, or an employee of its parent) as the decision maker…the whole structure of the contract is built upon the premise that the employer and the decision maker are separate entities and endless anomalies arise if the employer and the decision maker become one and the same….Such a situation is so unusual that an express term is required.”[9]

Justice Fraser held further that although Mr Boerboom was formally employed by AkzoNobel and not ICI, AkzoNobel is the parent company of ICI and thus he was the very opposite of independent.[10]

Justice Fraser concluded that no proper appointment was made of a replacement Project Manager and that the purported appointment of Mr Boerboom as the replacement was a breach of contract.[11]

The matter between ICI and MMT is very specific in that the Project Manager started off independent at the time of entering into the contract and towards completion of the works, ICI purported to replace the independent Project Manager with one of its own. The more familiar situation faced by contractors in South Africa is where the contractor is aware from the outset that the Project Manager is employed by the employer or one of its associated entities. The Scheldebouw case indicates that where the Project Manager is a direct employee of the employer and this circumstance was known to the contractor at the outset and the contractor went into such contract with “his eyes open”, the contractor cannot then challenge the independence of the Project Manager on the basis that he/she is an employee of the employer.[12]

  1. [2017] EWHC 1763 (TCC) (12 July 2017).
  2. Para 41.
  3. Para 41.
  4. Para 110.
  5. Para 113.
  6. Para 128.
  7. [1996] 78 B.L.R. 42.
  8. [2006] EWHC 89 (TCC) (16 January 2006).
  9. Para 134-135.
  10. Para 135.
  11. Para 139.
  12. Para 45.

Author: Kelly Stannard, Associate

Mind the Safety

Majority of construction disputes revolve around issues of payment, but every now and then, you deal with a dispute which is the result of a project site health or safety related issue. Safety on project sites and in particular the lack thereof, can cause a project to come to a complete halt, and not to mention the costs implications it might have on both the employer and or the contractor.

Over the years I noticed that on projects, and especially projects that have continued beyond its envisaged completion date or long duration projects, people tend to neglect or fail to comply with site-specific health and safety requirements. Which is usually different from when the project commenced, when everyone was fully aware of their respective obligations and complied therewith faithfully.

In light thereof, I intend to deal with and want to give a brief overview of what should be taken into account when considering your duties and obligations related to occupational health and safety.

The Occupational Health and Safety Act and general safety regulations (“OH&S Act”) provides the perfect guideline, which further sets out the rights and duties of the respective contracting parties to a construction contract.

It inter alia provides that employees (which includes persons appointed and or employed by either the employer or the contractor) should be aware of the possible hazards it is likely to encounter on the project site, they should be trained on how to identify hazards and how to protect themselves or others against it. This should remain the case for any and every new employee appointed prior, after and during project duration.

To create the best awareness, it is important that all relevant parties participate in occupational health and safety decision-making.

What can be done to achieve project completion free from the possible risk of encountering a health or safety related accident?

The OH&S Act inter alia provides that (but not limited hereto):

  • periodic health and safety audits and document verification be conducted at intervals mutually agreed between the employer and the contractor, at least ones every 30 days;
  • a safe workplace must be provided (in the event this is not the case, any party or its employees should voice his/her concerns and refuse dangerous work);
  • policy statements regarding accident prevention can be created; and
  • medical and first aid systems must be provided.

An employer or its appointed site representatives must stop any contractor from executing a construction activity which poses a threat to the health and safety of others, especially if the contractor’s conduct and activity fails to comply with the employer’s health and safety specifications issued for the project and further the contractor’s own health and safety plan it had submitted for the project.

Sufficient health and safety information and the appropriate resources should be available to execute and achieve completion to a project, in a safe, accident free manner as expected.

The OH&S Act further provides that no contractor may allow or permit any employee or person to enter any site unless that employee or person has undergone a health and safety induction training pertaining to the hazards prevalent on the site. This requirement extents to any visitors to the construction site as well. The contractor must ensure that a visitor has the necessary personal protective equipment (PPE), where its required.

A competent person, who’s duty it is to ensure that all occupational health and safety requirements are complied with on site, must be appointed full-time. If the size of the project spreads over various sections, more than one such person or assistant must be appointed to ensure safety on site.

Considering the above, I hereby conclude that health and safety requirements on projects, should not be taken lightly. All relevant parties must endeavour to maintain thorough and faithful compliance of site-specific health and safety requirements, and to do so in the same manner it was likely faithfully complied with at the commencement of the project. Any neglect, laziness or failure, could unfold in a serious accident, which can result in a large disadvantage for the project, and further cause a negative impact on costs and time.

Author: Barry Herholdt

 

Walking the Legal Tight Rope in Arbitration Proceedings

Sub-Section 33(1)(b) of the Arbitration Act No. 42 of 1965 provides that an arbitration award may be set aside where “[a]n arbitration tribunal has committed any gross irregularity in the conduct of the arbitration proceedings or has exceeded its powers”. The scope of this Sub-Section was recently tested in an appeal to the full bench of the Eastern Cape High Court, in the matter of K H Construction CC v Jenkins N.O. and Another (CA326/2017) [2018] ZAECGHC 37 (22 May 2018).

KH Construction and Mr. Conrad Winterbach, entered into an agreement for the construction of a residential dwelling. A number of disputes arose between the two, regarding whether or not the works had been properly completed and the amount, if any, due to K H. KH claimed R 567 312.00 in terms of its final account. Mr. Winterbach sought damages in the sum of R 851 940.00 for defective works and repayment of R 570 280.00 which he alleged had been overpaid to KH.

These disputes were referred to arbitration before Mr. Dennis Jenkins. During the hearing of the matter, KH produced the evidence of three expert witnesses and its managing member, Mr. Heny. Mr Heny’s evidence was subject to lengthy and exhaustive cross-examination. Mr. Winterbach, on the other hand, gave evidence in chief, but walked out shortly after cross examination commenced, refusing to return even after being offered a further opportunity to do so, alleging that the Mr. Jenkins was biased against him.

Despite this, Mr. Jenkins accepted the evidence provided by Mr. Winterbach, in his evidence in chief, awarding KH the sum of R 399 150.00 on condition that it completed the works to Mr. Winterbach’s satisfaction.

Dissatisfied with this, KH sought an order, from the Eastern Cape High Court, setting aside the award and appointing a new arbitrator to determine the dispute between the parties afresh.

On appeal to the full bench, the court found that Mr. Jenkins had, in terms of Sub-Section 33(1)(b) of the Arbitration Act:

  1. Committed a gross irregularity in the conduct of the proceedings, when he relied upon the evidence of Mr. Winterbach, despite it being untested by cross examination. Cross-examination of evidence is a right, which goes to the root of a fair hearing; and
  2. Exceeded his powers by ordering KH to complete the works. In his defence and counterclaim, Mr. Winterback sought only repayment of the alleged overpayment and damages. He did not ask for specific performance i.e. the completion of the works. The jurisdiction of an arbitrator is limited to matters pleaded and Mr. Jenkins did not have jurisdiction to decide on whether specific performance was warranted or not.

The appeal, therefore, succeeded and the parties were directed to refer the dispute to a new arbitrator for determination. Mr. Winterbach was ordered to pay the wasted costs of the arbitration, the costs of the appeal and the review application before the court a quo.

Author: Michelle Kerr, senior associate

Jurisdictional Challenges That Can Be Raised Against an Adjudicator

Construction disputes are inevitable. Looking at adjudication as a form of dispute resolution, I thought it might be necessary to refresh and briefly look at some of the jurisdictional challenges which can be raised against an adjudicator and the adjudicator’s decision.

Jurisdictional challenges can be the following:

  • that there is no agreement to refer a dispute to adjudication;
  • that the adjudicator was not properly appointed in terms of the required adjudication agreement;
  • that the dispute, is one not capable of being referred to adjudication;
  • the parties to the dispute, are not the same parties that entered into the contract;
  • the dispute has been previously decided; and
  • breach of natural justice.

It is important (if not crucial), that any jurisdictional challenge should be addressed at the outset as and when it arises. Jurisdictional challenges can be raised at a later stage in the adjudication process by a defeated party, when the victorious party seeks to enforce the adjudicator’s decision. In failing to deal with a jurisdictional challenge, can result in the adjudicator’s decision been found to be null and void, which decision will not be enforceable.

The agreement to refer a dispute

An adjudicator derives his jurisdiction from the notice of adjudication.[1] It is the dispute described in the notice of adjudication that the adjudicator has jurisdiction to determine.[2]

Under the FIDIC, the wording of the Referral Notice should be concise and clearly state what the claimant is asking the DAB to decide. The Referral Notice will define the scope of the dispute and hence the jurisdiction of the DAB.[3]

Appointment of the adjudicator

The adjudicator should confirm and establish that the prescribed procedure for his or her appointment was properly complied with. If not, the adjudicator’s appointment can be challenged.[4]

In Eskom Holdings SOC Limited v CMC-Mavundla-Impregilo JV[5], the adjudicator’s contract was to be renewed on an annual basis. The court found that the adjudicator’s contract terminated when that annual period had expired. Upon such expiration with no renewal of the adjudicator’s term, its jurisdiction ceased to exist and it could not decide on a dispute arising thereafter.

The dispute should be one capable of being referred

The dispute should be one that is capable of being referred to adjudication, which satisfies the requirements of the contract.[6]

In Purton (t/a Richwood Interiors) v Kilker Projects Ltd[7], the judge referred to Court of Appeal case, Percy Trentham[8], stating, “The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter legal relations…”. It was considered that there was substantial “performance” on both sides. While the judge acknowledged that it was theoretically possible for parties to carry out works and receive payments without having entered into a binding agreement, the judge considered that it was unrealistic to suggest that was what happened in this case.[9] The jurisdiction to refer was dependent upon the existence of a construction contract and a dispute arising under it. It was not dependent upon identifying each and every term with complete accuracy.[10]

The JBCC contract requires that a notice of disagreement be issued and only after prescribed period of time, does the disagreement become a dispute. If a dispute was notified before the disputing party followed the process of notifying a disagreement, the adjudicator will not have jurisdiction to decide on the dispute(s) which have not been properly notified.

There is no dispute if the responding party has not had sufficient time to respond to the claim before adjudication was commenced.[11]

Parties to the dispute, the same parties to the contract

The adjudicator should establish that the parties to the dispute, is the same parties that had entered into the contract under which the dispute has been referred.

Dispute previously decided

In Carillion Construction Ltd. v Stephen Andrew Smith[12], the court held that “One needs to consider what is and was the ambit and scope of the disputed claims which is being and was referred to adjudication…One has however to take a reasonably broad brush approach in determining what the referred claims were. The reason for this is to avoid repeat references to adjudication of what is essentially the same dispute.”

In the event the adjudicator is of the view that the dispute(s) referred was already decided on, he/she should rather resign.[13] In the Watkin Jones[14] case, the second adjudicator had resigned because there was no dispute, because it had already been decided.

Rules of Natural Justice:

Audi alteram partem

The extent and scope of dispute referred, is further derived from the applicable procedural rules of the adjudication and the referrals exchanged between the disputing parties.[15] An enquiry into jurisdiction “will usually involve considering the Referral, witness statements and other documents available to the adjudicator at the time that he is making that enquiry.”[16]

In Redwing Construction Ltd v Wishart[17] the court held that an adjudicator had not had jurisdiction to make findings on an issue which was beyond the scope of the dispute referred to him.

Time periods

Time periods prescribed within the adjudication provisions and the procedural rules to the adjudication should be strictly complied with. Failure by the parties and / or the adjudicator to comply with the prescribed time periods, will result in the adjudicator losing jurisdiction. If a referring party fails to issue its referral within the specified / agreed time period then the referral will be irregular and invalid and the adjudicator would have lost jurisdiction to decide the dispute.[18]

However, a failure by the responding party will not necessarily result in a loss of jurisdiction. The adjudicator can still proceed on the referral alone to decide the dispute.[19]

  1. CONCLUSION

When a party challenges the adjudicator’s jurisdiction, the adjudicator should investigate such challenge at the outset as and when it is raised.

If the challenge has merit, then the adjudicator should refuse to proceed with the adjudication, unless and until it has jurisdiction. If the challenge is without merit, then the adjudicator should notify the disputing parties accordingly and proceed with the adjudication.

The adjudicator should establish the limits of its jurisdiction within the wording of the notice of adjudication, the construction contract, the identity, capacity and authority of the contracting parties, previous decisions and the defences raised during the adjudication. Further, to deal with any jurisdictional objections identified in other documents, such as witness statements.

The adjudicator should not be bias and should adhere to the audi alteram partem principle and give each party fair opportunity to state its case or to respond or comment on important points raised.

The time periods prescribed to the adjudication process (i.e. time for submission of referral/response and the issuing of adjudicator’s decision), should not be undermined to impede the benefit of a speedy dispute resolution process.

An adjudicator who proceeds to issue a decision when his/her jurisdiction limits are not established and complied with, will run the risk that the decision becomes unenforceable. It may even risk the entitlement to any payment of its adjudicator’s fees.

  1. Construction Law Journal 2014, article titled “Construction Act review: jurisdiction – defences and the scope of the dispute referred to adjudication”, authored by Peter Sheridan (pp1)
  2. Ibid
  3. See “The Working of the Dispute Adjudication Board (DAB) under new FIDIC 1999 (New Red Book) by Gwyn Owen (pp 51)
  4. Eskom Holdings SOC Limited v CMC-Mavundla-Impregilo JV (unreported 15 April 2015) [SGHC]
  5. (unreported 15 April 2015) [SGHC]
  6. Radon Projects (Pty) Ltd v N V Properties (Pty) Ltd and Another 2013 (6) SA 345 (SCA)
  7. [2015] EWHC 2624 (TCC); [2015] B.L.R 754 (QBD (TCC))
  8. G Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep. 25; (1992) 63 B.L.R. 44
  9. Construction Law Journal, article titled “If it smells like a contract…establishing the existence of a contract and adjudication jurisdiction”, authored by Katie Lee (pp 2-3)
  10. Ibid
  11. Carillion Construction Ltd v Devonport Royal Docks Ltd [2005] EWHC 778 (TCC)
  12. [2011] EWHC 2910 (TCC) (10 November 2011)
  13. Watkin Jones & Son Ltd v Lidl UK GmbH Unreported December 27, 2001 TCC
  14. Ibid
  15. Pilon Ltd v Breyer Group Ltd [2010] EWHC 837 (TCC)
  16. Aedifice Partnership Limited v Mr Ashwin Shah [2010] EWHC 2106 (TCC)
  17. [2010] EWHC 3366 (TCC)
  18. Hart Investments v Fidler and Another [2006] EWHC 2857 (TCC)
  19. Sasol Chemical Industries Ltd v Odell and Another (401/2014) [2014] ZAFSHC 11 (20 February 2014) (FS)
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