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The construction industry is built on various contractual relationships between contractors, subcontractors and employers. Contract terms differ but at their core, the principles governing the law of contract are the same.
It all begins when you hear about this new project and you see that invitation to tender come through. The excitement is real! And you eagerly start preparing your tender. In order for a contract to come into being there needs to be an offer and an acceptance. Please remember that the call for tender is a mere invitation (usually from the employer or contractor) to generate offers and proposals (usually from the contractor or subcontractor) from competing companies for the specified works. Do not get confused, this is not an offer for you to accept the works. Offers lead to a contract while invitation or call for tenders lead to offers which are still subject to acceptance.
Slow down, contain your excitement, there are risks associated with tendering. The greatest risk in a tender process is a lack of clarity that can lead to uncertainties misunderstandings and eventually to disagreements and disputes. So make sure that the tender process is fully and clearly documented and that your tender meets all the requirements to conform with the invitation.
A works contract is created upon the acceptance of a tender.
Once the parties are satisfied, the employer will award the contract to the desired bidder and produce the letter of award which confirms that the employer has accepted the bidder’s proposal and agrees to proceed to the next step and sign a formal contract. This letter is promising but is often not legally binding as it just falls short of a formal contract and there are no legal requirement for a contact to be signed. An agreement to agree is not binding.
If you could not contain your excitement and commenced with the works without signing the contract, it does not mean that there is no contract in place at all. A contract does not need to be in writing and signed for it to be binding on the parties as acceptance of its terms can be either verbal or implied through conduct. You are however now subject to the common laws governing these types of contracts as opposed to the specified clauses in the standard contracts which are often clearer and provide for simpler remedies.
In this unfortunate instance, not all hope is lost. The common laws have you covered but the fight is messier, tougher and longer as the fight (eventually) ends up in a court room (instead of a luxurious board room for an alternative dispute resolution). If you did your work but you are not getting paid, normally the contract is clear on your remedies and rights but now, a concept known as unjustified enrichment comes into play. If you are able to prove that the employer had been enriched, that you had been impoverished, that there is a causal link between the enrichment and the impoverishment, and that the enrichment was at the expense of the person who was impoverished, then you have yourself a successful unjustified enrichment claim. If you found this paragraph confusing, read it again and let that be a reminder to always sign your contract before you start working.
Ok so we know that you are the one who put in the offer, you have been awarded the contract, we understand that acceptance of the offer does not have to be in writing (but it should) and that your offer was in fact accepted. Let’s take a look at the terms of the contract.
You will often have the standard terms of contract and the particular terms of the contract. The standard form of contract will usually be one of the generic standard form construction contracts, stipulated by the employer. The particular terms, which are unique to the specified project, amend the main, standard form of contract and should therefore always be considered very carefully. The latest revision of the particular terms and conditions should always prevail and take precedence over the terms of the standard form of contract, unless specifically told otherwise.
The key to a successful contract is a proper understanding of its terms and conditions so it is always a good idea to have a dedicated team that knows the contract well, is able to answer questions and ensure compliance throughout the project.
Now that you have considered all the terms of the contract, you understand the project specifications and exactly what you have to do, go ahead and get signing.
There will often be a requirement to provide a guarantee as a form of security for the parties. The most common forms of a guarantees is a performance guarantee that ensures the contractor executes the works.
Another form of security is the retention guarantees where a percentage of your payment is deducted every month and only released on completion of the works – a release of a portion of the sum held at practical completion / taking over of the works by the employer and the balance being released upon the expiry of the defects liability period.
There is a lot of money on the line here and it is therefore a good idea to always engage, make sure the progress is smooth and understand any mistakes or issues early on.
When you run into problems, don’t be afraid to speak up. Your contract tells you that you must notify and claim for the delays within a stipulated time and if you don’t, you could find yourself in trouble as time bars are difficult, sometimes impossible, to overcome. If you are time barred from notifying/claiming a delay, after the contractual end date of the project, you will be charged hefty penalties. Please! Notify every single delay on time and consider each one carefully thereafter. You might realise that you do not need to put in a claim at the end (and decide to withdraw it) and that’s fine but you do not want to miss out on your chance to claim.
Throughout the project, on a monthly basis, you will be submitting documents for payment for works done and the payments will then be certified in payment certificates. These certificates are not final and get adjusted throughout the project. At the end of the project, all the payments certified and paid get reconsidered, the works get remeasured, the amounts are adjusted and a final payment certificate is then issued.
A payment certificate is a liquid document which means that the amount certified does not have to be proven, that amount is due and owing. If that amount is not paid on time, you would be able to approach the court for summary relief known as provisional sentence or summary judgement. The only defences that may be raised to a payment certificate are fraud or the lack of authority of the signatory to the payment certificate.
So you are continuing with your works, you get that payment certificate but you do not get paid. You suspend the works, still nothing so you terminate the agreement in terms of the provisions of the contract. Please do not rush to terminate without considering your position first. Will your attempt to terminate result in repudiation? A party to a contract can be said to have repudiated it when they show that they are unwilling or unable to fulfil their obligations. The other party’s remedy for this is to accept the repudiation and terminate the contract. If you terminate without valid grounds to do so, the other party may claim that you have repudiated the contract, accept that repudiation and terminate the contract themselves.
When the contract is terminated, the agreement ends and most of the obligations are discharged. Now you have a claim for damages. The contract will tell you whether some clauses of the contract survive termination, such as the dispute resolution clauses and the latent defects clauses.
Approaching the end of the contract, you can breathe again, the works are complete! But the employer is not fully satisfied, you have reached practical completion but there are still minor issues that need attention.. the defects liability period has now commenced where the obvious, apparent or patent defects require fixing. Once that period expires or on the date on which the defects have all been corrected (or after the contractually specified time), the employer is satisfied, the project is finally complete, the securities are released, the final payment certificate is issued where all the mistakes (we spoke about earlier) are corrected, you get paid the final amount and the contract has come to an end.
Sho, what a ride! But..
Hold on, don’t go anywhere, you still need to hang around for the hidden or latent defects liability period which has now commenced. This is when all the unseen defects start to come up, which you, as the contractor responsible for the works, are still under an obligation to fix. There is no time limit on this period under the common law but most standard form contracts cap the latent defects liability period at 5 or 10 years.
Don’t worry though, the employer will certainly let you know if anything comes up so in the meantime, you are done. Go find another tender and lets start again!
RECENT LEGISLATION
NEW PREFERENTIAL PROCUREMENT REGULATIONS
There is much hype surrounding the Preferential Procurement Regulations which came into effect on 16 January 2023 in accordance with the Preferential Procurement Policy Framework Act (PPPFA 5 of 2000). This new Regulations was invoked by the Constitutional Court judgment in Minister of Finance v Afribusiness, NCP CCT279/20 which declared the old 2017 Preferential Procurement Regulations invalid and held that the Minister had exceeded his powers in prescribing the 2017 Regulations.
The new Regulations are aimed at widening the selection process by an Organ of State when awarding a tender to a supplier by removing the pre-qualifying criteria in Regulation 4 of the old Regulations which limited the bidder from proceeding if they lacked Broad-based Black Economic Empowerment (B-BBEE) status criteria. Regulation 3 of the New Regulations states that an Organ of State must first consider the point preference system together with the specific goals of the tender;
It has been argued that an Organ of State would interpret the specific goals as defined in the Act which includes categories of persons historically disadvantaged by unfair discrimination on the basis of race, gender, and disability including the implementation of programmes of the Reconstruction and Development programmes to apply to B-BBEE criteria. While the new Procurement Regulations may be criticised for being too “lenient”, it is considered to be “placeholder” until the passing of the New Procurement Bill to be before Parliament end of March 2023.
OCCUPATIONAL HEALTH AND SAFETY AMENDMENT BILL (OHS)
The OHS will be gazetted and signed into Legislation in the first half of 2023.
The aim of the new Amendment Bill is to enforce stricter penalties on businesses for non-compliance of the provisions of the OHS Amendment Bill. Section 7 of the Act fails to elaborate on the OHS policy to be implemented by businesses. This is remedied by Section 7 of the Amendment Bill which requires a business to develop its own Health and Safety Management System. The Safety Management Plan which is a comprehensive plan entailing health and safety procedures of its employees, the public and impact of the Environment. The Management Plan will not only lead to compliance with legislation but is also considered during the tender process. In addition to the Plan, a business must undertake to conduct its own risk assessment as per its own Risk Assessment Plan. A Health and Safety inspector may now be entitled to issue on the spot administrative fines which range from R25000.00 to R50000.00.Penalties are stipulated in section 38 of the Bill deals with breaches in Schedule 1 with maximum fines ranging between R500 000.00 to R5 000 000.00 and the maximum imprisonment range between 2 and 5years imprisonment. Companies must we aware of the penalties assigned for non-compliance with the OHS Amendment bill and should appoint an external health and safety practitioner to assist with integrating their policies and management plans accordingly.
EMPLOYMENT EQUITY ACT AMENDMENT BILL
The Employment Amendment is set to come into effect in September 2023.
The main objective of the Amendment Bill is to empower the Minister of Labour to identify sectoral numerical Employment Equity (EE) targets and ensure equality in the workplace across all qualified employees from designated groups in terms of new Section 15A. The Minister is also tasked with establishing a criteria in respect of the issuing of the Compliance Certificate. This objective is tied in with the Amendment to Section 53 of the Bill which states that before a State Contract can be awarded, the Employer must be in possession of the Compliance Certificate. Small businesses with the less than 50 employees, irrespective of the turnover are excluded from the definition of ‘designated employer’ and are not required to follow the conditions entrenched on a designated Employer. This is to lessen the burden of the Employer of a small business.
The designated employer is required to report on the compliance of the sectoral targets before the end of 2024 and furnish reasons for not achieving the targets. The new Bill is of vital importance in ensuring equal representation of suitably qualified people from designated groups to achieve sustainability and socio-economic development.
COMMUNITY UNREST
The Construction Industry has been hit knock after knock due to disruptions caused by load shedding, looting, flooding in Kwazulu-Natal and the ongoing community unrest. Socio-economic factors, political instability and desperation to survive has led to community unrest of violent disruptions on construction sites. Community unrest is headed by the “construction mafia” which has taken it upon themselves to obtain economic transformation by the threatening businesses and construction companies.
The construction mafia creates their own local business forum which demands 30% of the economic value of the contract in exchange for the protection of the construction companies.
Failing to enter into negotiations with the construction mafia leads to violent disruptions and threats to the construction companies;
It is recommended that in order to attempt to mitigate the risks caused by the construction mafia, education and awareness is the key between all parties to the Construction Contract. The Construction Industry Business Development Board has developed a Standard for Contract Participation Goals (CPG) for Targeting Enterprises and Labour through Construction Works Contracts(2017);
This guideline establishes CPG’s is aimed at ensuring that small, emerging contractors are engaged with on certain projects. Thus, promoting sustainable business development. All parties must actively carry out the practices set out in the CIBD and understand the CPG’s and targeted areas once the tender is accepted.
SOUTH AFRICA DECLARED A NATIONAL STATE OF DISASTER
On 9th February 2023, President Cyril Ramaphosa has declared load shedding a National State of Disaster in terms of the National Disaster Management Act 2002;
Construction Companies should be alerted that this would open the flood gates to endless lists of risks that could jeopardise the performance of its Works. This could include unlawful and violent disruptions to the Site or Works, lead to shortage of supplies, downtime caused by load shedding and unplanned power outages. Contractors should take all necessary steps to mitigate against any loss and fully understand their rights and obligations in terms of the Contract. Contracts are required to always notify and communicate with the Employer and the Employer’s agents on the impact an event will have on the time required to carry out the performance of its Works.
GENERAL CONDITIONS OF CONTRACT (GCC) 2023 HAS BEEN RELEASED FOR COMMENTARY.
The much anticipated GCC 2023 has been released for commentary on 20 February 2023.
The GCC 2023 is aimed at ensuring the responsibility of all parties to the Contract and deals with contractual obligations of the Employer, Employers Agent and Contractor to act in good faith and mutual co-operation in terms of the Contract.
Clause 2.2 (Advance Warning) is a new clause which states that it is now the responsibility of the Employer, Employers agent and Contractor to notify each other in advance of any circumstance which may adversely affect the time, cost or quality of the Works. It is the duty of the Employer’s agent to advise on methods to mitigate or avoid the risks caused by the event;
Clause 5.1.1 is an amended clause regarding time calculations which states that where a specific time-span is stipulated in the Contract for carrying out any task, or for the acquisition or termination or lapsing of any right or fulfilment of any obligation or the duration of any event or circumstance, the special non-working days set out in the contract and the day on which the time-span commences shall be excluded from calculation of the time span;
The subheading in Clause 8.3 is amended from Excepted risks to Employer’s Risks. Subclause 8.3.1.2 is a new event which includes, “A State of Emergency, State of Disaster, or any other declaration by the Government that prevents the Contractor from performing its obligations in terms of the Contract”.
It can be conceded that the above risk was included after the President had declared a National State of Disaster on 9th February 2023 due to the on-going load shedding crisis.
Contractors who suffered a loss due to the Employer’s Risks can claim for an extension of time and additional costs under the provisions of Clause 10.1.
The highlight of GCC 2023 is the simplified dispute resolution clauses and the promotion of amicable settlement between the parties as successful settlement results in the suspension of the adjudication process under clause 10.4.
Ultimately, the GCC 2023 emanates a sense of hope to all parties to the Construction Contract especially the Contractors by ensuring fairness of the obligations imposed by each party and for encouraging amicable settlement.
In his report, “Constructing the Team” published in July 1994, Sir Michael Latham made the following recommendation for provision in construction contracts:
“While taking all possible steps to avoid conflict on site, providing for speedy dispute resolution if any conflict arises, by a pre-determined impartial adjudicator/ referee/ expert.”
Historically, construction disputes have been resolved via litigation. In more recent times, public sector contracts usually included litigation as the means of settling disputes whereas private sector contracts employed arbitration.
Cost, delay and uncertainty of the outcome lead to an erosion in user confidence in litigation and this led to the growing move to arbitration as the preferred means of dispute resolution.
Arbitration has been used as a means of resolving commercial disputes in the United Kingdom, since medieval times, though the first Arbitration Act was only enacted in 1698. A growing discontent with the process led to the enactment of the latest Arbitration Act in the United Kingdom in the 1996.
In South Africa, the current Act was enacted in 1965 and is subject to criticism and is long overdue for updating.
Arbitration has suffered the same fate as litigation, it is costly, time consuming and the outcome can also be unpredictable.
During the late 1980’s and early 1990’s the construction industry flirted briefly with Dispute Review Boards (DRB’s). In this process a panel of experts provides a non-binding recommendation on any matter or difference brought before them.
The results experienced on projects such as the Lesotho Highlands Project, phase 1 were promising. Approximately 60% of disputes were resolved by the expert panel and 60% of the remaining 40% were resolved after the panel’s intervention, via negotiation. Only 16% of disputes were eventually unresolved and had to be referred to arbitration. This process obviously suits the larger, well healed contractors who can afford to wait for their payment, but not the small subcontractors whose life blood is cash flow.
Following the Latham report, the UK Government was persuaded that primary legislation was required to give all parties to construction contracts a statutory right to have disputes resolved, in the first instance, by adjudication, which was designed to be a rapid and relatively inexpensive process.
This legislation, the Housing Grants, Construction and Regeneration Act, 1996, is now in force in the UK and parties to construction contracts are allowed to refer a dispute for adjudication at any time. Similar legislation has been adopted in parts of Australia, New Zealand, Singapore and Hong Kong.
South Africa attempted to introduce a “prompt payment act” in 2016 that would have provided, amongst other things, for statutory adjudication, but it was opposed by certain government institutions as being anti-competitive and has not been enacted.
South Africa, as in the rest of Africa, relies on the terms of the contract to provide for Adjudication as one of the phases in the (usually) stepped dispute resolution process.
The World Bank is also advocating that such procedures be used on projects it funds, where the FIDIC MDB Harmonised Edition Contract, (the Pink Book of 2010) is usually used (which provides for a standing Dispute Board {DB}).
Construction disputes are better served by mechanisms that are speedy, cost effective and binding. Such mechanisms should be conducted by an independent third party and should be undertaken by a person (or group of people) chosen by the parties and with the required legal/technical knowledge[1]. Such mechanisms should be able to hear any matter, should be capable of becoming final and enforceable, and should not interfere with the progress of the works[2].
It also recognised that small and emerging contractors are disadvantaged – even imperilled – in the event of a major dispute[3].
The Construction Industry Development Board (CIDB), again in South Africa, took the lead to officially introduce adjudication on construction contracts in South Africa and published a Procurement Practice Guide in 2003[4].
This document dealt, inter alia, with the implementation of adjudication and advocated that “adjudication should be applied to all categories of construction contracts, namely engineering and construction works, services and supplies, at both prime and subcontract level, and should be a mandatory requirement for the settlement of disputes prior to the completion of the contract.”[5]
In South Africa, the CIDB advocated four contract forms for use on public sector contracts. Two of these, (namely FIDIC and NEC) are international contracts and the other two are home grown South African Contracts (JBCC and the GCC). Initially, only the NEC contract made provision for Adjudication.
The first Edition “Rainbow Suit” of FIDIC, published in 1999 adopted adjudication as a means of resolving disputes, in the first instance and the second and third steps in the process remained as they had been in the previous editions of the FIDIC contracts, being, amicable settlement followed by arbitration.
As new versions of our local contract forms were published, these too, in keeping with the CIDB policy guideline, make provision for adjudication as a mandatory step in the dispute resolution process.
Mediation, and/or Amicable settlement are, currently a voluntary process that can be attempted by agreement between the Parties.
What is adjudication really? The Procurement Practice Guide of the CIDB defines adjudication as “… an accelerated and cost-effective form of dispute resolution that, unlike other means of resolving disputes that involve a third-party intermediary, results in an outcome that is a decision by a third party, which is binding on the parties in the dispute.”[6]
However, adjudication is often defined by reference to what it is not. Adjudication is not arbitration or litigation, nor is adjudication a decision by the engineer/project manager[7].
Adjudication is often described as being ”rough justice”, deciding “who should hold the money for now”? This promotes cash flow to the small players. Of course, the adjudicators decision is subject to review by (usually) an arbitrator, if one of the parties in the adjudication is sufficiently unhappy with the outcome of the adjudication.
Surprisingly few adjudicator’s decisions are subject to review by an arbitrator. Anecdotal evidence from the United Kingdom suggests that only around 3% of disputes are referred to arbitration after adjudication.
However, a large proportion of adjudicators decisions have to be enforced by a subsequent court action to force one of the Parties (usually the loser) to comply with the adjudicators ruling.
In South Africa, courts have followed the lead of courts elsewhere in the developed world (particularly the United Kingdom) and are recognising the need to enforce such decisions. Unfortunately, owing to backlogs and an overloaded court system, this can take as much as 9 months to achieve.
In the United Kingdom, enforcement applications are heard by the Construction and Technology courts, and this usually takes less than a month.
We have a “kitchen sink approach” in South Africa to adjudications. A dispute on any topic relevant to a contract can be referred for adjudication.
By contrast, in New South Wales (NSW) in Australia, is quite narrow in its application of adjudication and is limited only to matters concerning payment[8].
In other jurisdictions (like Malasia) only disputes concerning certified payment may be referred to adjudication.
Adjudication may take the form of ad-hoc adjudication where the adjudicator is only appointed when a dispute arises and for a specific dispute. Ad-hoc adjudicators do not normally then become standing adjudicators to deal with subsequent disputes should these arise. Alternatively, a standing dispute board is appointed at the commencement of the contract.
The current market trend appears to be for standing rather than ad-hoc appointments. This is because there is a move towards dispute avoidance and the DB fulfils the role of a DAAB so needs to be available before a claim turns into a dispute.
In the 1999 FIDIC Rainbow suit, the Red book provided for standing DAB’s but the yellow and silver books made provision for ad-hoc adjudication. The 2017 FIDIC Rainbow suit, second edition, however calls for standing adjudicators for all the Contracts. The NEC3 and NEC 4 both call for standing adjudication.
In South Africa, the preference appears to be for ad-hoc adjudication. This may be for cost reasons as well as clients appear to be hedging their bets. If they get a bad decision from the first adjudicator, they can change adjudicators for subsequent disputes.
Standing DAB members charge a monthly retainer fee that is charged quarterly in advance. The standing DAB are usually required to conduct site visits and meet with the Parties and the Engineer. These are usually at not less than 70 day and not longer than 140-day intervals.
The DAB members charge a daily fee for travel time and the site visit as well as travel and accommodation costs for these visits which are charged in addition to the retainer fee. When disputes arise (in both ad-hoc and standing DAB’s) or when the DAB’s are asked to assist in resolving potential disputes (standing DAB’s) this time required to adjudicate the dispute is charged for either on a daily or an hourly fee basis.
So, who are the adjudicators and how can they be found?
The CIDB best practice guidelines provides that adjudicators are not usually practicing lawyers but rather senior engineering and construction industry persons with a sound knowledge of the technology of the industry, cost analysis and programming techniques. Competence in contract law and general legal rights will be a requirement for an adjudicator.
The FIDIC Red Book requirements for the adjudicator are pretty standard and state the following.
The Member shall:
(a) have no interest financial or otherwise in the Employer, the Contractor or the Engineer, nor any financial interest in the Contract except for payment under the Dispute Adjudication Agreement.
(b) not previously have been employed as a consultant or otherwise by the Employer, the Contractor or the Engineer, except in such circumstances as were disclosed in writing to the Employer and the Contractor before they signed the Dispute Adjudication Agreement.
(c) have disclosed in writing to the Employer, the Contractor and the Other Members (if any), before entering into the Dispute Adjudication Agreement and to his/her best knowledge and recollection, any professional or personal relationships with any director, officer or employee of the Employer, the Contractor or the Engineer, and any previous involvement in the overall project of which the Contract form’s part.
(d) not, for the duration of the Dispute Adjudication Agreement, be employed as a consultant or otherwise by the Employer, the Contractor or the Engineer, except as may be agreed in writing by the Employer, the Contractor and the Other Members (if any).
(e) comply with the annexed procedural rules and with Sub-Clause 20.4 of the Conditions of Contract.
(f) not give advice to the Employer, the Contractor, the Employer’s Personnel or the Contractor’s Personnel concerning the conduct of the Contract, other than in accordance with the annexed procedural rules.
(g) not while a Member enter into discussions or make any agreement with the Employer, the Contractor or the Engineer regarding employment by any of them, whether as a consultant or otherwise, after ceasing to act under the Dispute Adjudication Agreement;
(h) ensure his/her availability for all site visits and hearings as are necessary.
(i) become conversant with the Contract and with the progress of the Works (and of any other parts of the project of which the Contract form’s part) by studying all documents received which shall be maintained in a current working file;
(j) treat the details of the Contract and all the DAB’ s activities and hearings as private and confidential, and not publish or disclose them without the prior written consent of the Employer, the Contractor, and the Other Members (if any); and
(k) be available to give advice and opinions, on any matter relevant to the Contract when requested by both the Employer and the Contractor, subject to the agreement of the Other Members (if any).
Generally, adjudicators belong to published panels of adjudicators and are restrained by codes of conduct.
The ICE-SA NEC Adjudicator panel requires that panellists comply with the following:
(a) Before accepting any appointment as adjudicator, the Panel member shall carefully consider and ensure so far as possible that;
(b) Where the appointment is made by ICE-SA the Registered Person will be required to make a declaration to this effect. In the event of any doubt, the Registered Person should decline the appointment from whatever source.
Conduct
(c) When and however appointed to act as adjudicator, the Panel member shall:
There are adjudication service providers in many countries in Africa and they usually have a panel of potential adjudicators. Examples are the FIDIC Presidents List of Adjudicators, the Construction Adjudication Association of South Africa (CAASA), the above-mentioned ICE-SA panel of NEC Adjudicators and the Cairo Regional Centre for International Commercial Arbitration (CRCICA).
Some of these are closed lists and some are open. Where it is an open list it means that the list can be accessed, and an adjudicator chosen from the list. FIDIC and the ICE-SA list are open lists. Closed lists cannot be accessed, and a nomination fee has to be paid to get the information on a prospective adjudicator.
Some contracts have a panel of adjudicators named in the Contract Data and the adjudicator has to be chosen from these select few. Other contracts require that the adjudicator is chosen from a particular panel (like FIDIC or ICE-SA for example).
The adjudication starts in an ad hoc and a standing adjudicator scenario with the notice of a dispute. In some contracts this is a more formal process. However, it is required to be done, it is an important step since it is usually from this communication that the ambit of the dispute is defined and the jurisdiction of the adjudicator is determined.
In this notice, if it is an ad-hoc DAB, the claiming Party nominates someone from the named panel of adjudicators from the Contract Data or suggests a group of three prospective adjudicators for the selection by the responding party of the adjudicator that will preside over the matter (either from the panel prescribed in the Contract or just the preference of the claiming party).
If the responding Party is not happy with any of the suggested potential adjudicators and agreement cannot be reached, the adjudicator nominating body named in the Contract Data is approached to appoint an adjudicator.
Where a three-person DAB is called for, both Parties choose an adjudicator for the approval of the other Party. These two approved adjudicators and the Parties, agree on a third adjudicator who assumes the chair-persons role in the DAB and usually has the casting vote.
Some contracts (like the NEC) prescribe the number and timing of submissions from the Parties and others (like FIDIC) prescribe the duration of the whole process from the date of the referral by the claiming Party (that is the submission of the statement of claim) to the date when the adjudicator is obliged to give his decision.
Adjudicators often call for a case management meeting at the start of the process, shortly after or at the time of the formalisation of their appointment. In this meeting, the number and timing of submissions, the date and venue for any hearing (if required) and the date for the delivery of the adjudicators decision can be discussed and understood by all participants at this meeting.
Sometimes adjudicators need expert assistance to fulfil their function (like for example, appointing a forensic planner). Adjudicators are obliged to advise the Parties of their intention to appoint such an expert and the terms of service for this person.
Once the expert’s report has been received, the Parties must be given the opportunity to comment on the report produced by the expert.
Adjudicators are not arbitrators and the laws of evidence do not have to be observed in adjudications. The laws of natural justice do however apply, and adjudicators are well advised to make sure they give both parties equal opportunity to present their cases.
In South Africa for language skills and communication reasons, hearings are frowned upon. It can however be advisable to allow the Parties to make oral presentations so that they cannot complain that they didn’t have a chance to present their cases. In these circumstances a hearing would be advisable. This would also give the adjudicator the opportunity to explain the process to the Parties who are often inexperienced in these matters.
The golden rule of whether to call a hearing or not is, if there are disagreements of fact, call a hearing. If the issues are in principle, it can usually be handled on the papers, without a hearing.
The objective of an adjudicator is to give a decision that can be enforced. The adjudicator can give the wrong answer to the right question and this would be enforceable. However, if he gives the right answer to the wrong question (this is called the Bouygues effect) it would not be enforceable because that would be outside of his jurisdiction.
Quoted authorities have ventured the opinion that the most frequent challenges to the enforcement of an adjudicators award are where the adjudicator didn’t have jurisdiction.
The next most frequent challenge is that the laws of natural justice were not complied with. In South Africa, there have been challenges to the jurisdiction of an adjudicator because appointment procedures were not (allegedly) properly followed.
We have also experienced a Constitutional challenge because there is not an automatic right in the adjudication process to legal representation and to having a hearing. This challenge was unsuccessful.
Many adjudicators have had long careers and it can be difficult to comply with the warrantee requirements when being appointed.
The criteria for the assessment of bias is not that the adjudicator displayed bias in his conduct or expressly in his decision (for example) but that there was the perception of bias. This is why the candid disclosure of the potential adjudicators business relationships with either of the parties is so important.
The International Bar Association published a document in 2014 entitled the “IBA Guidelines on Conflicts of Interest in International Arbitration”, which is a very useful document to determine whether there is a possibility that there could be a perception of bias.
At a recent webinar held in May this year organised by Pinsent Masons entitled “Dispute Boards in Africa” a discussion took place concerning Adjudicators fees.
The representative from the Cairo Regional Centre for International Commercial Arbitration (CRCICA) divulged that their fee scale ranged from US$800 to US$ 3 400.00 per day.
The latest versions of the FIDIC (2017 second edition) and the NEC (NEC4 2017) make provision for dispute avoidance procedures. This is carried out by an executive intervention or by adding a preliminary role for the DAB to provide an opinion prior to the dispute being declared and being referred to adjudication.
The Royal Institute of Chartered Surveyors (RICS) have introduced a low-value construction adjudication process.
With these developments, there was a concern that the industry was losing confidence in adjudication as a means of resolving disputes and that cheaper and more expedient means of addressing the differences between the Parties was being sought.
This however is not the case and
the experience in the United Kingdom (in Particular) is that the demand for the
intervention by a third party (like an adjudicator) is increasing.
[1] Adjudication of disputes in the construction industry by Marthinus J Maritz
[2] Adjudication of disputes in the construction industry by Marthinus J Maritz
[3] Adjudication of disputes in the construction industry by Marthinus J Maritz
[4] Adjudication of disputes in the construction industry by Marthinus J Maritz
[5] Adjudication of disputes in the construction industry by Marthinus J Maritz
[6] Adjudication of disputes in the construction industry by Marthinus J Maritz
[7] Adjudication of disputes in the construction industry by Marthinus J Maritz
Although there is no standard definition for PPP’s the following is a useful description:
“A PPP is a long terms asset or service delivery agreement established between the public and private sector with the aim of achieving economic development by taking advantage of the private sectors qualifications as well as its capital”
In addition, that:
“PPP is a project finance funding method with payments from the users during the determined concession period and enables transferring of the asset or service to the public at the end of the concession period”[1]
THE HISTORICAL CONTEXT OF PPP CONTRACTS
Partnerships between the public and private sector have been used for a very long time. (e.g. Roman corn distribution during the days of the Roman Empire.)
The 19th Century was the golden age of concessions in Europe.
One of the most renowned cooperations between the public and private sector was the concession granted in 1854 for the construction and operation of the Suez Canal[2].
Closer to home – 99 year concession, to construct and operate the Benguela Railway line granted to Sir Robert Williams on 28 November 1902.
Although this implementation model has a long history, the acronym PPP only gained currency during the 1970’s.
Public Private Partnerships have been widely adopted as a project implementation strategy throughout Africa and enabling legislation and standard documentation is available in 50 countries in Africa (out of a total of 54)
Despite their potential, PPP’s in African countries currently face many constraints[3] such as:
DESCRIBING PPP’S
The following figure is a typical PPP Contract Structure[4]
PPP Contracts Require[5]
In South Africa the implementation models have been[6]:
In summary – there are in general, six typical forms of private sector involvement:[7]
– Short-term service contracts
– Management Contracts
– Lease Contracts
– Greenfield Projects (commonly BOT)
– Concessions; and
– Divesitures
COMPARING TRADITIONAL PUBLIC PROCUREMENT AND PPP’s[8]
Traditional public procurement, of infrastructure is financed, generally speaking using taxpayers’ money.
The objective of any public procurement project is to achieve Value for Money.
Therefore, any project, whether it is a PPP or a traditionally procured project, should be undertaken only if it creates Value for Money.
How do we define Value for Money?
Good value for money consists of three constituent components:
There is a fourth E, “equity”, is often added in making the viability assessment of a PPP, which is the extent to which services are available to and reach all people that they are intended to be reached.
This consideration has particular relevance in the African environment.
A PPP may, conceivably, provide Value for Money compared to traditional procurement models if the advantages of risk transfer combined with private sector incentives, experience, and innovation – in improved service delivery or efficiencies over the project life-time are realised – and this could outweigh the increased costs of contracting and financing.
Such an analysis, from anecdotal evidence, demonstrates that PPPs are superior to traditional public procurement. Accordingly, PPP procurement is often favoured over traditional public procurement models.
PPP’s do not offer a miraculous solution for every public sector infrastructure problem. Usually, this kind of arrangement takes longer and costs more. The main drawbacks are mostly related to the public sector’s inability to deal with such structures (lack of experience) , insufficient competition, lengthy and complex negotiations and high transaction costs[9].
PPPs are not a simple formula “one size fits all”. Each project must be arranged to suit the prevailing circumstances of:
The reasons for adopting a PPP implementation strategy may be summarised as follows:[10]
Throughout the whole Project life cycle[11], the public partner must ensure to maintain effective control that enables it to react instantly when the PPP strays from the set path, and thus limit the potential damage that may arise.
Therefore, it is crucial that the PPP contract clearly defines the instruments that allow the public partner to intervene in the PPP in order to protect the public interest and avoid consequences for both partners.
Secondly, the PPP contract must define, clearly and in advance, the conditions and consequences of early termination of the PPP, especially in terms of charges, damages, penalties, etc. to which each of the partners is entitled in such cases.
In the African region, investment flows are dominated by three countries – South Africa, Morocco and Nigeria – which collectively account for 54% of total commitments. By contrast, the number of projects spans 48 African countries, of which a quarter concluded PPP contracts entailing little to no investment commitments[12].
STANDARD FORMS AVAILABLE
In any PPP arrangement there are obviously a number of Contractual relationships that must be catered for, as illustrated hereunder:
The Special Purpose Vehicle (SPV) will obviously enter into a PPP with the Public entity which makes provision, for design, construction, financing, operation and maintenance of the facility or service.
Some observers[13] have commented that standard form contracts such as FIDIC or the NEC may not be appropriate for PPP’s due to the fact that they are designed for conventional project delivery methods.
It should however be noted that FIDIC are planning to release in 2024 a standard form contract for PPP Projects including a concession agreement and direct agreements that are currently not covered by the Silver Book.
It is therefore apparent that if EPC contract services are required the FIDIC Silver Book, or one of the NEC Suite of documents could be used.
Alternatively, if it is a Design Build Operate (DBO) arrangement the FIDIC Gold Book, or the NEC4 DBO Contract may be suitable.
CREATING A SYMPATHETIC ENVIRONMENT FOR THE ADOPTION OF PPPs
Since the 1990’s there has been widespread adoption of PPP’s across Africa as a project implementation strategy as demonstrated by the number of countries where enabling legislation has been implemented.
To this extent therefore, Africa has a level of maturity in the PPP market. There have been some successes as well as failures.
Current recommendations for improving the environment for implementation include[14]:
Key features for the successful implementation of PPP’s, are the following[15]:
Political Support: It is essential that any PPP has strong political support as well as consensus from opposition parties.
Political Interference: At the same time, government must resist the temptation to interfere with a PPP Project (for example limiting a toll concession’s ability to adjust its tolls).
Sectoral Reform: PPP’s do not exist in isolation of the environment. Big differences between existing facilities and those provided by the PPP may prove problematic.
Affordability: The price for the service is key and must be affordable for the end user.
Risk Transfer: This is a key element of PPP’s but it must be understood that all risks can never be completed transferred.
Governance: Appropriate governance structures are required.
Currency risk: With the exception of Nigeria and South Africa, local finance markets (in Africa) are unlikely to be able to provide the long-term finance that is required. This means thar borrowing in a foreign (hard) currency will be necessary.
Asset Reversion: The PPP contract must set out clearly the condition that the asset must be in when it is returned.
Legal, Policy and Institutional Frameworks[16]:
The rise of infrastructure PPPs in Africa is closely linked to sector reforms that were implemented across the continent throughout the 1990’s.
Political Risk:
The state is an active partner in PPP, which means that investments respond to sovereign risks or risk perceptions[17].
Local Capacity:
PPP structuring requires specialist skills to undertake feasibility studies; arrange financing; draft terms of reference for contractors, bidding documents, and concession agreements; and negotiate contracts[18].
There is also a need to retain expertise to monitor contract implementation and compliance with performance targets.
Financial Considerations:
The revenue derived from a PPP contract has to be calculated to cover:
• The design and development of the PPP
• The project operating and maintenance costs
• The investors required return on their investment
Payment to the PPP entity (the special purpose vehicle) is usually linked to progress of the development and the achievement of key performance indicators (KPI’s).
Project Financing[19] relies primarily on cash flow rather than a corporate balance sheet of the value of the physical asset and is in two forms.
Investments made by the project sponsors (Investors) who develop the project. This is usually between 15% and 40% of the development cost.
Loans received from lenders (debt) who receive a fixed rate of return. There is no up-side to their involvement, but they can lose their investment if the PPP goes badly. Lenders finance the balance of the project (not financed by the investors) of between 60% and 85% of the project cost.
Commercial risk[20]:
PPP’s structured as project finance operations, for example, BOT’s, often seek non-recourse debt (i.e., debt guaranteed only by project cashflows) which means that the availability and cost of financing is highly sensitive to perceived commercial risks. This includes performance or price risk, resource risk, demand risk and revenue risk, among others. Commercial risk can be managed through instruments such as government guarantees or credit risk insurance.
For the same reasons that general foreign direct investment responds to stable macroeconomic environments, PPPs fare better in countries with lower inflationary pressures, stable exchange rates and investor-friendly foreign exchange management policies. Private capital investments into infrastructure assets are mostly foreign currency based, given the need to source capital equipment from foreign markets. However, revenue streams are typically local currency based, introducing foreign exchange risk for private investors. In addition, because the private partner is often foreign or would have accumulated foreign currency debt to facilitate its participation in the transaction, currency convertibility and transferability are important considerations. For related reasons, so is inflation.
CONCLUSION
The Covid-19 pandemic has had an adverse effect on economies around the world. This has resulted in a slowing down of economic activity in general and PPP projects in particular, some of which have been cancelled.
Those same economic strictures will result in public funds being limited and that will, it is suggested, be good for PPP adoption across Africa, if infra structural development is going to take place, which it must.
There is therefore no reason to expect that borrowing and budgetary constraint will not remain as the main reason for adopting PPP’s and that this will be the implementation strategy of choice since this could be the only implementation strategy available in sub-Saharan Africa.
[1] Kadir Kuru and Deniz Artan-International Journal of Construction Management May 2020
[2] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[3] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[4] PPP Knowledge Lab- 17 Finance Structures for PPP’s
[5] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[6] Treasury.gov.za
[7] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[8] Public-Private Partnerships as Alternative Public Procurement Instruments Emmanuel Botlhale Department of Political and Administrative Studies, University of Botswana, Gaborone, Botswana
[9] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[10] Public-Private-Partnerships in Sub Saharan Africa Case Studies 2017
[11] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[12] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[13] Kadir Kuru and Deniz Artan-International Journal of Construction Management May 2020
[14] Li, Ng and Wong, A Framework for Public Engagement
[15] Public-Private-Partnerships in Sub Saharan Africa Case Studies 2017
[16] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[17] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[18] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
[19] Public-Private-Partnerships in Sub Saharan Africa Case Studies 2017
[20] The Emerald Handbook of Public–Private Partnerships in Developing and Emerging Economies
Construction contracts are often of large value and could entail complex works with detailed specifications. Whilst generally based on standard form contracts we often tend to find extensive modifications in the form of particular conditions.
Key to a successful contract is a proper understanding of its terms and conditions and following the provisions thereof to the letter. However, extensive modifications often change the standard form contract to a form unfamiliar to the contractor. As a result, things may go awry and the contractor is faced with challenges ranging from recouping payments, return of performance guarantees, unlawful calls on guarantees and release of retentions.
We have seen in the media from the likes of the Eskom Kusile and Medupi projects how standard form contracts amended extensively can lead to snowballing problems in execution and completion. Shortcomings in these contracts have been identified, inter alia, as irregular contract modifications and deviations from its provisions.
In this complex playing field, have a specialist legal provider to assist in navigating through the contract and advising on a solution aimed at achieving the quickest and most cost effective result will alleviate further unnecessary hurdles in the process. It’s common knowledge that smaller contractors faced with delayed resolution of such financial challenges may not be able to sustain their businesses and run the risk of going under.
At MDA we have extensive experience and success at recoveries for our clients. We have successfully pursued recovery through the courts on provisional sentence proceedings for clients with overdue payment certificates.
Provisional sentence is a motion proceeding – meaning it is brought by way of an application i.e. it does not follow the traditional civil process. It accordingly allows for an expedited process as immediately the summons is issued, a date for the hearing of the matter on the unopposed roll is allocated by the Court. The Defendant is served with a copy of the summons and is compelled to appear before court to admit or deny liability in relation to the liquid document. The only defences that may be raised to a payment certificate are:
Once the court is satisfied that the defendant is liable, an order will be issued against the defendant ordering payment of the amount per the payment certificate, interest as applicable and costs of the action. In circumstances where the defendant still does not satisfy the Court order a warrant of execution can be issued to obtain payment from the defendant.
Where payment may be due but the contract does not provide for a payment certificate process, we at MDA will assist to formulate your claim and present this to the employer in terms of the contractual provisions and advance the discussions to achieve resolution of any impasse. Our experience in this field extends to government contracts where we managed the process for our client and achieved a better than expected settlement.
MDA has also successfully defended calls on client’s performance bond where the call was made in circumstances not allowed for. A performance bond is generally called where there is a default by the contractor in the performance of the works under the contract. Circumstances which allow for calling a bond , include where a contractor abandons the works or commits an act of insolvency. The process to oppose a call on a performance bond is an urgent application to interdict the guarantor from payment to the insured and this is naturally only successful where valid grounds exist to substantiate why the call is invalid.
Otherwise, in the normal course where the works are successfully completed a performance bond is returned once the certificate of practical completion/performance certificate has been issued and the risk in the works transfers to the employer.
Retention guarantees or release of retention monies also follow completion of the works, generally at the end of the contract. However, normal practice is a reduction at practical completion / taking over of the works by the employer and the balance being released upon the expiry of the defects liability period. This is not cast in stone and release of retention monies can differ from contract to contract. For this reason, MDA has recently launched a retention recovery service to assist our clients, inter alia, in reviewing their contracts to determine retention due dates for payback; a diary system to alert us us once a retention payment becomes due, contract specific notice being drafted to be placed on our client’s letterhead to call for payment of the retention/return of the retention bond.
MDA’s leadership team offers in excess of 60 years combined experience in this field and we believe our service offering can aid in the efficient management of your recovery process which will prove invaluable to your business. We look forward to hearing from you and making a difference in the management of your contracts and overall business efficacy.
The recent Constitutional Court judgment in Minister of Finance v Afribusiness NCP has put an abrupt halt to public sector procurement with National Treasury publishing a notice on 25 February 2022 to the effect that it is seeking clarity on the suspension of the preferential procurement regulations and advising that whilst it does so, tenders advertised after 16 February 2022 (being the date of the judgment) should be held in abeyance and that no new tenders should be advertised.
So, what is the effect of the judgment and how long is the situation likely to last?
The Supreme Court of Appeal (SCA) found the Preferential Procurement Regulations of 2017 to be invalid as they are inconsistent with the Preferential Procurement Policy Framework Act (the Act) and declared a suspension on the effect of the invalidity for a period of 12 months from the date of the order (Decision delivered 2 November 2020).
The reasoning for such invalidity is that the 2017 Regulations were found to be inconsistent with the approach envisaged in s217(1) of the Constitution, which provides:
“When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.”
The SCA held that the pre-qualification criteria allowed for in regulations 3(b), 4 and 9 constitute an overstepping by the Minister in that the Regulations go beyond giving effect to the Act and extend to broadening the legislative mechanisms within the Act.
Regulation 3(b) provides that an organ of state must determine whether pre-qualification criteria are applicable to the tender as envisaged in Regulation 4.
Regulation 4 provides that if an organ of state decides to apply pre-qualifying criteria to advance certain designated groups, that organ of state must advertise the tender with a specific tendering condition that only one or more of a defined list of tenderers may respond. The defined list deals inter alia with minimum B-BBEE status level of contributor, minimum ownership by black people or black people who are youth, women, people with disabilities or living in rural or underdeveloped areas or townships. A tender that fails to meet any pre-qualifying criteria stipulated in the tender documents is an unacceptable tender.
Regulation 9 deals with targets for subcontracting to advance designated groups.
The Constitutional Court confirmed the decision of the SCA to declare the 2017 Regulations invalid but by the reasoning that a reading in of s2(1) of the Act reveals that the authority lies with individual organs of state to regulate its preferential procurement policy and that as such, the regulations promulgated by the Minister are in conflict with such authority granted to organs of state.
In terms of s18 of the Superior Courts Act, an order will be temporarily suspended for the duration of appeal proceedings unless the appeal court makes an order to the contrary. The proceedings in the Constitutional Court thus postponed the 12 month suspension on the invalidity of the regulations decided by the SCA.
The position as provided in the letter addressed to all organs of state by the Director General of National Treasury on 25 February 2022 is a cautious approach which states that tenders advertised before 16 February 2022 will be finalised in accordance with the 2017 regulations and other tenders will be addressed once guidance has been obtained from the Constitutional Court.
In our view the finding of the Courts does not require clarification. The handing down of judgment by the Constitutional Court on 16 February 2022 meant that the suspension period determined by the SCA now starts running. This time period is to allow for 2017 Regulations to be addressed.
It is important to note that only the 2017 Regulations are invalidated, all other regulations (2011 and before) remain in effect and the preferential procurement policy prescribed by various organs of state must be strictly complied with. National Treasury’s suggested suspension of all public procurement is unnecessary and if it is prolonged will have a severely negative impact on the South African economy. This has been recently conceded by the Treasury DG, Dondo Mogajane, in a circular, which confirms that the letter is non-binding.
Article by Euan Massey, Zodwa Malinga and Alex Goddard
The General Conditions of Contract for Construction, Third Edition, 2015 (“GCC2015”), a widely used contract within the South Africa Construction Industry, contains a gap in its dispute resolution provisions which may cause some confusion to Contractors and Employers alike and may require some revision by the GCC2015’s drafters when they are considering the release of a new edition.
Clause 10.3 of the GCC2015 deals with the issuing of a dispute notice which is a prerequisite for referring a matter to adjudication. However, in order to issue a dispute notice, the dispute must arise from a rejected claim. The claim referred to in the GCC2015 is either a rejected contractor’s claim issued in terms of clause 10.1 or a rejected dissatisfaction claim issued in terms of clause 10.2.
If a Contractor or the Employer submits a claim to the Employer’s Agent in terms of the aforementioned provisions, the Employer’s Agent is required to provide the party who submitted the claim with an adequately reasoned ruling in respect of such claim within 28 days. If the claim is rejected, then the referring party can issue a notice of dispute and refer the matter to adjudication (if this is the method of dispute resolution chosen) within 28 days of such rejection.
Referring a matter is adjudication is simple where the claim is referred to the Employer’s Agent and the Employer’s Agent provides a formal rejection. The referring party can begin counting the 28-day time period the day after such a rejection is received. However, it is unclear as to the situation where no formal response is received – and this is unfortunately a common occurrence in construction projects.
A contractors claim in terms of clause 10.1 is submitted in the event that the Contractor is seeking an extension of time to the date for Practical Completion. Clause 10.2. deals with claims by both the Employer and the Contractor which do not fall within the ambit of clause 10.1. Clause 10.2.1 states that “in respect of any matter arising out of or in connection with the Contract which is not required to be dealt with in terms of Clause 10.1, the Contractor or the Employer shall have the right to deliver a written dissatisfaction claim to the Employer’s Agent. This written claim shall be supported by particulars and substantiated.”
Clause 10.2.3 states that “The Employer’s Agent shall, within 28 days after the Contractor or Employer has delivered the dissatisfaction claim to him, give effect to Clause 3.2.2 and give his adequately reasoned ruling on the dissatisfaction…”
Therefore, the clause deals with the Employer/Contractor’s obligation to submit the dissatisfaction claim and the Employer’s Agent’s obligation to respond to a dissatisfaction claim but fails to offer any remedy regarding the situation where the Employer’s Agent fails to comply with its obligation and simply does not respond.
This creates a situation in the GCC2015 where the Contractor (or the Employer depending on the situation) is stuck in a limbo type situation and where it is unclear when the 28-day period for issuing a dispute notice begins and ends.
There are two potential ways to deal with the gap in the GCC2015, the first being that the period for issuing a dispute notice is not triggered and that instead an additional dissatisfaction claim must be issued which deals with the Employer’s Agent’s failure to respond to the initial dissatisfaction claim.
Alternatively, if the Employer’s Agent does not respond within the 28-day period, it is a deemed rejection of the claim and the 28-day period for issuing a dispute notice under clause 10.3 is triggered automatically and begins the day after the day on which the ruling by the Employer’s Agent is due.
The first option is, for lack of a better word, absurd and unlikely to yield any sort of different and instead is likely to lead to a multitude of unanswered dissatisfaction claims, and no resolution of the original issue which is not the intention of the dispute resolution provisions of the GCC2015.
Therefore, the approach that we have advised our clients to adopt is the second option which is to deem the Employer’s Agent’s failure to respond as a deemed rejection. Practically, this means that the 28-day period to issue a dispute notice would begin on the day after the Employer’s Agent’s ruling would be due and this would in turn in able the parties to proceed with the dispute resolution process under the GCC2015.
It remains to be seen whether the drafters of the GCC will remedy this gap in the GCC2015 in the new edition of the contract in due course and of their own volition or whether this gap will be challenged in court instead.
Author: Tamlynn Caelers-Avis, Associate
Working on construction projects and specifically with the construction contracts, whether large and/or medium to small scale projects, every so often, you come across conflicting clauses. This is not uncommon. There will always be contract documents, consisting of several documents (more so on larger projects), where the volume of details found in the contract, provides for plenty scope for discrepancies and inconsistencies.
Most standard form construction contracts utilised in South Africa, contains clauses which makes express provision on how conflicting provisions contained in different documents can be dealt with and be resolved.
Generally, if any such inconsistency or discrepancy is to be found, some contracts provide that the contract administrator (known as, the engineer, principal agent and employer’s representative etc.) is the party that can be approached to resolve. The contract administrator would then usually issue an instruction setting out the explanation and / or details that resolves the discrepancy. By doing so, the contract administrator should inter alia act pursuant the general principles of law that governs interpretation of contracts.
Also, when dealing with conflicted conditions in contract documents, some common law rules can be applied as guidance to assist a contract administrator and even the courts. An example being that, (i) written words would prevail over typed words, and (ii) type words in turn prevail over printed words.
The aforesaid considered, hereunder follows few examples of contract provisions from standard form constructions contracts used in South Africa, which specifies what contracting parties can do to clarify any inconsistency and or discrepancies.
Clause 2.4 of the GCC2015, provides that in the event of any ambiguity and/or discrepancy between documents, the “Employer’s Agent” shall provide the necessary clarification. It further provides that the contractor can become entitled to an extension of the date of practical completion and/or additional costs, should the instruction by the employer’s agent that resolves the ambiguity / discrepancy, result in a delay.
Clause 5.6 of the JBCC Principal Building Agreement, edition 6.1 March 2014, states it differently in the sense that it does not provide that the Principal Agent should clarify. It simply provides that “The contract documents shall be deemed to be mutually explanatory of one another. In the event of ambiguity, discrepancy, divergence or inconsistency in or between them, this agreement shall prevail over all other contract documents.” This can be interpreted that the general conditions of the JBCC, would prevail over all other possible contractual documentation, unless the true or clear intention of the contracting parties can be established to know what condition is gets a higher level of priority over the other.
Under the NEC3 (2013), Clause 17.1, provides that the “Project Manager” or the “Contractor”, can notify “the other as soon as either becomes aware of an ambiguity or inconsistency in or
between the documents which are part of this contract. The Project Manager gives an instruction resolving the ambiguity or inconsistency.”
Clause 1.5 of the FIDIC Red Book 1999, expressly provides for a listed priority of documents to avoid possible uncertainty. It states that:
“The documents forming the Contract are to be taken as mutually explanatory of one another. For the purposes of interpretation, the priority of the documents shall be in accordance with the following sequence:
(a) The Contract Agreement (if any);
(b) The Letter of Acceptance,
(c) The Letter of Tender,
(d) The Particular Conditions,
(e) These General Conditions,
(f) The Specifications,
(g) The Drawings, and
(h) The Schedules and any other documents forming part of the Contract.
If an ambiguity or discrepancy is found in the documents, the Engineer shall issue any necessary clarification or instruction.”
Over the years and to date, the courts must decide on interpretation issues and are approached to give their decision to clarify an inconsistency or discrepancy between conditions in contract documents that can govern the relationship between an employer and contractor.
In a few English cases, one being a 2009 case, Bovis Lend Lease Ltd v Cofely Engineering Service, the courts have stated that in the event of conflict or discrepancy, the special conditions or amendments to the contract are to prevail over the general conditions.
In this Bovis case, a few clauses were highlighted. Clause 2.1, which provided for a hierarchy of documents (like that as the listed priority of documents under the general conditions of Clause 1.5 of the FIDIC), stated as follows:
“2.1 The Subcontract Documents…
(a) the Articles of Agreement, including the Appendix;
(b) the Schedule of Subcontract Amendments;
(c) the DOM/2 standard conditions; and
(d) the Schedule of Main Contract Amendments.”
An article 12 was introduced under the above listed Schedule of Subcontract Amendments, which provided:
“Without prejudice to clause 2, this Subcontract shall be amended in accordance with the Schedule of Amendments at DOM/2 attached hereto and if there is any discrepancy between the terms of this Subcontract and the Schedule of Amendments, the wording of the said Schedule shall prevail.”
The court further in their judgment, referred to other documents and confirmed that the Appendix to the subcontract was the most important subcontract document. It was the case for two distinct reasons. First, because clause 2.2 of the DOM/2 standard conditions stated the following terms:
“If any conflict appears between the DOM/2 conditions and the Appendix then the Appendix shall prevail. If any conflict appears between the terms of Subcontract DOM/2 and the numbered documents the terms of Subcontract DOM/2 shall prevail. If any conflict appears between the provisions of the Main Contract and the terms of the Subcontract documents the terms of the Subcontract documents shall prevail.”
Based on the aforesaid, the court was of the view that “it is clear therefore that the Subcontract itself provides that the Appendix is the most important document.”
The court’s second reason for concluding that the Appendix is the key document, was “because it is the one document included in the Subcontract which the parties have filled out themselves.” The court viewed that “where there is a clash between manuscript and standard printed words, the former must prevail.” The latter sounds similar and in line with the common law rules that can be applied.
In considering the respective contract clauses stated in this article and seeing how the courts can approach to deal with contract interpretation issues where parties cannot find common ground on resolving an inconsistency or discrepancy in documents, it is safe to conclude that there is a standard rule of interpretation when it comes to contracts. In circumstances where an order to documents is clear (i.e. expressly provided for), it serves to ensure that a condition higher in the hierarchy (a higher listed priority), would take precedence over one that is listed lower. As a result, it would not be uncommon where tender conditions prevail and can amend the contractor’s rights or obligations as stipulated under the general conditions of a standard contract. Especially, if such tender conditions are given a higher priority.
Contracting parties must pay clear attention to these various pitfalls and rather seek and obtain specialist and expert advice and services, when negotiating and entering contracts. It can assist a great deal, and even possibly avoid the parties to incur future costs related to dispute or litigation proceedings to resolve a contractual interpretation issue.
Author: Barry Herholdt, Senior Associate
We acted on behalf of a contractor constructing civil and electrical engineering services. The conditions of contract were the GCC 2015. The project was delayed by the nationwide lockdown between 27 March 2020 and 1 May 2020 (levels 5 and 4 of the lockdown).
The employer’s agent awarded the contractor an extension of the date for practical completion and associated time-related general items in terms of Clause 5.12 of the GCC 2015. The employer’s agent, however, rejected the contractor’s claim for proven additional costs on the grounds that the contractor had relied upon the incorrect clause in the contract (Clause 5.10 instead of Clause 8.3.2 read with Clause 8.1.7) in claiming such entitlement. The contractor had at all times included a reference to Clause 8.1.7 in its claims correspondence but agreed that it had incorrectly relied upon Clause 5.10 instead of Clause 8.3.2. The contractor did not, however, accept that this rendered is claim sufficiently defective to warrant rejection.
The adjudicator found in favour of the contractor on the grounds that the Adjudication Board Rules entitle him to open up review and revise the employer’s agents ruling, and he is not restricted by what was considered in this ruling. The contractor’s reliance upon Clause 5.10 instead of Clause 8.3.2 was a technical error which in no way affected the underlying validity of the claim or calculation of the contractor’s entitlement, and there was no intention on the part of the contractor to mislead the employer’s agent.
The employer also raised a number of other issues relating to the time bar attached to the dispute notice and notice of adjudication, but these will not be addressed in detail here save to say that these arguments were also rejected by the adjudicator.
Author: Michelle Kerr, Director
In between the rotational load shedding the country is experiencing, recent media reports that Eskom has resorted to “load reduction” have also come to the fore. Load reduction involves switching off power in areas where illegal connections overload and damage its infrastructure. Hence, through load reduction the power utility endeavours to protect the grid and reduce the usage during peak hours.
A recent judgment inVaal River Development Association (Pty) Ltd v Eskom Holdings SOC Ltd and Others; Lekwa Rate Payers Association NPC v Eskom Holdings SOC Ltd and Others[1] handed down in the North Gauteng High Court by acting judge A Millar, is of particular interest as it brings to the fore another avenue the embattled power utility is seeking to rely on in order to curb its already constrained supply.
The two matters were heard at the same time and the Court granted both urgent applications brought by representative bodies of local businesses – Vaal River Development Association (Pty) Ltd (Ngwathe Municipality in the Free State) and Lekwa Rate Payers Association NPC (Lekwa Municipality in Mpumalanga).
Eskom, in reliance of the provisions of the bulk electricity supply agreement entered into with both municipalities had taken steps around June/July of this year to reduce the supply of electricity to the Notified Maximum Demand (NMD) as stipulated in the agreements. NERSA rules describe NMD as “the contractual value of demand which binds Eskom and the customer.” Eskom is required to provide the contracted NMD and where customers exceed the NMD, a NMD penalty is imposed.
The NMD for Ngwathe per the September 2008 agreement was 24 300kVA and in respect of Lekwa per the January 1981 agreement was 22 260 kVA – Lekwa being increased to 55 000 kVA by 2010. Despite these limitations, and no further increases since 2008 and 2010 respectively, Eskom continued to supply electricity in excess of the NMD to both municipalities for an extended period of time and only sought to rely on the NMD provision earlier this year.
The impact of the adherence to the NMD became apparent as business gradually resumed during the reduced risk levels of the national lockdown. Apart from the expected adverse effects on the community and business at large owing to the reduction in electricity supply, the Ngwathe Municipality experienced raw sewage of some two hundred thousand residents flowing into the Vaal River at a point where the municipality extracted drinking water which in turn resulted in the water being impure and leading to increased illness and disease. The Lekwa Municipality suffered similar adverse effects being unable to meet the demands of the industrial sector which includes poultry farming, colliery and transportation of coal.
Eskom opposed the applications on the basis that its obligation was to supply electricity in terms of the contractual arrangements in place with the respective municipalities – hence it was only required to provide such supply as per the agreements. Eskom further argued that as the contracts were between itself and the municipalities, the applicants’ rights would need to be enforced against the municipality. It further stated that it was the municipality that was failing to discharge its constitutional mandate to its residents.
The Court however found that Eskom’s actions as a State-Owned Enterprise operating a monopoly on the supply of electricity, in enforcing the NMD, amounted to an infringement of the rights of the residents of both municipalities. The learned judge stated “It seems to me at the very least that enjoying a clear right to be supplied with electricity, the right to be supplied with sufficient electricity to meet the most basic threshold of the individual rights in the bill of rights must at least be a prima facie right. To find otherwise would render those rights and the obligations of the State and its organs – which includes Eskom – to fulfil them, nugatory”.
The Court further found that the debt levels of the municipalities and the period that Eskom allowed them to exceed the NMD, without imposing penalties, counters any prejudice that Eskom may suffer as opposed to the prejudice suffered by the residents of these two municipalities – the Court therefore held that the balance of convenience favoured the applicants.
Eskom was ordered to immediately restore full maximum electricity supply to several areas in the Free State province and Mpumalanga province. Judge Millar poignantly stated that as municipalities (and mostly insolvent ones at that) are being saddled with NMD penalties and interest charges by Eskom, their debt burden increases exponentially which leaves them with no other recourse than to approach the courts for relief.
It is abundantly clear that the embattled state utility will most certainly be seeing several court challenges similar to this, as frustrated businesses are now at a breaking point. Eskom’s needs to come up with a new strategy to manage its constrained resources as its actions in curtailing supply and its argument that it has no obligation to the end-users by laying blame with the municipality, is failing dismally.
[1]Vaal River Development Association (Pty) Ltd v Eskom Holdings SOC Ltd and Others; Lekwa Rate Payers Association NPC v Eskom Holdings SOC Ltd and Others (31813/20) [2020] ZAGPPHC 429
Author: Arvitha Singh, Associate
We were recently approached by a client that rents out certain equipment on construction sites and was facing difficulties collecting said equipment when other party to the contract failed to pay the monthly rental amount. The reason for this difficulty was that the other party to the contract was not providing him with access to site.
In this regard, our first advice to our client was to include a provision in the contract which obligates the other party to provide access to the site. This creates a contractual entitlement to our client and a contractual obligation on the other party.
In the event that there is a default in paying the rent for the construction equipment, the client is advised to address a letter to the other party reminding it to comply with the terms of the rental agreement and placing it on terms to make payment of the rent within a specific period of time.
Should the other party remain in default of their payment obligations, a second letter should be addressed to the defaulting party stating that the client will be terminating the rental agreement on the basis of the defaulting party’s breach and attending on site on a specific day and at a specific time and that access should be made available
However, should the defaulting party fail to adhere to the obligation to provide access, the client would need to approach the High Court for an application known as the rei vindicatio. This application is used when a person wishes to recover possession of property that belongs to them but such property is in the possession of another person. The Property is in this case, the equipment which has been rented.
In order to succeed with such an application, the following needs to be proved by the person who has instituted the application:
If the application is successful, a court order will be granted which the applicant may use to attend at site and collect its outstanding equipment.
While going to court may seem costly and daunting, it is always in your best interest to follow the correct legal procedure as you will be then have a legally binding court order to use to recover your property. Another positive in making an application to court is that you may request that the Court order the Respondent to pay the costs of the removal of the equipment from site due to the fact that such costs arose directly as a result of the Respondents failure to comply with the conditions of the rental agreement.
Lastly, once you are in possession of a court order, it may be prudent to have said court order served by Sheriff as well as by email. In your email attaching the court order, you should notify the Respondent of the date on which you will be attending site to collect the equipment and a warning that a failure to comply with the provisions of the order could lead to a contempt of court application.
Author: Tamlynn Avis, Associate
Recently we were involved in a matter where adjudication proceedings were instituted against our client under a subcontract whereby our client’s opponent (the Contractor) sought to recover amounts that an arbitrator had decided the Contractor was liable for in arbitration proceedings that took place under the main contract. In other words, the Contractor sought to recover amounts it was liable for to the Employer per the arbitration award from its Subcontractor (our client).
We successfully defended these proceedings on behalf of our client. The Adjudicator dismissed the Contractor’s claim. In doing so, the Adjudicator determined that the finding of the arbitrator is nothing but an irrelevant opinion, relying on established case law to make this determination.
The case law relied on is an old English judgment dating back to 1943 that was adopted into South African law many years ago but is still applied by our courts today, so we thought to provide a refresher on the principle. The case law relied on is an old English judgment dating back to 1943 that was adopted into South African law many years ago but is still applied by our courts today, so we thought to provide a refresher on the principle.
Hollington v F Hewthorne & Co[1] arose out of a collision between two cars on a highway. The driver of the defendant’s car was convicted of the criminal charge of careless driving. The plaintiff’s car had been damaged by the collision and the plaintiff sought damages against the defendant in subsequent civil proceedings. However, before the hearing, the plaintiff’s driver (his only witness) died. The plaintiff sought to use the conviction of the defendant to establish a case against the defendant for damages. The court determined that the judgment of the criminal court is an “irrelevant and inadmissible opinion” in later civil proceedings. This principle has been adopted in several jurisdictions but has also been excluded by several, having faced a lot of criticism for being prejudicial to litigants.
So how is this judgment relevant to arbitration and adjudication proceedings? Our courts have determined that it is. In the case of Graham v Park Mews Body Corporate[2], the High Court determined that the Hollington rule applied in a matter where the previous proceedings were arbitration proceedings. The High Court held that there seems to be a general rule that findings of another tribunal cannot be used to prove a fact in a subsequent tribunal and held that there is no logical reason why this rule cannot be extended to the findings, orders and awards of other tribunals.
Several South African legal scholars have argued for the abolition of this rule, but our superior courts have yet to develop our law to this effect.
[1] [1943] 2 ALL ER 35.
[2] 2012 (1) SA 355 (WCC).
Author: Kelly Meijers, Senior Associate
Covid-19 Statistics South Africa reported that 1 630 008 tests have been conducted, 151 209 positive cases identified, 2 657 total deaths and with 6945 new cases as at 30 June 2020. It seems it is time to accept that this virus is likely to knock on the doors for many more weeks to come, probably months and possibly years for that matter. The question to be asked is, will it ever vanish and disappear. Because of this uncertainty, we should strongly consider ways to rather adapt to the current circumstances and the sooner, the better. Life must go on!
When the respective lockdowns commenced more aggressively around the globe, there was immense impact on construction projects (amongst other business operations around the World). This caused an impact through the whole supply chain and effected all stakeholders. Projects were stopped, supply and delivery of goods or materials were either redirected, prevented or halted in its entirety, people were told to isolate, work from home. Some Governments in various countries implemented new laws that restricted or limited the movement of people. Various companies had to close doors, which prevented them from any further operation. No operations, no customers, no income, leading to the worst possible consequence, a cut in salary or even no salary, resulting in loss of jobs. This has already affected thousands and millions of people around the World.
Due to these unforeseen events and circumstances, which no person could have predicted, force majeure notices were getting issued left and right seeking relief from compliance of contractual obligations. Later, as some governments started to implement restriction laws, it raised the question if force majeure by itself was enough, was it the correct and only contractual remedy to seek for relief. This topic has been canvassed already in articles and toolkit guidelines released by various industry experts over the past few months.
With this article, the author looks to the future, by considering particular types of clauses and provisions found in standard form construction contracts, and what possible changes to these provisions will require.
How should parties approach future contract negotiations, to ensure that a perfect balance of risks remains the champion of the day. It has been noted over the years, that a perfect balance of contractual rights and responsibilities, can be achieved between parties that enter negotiations with a collaborative approach, with a “we together” mentality.
In order to understand what clause and provisions will likely need to be relooked at, it is necessary to identify the various areas of impact caused by this event. Some has been briefly stated above, but it includes inter alia the following from what we have experienced so far:
Considering the aforementioned circumstances, which is likely not exhaustive, it is already possible to identify which particular clauses or provisions of a contract should be reviewed for amendment, that can accommodate for a specific relief and protection against the continuance of this event or the occurrence of such similar future event. The affected clauses or provisions may include:
Delaying events can be identified and be stipulated, providing for an entitlement to claim extension of time with costs or for an extension of time without costs. Some events can be identified, whereto the parties can agree will likely occur. For example, instructions from Employer / Engineer for additional works (variations), to suspend or stop works etc. These types of clause should be reviewed to consider the current circumstances. Covid-19 was unforeseen a few months ago. However, as it is still very much present today, everyone is now aware of it. With new contract negotiations in this period, this should be considered and reviewed. With regulated levels of lockdown, and with each level with its own prescribed measures and actions to be taken, this can result in circumstances where business can proceed normal one day, but the next, a sudden announcement which causes all operations to fall back to more stricter level with stricter measures and regulations. Further with limited or no access to site, resulting in possible demobilisation and remobilisation etc.
People must travel from and to site, depending on the location of the site, some will need to be transported, thus having a costly effect relating to transporting arrangements and further limitations that can be imposed in this regard, which limits the amount of passengers that can be transported in one bus or taxi. This will also inevitably have a likely time and cost impact, which calls for review and a different approach. These cost will need to be accounted for and be agreed to. Consideration must also be given to the restrictions to travel across borders and between provinces or countries. Regulated periods for isolation or quarantine of each country when people arrive, should be considered together with possible exemptions and permit requirements.
With regards to health and safety on site, regulations have promulgated additional safety measures that needs to be implemented by all businesses to protect its workers and prevent the spread of the virus. This will require a detailed and proper stipulation of health and safety specifications in a contract. Proper guidelines and protocols which can be followed. On construction sites, additional measures must be in place and the costs related thereto should be agreed, which will then form part of the contract value. These additional measures inter alia includes, hand-washing stations, sanitisers, screening equipment, protection gloves, face protection or masks, sterilisation of safety gear and clothes, restriction on sharing of tools, equipment and machinery between persons, medical testing and possibly testing facilities on or close to site. The parties should also take into account the required period of isolation in quarantine.
This event had an immense impact on the supply chain. Construction works were affected and completely halted as a result of materials that could not reach the country or the site due to border restrictions. Various contractors placed orders for materials, paid therefore and waited for it to be shipped and delivered. These orders and delivery on construction projects, are sometimes subject to a programme and delivery schedule in order to plan works properly and by hoping that works can proceed upon receipt of materials as initially planned. Other scenarios are where prices were already agreed at contract commencement. However, the lockdown and border restrictions have forced a different date of supply or delivery, which period likely extended beyond the pricing terms and conditions that was locked-in at the start. Suppliers can then become entitled (or may demand), escalation in prices as a result of the changed circumstances, possible changed routes to deliver the materials etc. It makes it necessary that the contracting parties should discuss and consider the options of sourcing more than one supplier as back-up in such circumstances. Further, review and consider how the pricing and conditions can be adjusted to accommodate supplier restrictions and or delays by defining the circumstances which will entitle an escalation in prices.
The clause (which has quickly become very popular), the one dealing with force majeure. A pandemic as the Covid-19 are no longer unforeseen, it is ongoing and all are aware. The effects thereof have forced certain changes already, as stated, regarding new health and safety requirements (some regulated by governments or some as a direct instruction from the employer). In negotiating current new construction contracts, the parties must carefully review the circumstances and expressly define the events that will be accepted to be force majeure events. Attention should be given to the express use of wording to avoid confusion. Some standard forms contracts do not expressly use and stipulate wording, such as “virus”, “epidemic” or “pandemic”. Under this clause, you generally only become entitled to an extension of time, but no additional costs, because its usually events which no party could have foreseen or prevented, but which prevents the performance of certain obligations.
The parties must review the types of insurance policies to cover for certain events. Covid-19 has made a lot of companies realise that they need to rethink their future. Companies need proper cover to protect itself against loss of income and or loss of revenue, to protect its workers and place itself in a position to be able and to continue paying salaries, adapt to accommodate different working environments (where people are forced to work from home and not the office). Policies to cover additional company costs which may arise if workers must have access to office facilities like printing, scanning and network connections. In addition, are further insurances that may produce cover for security, protection of works, materials, equipment, and site offices during a time of lockdown, with no access to site. Lastly, cover for possible loss or delays to the supply chain regarding the delivery and supply of materials as per a planned schedule or to cover cost related to the termination of a supply or service agreement.
With an event as Covid-19, it is understandable if any party want to protect itself and consider termination. It is an uncertain event, with an uncertain outcome, and with no one knowing for how long this can still endure. The parties can review and consider the express conditions relating to termination for convenience in circumstances of such a pandemic. Termination in this regard, should purely result in the commercial protection of both parties. It must make commercial sense for both contracting parties. The conditions for such termination should be agreed and be expressly set out in clear words, notice requirements and the subsequent responsibilities and procedures that follows thereafter.
The periods related to notification must be clearly stipulated, to whom it should be addressed and how it should be transmitted. Notification conditions are sometimes prescribed in a clause on its own or is incorporated within other clauses. For various circumstances, the contracts require some notice. This includes for claims due to a delay, variations, instructions by employer or its agent to suspend or stop works, termination and disputes. If properly complied with and within the prescribed contractual period, this can ensure an entitlement to a claim for additional time and / or costs or the alternative relief sought in terms of the contract. Notification requirements must be considered and reviewed, to accommodate for Covid-19 types of circumstances.
In conclusion, the risks and circumstances to each respective project will differ from the other. The parties will need to identify and research the various possible areas of risk to their particular project, and adapt thereto accordingly by reviewing the provisions of the contract and agree to clear, balanced duties and responsibilities, which will result in efficient and cost effective operations. The considerations stated above, deals only with few identified provisions
and clauses, and can likely still evolve as the time goes on. That being said, in these times, it has become a lot more clear that parties should start to seek resolution collaboratively, and communicate form the outset of any such event in an attempt to seek ways of mitigation, or to decide and agree the best commercial way forward to the benefit of both, including any other stakeholders, which should avoid a party from getting financially scarred, or worse, burn down to the ground (figuratively speaking).
Author: Barry Herholdt, Senior Associate
After the announcement by President Ramaphosa of the nationwide lockdown on the eve of 23 March 2020, necessary guidelines, procedures, and directives were issued to guide various practices and other entities on how business could continue or not continue during the lockdown period.
On 25 March 2020, the Judge President for the Gauteng division of the High Court of South Africa issued directives (with effective period from midnight Thursday, 26 March 2020 until 09h00 on Monday, 20 April 2020), setting out special arrangements for how the litigation matters had to be dealt with in the Pretoria and Johannesburg High Courts. The directives inter alia provided that (not limited hereto):
Supplementary directives followed on 2 April 2020, addressing dies non concerns from litigants and members of the profession with regards to their obligations in terms of the rules of Court and/or any statute regarding the filing of Court processes and/or delivering of documents within stipulated periods if those periods fell within the lockdown period. Meaning, could the lockdown periods (the dates falling inside those periods be considered as dies non).
The directives accordingly clarified and inter alia provided that:
The 16 April 2020 directive, encouraged that the legal representatives of the parties were to conduct their business and act in the spirit of cooperation, to communicate with each other in order reach certain agreements and further to agree on suitable alternative dates for hearing and or trial if dates for hearing and / or trial were allocated in the lockdown periods. The Registrar would then be informed on what has been agreed accordingly.
Considering the aforesaid, what would be to position regarding other dispute resolution procedures, for example the procedures provided under construction contracts (i.e adjudication and arbitration). If the Courts can operate and function in a specific prescribed manner, why should an adjudication or an arbitration process be any different. Does a pandemic like Covid-19, which has moved various countries and Governments to enforce a regulated lockdown, stop an adjudication and/or an arbitration?
Although the author could not source whether such request and/or question has been dealt with in our South African Courts at the date of writing this article, there was however a matter dealt with in the UK and by their Technology and Construction Court on 2 April 2020. The case of Millchris Developments Ltd v Waters, which is believed was the first case dealing with the effect of Covid-19.
In not dealing in detail with all the facts in this matter, but briefly summarised, an initial timetable was proposed by the Adjudicator. Millchris (the contractor) claimed that he could not meet the proposed date to file its response as a result of the Covid-19 lockdown and requested that the adjudication rather be postponed until after relaxation of the lockdown measures. This was not agreed to and the Adjudicator proposed a two-week extension for the contractor to file its response. As a result, the contractor rejected the proposal and approached the court with a request to suspend the adjudication process. They argued for an order based on the grounds of ‘natural justice’ due to the fact that they faced certain difficulties caused by the Covid-19 lockdown. The difficulties raised by the contractor was that:
The Judge (Mrs Justice Jefford), stated that it was uncommon to grant an order that prevents adjudication. In order to be successful in such circumstances, the contractor must proof that it will be in breach of natural justice, if the adjudication would continue to be conducted, which could further result in the inevitable consequence that it would be unenforceable.
However, the Judge was not totally convinced and rejected the contractor’s request for the order it sought. The Judge was of the view that they failed to meet the necessary threshold for such an order and was led by some of the following factors:
In considering the Millchris case, it seems that the facts that was put forward by the contractor was not enough and did not convince the court. However, as with many cases dealt with by the Courts, the author believes that the nature and facts of each matter will be considered and be dealt with differently. Not all circumstances are the same. Had the contractor possibly ticked alternative and relevant boxes to convince the court, it might have succeeded.
Again, this comes back to the parties to consider and act promptly and in the spirit of cooperation. In event of such a sudden lockdown caused by a pandemic (or anything else of such nature), it would be advised that the relevant parties rather communicate from the outset. Be honest and open with each other. This might help to reach certain agreements and revise what was previously agreed.
In light of the factors considered by the Court in the Millchris case, we should be careful and not ignore the current times in which we operate and conduct our businesses. With technological advancements and the resources to our disposal, allowing for scanning of documents, video and/or teleconferencing communication software, correspondence by email and other telecommunication apparatuses, it becomes difficult to voice any difficulty which prevented a person from taking and/or proceeding with certain actions to ensure it complies with prescribed timelines and other obligations.
In this day and age, the majority of all Corporations and Companies in the World (including its workforce), have access to these technological resources. However, exceptional circumstances will always remain, which will exclude a limited few. For others, it can be business as usual.
Author: Barry Herholdt, Senior Associate
The nation-wide lockdown enforced in terms of the Disaster Management Act 57 of 2002 is upon us. Subject to any extension of the time period for the lockdown, it is currently effective until 0:00pm on Thursday 16 April 2019.
Construction sites in South Africa have been affected. Numerous enquiries have been received regarding the impact of the nation-wide lockdown and the notifications and requirements in respect if the FIDIC agreements.
In response to these enquires, we have put together this note that examines the provisions of an unamended FIDIC Red Book 1999. To the extent that we have received queries from parties to FIDIC Red Book contracts in Botswana and Eswatini, we shall briefly deal with this below.
At the outset, there appears to be confusion as to whether a “Force Majeure” event has occurred or not.
“Force Majeure” is defined in Clause 19.1 of the FIDIC Red as follows:
“In this Clause, “Force Majeure” means an exceptional event or circumstance:
a) Which is beyond a Party’s control;
b) Which such Party could not reasonably have provided against before entering into the Contract;
c) Which, having arisen, such Party could not reasonably have avoided or overcome; and
d) Which is not substantially attributable to the other Party.
Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, as long as conditions (a) to (d) above are satisfied:
Clause 19.2 provides that:
“In the event that a Party is prevented from performing any of its obligations under the Contract by Force Majeure, such Party shall give notice to the other Party of the event or circumstance constituting the Force Majeure. The notice shall be given within 14 (fourteen) Days after the Party became aware, or should have become aware, of the relevant event constituting Force Majeure.
The Parties shall, having given notice, be excused from performance of such obligations for so long as such Force Majeure prevents it from performing them.
Notwithstanding any other provision of this Clause, Force Majeure shall not apply to obligations of either Party to make payments to the other Party under the Contract.”
In order for an event to be classified as a “Force Majeure” event, the requirements of all four sub-paragraphs (a)-(d) of clause 19.1 must be satisfied.
Where these four requirements are met, the party to the Contract who is affected by the event may give a notice to the other party in terms of Clause 19.2 within 14 days of such party becoming aware of an event of Force Majeure which is preventing him from performing his obligations under the Contract. If he gives this notice, and the event is a Force Majeure event (as defined), then the party who issued the notice is excused from performing his obligations that he cannot perform while the Force Majeure event is occurring.
Then, whether or not the Contractor is the party who is prevented from performing his obligations under the Contract, and subject to compliance with the provisions of Clause 20.1, the Contractor will be entitled to an extension to the Time for Completion – but with no Cost (see Clause 19.4 [Consequences of Force Majeure]). What this means essentially is that the Contractor will have longer to complete the Works, but will not be entitled to any additional Cost as a result.
Until recently, we were seeing the impact of COVID-19 affecting delivery of materials and Goods from China. This situation has now changed, and the publication of Regulations under the Disaster Management Act is the event that is affecting the Contractor’s obligations to perform the Works.
The immediate (and perhaps most obvious) course is to invoke contractual provisions regulating a “Force Majeure” situation, where these are available in terms of the relevant contract. The lockdown ticks all the boxes:
a) Which is beyond a Party’s control; [tick]
b) Which such Party could not reasonably have provided against before entering into the Contract; [tick]
c) Which, having arisen, such Party could not reasonably have avoided or overcome; and [tick]
d) Which is not substantially attributable to the other Party. [tick]
However, the FIDIC Red Book has a clause that specifically deals with instances of changes to legislation within the Country (this being the country where the Permanent Works are being executed).
The Contractor is required to comply with the Laws of the Country.
Clause 13.7 of the FIDIC Red Book states:
“The Contract Price shall be adjusted to take account of any increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) … made after the Base Date, which affect the Contractor in the performance of obligations under the Contract.
If the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in Laws … the Contractor shall give notice to the Engineer and shall be entitled subject to Clause 20.1 [Contractor’s Claims] to:
a) An extension of time for any such delay, if completion is or will be delayed, under sub-clause 8.4 [Extension of Time for Completion]; and
b) Payment of any such Cost, which shall be included in the Contract Price.
After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine these matters.
Clause 3.5 [Determinations] requires the Engineer to consult with each Party in an endeavour to reach an agreement. If an agreement is not achieved, the Engineer then makes a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.
The Regulations published under the Disaster Management Act may be a change in Legislation. We have, in the past, seen successful challenges to this allegation and hence it is difficult to say that each and every adjudicator / arbitrator will find that the regulations are in fact a change in Legislation.
If Contractor’s are of the view that it is a change in Legislation, then Clause 13.7 applies. The Contractor is required to give this notice to the Engineer in terms of Clause 13.7 if the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in Legislation. The Contractor does not actually have had to suffer delays or additional Costs he can issue the notice in anticipation thereof.
The Engineer is then required to give effect to Clause 3.5 [Determinations]. At this stage, a meeting would occur between the Engineer / Employer / Contractor to reach agreement on the impact of the change in Legislation on the Works and it would be useful to implement measures at this stage to minimise the impact of the change in Legislation.
The Contractor still has to comply with Clause 20.1 [Contractor’s Claims] in order to be entitled to as extension of time and Cost. This includes being able to show that he did actually suffer a delay and that Costs were actually incurred, and needs to include in his calculation any Cost savings as a result and measures he has taken to mitigate these Costs as well.
With regards to any additional compensation that may be claimed by the Contractor under the FIDIC Red Book we have already determined that (subject to compliance with Clause 20.1):
a. The Contractor is not entitled to “Cost” as a result of a Force Majeure event.
b. The Contractor is entitled to “Cost” (reasonably incurred) as a result of a change in Legislation.
The FIDIC Red Book is quite specific as to when a Contractor is entitled to payment of Cost, however Clause 20.1 does allow the Contractor to make a claim for additional payment “otherwise in connection with the Contract”. We could not anticipate what such a claim would be by the Contractor, but he does have to notify the Engineer of the event or circumstance giving rise to the claim within the 28-day notice period.
Instructions issued by the Engineer may result in a Variation. In this regard it is noted that in terms of Clause 1.13 [Compliance with Laws], the FIDIC Red Book places an overarching obligation on the Contractor to comply with the Laws. The Engineer should not have to issue instructions to the Contractor regarding compliance with these Laws, and if he does so this may be seen as a Variation.
We have come across some instances where the Engineer has issued a notice of suspension of the Works in terms of Clause 8.8, the cause of the suspension being “Force Majeure”. In this instance, the Contractor would be required to protect, store and secure such part of the Works against any deterioration, loss or damage. We are not convinced that this is the correct way to handle this situation, particularly in light of the wording of Clause 8.8 – “If and to the extent that the cause is notified and is the responsibility of the Contractor, the following Sub-Clauses 8.9, 8.10 and 8.11 shall not apply”. We know that the lockdown is not the responsibility of the Contractor, but does this imply then that it is the responsibility of the Employer?
The remedies for the Contractor in terms of Clauses 8.8, however, remain the same in terms of time and Cost as for a change in Legislation. The Contractor’s compliance with the Laws would be the primary obligation. If the notice of suspension was issued and the suspension was effective prior to the nationwide lockdown, these days of suspension prior to the nationwide lockdown would be claimable by the Contractor as a separate event giving rise to time and Cost.
In South Africa, the COVID-19 global pandemic is not the event causing the temporary closure of construction sites and the ceasing of related on-site construction activities for the lockdown period.
Contractors executing Works on South African construction sites have an overarching statutory obligation to comply with the “Laws” including especially the nationwide lockdown and subsequent regulations issued in terms of the Disaster Management Act 57 of 2002.
This is the event causing the closure and it may be a change in Legislation, open to dispute by an Employer as to whether or not it is a change in Legislation or simply an operation of the Legislation currently in place.
The fact remains – we are in unchartered territory and Employers and Contractors should not sit back in the comfort of the belief that they have entitlements under the Contract that a third-party adjudicator or arbitrator may not agree with. Employers and Contractors alike should submit their notices under the contract, but more importantly, have discussions regarding the best way to deal with this situation, which would ultimately enable the Contractor to be ready and able to return to the Site as soon as the lockdown is over to avoid further delays to the Works. There is no right or wrong answer.
FIDIC Red 1999 contracts where the Permanent Works are being executed in Botswana
Botswana declared a Public Health Emergency in terms of the Public Health Act (Cap.63.01) contained in the Government Gazette Extraordinary Vol. LVIIL No. 23 dated 20 March 2020. Construction sites were not shut down, and Contractors could continue working, whilst abiding to the Government of Botswana’s guidelines on preventing the spread of the pandemic (for example, site meetings to be attended by fewer people, the provision of hand sanitizers, masks and other safety measures on Site).
The declaration of a Public Health Emergency has been followed by a declaration by the President of Botswana of a state of public emergency, to be in existence from midnight on 2 April 2020 until further notice. The President has stated that he intends to swiftly issue a Proclamation declaring a State of Emergency and summon Parliament to meet within seven (7) days thereof, as well as sign and publish the State of Emergency Regulations.
While the State of Emergency is in place “a period of extreme lockdown” will be in place for a period of 28 days. All individuals across the country will be expected to adhere to a more
severe form of social distancing where movement out of the home is only restricted to those performing essential services and transporting essential goods.
In this regard, up until midnight 2 April 2020, the impact that the pandemic has had on construction sites was:
a. To the extent that the 20 March 2020 Public Health emergency declaration affected the performance of the works by the Contractor, he would have issued a notice to the Engineer in terms of Clause 13.7. The Contractor is required to give this notice to the Engineer in terms of Clause 13.7 if the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in Laws. The Contractor does not actually have had to suffer delays or additional Costs, he can issue the notice in anticipation thereof.
b. To the extent that the pandemic had affected the Contractor’s inability to obtain materials and goods, he would have issued a notice in terms of 8.4 read with clause 20.1 – (d) Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions..” Subject to compliance with the provisions of Clause 20.1, the Contractor would be entitled to time, but no cost.
c. Employers affected by the period of extreme lockdown would have submitted their notices in terms if clause 19.2.
Now that the President has declared a period of extreme lockdown, this will shut down construction sites and the provisions of Clause 13.7 may apply. The issuance by the Contractor of a Clause 13.7 notice is followed by the requirement for the Engineer to give effect to Clause 3.5 [Determinations]. At this stage, a meeting would occur between the Engineer / Employer / Contractor to reach agreement on the impact of the change in Legislation on the Works. The Contractor could explain how it anticipates being delayed and the parties could agree on methods to mitigate this delay, whether or not the Employer agrees to the application of Clause 13.7 to this scenario. It enables the parties to achieve agreement now on the parties’ respective obligations for payment during the lockdown period, securing cash flow for contractors during the lockdown period and enabling them to return to the site to recommence the Works and ramp up to acceptable production levels as soon as possible, and further, saves a dispute on this situation later
FIDIC Red contracts where the Permanent Works are being executed in Eswatini
Eswatini are currently in a similar position to South Africa and Botswana prior to their respective lockdowns.
His Majesty King Mswati III and Ingwenyama has commanded Government to introduce a partial lockdown on selected sectors of the economy to curtail the spread of coronavirus with effect from 27 March 2020.
For those businesses that do not fall within the specified essential services sectors, they have been encouraged to scale down by minimising their working hours. Businesses that cannot comply to WHO and Ministry of Health guidelines are expected to shut down until the situation normalises.
This may impact the progress of the Contractor’s works to the extent that the Contract is for Permanent Works being executed in Swaziland.
The Contractor would have issued a notice to the Engineer in terms of Clause 13.7. The Contractor is required to give this notice to the Engineer in terms of Clause 13.7 if the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in Laws. The Contractor does not actually have had to suffer delays or additional Costs, he can issue the notice in anticipation thereof.
To the extent that the pandemic had affected the Contractor’s inability to obtain materials and goods, he would have issued a notice in terms of 8.4 read with clause 20.1 – (d) Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions..” Subject to compliance with the provisions of Clause 20.1, the Contractor would be entitled to time, but no cost.
Whilst many consumers around the country rejoiced at the recent news of Eskom’s failed bid relating to the implementation of electricity tariff hikes of 16.6% and 16.7% respectively, over the next two years, the unfortunate reality is that the dismissal by Judge Jody Kollapen of the High Court application related only to the request for the matter to be heard as urgent (Part A of the application).
The merits of Eskom’s case are still to be heard and determined when the matter comes before the Court through the normal court process. Part B of the application relates to a review of Nersa’s decision on the multi-year price determination (MYPD4).
The basis of Part A of the application was to enable the cash strapped SOE to implement the higher tariff increase before the beginning of its financial year in April 2020 instead of 8.1% for the 2020/21 financial year and 5.2% for 2021/22 financial year, as approved by Nersa.
Eskom’s basis for rejecting Nersa’s multi-year price determination is that it incorrectly regarded the R69 billion cash injection announced by Finance Minister Tito Mboweni in his 2019 Budget, as revenue. Eskom calls this an error and it appears that Judge Kollapen sees the merit in this – the learned Judge indicated on Monday that “Nersa violated the basic principle of accounting by treating an equity injection as revenue”.
The Court indicated that it would assist in the expedited hearing of Part B of the application – however any delay seriously impacts an already failing SOE which has crippling debt and is unable to attend to the critical maintenance needed at power stations across the country, which supports their current projection that load shedding is to continue for at least another 18 months.
However, looking to cash-strapped consumers in an already ailing economy with rampant job losses, to make up for huge revenue shortfalls cannot be the SOE’s only solution to its current debt crisis and we hope that the impending SONA brings a sustainable rehabilitative action plan without further burdens being placed on the ordinary consumer.
Author: Arvitha Singh, Candidate Attorney
The South African National Roads Agency (“Sanral”) started rolling out tenders for the upgrades to the N2/N3 last year; contracts that are worth millions, which is great news for contractors in what seems like a never-ending slump in the industry right now.
However, take note that these new tenders include a new form of Sanral Works Contract. The contract is still based on the FIDIC Conditions of Contract for Construction, 1999 edition (the Red Book) but there have been some changes made to the particular conditions, most notably, clause 19.1 – Force Majeure.
This clause is relied on by contractors when dealing with strikes and riots (including construction mafia type circumstances) but Sanral has added five conditions which make it more difficult for contractors to do so.
Clause 19.1 lists the kinds of events that constitute a Force Majeure. Item (iii) of this list includes strikes, riots and the like.
The latest particular conditions list five pre-conditions before the events included under this item (iii) may be considered a Force Majeure. These conditions are:
So why should contractors care about these amendments? Well, these days, there is a very high possibility of their works coming to a grinding halt due to “local communities”, “business forums” and the like. This could mean very prolonged delays and possibly the inability to proceed – remember the Mtentu bridge saga? Contractors need these events to fit the definition of Force Majeure so that 1) they can obtain an extension of time (to avoid being held liable for delay damages / penalties) and payment of any Cost or 2) they have a reason to terminate should the disruptions get completely out of hand.
Contractor’s already had it tough trying to get their events within the definition of Force Majeure and now Sanral has upped the ante – A risk to carefully manage if you are awarded one of their lastest contracts.
Author: Kelly Meijers, Senior Associate
Early Warnings
Early warnings are addressed in Clause 16 of the NEC3, which requires either the Contractor or the Project Manager to issue an early warning as soon as they become aware of any matter which could increase the total of the Prices, delay Completion, delay the meeting of a Key Date or impair the performance of the Works.
Early warnings do not constitute notification of a compensation event and do not interrupt the running of the Clause 61.3 8-week time bar (addressed below).
The significance of an early warning relates to the assessment of the value of the compensation event. In this regard, Clause 63.5 states that “[i]f the Project Manager has notified the Contractor of his decision that the Contractor did not give an early warning of a compensation event which an experienced contractor could have given, the event is assessed as if the Contractor had given early warning”. This means that, if the cost or delay (or a portion thereof) of the compensation event could have been mitigated if an early warning was issued, then the Contractor is sanctioned by losing its entitlement to that cost or delay (or potion thereof) which could have been avoided.
Compensation Events under the NEC3
Compensation Events are addressed in Clause 6 of the NEC3. Only the events listed in Clause 60.1 are considered compensation events. Compensation events entitle a Contractor to a change in the Prices (assessed as an impact upon the cost of the components in the Shorter Schedule of Cost Components), the Completion Date or a Key Date.
Compensation events must be notified to the Project Manager within 8 weeks of the Contractor becoming aware thereof, failing which (unless the event arises from the Project Manager or Supervisor giving an instruction, issuing a certificate, changing an earlier decision or correcting an assumption) the Contractor “is not entitled to a change in the Prices, the Completion Date or a Key Date”. This operates as a time bar.
Once the compensation event has been notified, the Project Manager has one week to respond, advising of his decision as to whether the event in question constitutes a compensation event. Should he fail to do so, the Contractor may give a notice to this effect, and the Project Manager has a further two weeks to provide his decision. Should he still fail to do so, the compensation event is treated as being accepted as such by the Project Manager.
Once the compensation event has been accepted, the Contractor has three weeks to submit its quotation (for a change to the Prices, Completion Date or Key Dates as a result of this event) to the Project Manager. The Project Manager has two weeks to respond. Should he fail to do so, the Contractor may give a notice to this effect, and the Project Manager has a further two weeks to provide his decision. Should he still fail to do so, the quotation is treated as being accepted as such by the Project Manager (this may be disputed by the Employer and reviewed by the Adjudicator in terms of Clause W1).
Access
Lack of access is often relied upon as the cause of action for a compensation event under the NEC3 and, therefore, warrants specific mention. Clause 60.1(2) states that it is a compensation event when “[t]he Employer does not allow access to and use of a part of the Site by the later of its access date and the date shown on the Accepted Programme”.
In Imprefed (Pty) Ltd v National Transport Commission 1993 (3) SA 94 (A), however, it was held that a clause which obliges the Employer to give the Contractor initial access to the site, to commence performance of the Works, does not give rise to an entitlement to make a claim when the Contractor, after being initially granted access to the Site, is later prevented from accessing a portion of that Site. Such prevention constitutes a different cause of action, which must be established under one of the other compensation events listed in Clause 60.1.
Dispute Resolution under the NEC3
Dispute resolution is dealt with in Clause W1 of the NEC3. Should a dispute arise (most commonly when the Project Manager issues a decision rejecting the Contractor’s compensation event and/or quotation), the referring party has four weeks to issue a dispute notice. If they do not do so, neither party may refer the dispute to the Adjudicator or the Tribunal. This operates as a time bar.
The parties are required to appoint the Adjudicator under the NEC Adjudicator’s Contract current at the starting date. The Adjudicator should be named in the contract data, however, if not, and the parties cannot agree on his identify, either party may apply to the Adjudicator nominating body to chose the Adjudicator.
The referring party must deliver its referral between two and four weeks after notification of the dispute. This creates a two-week cooling off period after the appointment of the Adjudicator, during which no submissions can be made to him. If the referring party does not deliver its referral within four weeks of notification of the dispute, neither party may refer the dispute to the Adjudicator or the Tribunal. This operates as a further time bar.
Following delivery of the referral, both parties have a further four weeks to submit any additional information they wish the Adjudicator to consider. In practice this does not work well, as the responding party will usually wait until the final day of this four-week period to submit its response, raising new material/arguments. This leaves the referring party without an opportunity to respond thereto. It is, therefore, recommended that the parties agree to a more structured approach to the submissions i.e.:
The Adjudicator will then have four weeks from the last submission to deliver his decision, which decision is binding unless and until it is revised by the Tribunal.
A dissatisfied party has four weeks to deliver a notice of referral of the dispute to the Tribunal. If neither party delivers such a notice, the Adjudicator’s decision becomes final and binding. This also acts as a time bar.
Author: Michelle Kerr, Director
Adjudication under the NEC3
Clause W1 of the NEC3 governs adjudication of disputes in jurisdictions where the UK Housing Grants, Construction and Regeneration Act 1996 does not apply, such as South Africa.
In terms of Clause W1.1 of the NEC3 “[a] dispute arising under or in connection with this contract is referred to and decided by the Adjudicator”. In terms of Clause W1.4(1) “[a] Party does not refer any dispute under or in connection with this contract to the tribunal unless it has first been referred to the Adjudicator in accordance with this contract”. When these two clauses are read in conjunction, it is clear that adjudication is a mandatory step before proceeding to arbitration or court proceedings (whichever is selected by the Parties in the Contract Data).
Appointment of the Adjudicator
‘Adjudicator’ is a defined term, and the Adjudicator is generally identified in the Contract Data. Clause W1.2(3), however, provides that “[i]f the Adjudicator is not identified in the Contract Data or if the Adjudicator resigns or is unable to act, the Parties choose a new adjudicator jointly. If the Parties have not chosen an adjudicator, either Party may ask the Adjudicator nominating body to choose one. The Adjudicator nominating body chooses an adjudicator within four days of the request. The chosen adjudicator becomes the Adjudicator.”
Although Clause W1.1 refers to the Adjudicator in the singular, Clause 12.1 of the Core Clauses expressly contemplates the plural as well. It states, “In this contract, except where the context shows otherwise, words in the singular also mean in the plural and the other way round…”. Further, as pointed out in Keating on NEC, “the adjudication contract is sufficiently flexible to allow the terms to be agreed as and when a dispute arises and a party wishes to refer it to adjudication”. The provisions of the NEC3 cannot, therefore, be said to be a bar to the appointment of an ad hoc adjudicator.
A standing adjudicator is generally appointed at the start of the contract and would generally be expected to keep herself abreast of developments on the site. For this she would usually charge a monthly retainer. An ad hoc adjudicator is appointed as and when a dispute arises for the purposes of determining only that dispute and would usually only charge an hourly fee for their services.
Adjudicator’s Authority to Determine Jurisdiction
Some adjudication contracts do grant an adjudicator the power to determine whether or not she has jurisdiction to hear the dispute. This would be a way of eliminating later jurisdictional challenges from a losing party.
This is not explicitly dealt with under the NEC3, however, it is generally accepted that if a party challenges an adjudicator’s jurisdiction, the adjudicator may investigate this challenge and come to a non-binding “decision” as to jurisdiction, so as to determine whether to continue the adjudication or, if she believes she has no jurisdiction, to resign [Fastrack Contractors Ltd v Morrison Contractors Ltd [2000] BLR 168; AMEC Projects Ltd v Whitefriars City Estates Ltd [2004] EWCA Civ 1418; Nicholas Gould, King’s College London, Centre of Construction Law, MSc in Construction Law & Dispute Resolution]
Enforcement of the Adjudicator’s Decision
If the Adjudicator decides that she does have jurisdiction to act, and makes an award, Clause W1.3(10) of the NEC3 states that “[t]he Adjudicator’s decision is binding on the Parties unless and until revised by the Tribunal and is enforceable as a matter of contractual obligation” [emphasis added].
If the losing party refuses to make payment of an Adjudicator’s award, enforcement may be pursued by way of both:
There is a myriad of case law supporting the enforcement of an adjudicator’s award, as a matter of contractual obligation, where the contract states that such award is binding upon the parties, pending determination by a court or arbitrator [Freeman NO v Eskom Holdings Limited (2010); Basil Read (Proprietary) Limited v Regent Devco (Proprietary) Limited (2010); Emfuleni Local Municipality v Tau Ya Mariri Transport and General Services (2012); Esor Africa Pty (Ltd) v Bombela Civils Joint Venture (Pty) Ltd (2012); Tubular Holdings (Pty) Ltd v DBT Technologies (2013); Stefanutti Stocks (Pty) Ltd v S8 Property (Pty) Ltd (2013)].
Enforcement of the Adjudicator’s award may not be resisted based on an error of fact or law.
The issue of a notice disputing the adjudicator’s award and/or the referral of the dispute to a court or arbitrator also does not suspend the obligation to make payment of the adjudicator’s award, pending determination by such court or arbitrator, and the courts have even gone so far as to enforce payment of a temporarily binding adjudicator’s award, as a matter of contractual obligation (in line with the principles of sanctity of contracts and freedom of contract) in circumstances where the contractor had gone into business rescue [Frese NO. v Steve Biko Foundation 2017 JDR 0360 (GJ)].
The only remaining grounds available to resist the enforcement of the Adjudicator’s award, is to challenge her jurisdiction. There are two legs to this test:
Establishing compliance with this test is not an easy feat.
Author: Michelle Kerr, Director
“The doctrine of repudiation must of course be applied in a just and reasonable manner…” – McCardie J[1].
You entered a contract with your counterparty. The contract expressly provided for each parties’ rights, obligations and inter alia the contractual procedures to execute in the event of a possible default and or failure by a party to execute or perform its envisaged obligations. Your contractual obligation to notify the defaulting party in order to afford it an opportunity to rectify, has been actioned and exhausted. No response to your notification to rectify is forthcoming, no further performance by the defaulting party and it plainly remains silent to any demands or requests directed in terms of the contract.
Such act or conduct (inter alia silence, non-responsive, refusal to perform), can lead a reasonable person to question the defaulting party’s true intentions under the circumstances.
The test for repudiation was confirmed by the courts and dates as far back as the late 1800’s, when Lord Colebridge LCJ expressed as follows[2]:
“the true question is whether the acts or conduct of the party evince an intention no longer be bound by the contract.”
The circumstances and facts will differ from case to case and not every conduct or act of refusal or malperformance under a contract can be canvassed and alleged to be an act of repudiation. In Re Rubel Bronze and Metal Co and Vos [1918] 1 KB at p3222 McCardie J said as follows:
“…In every case the question of repudiation must depend on the character of the contract, the number and weight of the wrongful acts or assertions, the intention indicated by such acts or words, the deliberation or otherwise with which they are committed or uttered, and the general circumstance of the case.”[3] The conduct must exhibit a deliberate and unequivocal intention to no longer be bound.[4]
The onus lies on the party who asserts repudiation to proof that the other party has repudiated the contract. In Datacolor International (Pty) Ltd v Intamarket (Pty) Ltd[5], the court held:
‘Repudiation is…not a matter of intention, it is a matter of perception. The perception is that of a reasonable person placed in the position of the aggrieved party. The test is whether such notional reasonable person would concluded that proper performance (in accordance with the true interpretation of the agreement) will not be forthcoming…The conduct from which the inference or impending non- or malperformance is to be drawn must be clearcut and unequivocal…Repudiation, it has often been stated, is a “serious matter”…requiring anxious consideration and – because parties must be assumed to be predisposed to respect rather than to disregard their contractual commitments – not lightly to be presumed.’[6]
Conduct and or an act of repudiation takes many forms. The author of Christie’s Law of Contract in South Africa (7th edition)[7], sets out some of these forms and separates conduct before performance is due and conduct when performance is due. These are inter alia:
Another party’s conduct of repudiation does not provide the innocent party with an open window to cease total compliance of its contractual obligations. When another party’s cooperation and performance of its contractual obligations is necessarily required to place you in a position of performance, but he/she fails and or refuses to perform (repudiates its contractual obligations), the innocent party can be relieved from further performance. However, considering the repudiating party’s conduct, it remains important that the he/she is informed and or has knowledge that the innocent party remains willing and able to perform.
The writer concludes and hereby suggest that in circumstances, when the parties are seeking cooperation and or are already entangled in flared and angry emotions, carefully consider the circumstances. Ensure you execute and exhaust all your contractual obligations and remedies available to you under the contract. If all has been exhausted and the default remains unrectified, consider the doctrine of repudiation and seek proper legal advice before hastily taking any action.
As per our previous two articles, the President has signed into law the Carbon Tax Act No 15 of 2019, which came into effect from 1 June 2019.
Our clients that are contractors in the construction industry continue to receive price increase notification letters from suppliers (particularly in the cement and steel industries).
This is the third in our series of articles which sets out how a contractor may claim additional compensation from an employer should such price increases have an effect on the contract price.
The third contract form in our series is the GCC2010. This contract has specific clauses that deal with the Contractor’s obligation to comply with the laws of the country (the GCC2010 being a South African standard form contract, we have assumed that the law of South Africa applies).
Clause 6.8.1 of the GCC states:
“Except as provided in this Clause or elsewhere in the Contract, the rates and/or prices stated in the Pricing Data shall be final and binding throughout the period of the Contract.”
One of the provisos to Clause 6.8.1 is in respect to additional or reduced cost to the Contractor as a result of a change in the laws. More specifically, Clause 6.8.4 of the GCC states:
“If at any time within 28 days before the closing date for tenders or thereafter, there occur changes to any Act of Parliament, Ordinance, Regulation or By-law of any local or statutory authority which cause additional or reduced cost to the Contractor (other than in terms of Clauses 6.8.2 and 6.8.3) arising from the execution of the Contract, such additional or reduced cost shall, after due consultation between the Employer and the Contractor, be determined by the Engineer and shall be added to or deducted from the Contract Price and the Engineer shall notify the Contractor accordingly, with a copy to the Employer”.
Unlike the FIDIC and JBCC contracts (where claim notifications for additional compensation / expense and loss are required before the Contractor is entitled to payment of any such additional compensation / expense and loss) the GCC2010 does not appear to require any notifications from the Contractor in line with a specific claims clause.
Clause 3.1.2 of the GCC2010 states:
“Whenever the Engineer intends, in terms of the Contract, to exercise any discretion or make or issue any ruling, contract interpretation or price determination, he shall first consult with the Contractor and the Employer in an attempt to reach agreement. Failing agreement, the Engineer shall act impartially and make a decision in accordance with the Contract, taking into account all relevant facts and circumstances.”
Clause 3.1.2 reads with Clause 6.8.4 in that the Engineer is required to consult with the Contractor and Employer prior to making a determination on price. There is a clear right for the Contractor to additional cost as a result of a change in the law, as long as the change in the law occurred within 28 days of the closing date for tender, or thereafter (ie. during the course of the Contract). The Contractor must, obviously, be able to display how the change in the law has given rise to such additional cost. Clause 6.8.4 is an interesting clause because it also allows the Engineer to reduce the Contract Price should a change in law result in a reduced cost. This could be the reason for the fact that there are no prescribed notification requirements for the Contractor – why would the Contractor notify the Engineer for reduced cost?
Similarly to the FIDIC and JBCC contracts, a Contractor (and an Engineer in making his determination) will be required to take into consideration any Contract Price Adjustment Factor agreed to between the Contractor and the Employer in the Contract, as steel and cement would be considered “Materials” when applying the Contract Price Adjustment Factor.
Summary
Unlike the FIDIC and JBCC contracts discussed in our previous articles, the GCC2010 does not contain a specific clause that requires the Contractor to issue a claim notification, within a prescribed period, to the Engineer in order to be entitled to additional compensation as a result of a change in the law. There would, however, be a requirement for the Contractor to initiate the conversation by notifying the Engineer of any price increase letters received from its suppliers as a result of the Carbon Tax Act. There is a consultation process, followed by a determination by the Engineer, acting impartially and taking into account all relevant facts and circumstances.
This weekend I decided to take a visit to the recently opened Fourways Mall, a mall that has been years in the making and is now the largest shopping centre in Africa. Looking around this spectacular mall got me thinking just how many different skills were required to put it together. The lawyer in me immediately wondered how the contractual relationships between so many different parties were managed.
Large projects like these require many capabilities to complete them – i.e. a number of specialist contractors (think HVAC, fire detection and prevention systems, electrical installations, plumbing etc). Employers will avoid contracting with so many individuals. They’ll choose a main contractor and then leave it up to them to manage all the specialist subcontractors.
Having assumed this responsibility, the main contractor will seek to pass its obligations with the employer onto each subcontractor. One of the easiest ways of doing so is to make the subcontract “back-to-back” with the main contract.
But what does this concept actually mean? It contemplates incorporating appropriately tailored terms from the main contract into the subcontract expressly. Doing so obviously takes time and effort. Therefore, many contractors adopt a short-cut approach – including a vague introductory statement into the subcontract such as, “This subcontract is back to back with the main contract” or not even drafting a subcontract and stating in the form of agreement something like, “All references to Employer in the main contract shall mean reference to the Contractor under the subcontract and all references to Contractor in the main contract shall mean reference to the Subcontractor under the subcontract”.
Although this short-cut approach may seem like the most cost effective at the time, its vagueness means that there is no certainty as to the parties’ obligations and vagueness leads to disputes. A contractor may think that he is passing down all his obligations by stating that the whole of the main contract applies to the subcontract, but in fact, all he is doing is providing a cause for dispute.
When such a dispute arises, whether certain main contract terms apply to the subcontractor will be a question of interpretation on a case-by-case basis. An adjudicator / arbitrator will look to factors such as what the parties intended the contractual arrangement to be, what is fair and what makes the most commercial sense.
An example that pops up a lot from our clients is the applicability of the penalties under the main contract to the subcontract. A contractor may think it has managed to get out of paying penalties by stating that the subcontractor is liable for penalties as provided under the main contract but, the principles of fairness and contract law, as well as the provisions of the Conventional Penalties Act, may not allow it in the circumstances. An adjudicator / arbitrator should consider these arguments in assessing whether the subcontractor is liable.
The short-cut approach isn’t sounding so cost effective anymore is it? Lengthy and expensive disputes in a contractor / subcontractor relationship can be avoided by drafting a subcontract that reads alongside the main contract, expressly incorporating terms that are applicable. If parties truly do not have the time or resources to do so, ensure that the most fundamental terms of the contractual relationship read together or make use of a standard form of contract that has a subcontract that works with it.
Author is Kelly Stannard, Associate
As per our previous article, the President has signed into law the Carbon Tax Act No 15 of 2019, which came into effect from 1 June 2019.
Our clients that are contractors in the construction industry continue to receive price increase notification letters from suppliers (particularly in the cement and steel industries).
This is the second in our series of articles which sets out how a contractor may claim additional compensation from employers should such price increases have an effect on the contract price.
The second contract form in our series is the JBCC Principal Building Agreement (both the 2007 and 2018 versions). How do each of these contracts allow the contractor to claim additional compensation in the event of a change in the laws of South Africa? Do they … or don’t they?
Unlike the FIDIC Red Book that we looked at in series one (which has a specific clause that enables the contractor to claim compensation based on a change in the laws) the 2007 PBA has no such clause.
Instead, clauses 32.5 and 32.6 of the 2007 PBA state:
In other words, the 2007 PBA prescribes the circumstances where expense and loss can be claimed by the contractor. None of these circumstances are as a result of a “change in the law”.
On the other side of the coin, the expense and loss clause in the 2018 JBCC PBA states:
The 2018 PBA does not list the circumstances in which expense and loss can be claimed. It seems to leave it wide open. The contractor merely notifies of expense and/or loss for which provision was not required in the contract sum. The contract sum is the tendered amount – the contractor would not have been able to provide for increases in prices due to a change in the law that occurred after the date of tender submission.
In order to be in the running for a potential award of additional compensation by the principal agent, the contractor will have to ensure that it sticks to the time frames outlined in clause 26.5 – or it forfeits its claim. This time bar may be applied strictly. Contractors who receive price increase notification letters from suppliers should ensure that the supplier accurately describes the reason for the price increase, and the contractor should be able to provide a detailed and substantiated claim to the principal agent in this regard.
Summary
The 2007 PBA does not appear to have a clause that enables the contractor to claim expense and loss as a result of a change in the laws. The 2018 PBA is less prescriptive in terms of what expense and/or loss is claimed by the contractor. A condition precedent to an entitlement for expense and/or loss is compliance with the provisions of clause 26.5, and the ability to submit a detailed and substantiated claim to the principal agent, taking into account any contract price adjustment provisions.
Author: Natalie Reyneke, Senior Associate
FIDIC’s 1999 suite of contracts are the most widely used construction contracts globally. Their nature is of a suite of contracts applying fair and balanced risk allocation between the parties. That said, the standard contracts are often amended, by parties, that the material characteristics of the contracts are lost – their nature.
There are two distinct parts of the FIDIC contracts. The General Conditions of Contract (“GCC”) and the Particular Conditions of Contract (“PCC”). GCC are the standard terms applicable to contract. Incorporated in the GCC is the nature of a FIDIC contract of fair and reasonable risk allocation. Under the PCC, parties have the right to amend the GCCs, as they see fit. The introduction of the golden principles is FIDIC’s way of limiting the amendments effected by parties and thereby changing the nature of the contract.
FIDIC has now set out five golden principles to address the excessive amending of the contracts, and to ensure their nature is retained, despite the amendments effected. These principles are as follows:
Minor amendments of the GCC that do not change the nature of the contracts will not be considered as a breach of these golden principles. Another reason FIDIC introduced these golden principles is to protect the integrity of their contracts used around the world. It is unknown whether the adoption of the golden principles will be successful. However, FIDIC can certainly count on contractors and subcontractors alike to support these proactive steps which aid in protecting their interests in an already unequal contractual relationship with employers.
Author: Tsele Moloi, Associate.
The President has signed into law the Carbon Tax Act No 15 of 2019, which came into effect from 1 June 2019.
The objectives of the levying of carbon tax are to force companies involved and/or operating carbon-intensive processes to make more environmentally responsible choices. The Act applies a base tax rate per ton of the CO2 equivalent of the greenhouse gas emitted. The Tax will have a financial impact on these companies, and/or third parties procuring manufactured goods and/or materials from such companies.
Our clients that are contractors in the construction industry have been receiving price increase notification letters from suppliers (particularly in the cement and steel industries) and have been left in the dark about how to deal with these price increase notifications.
We at MDA shall be putting together a series of articles that set out the relevant clauses under the standard form construction contracts whereby a contractor may be able to claim additional compensation as a result of price increases from suppliers, consequent upon the Carbon Tax Act.
The first contract form in our series is the FIDIC Red Book (1999 Edition).
Clause 14.1(b) of the FIDIC Red Book provides that “the Contractor shall pay all taxes, duties and fees required to be paid by him under the Contract, and the Contract Price shall not be adjusted for any of these costs except as stated in sub-Clause 13.7 [Adjustment for Changes in Legislation]”
Clause 13.7 of the FIDIC Red Book provides that:
“The contract Price shall be adjusted to take account of any increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) or in the judicial or official governmental interpretation of such Laws, made after the Base Date, which affect the Contractor in the performance of his obligations under the contract.
If the Contractor suffers (or will suffer) delay and / or incurs (or will incur) additional Cost as a result of these changes in the Laws or in such interpretations, made after the Base Date, the Contractor shall give notice to the Engineer and shall be entitled subject to sub-clause 20.1 [Contractor’s claims] to:
Although Clause 14.1(b) holds the Contractor responsible for the payment of all taxes, it is recognised that a change in legislation that affects the price of the Works shall not be a Contractor risk. In this regard, an exclusion from the requirement that the Contractor pay all taxes is found in Clause 13.7.
As is evident from Clause 13.7 however, the ability of the Contractor to claim additional payment due to a change in the Laws is subject to the following:
It is further noted that for Clause 13.7 to operate, the change in Laws needs to be a change in Law of the Country – ie. the country where the Site is located / the Permanent Works are being executed. Entitlement to claim additional compensation may therefore be limited to projects being executed in South Africa.
A claim submission that complies with the provisions of Clause 20.1
Clause 20.1 provides:
“If the Contractor considers himself to be entitled to any extension of the time for Completion and/or additional payment, under any clause of these Conditions or otherwise in connection with the Contract, the contractor shall give notice to the Engineer describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware of the event or circumstance.
If the Contractor fails to give notice of a claim within such period of 28 days, the time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the employer shall be discharged from all liability in connection with the claim…” [our emphasis]
Hence, a defence available to an employer to avoid making additional payment to a contractor would be that a contractor “should have become aware” of the circumstances surrounding the levying of carbon tax on construction materials as soon as the Carbon Tax Act was promulgated. A contractor would naturally only become aware of the additional expense upon receipt by it of price increase letters from suppliers.
The amount of compensation available to the Contractor is limited to the Cost thereof.
The definition of Cost as per the FIDIC Red Book is “all expenditure reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overhead and similar charges, but does not include profit.”
In this regard, the Contractor’s entitlement to additional compensation shall be limited to such Cost. A difficulty may arise in calculating the exact Cost involved, particularly in contracts where there are contract price adjustment provisions.
Summary
The Carbon Tax Act may have an affect on prices of building materials (particularly cement and steel). The promulgation of new laws may entitle the Contractor to additional compensation under its contract with the employer if the provisions of Clause 13.7 are satisfied (more particularly that the change in the Law is a change in the Law in the country where the Site is located). Once this condition is satisfied, the Contractor is required to comply with the provisions of clause 20.1 in order to secure its entitlement.
Author: Natalie Reyneke, Senior Associate.
Each of the four standard form construction contracts commonly used in South Africa (FIDIC, GCC, JBCC and NEC3) make provision for resolution of disputes by way of adjudication.
The CIDB discourages the holding of a hearing during adjudication proceedings, and the expectation is that the parties will present their versions to the adjudicator in written form. This means that the quality and content of the written submissions made to the adjudicator can make or break a party’s case.
These submissions usually consist of a referral (statement of case/statement of claim) by the claimant and a response (statement of defence) by the respondent. The claimant may wish to make a further reply (replication) to any new material raised in the response, and (although it is not always necessary) the respondent may wish to submit its own reply (rejoinder) to this as well.
Ideally, the referral will explain to the adjudicator:
It is important that the claimant demonstrate compliance with each element of the cause of action upon which it bases its claim. For example, a breach of contract will require the claimant to demonstrate:
Each allegation must be supported by evidence and reference to the relevant contractual provisions or law. A mistake typically made by those with a legal background, is to reserve or hold back legal/contractual argument and the production of supporting documents from their submissions, as they would in court proceedings. As there is unlikely to be a hearing or any sort of verbal submissions in an adjudication, however, this will reduce the impact of the claimant’s case.
It should also be borne in mind that an adjudicator is not strictly bound by the rules of evidence that would apply to court proceedings. The adjudicator’s overarching obligation will be to comply with the rules of natural justice i.e. to consider both parties versions and to avoid any appearance of bias (in particular, the adjudicator cannot be seen to be making the case for either party).
This doesn’t mean that the claimant avoids the obligation to prove its case. He who alleges (in this case the claimant) must prove (bears the burden of proof) and it is the claimant’s obligation to prove its version (by way of the production of evidence) on a balance of probabilities. The burden of proof always remains upon the alleging party.
The burden of proof can be distinguished from the evidential burden which shifts from party to party. If the claimant establishes its version and the existence of a dispute by way of evidence, the burden of rebutting this by way of further/alternative evidence shifts to the respondent. The respondent is not obliged to prove a plain denial but is obliged to provide evidence to prove any counter (differing) version of events.
The respondent will do this by way of its referral. It is important for the respondent to answer each and every allegation made in the referral, usually responding to it paragraph by paragraph (ad seriatim). If it does not, it may give rise to an inference that the respondent has admitted the unanswered allegations.
The response should follow the same guidelines regarding the inclusion of contractual/legal argument and supporting documents as those for the referral and, at the end, include a request for a remedy (prayer) usually that the claimant’s case is dismissed.
Evidence can be oral (in the case of an adjudication this will be produced by way of supporting affidavits), documentary such as site diaries and invoices, or ‘real’ such as the actual defective goods supplied or installed.
Evidence can also be direct (a direct assertion), circumstantial (where inferences are drawn from the evidence), primary (which doesn’t suggest better evidence is available e.g. signed daily diaries), secondary (which does suggest better evidence is available e.g. a schedule produced by the claimant from the signed daily diaries) and hearsay (which depends on the credibility of someone other than the person giving the evidence and is, therefore, usually inadmissible).
Whether you are drafting the referral or response, your ultimate aim is to persuade the adjudicator to provide an award in your favour. This is done by providing the adjudicator with a logical and easy to follow narrative, which sets out all of the contractual/legal arguments in your favour and supports each factual allegation with appropriate evidence.
Author: Michelle Kerr, Senior Associate
IF NOT, WHAT CAN BE DONE ABOUT IT?
Carrying out projects in Africa is demanding for a number of reasons. Firstly skills availability. The higher up the management tree you look, the more difficult it is to source the human resources necessary for the technically and commercially demanding world of modern contracting. Secondly, materials of an acceptable standard to conform to modern quality requirements may not be readily available and quality and durability issues can present themselves. Thirdly logistics, distances are big, and road and rail access can, in extreme cases render projects simply non-viable.
In addition, infra structure development projects are perceived as an opportunity to provide short term job opportunities and to enhance skills transfer. There are therefore heightened expectations from local stake holders that are often not met.
Many projects in Africa are, furthermore, funded by various aid agencies and come with requirements that the work be designed and supervised from the community providing the funding. In Africa, we are used to operating in a multi-cultural environment. People with, for example, a northern European background, are not necessarily so attuned to working on projects where there are multi-cultural challenges, and this can lead to frustrations and conflict.
Against this background, it is vital that the implementation strategy adopted on a Project in Africa provides a platform where these risks and expectations are accommodated in a fair and reasonable manner.
The FIDIC suite of documents is designed for international contracts, where (presumably) the possibility that the Contractor, Engineer and Employer, as well as the financier may all come from different countries is anticipated. These contracts do, however, assume that a modicum of competency (both technical and commercial) across the various players is available and the standard risk allocation adopted by FIDIC for all their contracts, wherever they may be located, will be fair and reasonable to all the parties.
One of the challenges facing the promoter of a project and of the designer of such a project, is to anticipate the risks that are likely to be encountered and to allocate these risks fairly to the Party best able to manage such a risk.
The problem arises when risks that are not anticipated (either by the Employer, Engineer or Contractor on a project) manifest themselves during the execution of the project, and there are no mechanisms in place to deal with these or even, in extreme circumstances, a willingness to address these risks collectively. They are just lumped under the one banner as “Contractor Risks”.
Conventional construction contracts like for example the abovementioned FIDIC suite of documents are what are termed as “adversarial” contracts. They promote a “them and us” environment for dealing with the issues arising under a contract. In other words, risks are dealt with in what is suggested (by this observer) may be a potentially unfavourable environment.
Scarcity of work and an overtraded construction industry can lead to under-pricing (particularly where the main tender adjudication criteria is price), poor performance (where service providers perform down to their price) and an escalation of claims and disputes.
Scarce resources are then diverted from their core tasks to resolving what are essentially peripheral issues and the project outcome is invariably unsatisfactory.
Steps therefore need to be taken to avoid this predicament and to facilitate team work. A collaborative implementation and more realistic risk sharing strategy needs to be adopted.
COLLABORATIVE CONTRACT FORMS
It is suggested that to achieve these objectives, the Parties need to adopt a more collaborative approach to implement the project such as what is commonly called an “Alliance”.
This can be achieved by the adoption of a memorandum of understanding whereby the Contractor, Engineer, Employer, (potentially, it is suggested including major suppliers, the work force and the local community) are bound and incentivised to cooperate to the end of achieving a successful outcome that can be objectively measured against a predetermined performance profile.
Standard forms for this “memorandum of understanding” are available such as FAC-1 drafted in 2016 by a team at Kings college London.[1]
FAC-1 is compatible with all and any combination of FIDIC/ICC/JCT/NEC/PPC contract forms, sub-contracts and term contracts[2].
NEC also published in June 2018 their NEC 4 Alliance Contract which combines the Alliance Memorandum and the Project Contract.
Alliances are not a new concept. They have been used successfully, for example for the exploitation of the North Sea Oil Fields where conventional contract implementation strategies obviated these developments for economic reasons. Applying Alliancing, savings in both cost and time meant that these assets could be exploited successfully[3]. Some harsh lessons were however learned such as savings in capital expenditure resulted in certain instances, in increased maintenance and running costs[4].
Track forward 20 years and we find a healthy stream of, in particular building contracts, and specifically refurbishment contracts, that have been very successfully implemented using Alliances[5].
One of the unsung heroes of Alliancing was the reconstruction of Christchurch, New Zealand following its destruction as a result of a series of multiple earth quakes in February 2011[6].
What is significant, in this observer’s opinion, in these examples is the ability to integrate stake holders into the planning and management process. Something that could not be achieved (it is suggested) with conventional Eurocentric adversarial implementation strategies.
So, for example, the community in Christchurch was used as the source of skilled resources for the design and reconstruction. Because of the inclusive and open nature of an Alliancing arrangement, better communications could be achieved with the community and this diffused what otherwise could have been potentially disastrous conflict over prioritising of the work. One can imagine the arguments that could have eventuated about whose street and whose house should be rebuilt first!
This is why the model has also been successfully used for refurbishment of Brown Fields projects where residents often have to be decanted for one area of the building being refurbished to another area to allow refurbishment to take place.
Whilst ultimately, the objective of this form of contracting strategy is to drive down costs and make money that is in short supply, go further[7], it is suggested, in the African context that there are other benefits that motivate for the adoption of this form of implementation strategy including:
THE PROCESS[8]
Although there have been a number of approaches to establishing Alliances, the following summary is based on the Two Stage Open Book and Supply Chain Collaboration model developed by Kings College London.
Two Stage Open Book is a system of preconstruction phase project processes governed by the early appointment of a full project team. The involvement of the Contractors at the earliest stage of the project is crucial to the successful outcome of the project.
The process obviously commences with a commitment from the Client organisation to this process.
The Client then invites prospective team members, whether for a single project or under a framework or alliance, to bid for a project on the basis of an outline brief and cost benchmark.
A number of Tier 1 Contractors and Consultant teams compete for the contract in a first stage, with bidders being chosen based on their capacity, capability, stability, experience and strength of their supply chain plus their profit/fees/overheads and their other costed proposals as appropriate.
The adjudication criteria therefore, in summary, are as follows:
In a multicultural environment cultural fit is paramount to the success of the collaboration and by implication, the Alliance.
The successful Tier 1 Contractor and Consultant team are appointed to work up detailed proposals on the basis of an Open Book cost that meets the Client’s stated outcomes and cost benchmark as a second stage.
The Two-Stage Open Book model reduces industry bidding costs, enables faster mobilisation and provides the opportunity for Clients to work earlier with a single Integrated team testing design, cost and risk issues ahead of start on site following full project award at the end of the second stage.
At the heart of this model is a systematic approach to early Tier 1 Contractor and Tier 2/3 Subcontractor/Supplier engagement, with deadlines for their design and risk contributions during the Preconstruction Phase, and with an agreed fixed price and clear risk profile before the Client authorises the Construction Phase.
Two Stage Open Book comprises a set of Client-led processes designed to develop an Integrated Team through which the Tier 1 Contractor and Tier 2/3 Subcontractors and Suppliers are appointed early in order to make the maximum contributions to improved design, costing, risk management and programming of the work/supply packages comprising a project or programme or work.
Thereafter the project should fall under the control of a committee made up of representatives from each of the Alliance members that should direct the day to day operations on the project.
A more proactive risk management strategy should be enforced. The provisions of clause 8.3 of the FIDIC Red Book 1999 (for example) should be enhanced to ensure that it is everyone’s business to identify risks and to manage them when they arise.
Risks may be reallocated, where a Party to the Alliance is in a better position to manage such risk.
Cultural fit (and appropriate behaviour) is very important in collaborative contracts and this will require that where an Alliance approach is to be adopted, the cultural fit between the Employer, Consultant and Contractor needs to be assessed prior to entering into the Contract.
Furthermore, Alliance unfriendly behaviour should not be tolerated. Alliance unfriendly behaviour would require an individual to undergo counselling or in extreme cases the individual should be removed from the site. Where differences between the Parties cannot be resolved and a dispute arises, the disputing Party should be expelled from the Alliance.
The essence of this arrangement is one of flexibility, in reacting to the dynamic everchanging contract/construction environment. Allocation of work is also flexible on a best fit basis, so that the skills utilization in the Alliance is optimised. Similarly, the collaborative nature of the contract should be enhanced by appropriate amendments to the Contract.
WHAT ARE THE PROVEN BENEFITS OF TWO STAGE OPEN BOOK AND SUPPLY CHAIN COLLABORATION?
Author: Ian Massey, Director, MDA Consulting
[1] See for example PPC 2000 and TPC 2005 now redrafted by a team at Kings College London as a new form of Alliance Contract known as FAC-1
[2] Professor David Mosey PhD
[3] BP Expro- Andrew Platform Completed in 1996
[4] Anecdotal- Kerfoot. N- Advance Consultancy
[5] 26 case studies in http://ppc2000.wiserhosting.com/wp-content/uploads/2016/12/10-Year-Anniversary-PPC-and-5-Year-TPC.pdf
[6] Duncan Gibb ICE Brunel Lecture 2015
[7] See the Government (UK) Construction Strategy [2011] which set out to achieve savings in construction procurement of up to 20%.
[8] This is based on the Two Stage Open Book and Supply Chain Collaboration guidance document prepared by Professor David Mosey and reproduced subject to the Open Government License. A copy of this license can be downloaded from psi@nationalarchives.gsi.gov.uk
If executed using the correct approach, techniques and procedure, mediation can result in a high rate of settlement between the parties, save each side a lot of costs and time, but most importantly, achieve an outcome to the satisfaction of both disputing parties, as highlighted by Brand, Steadman and Todd in their book Commercial Mediation, a user’s guide.
It is possible to resolve a R1 million or even a billion-rand dispute, while saving time and energy, without incurring excessive legal costs. It is even possible to retain a beneficial commercial relationship with the counterparty.
Successful mediation requires a well-educated, knowledgeable and trained driver – the mediator. To achieve a good outcome from mediation, the knowledge of mediation techniques and procedures and how they are applied by the particular mediator will play a crucial role.
Commercial Mediation refers to a South Gauteng High Court matter, MB v NB, which inter alia recognised that:
“Mediation can produce remarkable results in the most unpropitious of circumstances, especially when conducted by one of the several hundred people in this country who have been trained in the process.”
A strong advantage of mediation is that it can save costs, compared to other dispute resolution procedures contained in standard form construction contracts like adjudication, arbitration or court litigation.
Resolution of a dispute can be achieved in a shorter time period. It is designed and envisaged to be a speedy process compared to other available dispute procedures.
With the mediator aiming to assist and encourage the parties to create and seek resolutive options, the parties can be moved to address their respective interests and needs, including reputation management, which is scarce at best in typical adversarial litigation proceedings.
Mediation can protect business relationships and minimise deterioration between parties. It can even have the effect of strengthening and growing existing relationships over in the long term.
The effective implementation of a favourable settlement outcome is another attractive advantage of mediation. This can easily be achieved when the process is steered by an experienced and well-trained mediator. In addition to that, both disputing parties will need to display a willingness and openness to seek a settlement or resolution. After all, it takes two to tango, as the saying goes.
Another important benefit is that all parties involved, can be bound by strict confidentiality obligations, which would create a safe environment and encourage the parties to make full and honest disclosures.
All in all, mediation is an attractive dispute resolution mechanism when well applied. I conclude with a quote from Commercial Mediation which aptly sums it up:
“The success of the process lies in its very nature. Unlike settlement negotiations between legal advisors, in themselves frequently fruitful, the process is conducted by an independent expert who can, under conditions of the strictest confidentiality, isolate underlying interest, use the information to identify common ground and, by drawing on his or her own legal and other knowledge, sensitively encourage an evaluation of the prospects of success in the litigation and an appreciation of the costs and practical consequences of continued litigation, particularly if the case is a loser.”
Author: Barry Herholdt, Senior Associate: MDA Construction and Technology Attorneys
According to Statistics South Africa, the construction sector had its worst year in 2018, Production slumped by 1.2% and the sector experienced its second economic decline in two years. This as a result of limited infrastructure spending by the government which has translated into fewer major infrastructure projects. These projects are necessary for major construction companies to continue operating.
The ongoing lack of new projects has had a negative impact on a number of construction companies. NMC Construction commenced with liquidation proceedings, while Esor Construction, Liviero Construction, Basil Read and recently Group Five have each commenced business rescue proceedings.
This article briefly reviews aspects of business rescue proceedings that directly impact parties contracting with a company which has commenced with business rescue. These include the management and administration of the company (or a specific contract); the impact of the business rescue on existing contracts; the powers of the business rescue practitioner (“BRP”); and the business rescue plan.
Business rescue is intended to rehabilitate a company that is financially distressed. This achieved by providing temporary supervision of the company, and the management of its affairs, business and property; a temporary moratorium (stay) of legal proceedings against the company; and the development and implementation (if approved) of a business rescue plan to rescue the company by restructuring it.
The company’s management remains in its place, although the BRP has the power to remove a director by application to court in terms of section 137 of the Companies Act No 71 of 2008 (“the Act”). The BRP has effective full control over the company. The nature of a company’s contracts is that contractors and/or subcontractors – whichever is applicable – have relationships with contract managers, project managers, commercial managers and/or commercial directors. On commencement of business rescue, these individuals are stripped of all authority relating to the affairs of the company (or the contracts). Business rescue is aimed at either maximising the likelihood of the company continuing in existence on a solvent basis, or to achieve a better return for all the creditors of the company than would ordinarily result from the liquidation of the company. Payment of one creditor under a specific construction contract, without the authority of the BRP, may impact the prospect of achieving these aims or prejudice the remaining creditors.
In practice, the simple process of making payments as an when they fall due is transferred to the BRP unless he delegates authority to do so. Similarly, any undertakings by these individuals on behalf of the company are rendered of no force or effect. It is important to note that commencing with business recue doesn’t excuse a company from having to repay its debts, but is does provide breathing space to delay paying pre-existing debts – i.e. interim payments or monies due under a construction contract – and to continue trading until the business is rescued At this point, the company will have to pay its creditors the pre-existing debts, in accordance with the business rescue plan which may be only a portion of the claim. Unfortunately, payment under the approved business rescue plan is likely to occur significantly later than when the amount was due.
When business rescue commences, the company continues to operate as before. The contractors or subcontractors are obliged to comply with their obligations under the specific existing contract, u Unless the contract regulates the relationship between the parties in such circumstances. It is understandable for contractors and subcontractors – who are faced with either suspending their performance or continuing during the period of business rescue – will be reluctant to continue on the same terms and conditions as those in place prior to the commencement of business recue.
Broadly speaking, section 136 of the Act regulates the position of the company in respect of its obligations in terms of any existing contracts in force at the time of business recue. Under section 136(2) the BRP may, during business rescue, and despite any provision to the contrary in an agreement: (1) entirely, partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company that – (i) arises under an agreement to which the company was a party at the commencement of business rescue proceedings; and that would otherwise become due during the proceedings; (ii) apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any obligation of the company contemplated above. The practical implication of these wide-ranging powers is the power to unilaterally amend a contract concluded between parties in favour of the company under business rescue. These powers are a clear prejudice against a contractor or subcontractor executing its obligations in terms of the contract, in expectation of the other party reciprocating its obligations – making payment timeously.
Despite the clear disadvantage under subsection 2 above, subsection 3 offers some relief. Any party to an agreement that has been suspended or cancelled, or any provision which has been suspended or cancelled, may assert a claim against the company for damages. Be that as it may, this is little consolation for a contractor or subcontractor which undertook to execute the works to realise cash periodically or within a reasonable period of time. They are left out of pocket indefinitely.
The BRP is required to prepare, develop and implement a business rescue plan. Unless a formal extension is received from creditors, the Plan must be published within 25 days after appointment of the BRP. Within 10 days after publication of the plan it will be presented to a meeting of affected parties (affected parties are creditors, shareholders and employees of the business). The plan will be approved on a preliminary basis if supported by the holders of more than 75% of creditors’ voting interest; and if the votes in support of the proposed plan included at least 50% of the independent creditors voting interest.
Contractors and subcontractors operate on the basis of decisions being made without delay. A contractor or subcontractor’s payment is subject to acceptance of its claim and the final approved plan. In construction, time is money.
Similarly, they operate in a credit environment, in terms of which payment of goods and materials procured is made upon payment for the works completed. Given the above constraints, business rescue can become a great burden for contractors and subcontractors. This is especially true because in management and decision-making, the BRP has authority over the affairs of the business and payments. The time-consuming process required to prepare the plan is a further disadvantage to contractors and subcontractors.
There are a number of important issues and procedural requirements arising out of business rescue that have not been dealt with in this article. It is widely accepted that business rescue is a positive step in guiding companies towards rehabilitation. However, the overall benefits of it may not be as attractive when applied to the particular circumstances of a construction contract.
Author: Tsele Moloi, Associate
Safety on project sites is paramount, yet it is often overlooked, which increases the likelihood of fatal accidents. Contractors and employers alike should have a detailed knowledge of the guidelines, acts and regulations governing health and safety. Non-compliance or a breach of these rules (whether knowingly or unknowingly taking place) can bring project sites to a complete halt.
A collaborative approach between project stakeholders is required to promote a safer working environment. The Occupation Health and Safety Act (OH&S), together with the prescribed general safety regulations, provide clear guidelines, including the rights and duties of each project stakeholder involved in projects and working on site. A general overview of the duties of obligations is outlined below.
Employer
It is the duty of the employer to ensure that periodic H&S audits and document verification are conducted at intervals mutually agreed with the contractor, for example, once every 30 days.
An employer must provide a safe workplace, create policy statements regarding accident prevention, provide medical and first aid systems and provide budgets for safety related objectives. The same would be expected of a contractor employer in relation to its own employees.
An activity posing a threat to the health and safety of persons which is not in accordance with the relevant prescribed health and safety specifications, must be halted to prevent any further harm or threat.
An employer is expected to make sufficient health and safety information and appropriate resources available to the contractor to execute work safely if any changes were made to the design or construction works during the duration of the project.
Contractor
No person must be allowed to enter any site, unless that person has undergone health and safety induction training pertaining to the hazards prevalent on the site at the time of entry. The same will apply to visitors to the construction site. All personnel, including visitors to site, must be issued with the necessary personal protective equipment (PPE).
All employees of the contractor employees must have a valid medical certificate of fitness, specific to the construction work to be performed, which is issued by an occupational health practitioner in the prescribed form.
To assist in proper protection of others, the contractor must appoint a competent full-time person with the responsibility of ensuring that occupational health and safety is complied with on site.
All parties
The project stakeholders must consult to discuss and establish the size of the project, identify the degree of danger likely to be encountered or the accumulation of hazards or risks on the particular site.
Prior to commencement of works on site, all employees must be properly informed, instructed and trained regarding the identified hazards, related work procedures and / or considered control measures.
*The outline provides a selection of issues for consideration and is not comprehensive. It is important that stakeholders are sufficiently knowledgeable about their respective duties and obligations and we recommend that all stakeholders familiarise themselves with the details contained in the various rules, acts and regulations.
Author: Barry Herholdt, Senior Associate
A question which is often asked, is whether a contractor can claim back the cost of preparing its contractual claims under the terms of a construction contract. Unless there is an express term permitting this, the answer is generally no. In certain very limited circumstances, however, it may be possible.
The SCL Delay and Disruption protocol (second edition) 2017, Guidance Part C, Article 3, addresses this as follows:
“Most construction contracts provide that the Contractor may only recover the cost, loss and/or expense it has actually incurred and that this be demonstrated or proved by documentary evidence. The Contractor should not be entitled to additional costs for the preparation of that information, unless it can show that it has been put to additional cost as a result of unreasonable actions or inactions of the CA [contract administrator] in dealing with the Contractor’s claim.” [Emphasis added]
A number of the employer risk events, which entitle a contractor to make a claim in terms of a construction contract (such as late delivery of drawings and information) could also constitute a breach of contract [Hudson’s Building and Engineering Contracts (eleventh edition) states at paragraph 4.180]. Under the common law, damages for breach of contract are not intended to compensate the innocent party for loss, but to put that party in the position it would have been in if the contract had been properly performed [Victoria Falls and Transvaal Power Co Ltd v Consolidated Langlaagte Mines Ltd 1915 AD 1 22]. Such damages must flow naturally and generally from the kind of breach that has been committed [Holmdene Brickworks (Pty) Ltd v Roberts Construction Co Ltd 1977 (3) SA 670 (A)].
As stated in the SCL Delay and Disruption Protocol, claim preparation costs are generally considered to be nothing more than the cost of complying with the provisions of the contract. If, however, it could be shown that an employer or its agent (such as the engineer or project manager) acted unreasonably, or were in breach of contract, from which unreasonable action or breach, claim preparation costs can be said to flow, naturally and generally, it may be possible to claim back these costs.
Although this issue does not appear to have been considered in the South African courts, it has been addressed in the Technology and Construction Court in the matter of Walter Lilly & Company Limited v Giles Patrick Cyril Mackay and DMW Developments Limited [2012] EWHC 1773 (TCC). Mr Justice Akenhead found that the costs of preparing a claim were claimable, either in terms of the relevant contract provisions or by way of a damages claim for breach of contract.
It is, however, important to note that, in this matter, Mr. Mackay (the owner or employer) had been particularly obstructive during the course of the project, which may well have swayed the court in favour of Walter Lilly (the contractor). It will be necessary to demonstrate that the actions of the employer/engineer in a particular instance were so unreasonable, and far removed from the normal manner in which their projects are managed, as to result in a cost far beyond what could have been envisaged at tender stage. This is a factual enquiry.
It would, further, be important to keep the appropriate records, demonstrating which time of the contractor’s own staff and/or resources were dedicated or incurred as a result of the breach.
Author: Michelle Kerr, Senior Associate
Infrastructure development is a critical feature of economic growth, productive investment, job creation, and poverty reduction in any country. Financing of investment gaps, estimated to be in the region of $1.3 trillion per year, is a key priority for Multi National Banks[1]. This is no different for the World Bank particularly in Africa. For most countries in Africa, investment gaps exceed traditional sources of infrastructure funding – i.e. investment into infrastructure projects based on the government’s own available financial resources. The World Bank, as does other multilateral development banks (“MDB”), provides an alternative source of funding to fill this gap. Such projects present unique challenges and risks to their participants which include the MDBs. The need to adopt contracting regimes familiar to all parties has remained of critical importance, also ensuring certainty and effective management of risk.
The World Bank recently agreed to adopt the FIDIC 2017 editions of the Rainbow suite of contracts (“the Rainbow Suite”). The adoption extends the association between FIDIC and the World Bank. The agreement follows the adoption of a modified form of the FIDIC Conditions of Contract, 1st Edition, 1999, in which the general conditions contained standard wording applied by MDB’s – also known as the pink book. The purpose of adopting the first modified version was the obvious benefits of standardisation of procurement and bidding documents and to limit the variations (and amendments) often seen between the contracts prepared by the different MDB’s. According to the FIDIC chief executive Dr Nelson Ogunshakin, the adoption of the Rainbow suite “will create more certainty in the market. The familiarity that the FIDIC contracts bring make it easier to get projects under way as many of the typical commercial risks are clearly addressed in the contracts and all the parties understand their obligations and responsibilities[2]”.
Generally, the standard versions of these modified contract amendments reflect the risk profile of the project and the parties involved in such project. Under the modified form of the FIDIC Conditions of Contract, 1st Edition, 1999, the most obvious amendments were seen in the improved wording used throughout the contract – useful clarifications, simplifications and additions – the inclusion of bank-specific contractual requirements – i.e. financial requirements, the increased obligations of the contractor and a more balanced employer position and its obligations[3].
The adoption of the Rainbow Suite is not intended to replace the standard FIDIC conditions of Contract released during the course of 2018. The modified Rainbow Suite contracts shall bare the same structure as FIDIC 2017 suite of contracts. However, they have been modified to include consolidated clauses generally applicable and preferred by the World Bank and other MDB’s around Africa. The modified Rainbow Suite of contracts are available to the World Bank under a license agreement[4].
Author: Tsele Moloi, Associate
Last year I wrote an article, titled “What is Building Information Modelling or else known as BIM?”. With this article I continue dealing about BIM and more in particular want to briefly deal with the issue around intellectual property on BIM.
Who owns the design(s), and who is the lawful owner of the intellectual property of the particular BIM information, which is used in collaboration between the relevant project players on a particular project?
As stated in my previous article mentioned above, I defined the term “Information Providers”, which was defined to be “the people or organisations who contribute to the Information Model and are identified in the Information Model Requirements”.
Reading the above, it is evident that in some (if not in most) circumstances where BIM is used, you will have various people on a project, who will have access (preferably someone authorised in terms of the contract) to the BIM model, to either add into the design or take away or otherwise. These individuals can inter alia include the engineer, the employer’s agent or representative, the contractors (civil, electrical, piping, landscaping, the list goes on) and or the architects etc.
So, to what extent can anyone claim ownership of the intellectual property?
The authors, Peter Barnes and Nigel Davies who authored “BIM in Principle and in Practice”, explains that “Because the client will ordinarily have access to the model as it is being developed, care must be taken to ensure that the intellectual property rights are not lost because of the open and collaborative nature of model development”.
It gets a tricky when you work on a model that might contain confidential or trade secret information, where a model will disclose what a company is planning to build and the processes it will use. The risk is that this information will be broadly circulated in a collaborative team.
Barnes and Davies state that, “Many of the intellectual property issues are similar to those that existed before BIM.” But it is stated further that the intellectual property issues “are amplified by the amount of information contained in BIM, the access to this information by others and its ease of transfer”.
Considering the above, the authors are of the view that where the BIM model is a collaborative work, a single party cannot claim ownership.
Complexed ownership issues and or risks, should be determined and be fully dealt by the contract. This will avoid possible confusion or misunderstanding by the relevant parties. Further, confidentiality agreements should be considered and will be important in circumstances where the information is confidential and where the party who provides such information, wishes to limit the distribution thereof.
In conclusion, when deciding on who owns the model, who owns information in the model, and who has access to the model, Barnes and Davies states that all these relevant questions should be considered when BIM procedures are developed and when intellectual property rights are considered.
Author: Barry Herholdt, Senior Associate
For those Contractor’s who experience difficulty in obtaining payment on a project governed by the GCC 2010, suspension of the Works due to non-payment is an appealing yet elusive and, ultimately, risky response. Clause 5.11 of the GCC 2010 deals with suspension of the Works and a careful reader will note that the only person entitled to suspend the Works, for whatever reason, is the Engineer.
Some may argue that the principle of reciprocity applies i.e. that in any contract, where both parties undertake obligations to the other, the intention is that neither is entitled to enforce the contract unless they have themselves performed or are ready to perform their own obligations. In other words, the Employer cannot enforce progression of the Works, when it has failed to make progress payments for work already done. This is, however, subject to an interpretation of how the contract terms were intended to operate (Hauman v Nortje 1914 AD 293, Nesci v Meyer 1982 (3) SA 498 (A) 513; Rich and Others v Lagerwey 1974 (4) SA 748 (A), BK Tooling (Edms) BPK v Scope Precision Engineering (Edms) BPK 1979 (1) SA 391 (A), James v Mendelowitz 1983 (1) SA 481 (C)).
The 2015 edition of the GCC solves this difficulty with Clause 5.11.1 thereof stipulating that “[t]he Contractor may, after giving fourteen (14) days written notice to the Employer, with a copy to the Employer’s Agent, (with specific reference to this Clause) suspend the progress of the Works where the Employer’s Agent or the Employer has failed in terms of Clause 6.10.4 to…[d]eliver a payment certificate, or…[m]ake full payment of the amount certified in the payment certificate…” [emphasis added].
Author: Michelle Kerr, Senior Associate
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:
Therefore, even though the contract is terminated, the following obligations would still survive termination:
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.
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:
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:
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.
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.
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.
Author: Barry Herholdt, Senior Associate
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.
Author: Kelly Stannard, Associate
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 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;
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.
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
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]
Author: Kelly Stannard, Associate
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):
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
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:
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
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:
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]
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.
The procedure to be followed when submitting a claim under the GCC 2010, is set out in Clause 10.1 thereof. The process is relatively simple i.e. a written claim must be submitted within 28 days after the events or circumstances giving rise to the claim arose or occurred. If the events or circumstances are on-going, a written notice of intention to claim is delivered within this 28-day period, followed by monthly updated particulars and a final claim, submitted within 28 days after the end of the events or circumstances. The Engineer then has a further 28-day period to provide a ruling on this claim.
Although this may seem simple enough to the uninitiated, submission of a claim/notice of intention to claim and final claim within the relevant period does not automatically mean that the procedural requirements of the contract have all been met. Certain events or circumstances require the submission of preliminary notices by the Contractor, in order to earn the entitlement to claim.
An interesting example of this is the procedure to be followed when claiming for an extension of time and/or monetary compensation arising out of a Variation Order. Variations are dealt with in Clauses 6.3 and 6.4 of the GCC 2010.
Firstly, an instruction from the Engineer does not constitute a Variation Order unless it is in writing and is stated to be a “Variation Order”. If an oral instruction, or an instruction which does not contain the words “Variation Order” on it, is issued, the Contractor has 7 days to confirm, in writing, to the Engineer that it is a Variation Order. If the Contractor doesn’t do so, the instruction will not be considered a Variation Order. If the Engineer does not, in writing, contradict this notice within 7 days of receipt thereof, the instruction is deemed to be a Variation Order.
Once it has been determined whether or not there is a Variation Order in place, the Engineer has 28 days to value the Variation Order. If s/he does not, the Contractor may, with respect to any delay to Practical Completion and/or proven additional costs of giving effect to the Variation Order, make a claim in accordance with Clause 10.1. This claim is only due 28 days after the last date by which the Engineer should have delivered his/her valuation.
If the Engineer does provide a valuation, and the Contractor is dissatisfied with it, the Contractor has 28 days to submit a dissatisfaction claim in terms of Clause 10.2. Clause 10.1 will not be applicable in this instance.
The process is identical under the GCC 2015.
Author: Michelle Kerr, Senior Associate
Numerous construction disputes have raised claims that the employer’s agent had failed to act fairly and impartially when it was required of him or her to inter alia certify payment certificates or to make a ruling or decision on a claim.
Supported by views and guidelines by industry authors, scholars and some court cases, I intend to explain what it means for an engineer (or any other employer agent) to act fairly, impartially and to afford natural justice when it is expressly required or implied in terms of a standard form construction contract, hoping that it would provide clarity, but also, to avoid a possible dispute in the future.
Under the FIDIC contract when there is a dispute and an agreement cannot be achieved, the engineer is required under clause 3.5 to make a fair determination of any claim subject to clause 3.5.[1]
The word “impartially” is not stipulated in the FIDIC contract, although when an engineer certifies payment certificates, it is expected, as a matter of general principle, that it would act fairly and impartially between the parties. [2]
In the very familiar case, Sutcliffe v Thacrah[3], the role of an architect (which is applicable on an engineer) where payments are made to the contractor, was dealt with. It stated that the employer and the contractor enters into a contract with the understanding that the architect (engineer) will act in a fair and unbiased manner.[4] This matter applies to both the NEC3 and the FIDIC contracts. The engineer should not only exercise due care and skill, but should also reach decisions fairly, holding the balance between the employer and the contractor.[5] The engineer in its certifying function, acts administratively and not quasi-judicially.[6]
In Costain v Bechtel[7],this view was held to apply to the engineer. The employer can be in breach of an implied term of the contract with the contractor if the engineer acts in a biased or unfair manner in making assessments or other decisions.[8]
In Amec Civil Engineering Ltd v Secretary of State for Transport[9], it was said that the concepts of independence, impartiality, fairness and honesty are overlapping but not synonymous and imply that the architect (or engineer in this case) must use its professional skills and best endeavours to reach the right decision, as opposed to a decision which favours the interest of the employer. The duty is to act fairly, so long as what is regarded as fair, is flexible and treated together with the particular facts and circumstances.[10]
In granting certificates, the engineer is not obliged to observe the rules of natural justice by inter alia giving the employer or contractor an opportunity to state their case, but is required to act independently, honest and fairly.[11] However, if the engineer’s conduct is in material breach of the contract (i.e. fraud or collusion with one of the parties[12]), it may have the effect that the certificate is not binding because the engineer did not comply with its contractual duties as instructed or there may be grounds for disqualification, which will have the effect that the certificate is not binding.[13]
In the event of a dispute between the parties, it is for the engineer to resolve such dispute to minimise any disruption to the works.[14] Thus, the engineer should have a good understanding and knowledge of the law and contract and should enforce the balance of rights and obligations stipulated therein between the parties.
Barry Herholdt, senior associate.
Clause 5.12.1 of the GCC 2010 entitles the Contractor to an extension of time “for circumstances of any kind whatsoever which may occur that will, in fact, delay Practical Completion of the Works” [emphasis added]. These circumstances are limited to what may be termed ‘Employer Risk Events’. The question is often asked, however, how such extensions of time is impacted by ‘Contractor Risk Events’ which occur concurrently.
True concurrent delay is the occurrence of two or more delay events at the same time, one an Employer risk event, the other a Contractor risk event, the effects of which are felt at the same time. True concurrent delay is rare and the phrase “concurrent delay” is more commonly used to mean two or more delay events which arise at different times but have effects which are felt at the same time. [SCL Delay and Disruption Protocol (2nd edition) Guidance on Core Principles, paragraph 10.4]
The GCC 2010 Guide (first edition) (2010) recommends reliance upon the Delay and Disruption Protocol of the Society of Construction Law (SCL) when assessing extensions of time due to the Contractor in terms of Clause 5.12 of the GCC 2010.
Core Principle 10 of the SCL Delay and Disruption Protocol (2nd edition) makes it clear that “[w]here Contractor Delay to Completion occurs or has an effect concurrently with Employer Delay to Completion, the Contractor’s concurrent delay should not reduce any EOT due” [emphasis added]. “The Protocol’s position on concurrent delay is influenced by the English law ‘prevention principle’, by virtue of which an Employer cannot take advantage of the non-fulfilment of a condition (for example, to complete he works by a certain date), the performance of which the Employer has hindered”.
This is the position reflected in, among others, the English cases of Wells v Army and Navy Co-operative Society (1903) Hudson’s BC (4th Edition, Volume 2) 346 at 354 – 355, Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd (1999) 70 Con LR 32 at 37 and De Beers v Atos Origin IT Services UK Ltd [2011] BLR 274.
Float, which is the difference between the time available for executing an activity and the planned duration to execute it, must be taken into account. [GCC 2010 Guide] Concurrent delay only arises where the Employer Risk Event is shown to have caused delay to Completion or, in other words, causes critical delay (i.e. it is on the longest path) to completion. [SCL Delay and Disruption Protocol (2nd edition) Guidance on Core Principles, paragraph 10.10]
This is good news for Contractors, as far as it applies to extensions of time.
Author: Michelle Kerr, Senior Associate
In recent years, we have witnessed the Constitutional Court developing the law of contract so as to bring the commercial sector in line with constitutional principles such as fairness, equality and dignity. Some academics and legal professionals have criticised this approach for compromising legal certainty.
Let’s consider an example of a recent case where a court has embraced the Constitutional Court’s approach – Beadica 231 CC v The Trustees for the time being of the Oregon Trust & Others[1].
The applicants (the “lessees”) in the Beadica case concluded lease agreements with the first respondent (the “landlord”) as part of a black empowerment initiative. The terms of the lease agreements contained a right to renew the leases, provided the lessees gave notice of their exercise of this option at least 6 months prior to the termination dates – the lessees did not exercise their option within this period. In terminating the agreements and requesting the lessees to vacate its premises, the landlord relied on this non-compliance.
The court held that where the very idea of the agreements between the parties was to promote the interests of historically disadvantaged people, more is required to justify the landlord’s case than that the lessees requested a renewal of their lease in a form that should have been more precise and submitted within specific dates.[2] The court concluded that the option to renew the lease had been validly exercised.[3]
Although equitable, the conundrum of this approach is that it creates a level of legal uncertainty. No longer can one merely rely on the written terms of their agreement. Even if those written terms are unmistakeable, they may be determined as being inapplicable should they result in unfairness to either party.
Wallis JA has raised concerns with the Constitutional Court’s approach[4], including that the approach renders the law unpredictable and dangerously enforces commercial relationships purely as a matter of discretion. What is “fair” is often an obscure concept that academics have clashed over. Wallis JA uses an apt example of how this approach may be desirous in concept but impracticable in reality, when he states that judges of the Supreme Court of Appeal may be able to determine what is “fair” but how can your average person, or even magistrates, be expected to grapple with and enforce the concept daily.
So how does all of this affect those who are parties to a construction contract? Well, in terms of this approach, contractors that could not reasonably be expected to know any better could get out of the strict timing requirements of notices of claim for example. Or perhaps, contractors could wriggle their way out of strict compliance with quality requirements.
It is expected that parties to construction contracts will begin to seek to rely on the principles of fairness and good faith in their interpretation and enforcement of contracts more and more, and as and when it suits their case. However, as construction disputes are rarely heard in court, the likelihood of us seeing the courts applying and confirming these principles in respect of construction contracts is slim. Without any such case law to solidify the approach will adjudicators and arbitrators be convinced? We shall be keeping an eye out for court judgments with bated breath.
Appeal may be able to determine what is “fair” but how can your average person, or even magistrates, be expected to grapple with and enforce the concept daily.
So how does all of this affect those who are parties to a construction contract? Well, in terms of this approach, contractors that could not reasonably be expected to know any better could get out of the strict timing requirements of notices of claim for example. Or perhaps, contractors could wriggle their way out of strict compliance with quality requirements.
It is expected that parties to construction contracts will begin to seek to rely on the principles of fairness and good faith in their interpretation and enforcement of contracts more and more, and as and when it suits their case. However, as construction disputes are rarely heard in court, the likelihood of us seeing the courts applying and confirming these principles in respect of construction contracts is slim. Without any such case law to solidify the approach will adjudicators and arbitrators be convinced? We shall be keeping an eye out for court judgments with bated breath.
Author: Kelly Stannard, Associate
Construction is a risky business. Not all risks can be predicted prior to the commencement of a project. Not all risks can be prevented or curbed during the execution of a project. Millions of Rands could be lost should a risk materialize on a project. It is crucial for parties to construction contracts to be aware of which risks they are responsible for and for which they will ultimately bear the loss.
The CIDB endorsed standard forms of contract provide for who bears the risk in relation to specific events and thus who will be liable for the loss associated therewith. However, these contracts do not assign risk in respect of each and every possible event and a badly drafted bespoke contract might not assign risk at all, leaving the parties thereto in a very uncertain position.
While there are some risks that are clearly the risk of the contractor, such as substandard workmanship, or clearly the risk of the employer, such as a delay due to an instruction to carry out additional work, there are other events that are not obviously the fault of the contractor or the employer. Where it is not entirely apparent who should bear the risk, and in turn the loss, for an event, to whom should each party’s fingers be pointed?
Judge Edgar Fay QC in Henry Boot Construction Ltd v Central Lancashire New Town Development Corp[1] provided some clarity on this issue by stating as follows:
“There are cases where the loss should be shared, and there are cases where it should be wholly borne by the employer. There are also cases which do not fall within either of these conditions and which are the fault of the contractor. But in cases where the fault is not that of the contractor the scheme clearly is that in certain cases the loss is to be shared: the loss lies where it falls. But in other cases the employer has to compensate the contractor in respect of the delay, and that category, where the employer has to compensate the contractor, should, one would think, clearly be composed of cases where there is fault upon the employer or fault for which the employer can be said to bear some responsibility.”[2]
The words of Judge Fay QC are not entirely clear in that he refers to the loss being shared in cases where the fault is not that of the contractor and then summarises that statement with a seemingly contradictory phrase – “the loss lies where it falls”.
Our understanding of Judge Fay QC’s words is that where an event is neither an employer’s risk event nor a contractor’s risk event, the loss must lie where it falls, unless the party at which the loss has fallen can establish a breach of contract or fault on the other party’s part.
To illustrate this dictum; where an event causes delay, it is the contractor’s risk as that is where the loss has fallen. This is provided, of course, that the event was not caused (in whole or part) by a breach of contract by the employer.
As mentioned above, the standard forms of contract provide for who bears the risk for specific events and provides mechanisms for dealing therewith. For example, in FIDIC:
in respect of the risk of delay – several clauses specify when the contractor will be entitled to an extension of time and additional payment (i.e. where the contractor is not at risk) such as clause 4.12 (unforeseeable physical conditions) and 4.24 (fossils);
in respect of damage to the works – clause 17.3 specifies the causes of damage which constitute risks of the employer (eg: war, riots and design by the employer)
Although the standard forms of contract assign many of the risks parties to construction contracts are faced with, there are still a few that have not been accounted for. Some of the examples we have come across include – flooding due to ground conditions (rather than due to weather), flooding due to municipal drains being blocked, civil unrest in the local community and shortages of materials.
If one puts the legal dictum “the loss lies where it falls” into practice, where events such as these (and importantly, events that have not been caused by either party) cause a delay to the works, the contractor is at risk as it is the contractor that will face a loss in such circumstances.
It is therefore important to review the assignment of risk within a construction contract and to keep in mind that not all risks can be predicted and where they haven’t, the loss may lie with the party at which it falls.
Author: Kelly Stannard, Associate
An issue we are all aware off and which has affected and unfortunately still affects the construction industry to this day (not only in South Africa, but worldwide), is the issue turning on corruption. This can include unethical practices and conduct, and it can take place during pre-tender or pre-contract stages, further after contract award and even during the contract period of project execution.
NEC4 has included a new clause, clause 18, which deals with corrupt acts, and further defines a corrupt act under clause 11.2(5) as follows:
in connection with this contract or any other contract with the Client. This includes any commission paid as an inducement which was not declared to the Client before Contract Date.”
The CIDB Code of Conduct also deals with “corrupt acts”. It states that “This Code of Conduct represents an important step in management of integrity and the creation of an environment within which business can be conducted in a fair and transparent manner. It also forms an essential first line of defence in combating the scourge of corruption.”
All parties engaged with construction procurement in South Africa (and further within the construction world in general), should always be reminded of the provisions set out in the CIDB Code of Conduct.
It inter alia requires that the “Contractor or his employees should:
It further requires that the “employer, his employees, or agent should:
The above is only limited extracts applicable to the contractor and the employer and a full copy of the CIDB Code of Conduct can be obtained and downloaded from the CIDB website or at the link below:
http://www.cidb.org.za/publications/Documents/Code%20of%20Conduct.pdf
This Code of Conduct can be enforced in terms of Section 29 of the CIDB Act (2000). In the event of a breach of the code, the Board may convene and conduct an enquiry. If any misconduct exists and is established, the CIDB Board can sanction the guilty party (or parties) by either issuing a warning or a fine, or refer the matter to the South African Police Services for further investigation, or worse, deregister a contractor for a period of time, which will mean that it cannot take part in any tendering process during that period, or maybe at all depending on the misconduct. This will not be an ideal position to find yourself, especially when you seek to grow your company within the Construction Industry.
Author Barry Herholdt, Senior Associate
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.
Author: Tsele Moloi, Associate
The NEC has released a draft of a new NEC4 Alliance Contract, for consultation, allowing users to shape the final contract. This consultation process is now open and is expected to close on 30th November 2017. Formal publication is expected in January 2018.
It will be a single standalone contract, one of the NEC suite, consistent with all other NEC4 documents. It is designed for use on major projects or programmes of work, where longer-term collaborative ways of working are to be created. Due to the time investment needed, pre-contract, to create an alliance, it is not envisaged for use on low risk or low complexity projects.
The NEC contracts have always encouraged collaboration (although some disagree with its effectiveness in this regard[1]), with the NEC3 offering an additional partnering option under Clause X12. This option has, however, been criticised for its failure to create a multi-party set of relationships, to provide a basis for early contractor involvement or to provide adequate enforcement mechanisms[2].
These are issues which have been addressed in the PPC (Project Partnering Contract) 2000, which is a suite of standard form contracts developed, in the United Kingdom, for use on construction projects. It is one of a number of tools recommended by Constructing Excellence (a construction industry membership organisation based in the United Kingdom) as a means of helping to implement collaborative working.
Under the PPC2000 Employers (referred to as Clients), their agents such as the Engineer/Project Manager/Principal Agent (referred to as Consultants) and Contractors (referred to as Constructors) all sign a single multi-party contract, which can also accommodate early contractor involvement. The PPC200 has been used to good effect on projects such as the Cookham Wood Young Offenders Institution and North Wales Prison Trial Project in the United Kingdom.
A similar alliance agreement has also been shown to be effective through its use by the Stronger Christchurch Infrastructure Rebuild Team, established to repair roads and underground services damaged by earthquake.
The NEC4 Option X12 is now titled multi-party collaboration, however, the substance of this clause remains similar to Option X12 in the NEC3. NEC contracts allow all members of the supply chain to be engaged on similar terms and conditions, however, these are still two party rather than multi-party contracts.
The NEC4 Alliance Contract, on the other hand, is a single contract form, with a single set of terms and conditions which make provision for shared risks and rewards, that all members of the supply chain sign. It also makes provision for early contractor involvement, which allows budget, time and performance targets to be agreed with more accuracy.
What is envisaged is a cost reimbursable contract (defined cost-plus fee) similar to Main Option E in the other NEC suite contracts.
The members of the alliance then work together as an integrated team, work being allocated on a ‘best for project basis’, with an alliance board managing the alliance on behalf of the members, for the achievement of the alliance objectives, as determined by the Employer. Integrated systems and processes such as an early warning register and information modelling are used to assist the alliance members in achieving their objectives.
Decisions of the alliance board must be unanimous and will bind all members of the alliance. All liabilities are shared and manged by the alliance, except wilful default by one of the partners and third-party claims, which are the client’s risk.
Disputes are resolved by senior representatives or the alliance board, with third party support, if required. There is no provision for traditional dispute resolution provisions such as adjudication or arbitration, and a failure to resolve a dispute brings the alliance, or a partner’s involvement, to an end. It must, however, be born in mind that recourse to adjudication at any time is a statutory right afforded to all those engaged in construction operations in the United Kingdom, per the Housing Grants, Construction Regeneration Act 1996.
Author: Michelle Kerr, Senior Associate
It is a generally accepted principle that a main contractor is fully liable to an employer, for the works and cannot rely upon the default of his/her subcontractor to excuse poor workmanship or delay. [Loots Construction Law and Related Issues Juta & Co Ltd 1995, page 511] This is often re-stated in standard form contracts, such as the GCC 2010, which provides at Clause 4.4.2 that “[t]he Contractor shall be liable for the acts, defaults and negligence of any subcontractor, his agents or employees as fully as if they were the acts, defaults or negligence of the Contractor”.
This principle is applicable to all subcontractors, whether they are domestic, selected or nominated. A distinction must, however, be drawn between delays in nominating or re-nominating a subcontractor and delays caused by a subcontractor’s poor performance.
“It would be a clear breach of contract by the employers if their failure to nominate a subcontractor impeded the contractor in the execution of its work” [Reilly (RM) Ltd v Belfast Corporation [1970] NI 68] and while an employer does not warrant that a nominated subcontractor will not default in the execution of the subcontract, s/he will be liable for a delay in nominating a further subcontractor [Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd 69 LGR 1, (1976) 1 BLR 114 CA].
Delays caused by a subcontractor’s poor performance are subject to the general principle stated above. There are, however, in certain circumstances, arguments available to assist the main contractor, which may be extracted from the English cases.
Firstly, there is the matter of Holland Hannen and Cubitts (Northern) Ltd v Welsh Health Technical Services Organisation & Others (1981) 18 BLR 80, where it was held that the failure of the employer’s agent to issue a variation order, when they discovered that works designed by the nominated subcontractor were defective, breached the employer’s implied duty to ensure that he and his architect do all things necessary to enable the contractor to carry out the works and refrain from hindering or preventing the contractor from carrying out and completing the works.
Secondly, it has been proposed by Loots (at pages 513 and 514) that it may be implied, in exceptional cases, that an employer has entered into a direct contract with a subcontractor. Such exceptional circumstances could arise, as in Wallis v Robinson (1862) 130 RR 841, where the employer’s agent, with the express approval of the employer, requested the subcontractor to perform certain work for which he would be paid extra. It was held that this created a direct contract between the employer and the subcontractor.
As pointed out by Loots (at page 514), a contractor will be entitled to an extension of time for delays caused by another direct contractor employed by the employer.
Water is a resource that affects all and without it, the reality we face is that businesses and industries will eventually collapse. There will ultimately be very little or no economic growth. The lack of water has a fundamental impact on the construction industry whether we would like to believe it or not.
South Africa has recently been experiencing severe water shortages. The water scarcity has deteriorated to a critical level that requires urgent attention. To prevent long term damage, we urgently need solutions.
We are not alone in South Africa. The global increase in water scarcity has initiated the creation of a panel of high level global leaders by the United Nations. Convened to address global water crises, the panel met for the first time in September 2016 in South Africa to discuss water management and sustainability. The High Level Panel on Water concluded that water governance is inherently complex, with many shareholders or stakeholders across multiple sectors. It is characterised by incomplete data as well as hydrological and administrative boundaries that often conflict. In addition, it requires a “whole society approach”.
To address the water deficit, we need to accept the responsibility of managing our water resources as members of society and private stakeholders in the construction industry. We cannot attribute the responsibility of managing resources solely to the government.
The problems we face are the following:
I believe that the lack of suitable infrastructure is the largest contributing factor to the water crises we face today. We need technical solutions that are both functional and sustainable. If we do not develop the infrastructure to properly manage our resources, we will certainly not be able to provide water services that are necessary for future economic development.
I believe that South Africa has ignored this issue over a prolonged period of time and adopted a passive approach to the water crisis which has caused the diminished resources. We need to become aggressively reactive to ensure that the problems we face are effectively dealt with.
In order to ensure that we have an efficient and fully functioning water management system, we need to invest our time and efforts to discover new ways or technologies, in order to progress and become sustainable, so that we do not aggravate the water crises in South Africa. The solutions need to be designed essentially to work collectively with nature and the environment.
Author: Trenelle Moodley, Candidate Attorney
A lien is the right of X to retain possession of Y’s property, either movable or immovable. This right arises when X spends money or incurs costs with respect to this property, and comes to an end when the money or cost is reimbursed to X.
Liens may be divided into two general categories:
An enrichment lien arises when X spends money or incurs cost in preserving or improving the property, in order to maintain or enhance its market value. Y, as the owner of the property, is enriched by X’s actions. An example of this would be repairing a damaged water pipe or upgrading the external facade of an old building.
A debtor and creditor lien arises when X spends money or incurs cost that neither preserves nor improves the property. Y is not enriched by X’s actions and the only way in which X can claim reimbursement is if there is a contractual agreement in terms of which Y agrees to reimburse X for such expenditure. An example would be where a builder incurs expense in mobilising its resources to site, but the contract is terminated before any work can commence.
The main difference between the two types of lien, is that when X has an enrichment lien, the right to retain possession of Y’s property is enforceable against the whole world. An example would be where Y bought property off-plan from a developer, who, in turn, contracted with X to build a house on the property. In building the house, X enhanced the market value of the property. If the developer doesn’t pay X for the cost of building the house, X can hold an enrichment lien over the property, regardless of the fact that Y didn’t actually contract with X.
On the other hand, when X has a debtor and creditor lien, the right to retain possession of the property is only enforceable where Y, as owner of the property, contracted with X for the expenditure. In combining the two examples given above, this would mean that X could not hold a lien over Y’s property, for the cost of mobilisation alone, where X had contracted with the developer and not Y.
When considering holding a lien over Y’s property, X must, therefore, consider:
If the answer to both questions is “no”, then X has no right to retain possession of Y’s property.
If X does have a right to retain possession of Y’s property, then s/he must perfect his/her lien. This means that X must take some special step to show the world that s/he is holding a lien over the property. In the case of a construction site, this would require evidencing possession of the site. For example, this could be done by stationing a representative, in charge, on the site, securing it, putting up signage and generally making it clear that X is in physical control of the site.
If X gives up possession of the site, the lien will fall away. If Y takes back possession of the site by force, X can make application to the courts for a spoliation order, returning possession to him/her.
Y can offer security for the sum claimed by X, pending resolution of any dispute over the matter, in exchange for the return of possession of the site. If X refuses to accept such security, the courts have a discretion, upon application by Y, to order return of possession of the site to Y, in exchange for such security.
The situation is more complicated where public property is concerned as, although it has not definitively been decided, there is some authority for the proposition that a lien cannot be held over public property. [See Loots, Construction Law and Related Issues, 1995, pages 422 – 426]
A wavier is the voluntary giving up of a right. X may waive his/her lien. Certain construction contracts may, in fact, include a clause expressly agreeing to such waiver [See Clause 3.3 of the JBCC Principal Building Agreement, 5th edition and Clause 9.2.1.3 of the GCC 2010].
The waiver of X’s lien does not, however, have to be express. It could also be tacit, meaning that it is conveyed by X’s actions. These actions would have to show a clear and unambiguous intention not to hold a lien over Y’s property. An example would be where X, as a contractor, removes his/her labour, equipment and materials from the site and returns possession of the property to Y.
Author: Michelle Kerr, Senior Associate.
When involved with construction adjudication, you often hear and come across the use of the term ‘natural justice’, i.e. the adjudicator is obliged and should always ensure that natural justice prevail. But what exactly does this entail and when is natural justice breached?
A recent UK judgment “Dawnus Construction Holdings Limited v Marsh Life Limited [2017] EWHC 1066 (TCC) (11 May 2017)” (“Dawnus case”), dealt with an application brought by the claimant (Dawnus Construction Holdings Limited) for summary judgment for the enforcement of an adjudication decision and in defending the application, the defendant (Marsh Life Limited) argued that the adjudicator failed to apply the rules of natural justice by failing to consider and deal with certain of the defendant’s defences that was put forward. This article is not intended to deal with the facts of this particular case, but mainly to clarify principles of ‘natural justice’ as was determined by the courts (most of which are from the UK, but can be cited and referred to when dealing with similar issues and disputes in South Africa).
In the Dawnus case, dealing with natural justice, the court referred to a matter, “Hutton Construction v Wilson Properties [2017] EWHC 517 (TCC)” (“Hutton case”). In this case the judge inter alia stated that “the starting point… is that, if the adjudicator has decided the issue that was referred to him, and he has broadly acted in accordance with the rules of natural justice, his decision will be enforced” (Macob Civil Engineering Limited v Morrison Construction Limited [1999] BLR 93), and it was further said that “Adjudication decisions have been upheld on that basis, even where the adjudicator has been shown to have made an error” (Bouyques (UK) Limited v Dahl-Jensen (UK) Limited [2000] BLR 522.). In “Carillion Construction Limited v Devonport Royal Dockyard Limited [2006] BLR 15), the judge stated that “the need to have the ‘right’ answer has been subordinated to the need to have an answer quickly.”
As you note from the above, few matters have dealt with this issue regarding the principles of natural justice.
The Dawnus case further confirmed that the authorities have consistently emphasised that, for a breach of natural justice to be a bar to enforcement, the breach must be “plain“, “significant“, “causative of prejudice” or “material“.
In considering earlier authorities, in “Cantillon v Urvasco [2008] BLR 250” (“Cantillon case”), the applicable principles related to breaches of natural justice in adjudication were summarised to be the following:
“a) It must first be established that the adjudicator failed to apply the rules of natural justice;
b) Any breach of the rules must be more than peripheral; they must be material breaches;
c) Breaches of the rules will be material in cases where the adjudicator has failed to bring to the attention of the parties a point or issue which they ought to have given the opportunity to comment upon which it is one which is either decisive or of considerable potential importance to the outcome of the resolution of the dispute and is not peripheral or irrelevant.
d) Whether the issue is decisive or of considerable potential importance or is peripheral or irrelevant obviously involves the question of degree which must be assessed by any judge in any case such as this.
e) It is only if the adjudicator goes off on a frolic of his own, that is wishing to decide a case upon a factual or legal basis which has not been argued or put forward by either side, without giving the parties an opportunity to comment on or, where relevant put in further evidence, that the type of breach of the rules of natural justice with which the case of Balfour Beatty Construction Company Ltd v The Camden Borough of Lambeth was concerned comes into play. It follows that, if neither party has argued a particular point and the other party does not come back on the point, there is no breach of the rules of natural justice in relation thereto.”
Based on the above, it does seem straight forward. If you are an adjudicator or looking to become one, stay updated with most recent cases on these type of topics, whether to be found under our own South African law, UK or otherwise. It is important to keep ahead with the game to prevent that you fall subject to a possible review of your adjudication decision/ruling.
Author: Barry Herholdt – Associate
An entity’s Black Economic Empowerment (“BEE”) score and recognition status is measured either in terms of the Broad Based Black Economic Empowerment Generic Codes of Good Practice (“BB-BEE Codes”), or in terms of a specific sector code. The main difference between the two is that the BB-BEE Codes address empowerment and transformation for all sectors where there is no sector code. At the same time, the BB-BEE Codes provide guidance regarding the measurement principles to be applied, and incorporated into sector codes. A sector codes addresses empowerment and transformation within a defined sector and is more alive to a sector’s challenges and requirements.
During October 2013, the amended generic BB-BEE Codes of 2013 (“Amended Codes of 2013”) were gazetted, providing for revised principles of measuring transformation and empowerment. In the circumstances, all sector charter councils were required to amend their respective sector codes and submit these to the minister. The construction sector was no different and was required to prepare a draft construction sector code and submit it to the minister, however, failed to do so timeously. As a result, in February 2016, the Construction Sector Codes of 2009 (“Construction Codes”) were repealed.
The consequence of the minister’s decision to repeal the Construction Codes was that all entities previous falling within the scope and application of the Construction Codes would now to be measured in terms of the amended Codes of 2013. As mentioned, in some instances a generic code fails to adequately address sector specific challenges and consider whether it may become onerous to apply it measurement principles in a specific sector.
A draft of the revised construction sector codes (“Revised Codes”), gazetted in terms of Section 9 (5) of the Broad Based Black Economic Empowerment Act 53 of 2003 as amended by B-BBEE Act 46 of 2013 (“the Act”), was issued for public commentary. For a sector code to become applicable to a specific sector, in place of the prevailing BB-BBE Codes, it must be gazetted in terms Section 9(1) of the Act. Until this happens entities falling within construction sector continue to be measured against the Amended Codes of 2013.
The period within which to submit comments to the Revised Code has elapsed, yet the minister has not provided indication of his intention to gazette the Revised Codes under Section 9(1) of the Act. Furthermore, unlike the previous Construction Codes that had a transitional period when they were first published, the Revised Codes propose no transitional period. A transitional period would provide the sector with an opportunity to plan and adjust to the revised requirements prior to being compelled to apply the revised measurement principles. On publication, in terms of Section 9(1) of the Act, all entities falling within their scope of application may be forced to undertaken their measurement of BEE in terms of the Revised Codes. Such a provision has the potential to further stall the progress made by the sector.
The industry remains in an uncertain position, addressing transformation and empowerment in terms of the Amended Codes of 2013 which do not necessarily appreciate the sector’s challenges, similarly, aware that the Revised Codes await the minister’s gazetting whereafter application may be an immediate requirement.
Author: Tsele Moloi, Associate
The importance of a transparent and accountable public procurement process cannot be understated. It impacts the public, in general, in terms of service delivery and a failure to comply therewith can result in the wasting of tax payer’s funds.
What happens where it is obvious that public officials involved in a public procurement process have been corrupt, grossly negligent or otherwise did not apply their minds during the tender adjudication and arbitration process?
This issue is regularly raised, resulting in frequent referrals to Tender Appeal Tribunals and the various courts for a decision and evaluation of the process followed.
One such case is Westwood Insurance Brokers (Pty) Ltd v eThekwini Municipality (8221/2016) [2017] ZAKDHC 15 (5 April 2017). In short, a company by the name of NC South West Brokers CC (South West) was awarded a tender, by eThekwini Municipality, in the sum of approximately R 81 000 000.00, for the provision of insurance for water loss through underground leaks for individual dwelling units. The Conditions of Tender required that a letter of undertaking from an insurance company licensed to operate in South Africa, accompany the tender, and that the underwriter must be registered with the Financial Services Board (FSB). South West, however, submitted a quotation for professional indemnity insurance from Marsh (Pty) Ltd whose registration with the FSB, as an insurer, had not been established.
The tender award was challenged on this basis. The court found that
“whatever [eThekwini’s] motives were the irrationality of their choice of South West is so obvious and egregious that it ineluctably leads me to conclude that the officials knowingly acted unlawfully, unconstitutionally and unethically”.
When the court considered the far-reaching effects of the decision of awarding the tender to South West (i.e. vulnerable people occupying, for instance, municipal and other sub-economic housing schemes having no insurance for water leaks), the court came to the conclusion that it was not advisable for South West to retain the contract.
The court, however, did not stop there. It considered whether the eThekwini officials, involved in the procurement process, had failed to uphold the values of the Constitution and the guidelines provided to them when considering offers from tenderers. The court also considered the obligation of all persons performing public services, to be accountable and transparent.
The court found that both South West and the officials in question must be held accountable for their actions, by way of being held liable for the costs of the proceedings. As such, the court ordered as follows:
This case sounds a warning to all public officials who act unlawfully and unethically to the disadvantage of the general public and other suitably qualified tenderers who would have benefited from the process.
Author: Nombuso Shange, Associate.
An entity’s Black Economic Empowerment (“BEE”) score and recognition status is measured either in terms of the Broad Based Black Economic Empowerment Generic Codes of Good Practice (“BB-BEE Codes”), or in terms of a specific sector code. The main difference between the two is that the BB-BEE Codes address empowerment and transformation for all sectors where there is no sector code. At the same time, the BB-BEE Codes provide guidance regarding the measurement principles to be applied, and incorporated into sector codes. A sector codes addresses empowerment and transformation within a defined sector and is more alive to a sector’s challenges and requirements.
During October 2013, the amended generic BB-BEE Codes of 2013 (“Amended Codes of 2013”) were gazetted, providing for revised principles of measuring transformation and empowerment. In the circumstances, all sector charter councils were required to amend their respective sector codes and submit these to the minister. The construction sector was no different and was required to prepare a draft construction sector code and submit it to the minister, however, failed to do so timeously. As a result, in February 2016, the Construction Sector Codes of 2009 (“Construction Codes”) were repealed.
The consequence of the minister’s decision to repeal the Construction Codes was that all entities previous falling within the scope and application of the Construction Codes would now to be measured in terms of the amended Codes of 2013. As mentioned, in some instances a generic code fails to adequately address sector specific challenges and consider whether it may become onerous to apply it measurement principles in a specific sector.
A draft of the revised construction sector codes (“Revised Codes”), gazetted in terms of Section 9 (5) of the Broad Based Black Economic Empowerment Act 53 of 2003 as amended by B-BBEE Act 46 of 2013 (“the Act”), was issued for public commentary. For a sector code to become applicable to a specific sector, in place of the prevailing BB-BBE Codes, it must be gazetted in terms Section 9(1) of the Act. Until this happens entities falling within construction sector continue to be measured against the Amended Codes of 2013.
The period within which to submit comments to the Revised Code has elapsed, yet the minister has not provided indication of his intention to gazette the Revised Codes under Section 9(1) of the Act. Furthermore, unlike the previous Construction Codes that had a transitional period when they were first published, the Revised Codes propose no transitional period. A transitional period would provide the sector with an opportunity to plan and adjust to the revised requirements prior to being compelled to apply the revised measurement principles. On publication, in terms of Section 9(1) of the Act, all entities falling within their scope of application may be forced to undertaken their measurement of BEE in terms of the Revised Codes. Such a provision has the potential to further stall the progress made by the sector.
The industry remains in an uncertain position, addressing transformation and empowerment in terms of the Amended Codes of 2013 which do not necessarily appreciate the sector’s challenges, similarly, aware that the Revised Codes await the minister’s gazetting whereafter application may be an immediate requirement.
Author: Tsele Moloi, Associate
The importance of a transparent and accountable public procurement process cannot be understated. It impacts the public, in general, in terms of service delivery and a failure to comply therewith can result in the wasting of tax payer’s funds.
What happens where it is obvious that public officials involved in a public procurement process have been corrupt, grossly negligent or otherwise did not apply their minds during the tender adjudication and arbitration process?
This issue is regularly raised, resulting in frequent referrals to Tender Appeal Tribunals and the various courts for a decision and evaluation of the process followed.
One such case is Westwood Insurance Brokers (Pty) Ltd v eThekwini Municipality (8221/2016) [2017] ZAKDHC 15 (5 April 2017). In short, a company by the name of NC South West Brokers CC (South West) was awarded a tender, by eThekwini Municipality, in the sum of approximately R 81 000 000.00, for the provision of insurance for water loss through underground leaks for individual dwelling units. The Conditions of Tender required that a letter of undertaking from an insurance company licensed to operate in South Africa, accompany the tender, and that the underwriter must be registered with the Financial Services Board (FSB). South West, however, submitted a quotation for professional indemnity insurance from Marsh (Pty) Ltd whose registration with the FSB, as an insurer, had not been established.
The tender award was challenged on this basis. The court found that
“whatever [eThekwini’s] motives were the irrationality of their choice of South West is so obvious and egregious that it ineluctably leads me to conclude that the officials knowingly acted unlawfully, unconstitutionally and unethically”.
When the court considered the far-reaching effects of the decision of awarding the tender to South West (i.e. vulnerable people occupying, for instance, municipal and other sub-economic housing schemes having no insurance for water leaks), the court came to the conclusion that it was not advisable for South West to retain the contract.
The court, however, did not stop there. It considered whether the eThekwini officials, involved in the procurement process, had failed to uphold the values of the Constitution and the guidelines provided to them when considering offers from tenderers. The court also considered the obligation of all persons performing public services, to be accountable and transparent.
The court found that both South West and the officials in question must be held accountable for their actions, by way of being held liable for the costs of the proceedings. As such, the court ordered as follows:
This case sounds a warning to all public officials who act unlawfully and unethically to the disadvantage of the general public and other suitably qualified tenderers who would have benefited from the process.
Author: Nombuso Shange, Associate.
Last year, I am sure as most will agree, various companies, in particular within the construction industry (as well as other institutions / organisations) felt the sting of a tough economical period. However, as the fight goes on, it made me think about an old song by Judy Collins called the “Liverpool Lullaby”, with a lyrical line that states “Although we have no silver spoon, Better days are coming soon”.
With that in mind, we remain hopeful and positive that this year will make a turn for the better. With economic rehabilitation and growth, will come new opportunities, new developments etc. This will then hopefully open the doors wide again for existing construction companies, big or small and even new players to the game to get on the tender playing field. Therefore, with this article I felt it necessary to remind current players and for those who are unfamiliar, what is expected ethically wise and what can be done to grow your CIDB grading.
As you would know, and as stressed and promoted by inter alia the Constructio Industry Development Board (CIDB), it remains crucial that all players in the construction industry should strive in upholding high standards of ethics in all business dealings, especially at the start, when participating from tendering stage.
On the CIDB’s website, a “Code of Conduct” is provided for all parties engaged in construction procurement and I invite all to familiarise yourselves with this Code of Conduct, to view click here:
Further, what I think a lot have wondered about or have asked in the past (especially for the smaller or new construction companies coming into the game), what can be done to grow that CIDB grading and gunning for the giants (i.e. your bigger budget projects etc.)?
Your CIDB grading gets determined by some factors, such as your companies’ works capability and further your financial capabilities. To be able to get financially stronger and to better works capability, participate and keep tendering for projects at your specific qualified level, then work it up from there, increasing works capability and by doing so, getting paid by satisfied clients (hopefully the ones that do pay) to grow financially.
If you are small, attempt to build subcontractor relationships with other higher grading contractors or seek for possible Joint Venture opportunities. Trust and good relations is important in this regard. In light of the above, continue and endeavour to do business in good faith, upholding good business ethics and by doing so, building strong trusting relationships with others in the industry in order to grow yourself into one of the big players.
Author: Barry Herholdt, Associate
Last year, I am sure as most will agree, various companies, in particular within theconstruction industry (as well as other institutions / organisations) felt the sting of a tough economical period. However, as the fight goes on, it made me think about an old song by Judy Collins called the “Liverpool Lullaby”, with a lyrical line that states “Although we have no silver spoon, Better days are coming soon”.
With that in mind, we remain hopeful and positive that this year will make a turn for the better. With economic rehabilitation and growth, will come new opportunities, new developments etc. This will then hopefully open the doors wide again for existing construction companies, big or small and even new players to the game to get on the tender playing field. Therefore, with this article I felt it necessary to remind current players and for those who are unfamiliar, what is expected ethically wise and what can be done to grow your CIDB grading.
As you would know, and as stressed and promoted by inter alia the Constructio Industry Development Board (CIDB), it remains crucial that all players in the construction industry should strive in upholding high standards of ethics in all business dealings, especially at the start, when participating from tendering stage.
On the CIDB’s website, a “Code of Conduct” is provided for all parties engaged in construction procurement and I invite all to familiarise yourselves with this Code of Conduct, see link below: http://www.cidb.org.za/publications/Documents/Code%20of%20Conduct.pdf
Further, what I think a lot have wondered about or have asked in the past (especially for the smaller or new construction companies coming into the game), what can be done to grow that CIDB grading and gunning for the giants (i.e. your bigger budget projects etc.)?
Your CIDB grading gets determined by some factors, such as your companies’ works capability and further your financial capabilities. To be able to get financially stronger and to better works capability, participate and keep tendering for projects at your specific qualified level, then work it up from there, increasing works capability and by doing so, getting paid by satisfied clients (hopefully the ones that do pay) to grow financially.
If you are small, attempt to build subcontractor relationships with other higher grading contractors or seek for possible Joint Venture opportunities. Trust and good relations is important in this regard. In light of the above, continue and endeavour to do business in good faith, upholding good business ethics and by doing so, building strong trusting relationships with others in the industry in order to grow yourself into one of the big players.
Author: Barry Herholdt, Associate
The GCC 2010 Adjudication Board Rules (the Rules) define standing adjudication as a flexible procedure available to the parties, from the outset of the contract, for its full duration. The intention is to have the adjudication board members (the members) on hand for the duration of the contract, to assist the parties in reducing conflict.
The parties are required, at the outset of the contract to jointly select one or three persons from the SAICE panel of standing adjudication members. Failing selection by the parties, the president of SAICE, on application of either of the parties, will nominate the required person/s.
These persons are required to provide disclosure statements to the parties. Once both parties are satisfied with these disclosure statements, the member/s are appointed by entering into the Adjudication Board Agreement (the Agreement) with the parties.
If a three-member adjudication board is required, the parties will jointly pick the chairman. Failing agreement by the parties, the members will select their chairman, amongst themselves.
Clause 4 of the Agreement permits the parties to jointly terminate it. This must be done individually with respect to each member.
But what happens if only one of the parties lose confidence in a member or members? This is not specifically catered for in either the Rules or the Agreement.
While this explains the procedure to be followed in appointing new members, it does not establish the criteria for when a member “ought not to continue” as such.
Rule 6.4.11 of the Rules authorised the members to settle any dispute regarding the Agreement and decide on their own jurisdiction.
While a loss of confidence in one or more of the members, should in and of itself lead such members to seriously consider whether they “ought” to continue acting or not, this could be countered by the knowledge that such allegations may be used by intractable parties to delay proceedings. Should a party, however, be able to make a sufficiently strong case for the members’ failure to comply with the requirements of Rule 6.3, this may be more likely to sway the members in question.
Should they, despite being furnished with such argument, refuse to recuse themselves, it will support an objecting party’s case for damages for any future infractions, on the basis that the members were acting in bad faith, as per Rule 10.1.
Author: Michelle Kerr, Senior Associate
In an industry where new projects are limited and profits margins are severally depressed, it is important for the industry to consider innovative ways to weather the storm.
The ability of a project team to identify and manage issues, without delay as work progresses, is increasingly becoming important to reduce the, actual and time related, costs incurred to remedy defective work, address issues, and to ensure work is completed timeously.
The traditional approach of identifying and remedying defective work or issues is a delayed process. It is has also become inefficient in an environment where the loss of time has consequences for both the employer and the contractor. The risks can be managed more effectively if issues can be identified and communicated accordingly, and in real time. In other words, reducing the passage of time between identifying the issue and addressing it.
Real time technology provides an alternative method of managing risks on construction projects. An article recently published on the Engineering News website, reviews the uses of google glasses and drones to do this.
Procore and drones are real-time software application, and hardware, respectively, being used by professional teams to identify issues on construction sites, assessing the issues against the scope of work and communicating deficiencies to the contractor promptly to be remedied. The benefits are to lessen the time wasted identifying, communication, and addressing, the issues.
The result is an efficient means of managing the risks of costs overruns and avoidance of failing to complete the work within the construction period due to time taken to remedy issues.
To view the full article, click here.
Author: Tsele Moloi, Associate
The Society of Construction law recently released an article by Mr. Daryl Royce, titled “Errors in Adjudicator’s Decisions: Right Questions, Wrong Answer”, which I thought is an interesting piece to share.
Briefly, the article turned around a dispute where the subcontractor claimed certain monies from the main contractor and the adjudicator deciding the dispute, decided in favour of the subcontractor by deciding that a certain amount is to be paid to the subcontractor. The issue turned around the calculation of the amount. At the time of the dispute, the works had not been completed, but the adjudicator in his decision dealing with the amount due to be paid to the subcontractor by the main contractor, deducted sums paid that “excluded retention from a gross sum that included retention”. What is the issue? Well seeing that the works had not been completed at time of dispute, no retention could have been due to the subcontractor.
The adjudicators decision had the effect that retention was released to the subcontractor. When the subcontractor then approached the court to enforce the adjudicators decision, various questions came into play, raised by the opposition, which were dealing inter alia regarding circumstances when an adjudicator makes a decision on a point that was never referred for decision, meaning issue on jurisdiction and or, as was held by the Court of Appeal later when this matter was referred to it, the adjudicator had not exceeded its jurisdiction, but gave the wrong answer to the question referred to him. It deals further whether such decision can still be binding and be enforced.
This article canvasses over very interesting topics for discussion, inter alia various tests that has been applied over the years by courts hearing enforcement applications, advantages and or disadvantages on courts’ intervention to make a further ruling on adjudicator’s decisions and or correcting and adjudicator’s errors made in adjudication proceedings.
For the full article, Click here and follow the instructions (in particular for non-registered individuals).
Author: Barry Herholdt, Associate
As of 1 July 2016, National Treasury Instruction 5 of 201/17 came into effect. What this instruction does is come to the aid of any contractors or suppliers currently working for Organs of State (Government Departments) and Public Owned Entities (the likes of Eskom and Transnet). The Instruction is issued to all Accounting Officers of Departments and Constitutional Institutions, Accounting Authorities of Public Entities and Head officials of Provincial Treasuries and deals specifically with payments due to suppliers / creditors exceeding 30 days after submission of a valid invoice.
The instruction states that it aims to resolve non-payment to those suppliers exceeding 30 days and informs that a dedicated call centre is being established to assist affected suppliers in resolving non-payments.
Once a complaint is lodged with the call centre, the Accounting Officer/ Authority will be notified and required to settle payment within 5 days from receipt of the complaint if there is no dispute.
The Accounting Officer/ Authority must report to National Treasury within 5 working days of being so notified on the resolution of the outcome, in case of a dispute this reporting requirement remains and the reasons for non-resolution must be stated.
National Treasury will investigate any dispute and provide recommendations, should the National Treasury decide that payment is in fact due, the Accounting Officer / Authority has 5 working days within which to implement this decision, if it does not do so the National Treasury may invoke the provisions of S216(2) of the Constitution which allows the Treasury to enforce compliance. Further to all the above, the instruction allows National Treasury to release publicly every month all details of outstanding creditors per Department and Entity.
Once the call centre is in place, it will most certainly be of assistance to contractors and suppliers who are suffering hardships due to late or non-payment where there is no dispute regarding such payment.
To view the full instruction, click here.
Author: Taryn van Deventer, Senior Associate
It is inevitable, considering the many features of a construction project, and the expensive risks associated therewith, that disagreements will arise between contractors, employers and their agents. The way these disagreements are managed will determine how easily they may be overcome. More and more often, parties are turning to adjudication for this.
In order for an adjudicator to have jurisdiction, however, a dispute must actually exist between the parties. Determining whether a dispute is, in fact, a dispute which is ripe for adjudication is more complex than it first appears.
It is typical that in construction projects parties will raise issues which will be discussed at length, usually over a protracted period of time. The question is, when do these issues crystallise into disputes which are capable of being referred to adjudication.
A number of construction contracts provide for the issuing of a notice of dispute which signifies that at least one of the parties to the contract believes that a dispute has come into existence. The issuing of such notice does not, however, automatically mean that a dispute exists and further interrogation may be required.
Where the term “dispute” is not defined, regard must be had to the common law. The definition of a dispute has been thoroughly considered in the United Kingdom and the applicable case law is of persuasive value.
In the English case of Halki Shipping Corp v Sopex Oils [1998] 1 W.L.R. 726 it was held that a “dispute” means any claim of which the opposing party has been notified, which that party has refused to admit or pay.
In the English case of AMEC Civil Engineering Limited v Secretary of State for Transport [2005] B.L.R. 227, [2005] 1 W.L.R. 2339 the Court of Appeal approved the following seven propositions:
Author: Michelle Kerr, Senior Associate
So you’ve submitted your claim in terms of Clause 10 of the GCC 2010 but the Engineer comes back to you, in terms of Clause 10.1.5, rejecting your claim. What now?
Provided that you are sufficiently confident in the merits of your claim, you may wish to skip over the amicable settlement provisions contained in Clause 10.4 and proceed directly to the next step. This is adjudication, however, navigation of the provisions taking a party from the Engineer’s ruling to the appointment of an adjudicator may be confusing for the lay person.
First and foremost, you are required to submit a notice in terms of Clause 10.3 disputing the Engineer’s ruling within 28 days thereof. This is important as a time bar attaches to this notice and if it is not submitted timeously, you will lose your right to claim.
Secondly, you need to consider whether the contract provides for standing or ad-hoc adjudication. This is dealt with in Clause 10.5, read with the contract data. The contract data will specify whether one or three adjudicators are required.
From there, reference needs to be made to the Adjudication Board Rules contained at the back of the GCC 2010, read with Clause 10.9.
If the contract provides for standing adjudication, the parties should have selected one or three persons to act as adjudicator/s at the outset of the contract, from the SAICE panel of standing adjudication members. If the parties do not make a selection within seven days of either party delivering a request in writing for such a selection, either party may apply to the President of SAICE or his nominee to make a nomination. A referral may then be made to the adjudicator.
If the contract provides for ad hoc adjudication, the Adjudication Board Rules require a few extra steps before such a referral can be made. In terms of Rule 4.1 a notice of adjudication must be delivered within 28 days of the event giving rise to the adjudication.
It is often debated whether this event is the Engineer’s ruling or the delivery of the notice of dispute. For this reason, it is advisable to ensure it is delivered within 28 days of the Engineer’s rulings. This is important as this notice is separate and distinct from the dispute notice and is subject to its own time bar clause.
Included in this notice must be the names and fees of three or more potential adjudicator selected from the SAICE panel of ad hoc adjudicators, who have confirmed their availability to act. The other party is required to select one or three of these adjudicators within seven days of receipt of the adjudication notice.
If they do not, either party may apply to the President of SAICE or his nominee for this nomination. Once the nomination has been made and the Adjudication Board Member Agreement/s concluded, the dispute may be referred.
Author: Michelle Kerr, Senior Associate
Before construction commences and during the construction process, there is a plethora of environmental and heritage laws, regulations and processes in South Africa that must be complied with. The question of who bears the risk for compliance with environmental regulations and processes is often dictated by the type of contract utilised.
In FIDIC contracts, for example, it is the employer’s responsibility to ensure that all planning, zoning or similar permissions for the works are in place prior to commencement unless otherwise specified. The contractor is obliged to comply with all laws and regulations.
The GCC2010 has a similar risk allocation: the employer is responsible for planning approvals in respect of the permanent works, but the contractor is responsible for all consents, permits or approvals arising from any legislation, ordinance, Regulation or By-Law.
In the JBCC, the allocation is not borne out of the standard form, which means that the parties must allocate the risk. The only requirement that is required by the standard form is that both parties comply with all laws, regulations and bylaws of local and other authorities.
The unique complexities of each project will dictate how the specific risks are allocated. Using an example of a biogas production plant construction contract, the contractor is probably best placed to ensure that all emission regulations are complied with, while the employer would likely make application for any zoning or planning approvals as owner of the new plant and land on which it is situated.
Aside from the obvious requirement to comply with regulations, both contractors and employers have a moral and ethical duty to protect our environment and heritage. Pay careful attention to which party between the contracting parties is responsible for ensuring compliance with both environmental and heritage laws.
Author: Taryn van Deventer, Senior Associate
James Pickavance, a Partner in litigation at Eversheds LLP – Solicitors in London, recently published an interesting article, titled “THE REGULATION OF MISCONDUCT IN ADJUDICATION AND ARBITRATION”.
This article confirmed that arbitration is still the dominant method for resolving large scale disputes in the construction industry all over the world, however the use and provision of adjudication as the first tier dispute resolution procedure, stipulated in almost all new published standard form construction contracts, has brought some growth in popularity for adjudication.
The article further shines light on the importance of a well regulated arbitration or adjudication procedure. Whether you are pursuing to resolve your disputes by either adjudication or arbitration or by any other means, it is important and advisable to seek the necessary assistance, advice and expertise from someone who knows the process and who has knowledge and practical experience with regards to the various standard form construction contracts. Any dispute procedure should be properly regulated and this should be confirmed and brought to everyone’s attention well before any dispute proceedings commence. Thus, before you commence, all parties concerned should consult and agree as to the procedure, the rules and the rights and obligations of each party to the dispute. These rules and procedures can be recorded in an agreement (whether its an Adjudication Agreement and/or an Arbitration Agreement), for all parties to agree and sign. In most cases, only after such agreement is agreed to and signed by all parties, the dispute resolution process will take effect.
By having such agreement in place, which provides each parties’ rights and obligations and further sets out the procedural rules, it will be easy to regulate the dispute process and you will be aware of the steps to take in the event there is any misconduct or failure by a party to comply with the agreement. This will include any party to the proceedings, either the contractor, the employer or the Adjudicator and the Arbitrator in event proceedings are not conducted as prescribed.
See link below for full article:
https://www.scl.org.uk/papers/regulation-misconduct-adjudication-arbitration
Author: Barry Herholdt, Senior Associate
The NEC3 deals with the programme under clause 31 and states clearly what the contractor is expected to show on a programme which he submits for acceptance. Under clause 31.2 of the standard NEC3 contract, the terms “float” and “time risk allowance” are stipulated and we will be looking at the meaning and difference between these two terms.
Scholars on the NEC3 explains that “time risk allowance” (also known as “free float”) are for periods (events) which are for the contractor’s risk and which further have a great chance of occurring. Free float is thus owned by the contractor and cannot be used by the employer to mitigate the effect of a compensation event.
On the other hand, “float” records a period additional to what is required within the ordinary programme. Under usual conditions, it will record additional time on a programme to accommodate an impact of a compensation event in order to reduce planned completion and or to avoid delays thereto. This “float” is available for the project so the speak, and either the employer or the contractor, can use it in an endeavor to mitigate a delay caused by a compensation event and or other event having a negative influence on the programme.
Author: Barry Herholdt, Senior Associate
At MDA Consulting we work on site and provide onsite commercial support so we often see strikes, community unrest, service delivery protests, taxi protests and other uniquely South African events first hand, which, in most circumstances, disrupt and delay the works.
These events often occur when:
In these circumstances, all participants to a project lose money or are prejudiced in some way.
In most circumstances the standard form construction contracts make provision for such events under the definition of force majeure or prevention.
In this instance, the contractor will be entitled to submit a claim for an extension of time but not necessarily for payment of additional costs associated with the delay. Based on this, it is clear from the standard form contracts that the contractor may not be adequately compensated for all money lost.
As an example and with particular reference to FIDIC, clause 19 entitles the contractor to claim an extension of time and payment of additional cost – this does not include profit nor make provision for or take into account the disruption of works and decrease in productivity, which is likely to occur.
As the FIDIC is an international standard form contract used for international projects, it could be said that the principle of force majeure and more particularly the model of compensation in an international context is fair. However, within a South African context, the contractor is affected by force majeure events, which are unique to South Africa and over which the contractor has no control.
Based on this, the question remains whether the principle of force majeure and more particularly the model of compensation in a South African context is balanced? This is a concern in the South African construction industry.
At tender stage all parties need to consider the definition of force majeure and all potential risks. These should be dealt with upfront by deciding whose risk the event should be and to include the necessary particular conditions.
Author: Odette Potgieter, senior associate
It is an unfortunate fact that relationships between employers and contractors occasionally deteriorate, often over issues which would have been unimaginable at tender stage.
One of the consequences of this is that the employer may be tempted to invoke the provisions of the contract, permitting omission of work, and remove items from the contractor’s scope of work. The intention being to hasten the finalisation of the relationship between the employer and the contractor in question, and permit the employer to pass these items to another contractor (with less baggage) for completion.
It must be born in mind, however, that, in terms of the common law [See Hydro Holdings (EDMS) BPK v Minister of Public Works and Another 1977 (2) SA 778 (T); Van Streepen & Germs (Pty) Ltd v Transvaal Provincial Administration 1987 (4) SA 569 (A)], unless these provisions of the contract expressly and unambiguously permit an omission for the purposes of passing on work to another contractor, an omission must be a ‘genuine’ one i.e. it may not be for the purpose of handing the work to another contractor.
As pointed out in the 10th Edition of Hudsons’ Building and Engineering Contracts, under normal circumstances, a contractor is entitled to perform all of the contract work and, if the employer prevents the contractor from so doing, the contractor will have a remedy. In this case the remedy would be damages, such as the loss of profit suffered as a result of the omission.
Author: Michelle Kerr, senior associate
Communication plays a very important part during any engineering and construction project. You need to understand the provisions under the contract and what this requires you to do.
A standard form construction contract provides for the form of communication as well as the delivery or the submission of these communications.
An example: Your contract might require that a notice may be given by fax or hand delivery only. If you then proceed and give a notice of your intention to claim by email, you run the risk that the opposition may say that you did not notify your claim in the proper form required and that your claim will not be entertained until the proper procedure is followed. In this case, a further risk might be that you are then too late to notify your claim as the period of notification expired. Always make sure that you notify timeously and with sufficient detail.
It is important that the parties to a contract, understand where and how any form of communication should be delivered with specific reference to the address and the office hours etc. If your address changes during the course of the project, you need to inform the other party.
Contractors can encounter various obstructions or issues on site and it is to your benefit to have a record when these occur – especially where it might cause a delay, loss or damage to the works or prevent you from doing your work. It is important to record it in some form of communication. You can never go wrong by building a paper trail of records throughout the project.
Communicate and inform the other party and provide proper details and clarifications as needed. This will then make it easier to communicate or negotiate a way forward. Include in your notice to claim for example, the time you have lost and the costs that resulted.
Follow the procedure and periods required, refer to the correct clauses of the contract and be thorough when providing your details. This will then reduce misunderstanding or confusion between the parties.
Author: Barry Herholdt, associate
The course focuses on a comparison between the GCC 2010 and GCC 2015, and the significance of these changes.
The answer to this question is that industry is in bad shape. Most of the contracting major players have been over exposed to the Eskom contracts and this has placed tremendous pressure on their financial resources. These projects are a model for how not to set up and run construction contracts.
It is also true to say that the players to the industry are polarized and dysfunctional. The polarization is also the product of the traditional apartheid era industry structure.
Contracts in South Africa are traditionally administered on the basis of an adversarial model. The polarization, dysfunctionality and distrust that has been the product of such events as the Competitions Board Enquiry findings of collusive tendering and a misunderstanding of the Employer body’s insistence on the promotion of the BEE agenda has exacerbated this situation.
Many of these issues have been addressed by Manglin Pillay (the CEO of the SAICE) in his Civilution initiative where he advocates the bringing together of engineers from all sectors with each other and with government to actively try and understand what this new dispensation is all about and to seek solutions via dialogue.
The perception is that many employer bodies make their decisions for political rather than contractual and sound commercial reasons. One of the results of this approach has been interference by the employer on certain contracts in the employment conditions and remuneration levels of the work force. Whether this is for altruistic reasons or to enhance the political standing of the employer body is questionable. The result is the same,
the Contractors management have been emasculated and their ability to discipline labor and to achieve acceptable levels of productivity has undermined.
There can be no doubt in anyone’s minds that the labour/ contractor relationship is equally dysfunctional to that of the Contractors and Employers.
Jonathan Jansen, the Rector and Vice Chancellor of the University of the Orange Free State has observed that since Marikana, there has been a change in attitude from the Black work force. Where previously the perception was that to get ahead you needed education and training, the governments’ inability to deliver an acceptable level of education has now resulted in the work force deciding that to get ahead one needs to act collectively. Hence the emergence of more militant unions whose strategy is to strike and picket at the same time as they negotiate.
Most modern and in particular long duration Contracts are governed by some means (usually a formula) by which the price is escalated to compensate the Contractor for price increases experienced as a result of inflation. These formulae are dependent on the publication of indices by the Department of Statistics. The indices are calculated using the changes in price on a month by month of a basket of commodities. Obviously the performance of the indices is dependent on which commodities you choose for the basket of commodities.
The main driver for inflation in South Africa as in the rest of the world is the cost of fuel. This is price controlled in South Africa by the government and is not included as one of the commodities used for the basket on which the indices used in the formula are based.
The movement of the formula over the past three or so years must lead an objective observer to conclude that the basket of commodities does not include commodities that are sensitive to variations in the cost of fuel. Announcements from the Reserve Bank that inflation of our economy is operating within the target range of between 5.5 of 7 percent would also reinforce this impression.
There are two obvious consequences to this scenario. The first is that contractors are likely to lose money on the recovery of escalation. Secondly, their ability to pay salary and wage increases commensurate with the actual rate of inflation but in excess of the escalation recovery will be compromised.
From the labor movements perspective, the consequences of what can only be described as a misrepresentation by the government of the true inflation position (for whatever reason) is that what ever they ask for by way of wage increases will look like they are being unreasonable and greedy.
The project labor agreements implemented by the various employer bodies make no reference to productivity. The reality of our industry is that productivity is poor to non existent.
The combination of what appear (by reference to under reported inflation statistics) to be excessive wage demands and declining productivity is a sure road to ruin.
This situation cannot be resolved under the prevailing circumstances described above of a polarized and dysfunctional employer, contractor and labour relationships.
In this observers opinion, the thinking and momentum created by the Civilution initiative must be broadened. The time for inspired leadership is here. Leaders from the Contractor Employer and labour representative bodies with credibility and integrity need to intervene. Communication must be opened up and understanding and trust created and established. Adversarial contracting strategies must be avoided. People must be taught to work collaboratively.
The consequences of sitting tight and doing nothing are too awful to contemplate. We will lose our construction industry. The Infra structural growth that we need to allow the economy to grow will not happen. Our economy will die. The tax base will disappear, gone will be the government grants and gone will be the gravy train!
Author: Ian Massey – director
It has to be observed that for a variety of reasons, consulting engineers are not providing the service that we normally and traditionally expect of them. This invariably results in unsatisfactory outcomes during the contract execution. This article will identify and discuss some of these issues.
Very often the employer bodies that appoint the consulting engineers do not have the skill to administer the contracts or the decision-making ability that is necessary and in these circumstances the consultants are filling the void and fulfilling the role of the employer. The employer then performs simply a rubber-stamping role. This means that the checks and balances so important in the symbiotic relationship between the employer and his consultant just doesn’t perform and the project inevitably is compromised. It also means that consultant’s time and energy is diverted from their core activity.
Alternatively, for control reasons, Employer bodies fail to allow their consulting team to fulfill the role required on them by the various contract forms. The Project Manager, Principal Agent or Engineer become “lame ducks” and this has a detrimental impact on the project out comes.
Probably the most deleterious development of recent years insofar as successful contract implementation is concerned, is the tendency for employer bodies to require that consultants work on a lump sum fee. The net result of which is that very often, too little is allowed to do a proper job and the engineering and administration of the contract suffers as a result.
Any one who has driven between Johannesburg and Durban in recent years will have witnessed the effect that contractor led toll operators have on road maintenance. What decides the maintenance work to be carried out is not sound engineering practice but what the budget will allow. Given that there are an inordinate number of abnormal trucks on our roads but the continual maintenance that one witnesses that is constantly being undertaken would indicate in this observers opinion at least that a proper job is not being done.
The effect of the recession in the construction industry since the mid 1980’s is that a lot of skills have been lost and many of the operators have been inadequately or inappropriately trained. Training during the few boom periods that have been experienced (like around the 2010 soccer world cup and the G-FIP contracts) appears to have resulted in some bad practices being adopted and being hard wired into the system. So skills and bad practices (like for example the adoption of adversarial contracting strategies) is also an impediment to successful project implementation. Lump sum professional fees also results in little or no professional development of the consultants staff.
This skills deficiency in respect of contractual practices appears to have been recognized by certain employer bodies and they have resorted to using legal practitioners to assist in drawing up contract agreements. This results either in bespoke contract conditions (as apposed to using one of the standard forms recommended by the CIDB) or special conditions of contract attached to a standard form contract which are intended to make the contract more onerous towards the contractor. This is a very unwise and damaging policy.
There is no doubt that the traditional way that we have run our contracts, allocating risks in an even handed fashion and empowering the consultant to fulfill the roll envisaged by the contract form and remunerating him adequately, is preferable to the current situation. The Employer bodies must come to the party and make the right decisions at the right time for the right reasons.
The starting point should be to recognize the skills deficiencies that we have and to implement a programme to over come these. Secondly to recognize practices that work. Adversarial contracts stacked heavily in the favour of the Employer are a short sighted and unsound contract implementation policy. They are a recipe for disaster. The consulting fraternity should recognize this and make sure that employer bodies are properly advised as to how best to carry out their contracts.
The Risk Management Process involves identifying potential risks and deciding which risks should be managed on the basis of the likelihood of their taking place and the magnitude of their potential effect. Thereafter, measuring the effect of the risk and whether it is having the impact that you thought it would and having a risk response that you can implement to mitigate the effect of the risk.
Most contracts in Southern Africa are managed generically. In other words we do the same things to mitigate our risks no matter what risks are actually going to prevail on a particular contract. So although we are doing things that will mitigate the risks that might occur we are not specifically aware of these risks unless they are particularly severe and have a major delay or cost impact. Any special risks that might affect that particular contract are not identified and they come about as a surprise to us. In these circumstances the risks manage us rather than the other way around.
The reason that this is so can be traced to deficiencies in the contract documents that we use. Apart from the NEC contract and a half hearted attempt to introduce an early warning requirement in clause 8.3 of the FIDIC 1999 Red Book, there are no specific risk management tools and requirements in these contracts. The intention, it must be presumed is that in compiling the programme for the work, that risks will be identified and a risk response devised.
So here lies the rub. As a general statement and in an environment where skills are in any case in short supply, our planning skills and procedures are chronically bad! We have a surfeit of schedulers but a shortage of planners. Schedulers are the guys that know how the programming software works but don’t have the on site experience to understand things like construction methods and rates of production. The intention is that the site team that will carry out the work should provide this information to the scheduler. Either this is not done (and the scheduler works in isolation) or it is done in such a way as the risk identification process is either not done at all or it is done superficially.
In an environment where our skills are paper thin this is a really bad thing. We need to empower the people that we appoint to manage and carry out our contracts and the best way to do this is to identify the risks that they will in all probability have to deal with and to give them the tools and the support to manage the risk once they manifest themselves. This can only be done if a risk workshop is convened and fully experienced people are involved in the process.
As a general observation risk management is practiced at tender stage and at the inception of a contract but the effort tends to peter out as the contract progresses.
The management of construction contracts is the management of risk, so it is fundamental to the well being of our projects and our industry going forward that we start to manage risk proactively.
With the present economic growth and extensive opportunity in Africa, many developers, contractors and consultants are finding work north of the Limpopo. Contracting in another country other than the one where you are resident brings with it a host of potential issues from taxes and customs to the impact of local employment legislation. In this article Euan Massey takes a broader look at the various laws which impact on your rights when contracting in another African country.
Contracts, and the rights and obligations which flow from them are influenced by four potential areas of law. These are the law applicable to the contract (or governing law), the law of the courts which have jurisdiction over the contract, the mandatory law and the law of the arbitration agreement (if applicable). Considering these four potential areas it is quite possible to have a contract between a South African developer and Brazilian contractor for the construction of a new development in Mozambique where the applicable law is that of South Africa, it is agreed that the English courts have jurisdiction, the mandatory law is that of Mozambique and the law of the arbitration agreement is Swiss. This potential minefield introduces a myriad of rights and obligations and requires extensive consideration before diving headlong into a new contract.
The applicable law is the law which is applied to the interpretation of the contract and the rights and obligations contained therein. It is always advisable when contracting in another country, or with a party from another jurisdiction, to agree on an applicable law with which you are familiar. There is a tendency to automatically choose the law of South Africa when contracting in another country, or with a party from another jurisdiction, but often this is not acceptable to the other party. This leads to the option to either accept the other party’s proposed applicable law or to propose a “neutral” applicable law. Accepting a law with which you are unfamiliar can have disastrous consequences. For example choosing French law, or a derivative of French law (such as the law of Mauritius), as the applicable law may have unintended consequences for at least one the parties. The Napoleonic code introduces decennial liability into construction contracts which is effectively a 10-year warranty period over the works furnished by the contractor.
Outside of having knowledge of the applicable law, it is usually advisable to select the law of one of the common law countries (on the basis that these laws will share common characteristics as ours). Countries like Kenya, Botswana and Ghana will have legal systems and laws similar to ours. “Neutral” jurisdictions such as England also provide well-recognised laws and a familiar legal system.
The issue of jurisdiction is vitally important. A number of jurisdictions present logistical challenges and legal hurdles when it comes to enforcing your rights under a contract. Even though you might agree to arbitration, you may still require the assistance of the courts to enforce your rights. An excellent example of this is where the parties to a building contract agree to refer disputes, in the first instance, to adjudication. No country in Africa has introduced a statutory adjudication system which allows for adjudicator decisions to be enforced through the courts. Despite this, the South African courts have illustrated a robust willingness to enforce adjudicator decisions on the basis of the parties’ contractual agreement (see Stefanutti Stocks v S8 Property [2013] ZAGPJHC 249). There is no similar certainty that a court in another country will enforce adjudicator decisions on the same basis, particularly in civil jurisdictions such as Angola. Again if you are unable to agree to the jurisdiction of the South African courts then it is advisable to consider agreeing to submit to a “neutral” jurisdiction such as that of England and Wales.
The mandatory law is the law where the works are to be executed. No matter what you agree in your contract, you are unlikely to avoid the obligation to comply with mandatory law. The mandatory law includes the laws relating to employment, health and safety and the environment. With most African economies become more sophisticated it is imperative for the mandatory law to be understood before concluding the contract.
The law of the arbitration agreement is the law which is applied to the arbitration process. In South Africa this law would be the Arbitration Act 42 of 1965. This piece of legislation, like many others in Africa, has fallen behind modern developments in international arbitration. The upshot of this outdated legislation is that it may allow the local courts to interfere extensively in the arbitration process and may limit the parties’ rights to interim and conservatory measures, thereby blunting the effectiveness of the agreed arbitration process. Where contracting outside of South Africa, parties should consider agreeing to an arbitration law which is likely to assist the arbitration process. Good options here include Mauritius (which has recently opened a satellite court of the London Court of International Arbitration) and England and Wales.
When contracting internationally, arbitration is still the “only game in town”. Despite the process being expensive and time consuming, the New York Convention ensures that the holder of an arbitration award can enforce such award in countries who are signatories to such convention. It is therefore important to ensure that the party with whom you are contracting is a signatory to the New York Convention. Notable omissions include Angola and Swaziland. The full list of contracting states can be found at http://www.newyorkconvention.org/contracting-states/list-of-contracting-states.
If the parties to an arbitration agreement do not expressly agree the law of the arbitration agreement then there are a number of possibilities which could apply. A court may decide that the law of the arbitration agreement is the same as the applicable law (Sonatrach Petroleum v Ferrell International [2002] 1 All ER (Comm) 627) or the law of the arbitration agreement may be the seat of the arbitration (Dubai Islamic Bank v Paymentech 1 Lloyd’s Rep. 65). It is therefore recommended that this be dealt with in the arbitration clause.
As is clear from this article, the legal considerations to be taken account of when contracting in Africa, as with any other country internationally, are vast and should not be lightly considered.
Author: Euan Massey, director
When considering the plethora of unhappy contracts currently under construction and how they came to be in this situation, it is apparent that poor decisions concerning project implementation have been taken by Employers. In many instances, Employers have been reliant on experts to guide them for example in the choice of the contract form to be adopted and the alterations to standard forms that should be made. In most cases, this has resulted in adversarial contracts being even more adversarial. As a result a great deal of energy that should be directed at getting the job done is focused on commercial issues and pursuing claims.
One would find it hard to identify better examples of this scenario, than the Eskom contracts currently under construction. It must be concluded that the decision making on these projects demonstrated very little wisdom or appreciation of the consequences of adopting highly adversarial contracting strategies.
Contractors involved in these contracts must also accept their share of the responsibility for an unsatisfactory out come, notwithstanding that the performance of most contractors is dependent on the environment created by the Employer.
In a skills scarce environment adopting a strategy that results in polarization of the parties to the contract simply does not make sense. We have to set our projects up so people all pull in the same direction. Collaborative contracting has to be the way to go.
The challenge is to persuade Employer bodies that what they are doing is inadvisable. No doubt they feel that they are in a comfort zone and that keeping contractors at arms length is a preferable approach particularly as anything that could be interpreted as being preferential treatment could be misconstrued as being “tenderpreneurial”.
We have written previously about the polarization between the various parties in the industry. There is mistrust and suspicion between employer, contractor and consulting bodies and this has to be overcome before common ground and an understanding that we actually have no choice can be achieved. The current situation is making the successful execution of projects an impossibility. The result is a lack of jobs and job opportunities and an environment where emerging contractors will inevitably founder. The established contractors are fairing no better. It would be a brave (not to say unwise) investor that put his hard earned cash into a construction company under the current circumstances.
So we need a forum for discussing these issues and breaking down the barriers of mistrust. Policies must be adopted whereby we set our selves by agreement, rather than by government statute what our objectives are for training, for job creation and job opportunities, for the creation of viable emerging contracting organizations. This must not be a “ band aid” approach it needs to be a well thought through strategy with established out comes against which we as industry participants can measure our success and achievements against this blue print.
It’s time for the industry to take control of its own destiny and to stop following the lead set by the unions and by government. We should be performing above and beyond anything that the government or a union can envisage for our businesses or for the people that we work together with in the industry. Who better to decide what is achievable or acceptable either from a business or moral perspective than we who have devoted our lives to the well being of the industry?
There has been a major change in the past twenty or so years in the attitude of South African construction workers to working across border and up into Africa. Where previously workers were reluctant to venture more than a days’ drive away from their home base there is now willingness to work on an ex pat basis through out Africa and the Middle East.
The decline in work availability commencing in the mid 1980’s necessitated that work should be found elsewhere. There was obviously a perception that South Africans would be in a good position and be competitive in environments that were perceived as being very similar to those found in South Africa, The major obstacle at this time to winning work in many African Countries was obviously the pariah status of South Africa during the last decade of the Apartheid government.
This all changed after 1994 and there was a major move to acquire work, particularly road work and mining related projects throughout Africa. The major lure being that many of the contracts were funded by international aid agencies and these were therefore “hard currency” contracts.
Prior to the strengthening of the Rand approximately ten years ago, super profits were available on contracts where the revenue was in Dollars or Euros and the costs were incurred in Rand’s or whatever was the local currency at the job site and both these currencies were gradually losing value relative to the currency of payment.
When the Rand strengthened this situation reversed and many of the South African construction companies (particularly those working on road contracts) lost some significant amounts of money. Just after this there was an upswing in work availability (mainly to do with the 2010 world cup) and many companies took policy decisions NOT to take on cross border work.
Notwithstanding recent statements concerning major infra structure improvement and development projects mooted by the South African government this has yet to translate into tenders and an improvement in contractors (and for that matter consultants) order books. The major players on the construction scene are therefore venturing back into Africa in order to keep resources busy and keep their order books ticking over.
The environment is a very different one to that experienced in the late 1990’s and early 200’s. Competition in the form of Chinese, Arab and European and in some instances American companies are now competing with South African contractors. Very often they are able to offer finance (and in some instances they are subsidized by their governments) for these projects and that puts South African at a disadvantage.
Notwithstanding this, our local contractors are making major commitments and efforts to secure this work, which in some instances represents the majority of the work load being undertaken by these contractors.
Given the benefits of relevant experience both with working conditions and cultures, the cost benefit of a weak Rand and logistic advantages South African contractors are well positioned to secure and carry out these cross border projects.
Author: Ian Massey – Director
There is, unfortunately, no short term answer to this dilemma.
A decent living wage for your staff must be the objective for any responsible employer. However, what happened to workers responsibility to produce good work at an acceptable level of productivity?
We have written before about the polarization of the construction industry. Where there is mistrust between the employer bodies, the professional organizations and the contractors. There is a perception amongst employer bodies that workers best interests are not being looked after by contractors. Hence the appearance of Project Labour Agreements such as those imposed at the Eskom contracts. These, in this commentators opinion, cause more harm than good. They undermine the contractors ability to manage his workforce and create unrealistic and unreasonable anticipations in the workers. When these expectations are not met the result is a strike.
It must also be true to say that remuneration levels at the lower end of the skill scale have not kept up with the cost of living that has run away from the control of the government largely due to falling Rand values and increases in fuel prices. Unions appear to have been fooled (generally by misstatements by the reserve bank and government) into thinking that the inflation was under control and that an annual adjustment of between 5 and 7,5% was an adequate increase when nearer 15% would have been more the order of the day. Hence the erosion of workers spending power and the rise in more militant unions.
Maybe all these things are just symptoms of a more sinister problem. Firstly that capitalism in the African environment where the wealth of the nation is concentrated in the hands of a few people. That it appears to be governments policy to enrich a select band of cohorts who will join the fortunate few. Further the, what appear to be, obscene remuneration packages that top executives reward them selves with.
The knee jerk reaction to these issues is to suggest nationalization of major industry and the mines and the adoption of a more socialist government model. Winston Churchill has been quoted as saying that “the inherent vice of capitalism is the unequal sharing of the blessings; the inherent virtue of socialism is the equal sharing of the miseries”, lets hope we don’t have to test this observation by personal experience!
What has happened to the Construction Industry is that wage levels and conditions of employment have become institutionalized. That is that the industry waits almost cap in hand awaiting the out come of the annual wage negotiations, these days invariably accompanied by a strike. The system therefore appears impersonalized and this just reinforces the mistrust and polarization between construction company management and the work force. This is the crux of the issue.
We need to get back to creating personal relationships with each of our workers. They need to be recognized as valuable human beings and that their involvement in the organization is vital to the success of the company. Everyone should have a career path and a means of moving up the ladder. We should reward good work, integrity and recognize by personal interaction the contribution that everyone makes from the lowliest to the highest echelon of worker.
We shouldn’t and can’t deny a persons access to collective bargaining but by rewarding people’s personal efforts and contribution regardless of what the industry minimum wage is, we should strive to making resorting to union intervention to give someone a reasonable remuneration unnecessary.
Lets ask our selves a simple question; is everyone’s job in my organization worth keeping? If you are honest you will admit that most of your workers would rather do something else if it was available. There’s your yardstick. Give your people dignity and a job worth fighting for and my bet is we wont have any need for strikes.
The Engineering and Construction industries are very reliant on short (usually two days duration) public training courses to supplement commercial skills. These courses are of often of questionable quality. One thing they all have in common is that they are expensive but how do we choose the courses that will deliver a real benefit to our people deployed to a particular contract?
Lets start by discussing some fundamental issues.
Whilst we may disagree on many issues, the subject that there will be no dissention over is the lack of meaning full skills available to industry as a whole and the construction industry in particular.
Of course skills development starts with meaningful schooling and the Government have done society and industry no favors by down grading our educational standards. The closure of industry based technical skills development programmes (like apprenticeships) is equally a major blow to skilling up our industry.
The other dynamic that must be appreciated is that the industry demands and requirements have changed significantly in the past twenty or so years. The emphasis on what might be called “soft skills” has increased beyond all recognition and site managers can expect to expend 80% of their time immersed in sorting these HR, safety and environmental issues out and only the remaining 20% dealing with technical issues. The other important change is that the commercial skills necessary to properly manage a modern construction contract has increased dramatically.
So how has the industry responded to these changes? It is probably true to say that there has been no meaningful or coordinated response. Certain training companies have seen the gap and are providing training courses that vary from very poor to excellent. One feature that they all have in common however is that they are all expensive.
Some years ago , companies got a tax break for the training that they were doing. The training requirement was therefore top down (government) driven. Now that the benefits (tax at least) have been removed, training is driven by the individual skill development needs of each person or company. It is bottom up driven. This is a weakness and is counterproductive to making major changes and turning around the skills shortages at least in respect of commercial skills training.
Another feature of training programmes available is that people who already have a modicum of commercial skills are the ones we see on these courses. The people that really need the training (like the BBBEE contractors) are rarely if ever seen.
So what is missing? Well firstly, we need to identify the training needs of the entire industry not the training needs of the privileged (and monied) established contractors. Secondly we need standards. Standards for the course leaders and standards for the course material being presented. The present CPD arrangement does not assist the current varied and generally unsatisfactory quality of presenters and material alike. Anyone can present courses (and they do).
So the starting point for any project, whether we are talking about the actual construction of the Works or the training needs of the staff and labour to be deployed on the site is a risk analysis. Once we know the risks that have to be managed we can match or identify gaps between these risks and the experience and training of our people. This will identify the subjects and issues that need to be addressed.
This is a major shortcoming of most organizations operating in the construction environment. We don’t identify the specific risks that will be encountered. We run contracts generically. In other words we do the same things on all our contracts regardless of any specific risks that may be inherent in a particular contract. We “crank the handle”!
So the knee jerk reaction is give the guys a training course on the particular type of contract (i.e., JBCC, NEC, GCC 2010 etc.,) and hope for the best. We don’t say “ the NEC is an administration intensive contract” and respond by saying lets brush up our administrative skills.
Once we have decided what topics need to be dealt with we need to find the right training provider. Get out there, interview the people that will be presenting the course. Ask to see the material that will be presented and objectively decide which trainer and which course is going to result in the most benefit to your people.
The problem we have with this sort of training is that it usually only sensitizes people to the sorts of problems that they may encounter. It doesn’t give them the skill to deal with the issues. This will only come with experience and exposure. So make sure that the training provider is available to mentor your people and field calls whenever a problem arises and there is uncertainty of what to do. The better training providers will jump at the opportunity to maintain an involvement after the training work shop and maybe hold a follow up session to review and share experiences.
Author: Ian Massey – Directore
The trend in modern construction contracts is to reimburse contractors for additional expenditure via the payment of the actual cost incurred.
Let’s test this proposition shall we?
Under the NEC contract, there is an option to use, by agreement, the rates or the lump sums (option A and B as for example at clauses 63.14 and 63.13) to quantify compensation events. The default position however is that payment for compensation events including variations involving additional work is to pay the contractor his defined cost.
In accordance with the GCC 2010, additional work is paid for using the billed rates or adjusted billed rates where there are differences in the work or where the circumstances under which the work is carried out (see clause 6.4). He gets paid his time related General items (clause 5.12.3) when the time for completion is granted. Otherwise the Contractor gets his “proven cost”, (see for example clauses 5.4.3, 5.9.6 and 5.10.1)
The 1999 FIDIC Red Book contract has a very similar arrangement for the evaluation of variations (see clause 12.3) and other costs are compensated as cost, where the cause of the additional expenditure is beyond either parties control (see for example clause 4.12) or cost plus a reasonable profit where the cause of the additional expenditure is something within the Employer’s control (see for example clause 1.9). This is the remedy available to the contractor also for extensions of time.
Under JBCC 2000, variations are quantified (see clause 32.2) much as they are under FIDIC or the GCC, where additional time is awarded the Contractor gets his Preliminaries (clause 32.12) but where an expense is incurred through no fault of the contractor and which is not recovered through the other rates he gets paid his expense and loss (clause 32.5).
It is also of interest to note that there is a trend to adopt Target Cost Contracts as the preferred contracting strategy in contracts in Europe and North America. These are collaborative type contracts and the Contractors remuneration is in the first instance on a reimbursable (i.e., a cost plus) basis.
So the payment of cost under all these contract forms is an important issue.
It needs to be made clear that these costs are not the “allowable cost” or indeed anything to do with the Contractors tender. They are the out of pocket expense incurred in actually carrying out the work.
How does a contractor proceed to deal with these circumstances?
Well, under the NEC he is well prepared. He has the Schedule of Costs Components (both the “longer” and “shorter” schedules) and he has had the opportunity to complete the Contract Data section of the tender document, section two “Data provided by the Contractor”. He is also entitled to rely on trade publications to establish the cost of hiring certain equipment. So if he has been diligent, he will be in good shape to substantiate what his defined cost will be.
All well and good. How about FIDIC, GCC and JBCC, how does he shape up here? The answer is, not very well. These documents generally speaking do not require that cost information or the acceptable source of such information be provided or stipulated. Even the question of cost adjustments and what constitutes a reasonable mark-up are not normally established at tender stage prior to award.
This puts the professional team at an enormous disadvantage. Their bargaining power is effectively compromised and they have no basis for comparison except perhaps from previous contracts.
So the Contractors are onto a winning streak and are going to come out of this with a handsome profit?
As much as you might think that this would be the situation, this is not, generally speaking, the case. Most contractors are all at sea the moment they have to produce proof of what their costs were. Their accounts departments are not equipped to save this type of information and find it difficult to provide the requisite substantiation of what costs were incurred.
It is, in addition, a lot of work. Some of the information is confidential (like salaries and other remuneration costs) and most information is saved in a manner that makes it difficult to allocate a particular cost to a particular event.
All these contributory factors make the substantiation and agreement of the cost of doing a particular piece of work particularly problematic. Trust is also an issue here and the professionals team are invariably suspicious of the contractors motives and integrity.
So what is the lesson learned? Practitioners who are committed to using contract forms other than the NEC should take a leaf out of the NEC’s book and include a section into the Contract Data which the Contractor is required to complete, which will empower the consulting team to manage the process whilst at the same time enabling the contractor to quantify his claims for cost using accepted known data.
Author: Ian Massey – Director
A commonly asked question is, 15 or so years ago, how many contracts finished late? How many of those contracts had delay damages applied?
The answer was very few and none.
If the question were asked of the contracts currently under way, the answer would be diametrically opposite, namely most of them are late and all of these have penalties levied.
By definition therefore, whether you look at things from an employer or a contractor situation, most contracts are late and by definition will be over budget (or looking at things from the contractor’s view point), he will lose money.
This is therefore a pretty depressing outlook and clearly a topic of general interest.
Lets first and foremost try and get to grips with what has gone wrong. Is this a contractor’s problem alone? Is this perhaps exacerbated by problems within the professional team for example, the requirement that professionals tender for their work and have too little money to do their job properly? Are low skilled, inexperienced and perhaps politicized employers make things more difficult by not making the correct decisions at the right time? How about the work force? Have unionized workers who are under motivated to achieve acceptable levels of production contributed to the overall situation?
The answer is that all the parties to the contracts are contributing the poor performance of modern contracts.
So what is to be done about this?
Well firstly we have to realize how destructive our standard form contracts are. These are commonly referred to as adversarial contracts and as the name implies a great deal of time is spent in conflict on these contracts. If you want an example of the sorts of things we are talking about look no further than the Eskom contracts adopted for the Kusile and Medupi power stations. These use the Fidic form of contract which, notwithstanding statements by Fidic themselves to the contrary, is not a particularly contractor friendly contract. This contract has been “spiced up” to make life interesting (and no doubt more difficult) for any contractor unfortunate enough to be awarded a contract on either of these sites. An enormous amount of time (and money) is being expended in promoting and defending claims. This is time and effort that would be better expended getting the job done.
Developments overseas in recent years have favored more collaborative contract execution strategies like target cost contracts. The intention is to play to the parties’ strengths, align the aspirations and objectives of the parties to get the job done as quickly and as inexpensively as possible. These form of contract also require fewer levels of hierarchy and in a skills scarce environment this should also be a strong motivator to adopting less conflict prone means of running a contract.
Collaboration also requires a team approach from the professional team. “Them and us” attitudes are inappropriate and unacceptable. A slick service from the professional team is a necessity and to do this he must be properly remunerated. He must be able to afford to deploy sufficient top class people to perform his function in such a way that the scope of the work, the employers requirements, the geotechnical information and as many of the unknowns that inevitably bedevil the proper execution of a contract are attended to and are known as near to or preferably before commencement of the work.
Employers must get their acts together too. Making decisions at the right time and for the right reasons is paramount. One of the benefits of collaborative forms of contracts is that the Employer can take a greater role in the actual execution of the contract and where employers have expertise in contract execution this can be of major benefit.
Ultimately, the objective is to create a trust relationship between the parties to the contract and this brings us conveniently to the question of the work force. Contractor work force relationships are, generally strained and it would not be inaccurate to say that the relationship is polarized. Bold industry wide initiatives must be adopted. Fair and equitable remuneration packages must be available to workers who perform from a production, safety and quality perspective. Career paths must be established for each member of the work force. Training must be provided (literacy and numeracy included) to enable individual workers to achieve their particular aspirations and to move up the ladder to better levels of remuneration and employment benefits and to escape the poverty trap.
All of the issues that we have addressed in this article are risks that are inherent in the construction environment albeit, much bigger issues than might normally be addressed. Like the day to day risks that are dealt with in the normal course of events they must be managed in an effective way so that they do not present insurmountable impediments to the satisfactory and successful completion of the contract.
Author: Ian Massey – Director
