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The effect of business rescue on adjudication

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

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

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

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

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

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

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

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

Author: Kelly Stannard, Associate

Retention and the current state of the construction industry

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

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

When the JBCC was adopted, this arrangement was abandoned.

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

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

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

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

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

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

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

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

How to protect yourself

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

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

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

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

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

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

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

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

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

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

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

South African context and conclusion

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

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

Author: Nombuso Shange, Associate.

Reciprocity and Construction Contracts

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

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

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

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

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

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

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

Author. Tsele Moloi, Associate

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

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

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

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

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

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

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

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

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

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

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

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

Author: Kelly Stannard, Associate

Mind the Safety

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Author: Barry Herholdt

 

Walking the Legal Tight Rope in Arbitration Proceedings

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

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

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

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

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

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

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

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

Author: Michelle Kerr, senior associate

Jurisdictional Challenges That Can Be Raised Against an Adjudicator

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

Jurisdictional challenges can be the following:

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

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

The agreement to refer a dispute

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

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

Appointment of the adjudicator

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

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

The dispute should be one capable of being referred

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

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

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

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

Parties to the dispute, the same parties to the contract

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

Dispute previously decided

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

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

Rules of Natural Justice:

Audi alteram partem

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

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

Time periods

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

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

  1. CONCLUSION

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

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

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

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

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

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

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

Mind Your Step

 

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

What Does It Mean When It Is Required from an Employer’s Agent (Inter Alia an Engineer or Architect) to Act Fairly and Impartially, and Further to Afford Natural Justice.

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.

  1. Keating on Construction Contracts 10th Edition, Chapter 22 – The FIDIC Standard Forms, section 4 – The Engineer, paragraph 012
  2. Ibid
  3. [1974] A.C. 727
  4. Keating on Construction Contracts 10th Edition, Chapter 23 – NEC3 Contract, paragraph 015
  5. Ibid. Further see Sutcliffe v Thackrah [1974] A.C. 727
  6. Hudson’s Building and Engineering Contracts 13th Edition, Chapter 2 – Construction Professionals, paragraph 077
  7. [2005] EWHC 1018
  8. Keating on Construction Contracts 10th Edition, Chapter 23-NEC3 Contract, paragraph 016
  9. [2005] 1 W.L.R 2339 at 2354, CA
  10. Ibid
  11. Keating on Construction Contracts 10th Edition, Chapter 5, paragraph 043
  12. Supra at paragraph 064
  13. Supra at paragraph 038
  14. Keating on Construction Contracts 10th Edition, Chapter 23-NEC3 Contract, paragraph 082

Barry Herholdt, senior associate.

Concurrent Delays under the Gcc 2010

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

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