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Lohan Civils (Pty) Ltd v the Tokologo Local Municipality

6 March 2020

Section 217 of the Constitution of the Republic of South Africa of 1996 provides that a Municipality is an organ of state. In this regard, a Municipality’s expenditure is regulated by a litany of legislation, the purpose of which is to secure sound and sustainable management of the financial affairs of local government. It is no surprise that the standard form construction contracts applied by Municipalities often include amendments limiting the authority of the principal agent or engineer, as the case may be, to certify monthly interim payments. The earlier iterations of the Joint Building Contracts Committee, Principal Building Agreement (JBCC) incorporated specific clauses which are applicable where organ of states are a contracting party. These clauses included a limitation on principal agent’s power and authority to certify variations, without the approval of the employer.  In the case of the General Conditions of Contract (GCC), the NEC 3 and FIDIC suite of contracts the limitation will ordinarily be incorporated in the particular conditions.

This article reviews an application in the High Court for the division of the Free State Province, brought by the applicant being Lohan Civils (Pty) Ltd (the “Applicant”) against the Tokologo Local Municipality (the “Respondent”). In the premise the Applicant launched the application seeking payment of the sum of R4,364,322.94 based on it being certified by the engineer in the course of the Applicant carrying out the works. The certified amount included a sum for variation work executed by the Applicant.

The Applicant was appointed by the Respondent for the project known as the ‘Construction of a River Inlet Structure, Abstraction Works and Booster Pump Stations with associated work, near Riverton’. The applicable contract was the GCC 2010, Second Edition. Incorporated in the particular conditions was a limitation on the engineer’s power and authority to certify variations without the prior approval of the employer (the Respondent).

In considering the application, the court dealt with points of law, which also formed part of the Respondent’s defence against the Applicant’s allegation that is was liable to make payment of the certified amount. Based on this the court dismissed the Applicant’s application. The issues, inter alia, concerned:

  1. the validity of the certificate as it included sums for contract price adjustment; and
  2. the validity of the certificate as it included sums for variation work, certification of which was not approved by the Respondent as prescribed by the contract.

Ancillary to the issue of validity of the certificate were further issues the court dealt with in its decision. These were whether the:

  1. court had jurisdiction to hear the application or whether arbitration, in term of the contract, was the correct forum to first determine the dispute;
  2. Applicant was obliged to join the Department of Water and Sanitation (DWS) as an interested party to the application; and
  3. Action proceeding were better suited, than motion proceedings, to the resolution of the dispute.

Settled law provides, inter alia, that if a court is unable to decide an application on the pleadings before it, it may dismiss the application or refer the dispute for oral evidence to be provided or to trial. This decision must never be taken lightly, as application proceedings are pursued where there are no disputes of fact. Motion proceedings are intended to be expeditious and cost effective if compared to action proceedings. However, an applicant must not elect application proceedings to deprive his opponent of the procedural advantage available in action proceedings. In the present application there was no dispute of fact. Monies were due to the Applicant for works completed.

As mentioned above, the Respondent’s rejection of liability rested, inert alia, on the process undertaken to certify such sums. It was because of this that it contended that the payment certificate was unenforceable. Similarly, our law dictates that a party with direct and substantial interest in the outcome of litigation must be joined. If the application was granted, there was a risk the DWS would be liable to pay the Applicant. As such, it had sufficient interest to be joined in the application.

This article is not intended to interrogate the court’s position on the ancillary issues, as its decision to dismiss the application is founded on the engineer’s failure to seek approval from the Respondent prior to certifying the sum due for variation work completed. . A party’s rights and obligations are found in the contract. The right to enforce payment is premised on a valid payment certificate issued by the engineer. The issuing of a payment certificate presupposes that parties involved in the certification process have complied with the provisions of the contract. In the present application the engineer, failed to do so. The right to approve variations expressly stated in the contract for the engineer to gain approval from the Respondent. This departure rendered the certificate invalid and unenforceable. It was this procedural blemish that was the undoing of the Applicant’s application.

It has become common practice for organs of state to incorporate limitation on the power and authority of their agents to approve and certify payments. Versions of the JBCC suite of contracts are explicit in this area. However, the remaining standard form contracts are now no different with the amendments these bodies now include in their amendments of the general conditions of contract. In our law a certificate embodies an obligation on the part of the employer to pay. It is regarded as the equivalence of cash. Recovering such amount normally by application proceedings. However, contractors must be cautious in the weight they place on certificates issued by the engineer, particularly when contracting with organs of state. Appreciation must be had for the process of certification, and not the issued certificate itself. There may not be a dispute of monies due for work completed, but the process followed in order to determine such monies may throw a spanner in the works.