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Reciprocity and Construction Contracts

24 August 2018

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