The Carbon Tax and Construction

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:

• Where the contractor has incurred expense and loss due to no fault of the contractor for which provision was not required in the contract sum and for which reasonable compensation has not been made [32.2.12], the contractor shall provide details of such expense and loss to the principal agent [32.6]. Such circumstances are: [our emphasis]
• The issue of a contract instruction
• Failure to issue or the late issue of a contract instruction following timeous request from the contractor
• Nondisclosure of changes made to the provisions of the JBCC standard documentation
• Expense and loss caused by a direct contractor
• Default by the employer or his agents
• Suspension or termination of an n/s subcontract …
• Default or insolvency of a nominated subcontractor
• Suspension of the works…
• The contractor shall notify the principal agent within forty (40) working days from becoming aware or from when he ought reasonably to have become aware of such expense and loss [32.5] failing which no compensation will be made. Where such notification is given:
• The contractor shall submit details of the expense and loss once these can be quantified, and
• The principal agent shall make a reasonable assessment of the compensation to be added to the contract value within twenty (20) working days of receipt of such details
• The claim shall be deemed to have been refused where the principal agent fails to make an assessment.”

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 contractor shall give notice to the principal agent within twenty (20) working days from becoming aware or from when he ought reasonably to have become aware of expense and/or loss for which provision was not required in the contract sum failing which such claims shall be forfeited. [our emphasis]
• Following notice [26.5], the contractor shall submit a detailed and substantiated claim for the adjustment of the contract value to the principal agent within forty (40) working days, or such additional period as the principal agent may allow.
• The principal agent shall make a fair assessment of the claim [26.6] and adjust the contract value within twenty (20) working days of receipt of such details.
• Where the principal agent fails to act within such period [26.7] the claim shall be deemed to be refused. The contractor may give notice of disagreement [30.1] where no assessment is received.”

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