Commercial contracts are essential in business. So, the ultimate prize is to be able to draw-up a detailed and watertight contract that can foresee and provide for any possible scenario. This is easier said than done, as in any commercial transaction there are a multitude of things that can go wrong! This step-by step practical training course offers clause-by-clause guidance and will cover in detail everything you need to know about drafting commercial contracts that give you a distinct advantage.

1. Introduction

As the law in South Africa, when it comes to construction law (and by comparison to the laws of England and Wales), is underdeveloped, those of us in the construction industry often have to look into other areas of our law to obtain guidance on specific issues. One such issue is the often thorny concept of time barring provisions and their application. The leading case, when it comes to the application of time barring provisions under South African Law is Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration 1974 (3) SA 506 (A). This case prescribes that a time barring provision is enforceable under our law.

The strict application of time barring provisions was recently decided by our constitutional court in the case of Barkhuizen v Napier (CCT 72/05) which relates to an insurance contract and an insured’s claim for compensation under such contract being made outside of the prescribed time period. Starting off in the High Court the matter was subject to a number of appeals and ended in the Constitutional Court where the matter was finally determined.

The Constitutional Court considered what the proper approach is in constitutional challenges to contractual terms where both parties are private parties. It found that ordinarily constitutional challenges to contractual terms will give rise to the question whether the disputed provision is contrary to public policy which represents the legal convictions of the community, which are those values that are held by the society. It found that public policy must now be determined by reference to the values that underlie the constitutional democracy which has been given expression by the provision of the Bill of Rights. The court then considered the question whether clause 5.2.5 of the insurance contract and being the time bar provision, is contrary to public policy and thus unenforceable. This is the question whether public policy tolerates time limitation clauses in contracts. Taking into account that time limitation clauses are a common feature, both in South Africa’s statutory and contractual terrain, the Court said: “I can conceive of no reason either in logic or in principle why public policy would not tolerate time limitation clauses in contracts, subject to the considerations of reasonableness and fairness.”

2. Time bars in contracts

Several standard form contracts, such as FIDIC, NEC3 and GCC 2010 contain time bar clauses. These clauses preclude a contractor from making a claim against the employer if it does not notify the employer of its intention to make a claim within a defined period after a set of events (usually contractually defined events) arose giving rise to an entitlement to claim. The wording in the time bar contracts vary from one standard form contract to the next, however, the effect of non-compliance with a time barring clause is the same.

3. Time bar under FIDIC

In FIDIC Red Book contract sub-clause 20.1 contains the time barring provision and states that:

“If the Contractor considers himself to be entitled to any extension of the Time for Completion and/or any 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…”

This sub-clause has two parts to it, first the requirement of notifying the engineer and secondly, the sanction attached thereto which absolves the employer from liability in connection with the claim.

The event or circumstance giving rise to the claim will be found in the contract, but unlike the NEC standard form contracts, the entitlement clauses are not grouped together but spread throughout the contract. The following sub-clauses will contain a description of the event or circumstances: 1.9 (delayed drawings or instructions), 2.1 (right of access to site), 4.12 (unforeseeable physical conditions), 4.20 (employer’s equipment and free-issue material), 8.4 (extension of time for completion), 8.5 (delays caused by authorities), 8.8 (suspension of work) read with clause 8.9 (consequences of suspension), 13.1 (right to vary) read with sub-clause 8.4(a), 17.3 (employer’s risks) read with 17.4 (consequences of employer’s risks), 19.1 (force majeure), and sub-clause 20.1 (contractor’s claims). Please note that this list is not an exclusive list of entitlement clauses.

Sub-clause 20.1 merits a brief discussion. It is a ‘catch-all’ phrase for a claim for an extension of time for completion and additional payment. The ambit of sub-clause 20.1 is sufficiently wide to incorporate an entitlement to claim damages flowing from a clause in the contract and the contractor may claim additional payment on the basis of damages as a result of the event or circumstance even if the sub-clause in question does not entitle it to payment of cost. Such damages would be calculated on the basis of the contractor’s costs incurred, overhead costs and profit.

4. When do you give notice then?

The wording in sub-clause 20.1 in FIDIC “…28 days after the Contractor became aware, or should have become aware of the event or circumstance.” may be confusing. You may then find that the delay is ongoing and whilst you may have been happy to absorb the effect of a once off occurrence, the delay is now having a major effect on your ability to perform and you want to make a claim. Are you time barred?

Well, you are certainly were aware of the event or circumstance and didn’t give our notice timeously, so on the one hand you may be time barred, but the issue that you were not aware of was the fact that it was going to be on going.

Only once this became apparent would you then be obliged to give your notice. However, please note that your claim would then be limited to the period 28 days prior to the date of your giving the notice.

5. Conclusion

In the light of the above discussion and the enforceability of time bar provisions as sanctioned by the Constitutional Court, prudent record-keeping to keep track of potential claims is strongly advised. Further, contractors should develop a keen appetite to submit notices of their intention to claim. Once an entitlement to claim is lost as a result of a contractor failing to submit its notice within the stated period, it will be lost, however. The contractor is well advised to keep a daily check on the progress of the contract, or it will stand to lose precious resources in the form of additional time and money.

Introduction

Time bar clauses that are found in the standard form construction contracts (almost) always operate against the contractor. Hopefully we are all aware of the consequences of failing to comply with a time bar clause/s in a construction contract. However, the NEC is a change from this norm and it exonerates the contractor in certain circumstance and then shifts some risks onto the shoulders of the project manager for failing to respond to the contractor.

The relevant provisions of the NEC3

Compensation events are events stated in the contract, which, if they occur, entitle the contractor to be compensated for any effect, which the compensation event has on the prices and / or the accepted programme.  Compensation events, therefore, represent risks borne by the employer.  The principle function of the compensation events is to reduce the incidence of the risks highlighted by application of collaborative foresight. This is, amongst several other things, reflected in the clauses addressing the project manager’s and contractor’s duty to notify the other of a compensation event. The NEC3 lists the 19 compensation events in clause 60 and the duty to notify the compensation event in clause 61. To understand the mechanics of the NEC3 we will take a look at the duties of the project manager and the contractor to notify the other of a compensation event and the consequences of the project manager failing to do so where he should have.

Sub-clause 61.1 places a duty on the project manager to notify the contractor of a compensation event in the following instances: (i) if the compensation event in question arises from the project manager or (ii) where the supervisor gives an instruction or changes an earlier decision. Moreover, the second bullet point in sub-clause 61.3 imposes an obligation to notify other compensation events that the contractor would normally be expected to notify. This argument is supported by the early warning clause in 16.1 which requires that the project manager must have his finger on the pulse of everything that may have an impact on time and money.

The following compensation events arise from the project manager: sub-clause 60.1(1) being an instruction changing the works information, (4) instruction to stop or not start work or change a key date, (6) failure to reply to a communication with the period for reply, (7) instructions for objects of value or of historical content, (8) changes a decision, (9) withholds an acceptance, (10) search for a defect and no defect is found, (11) test or inspection done by the supervisor causes an unnecessary delay, (15) the project manager certifies take over or a part of the works before both completion and the completion date, and (17) the project notifies a correction to an assumption stated about a compensation event.

Sub-clause 61.3 places a duty on the contractor to notify the project manager of a compensation event which has happened or which he expects to happen as a compensation event if (i) the contractor believes that the event is a compensation event and (ii) the project manager has not notified the contractor of the event. Even if the compensation event does not strictly originate from the project manager, he has an obligation to notify these also, like a weather delay in terms of the early warning procedure and then also a subsequent compensation event as the project manager cannot argue that didn’t know that it may or may not have a  time and cost impact

The consequences of the engineer’s failure to notify a compensation event

Sub-clause 61.3 goes on to set out the consequences for the contractor if one of the following two situations occur. Firstly, if the contractor does not notify the compensation event within eight weeks of becoming aware of the event, it would not be entitled to a change in the prices, the completion date or a key date. This means that the contractor is time barred. However, the clause goes on to state as follows: “…unless the Project Manager should have notified the event to the contractor but did not.”

Therefore, the contractor cannot be time barred if the compensation event arises from the project manager (or any other cause of which he could or should have been aware) and he failed to notify the project manager thereof within eight weeks of becoming aware thereof.

The project manager’s failure to reply to a quotation for a compensation event

It is important to bear in mind that there is a further time bar provision in the NEC3 against the project manager. This time bar relates to the failure of the project manager to respond to the contractor’s quotation for a compensation event.  Clause 61.4 provides that, should the project manager fail to reply to a compensation event notification within a further 2 weeks, the quotation is treated as being accepted.  The following diagram illustrates this schematically:

Becoming aware of the event

We believe it is necessary to examine what the NEC3 means by the words in sub-clause 61.3 ‘…of becoming aware of the event…”. In other words, when does the clock actually start ticking before the contractor will be time barred and not be entitled to a change in the prices, the completion date or a key date, bearing in mind the project manager’s duty to notify a compensation event.

The intention is clearly to establish a contractual time bar.  However, this does not in our view succeed.  It is a requirement that the contractor became aware of the event, which is when the time period of eight weeks start within which to notify the project manager. The NEC3 does not state that the eight week period starts running when the contractor ‘ought to have become aware’ of the event. There is nothing to stop the Contractor saying, legitimately or otherwise, on the last day of the project: “I have now become aware of these circumstances that pertained two years ago” and then submit a compensation event to the engineer.

Dispute resolution time bar

Option W1 in the NEC3 applies where a dispute arises in connection with the contract and is referred to and decided by an Adjudicator. Set out in the adjudication table are the time periods within which a dispute may be referred to the adjudicator and the consequences of such failure are stipulated in sub-clause W1.3(2). Either party may refer a dispute to the adjudicator but this must be done between two and four weeks after notification of the dispute to the other party and the project manager. It is interesting to note that a referral prior to the two weeks will be premature and of no effect and after the four week period will be out of time and time barred.

Conclusion

From the above we note that, where the project manager should have notified a compensation event and did not, the contractor is exonerated from the time bar provisions and it may still claim a change in the prices and/or the completion date. This gives action to the above stated principle function of the compensation events which is to reduce the incidence of the risks by application of collaborative foresight.

Where the project manager fails to respond to a quotation for a compensation event from the contractor within two weeks after a further notice from the contractor, it bears the risk that the quotation will be treated as accepted after the expiry of the period and is then be liable to pay the contractor’s quotation in full.

Introduction

Construction contracts evolve over the passing of time into hopefully more structured, efficient and accurate tools for commercial trade.  With that they better facilitate the conduct of such trade and address risks more comprehensively and provide for more effective dispute resolution. Potentially the most important change to the standard form contract landscape in South Africa in recent times is the introduction of the long awaited GCC2010 which was finally released at the end of May 2010. The GCC2004 is widely used by public sector for the execution of civil engineering projects which is in line with the directive issued by the CIDB. It is therefore envisaged that the GCC2010 will soon replace the GCC2004 in practice.

General

A number of interested parties have contributed to the drafting of the contract (contractors, employers, engineers and a language expert) however, there is no acknowledged contribution from any legal practitioners.  Even the NEC suite of contracts, which is a clear attempt to break the shackles of legalistic conditions of contract, involved legally qualified experts in its drafting. That said however the drafters of the GCC2010 did not shy away from an attempt to draft the contract in the same legalistic style and language as its predecessor.   The GCC2010 has roughly 20 deeming provisions and approximately 10 indemnifications.

What is also clear is that, upon a reading of the GCC2010, it appears (much like the attempt found in the GCC2004) that the drafters have tried to blend the FIDIC style of drafting and have included a selection of certain of the mechanisms found in the NEC form of contract. This point will be elaborated upon below.

The GCC2004 and the JBCC2000 share the same attempt to deal with different ways of calculating time periods. This has lead to a number of problems in areas such as the calculation of penalties¹. This creates confusion.  A “Day” is clearly defined as a calendar day (see clause 1.1.1.12) but in clause 5.1 the contract states that non working days and the day when the time span commences fall outside of the specific time spans stipulated in the contract. The time periods used in the contract are based on a 7 day week.  Most contracts will specify Sundays and public holidays and non-working days.  Also most contractors work on Saturday mornings (this is typically reserved for catching-up where necessary).  If the contractor’s programme is included in the contract, this could lead to the interpretation that Saturdays are a working day.  This could well lead to different interpretations between the engineer and contractor with regards to the calculation of time periods and could be especially problematic in light of the number of time barring provisions now found in the GCC2010.

Moreover, there are a number of clauses which deal with other time periods not defined.  Clause 6.5.3 refers to one working day, clause 8.5.1 refers to 48 hours – this will give rise to questioning the way in which calculation these periods are calculated

The GCC2010 contains a number of clauses where one party may put the other on notice to perform within a “stated time”².  Nowhere is there any requirement for this “stated time” period to be reasonable.  So, for example, in clauses 7.6.1 and 7.6.3 the engineer could actually order the rectification of works within 1 day and, if the contractor failed to rectify such works, the employer would be entitled to employ other persons to carry out such rectification works at the expense of the contractor.

Claims, programme and time bars

The claims provision has introduced the concept of “proven additional cost”.  Claims for additional payment occasioned by an extension of time under the GCC2004 were typically determined on basis of “extra cost” and the effect of the extension on the contractor’s tendered P&G. Now the GCC2010 requires that the contractor prove the additional cost.

Clause 5.6 requires that the contractor submit and the engineer approve a programme for the works.  The clause does not provide any objective grounds upon which the engineer may reject a programme, which could be problematic.  The approved programme is then referred to (rather inconsistently) in some clauses which entitle the contractor to claim an extension of time. By doing this the drafters have attempted to adopt the NEC mechanism of evaluating entitlements to an extension of time against an approved programme. An example of a sub-clause where the GCC2010 does not refer to the approved programme is sub-clause 5.9.2 (further drawings and instructions). This requires that the engineer deliver drawings and instructions to the contractor during the ‘…progress of the Works…’ The contractor’s entitlement to claim an extension of time for completion and additional payment where these drawings and instructions are not so delivered is found in sub-clause 5.9.6. However, this does not specifically link this delay against the approved programme. The contractor’s right to claim is not reliant on the programme as it is under the NEC. This is a fundamental difference between the FIDIC and GCC suite of contracts and the NEC. Reference to the programme just confuses the process. Therefore the contractor is warned in this instance that the inclusion of a date by which something has to be done as shown on the programme, is not enough to secure the right to claim in the event that the obligation is not met by the engineer.

A new addition to the GCC2010 is clause 5.12.4 which grants the engineer the right to request the contractor to accelerate as opposed to granting an extension of time. It is widely recommended³ that where a contract is in delay the parties deal with and, agree or determine the extension of time, prior to agreeing or instructing acceleration.

The contract has maintained the time barring provisions on claims found in clause 48 of the GCC2004.  It has gone one step further and has incorporated further time bar clauses into matters which need to be referred to dispute resolution which follows the NEC3 provisions in this regard (refer to Option W1 in the NEC3).

Confirming variations and time bars

All instructions which the contractor believes should constitute a variation order need to be confirmed by the contractor in writing within 7 days of the issuing of such instruction as stated in sub-clause 6.3.2.1. If the contractor fails to confirm such variation order, the contractor shall not be entitled to additional payment. The contractor should be very vigilant during the execution of the contract as the onus here lies with the contractor to confirm variations or lose their entitlement if they fail to do so. This differs from the old GCC 2004 which had a time bar (in clause 48) on all extension of time claims but only a time bar on any payment clause that made reference to clause 48. The variations clause in the GCC 2004 made no reference to clause 48. This additional provision has very serious consequences to contractors and should be carefully considered prior to entering into contracts under the GCC2010.

Adjudication

It appears that the drafters of the adjudication rules do not understand the difference between adjudication and a dispute review board. The contract makes provision for a standing adjudication board and ad-hoc adjudication. The decision of the standing adjudication board is binding by express provision of the contract until it is overturned by arbitration or by the court whereas the enforcement of the decision of the ad hoc adjudicator is not dealt with. Perhaps this issue will be clarified through practice and use of the GCC2010.

Conclusion

Only through the actual application and use of a contract will all the real problems be identified and some expected problem perhaps proved to be less problematic than first thought. There are however reasons to be cautious when embarking on any contract where the GCC 2010 has been used and the initial conclusion must be that the risk allocation in the GCC 2010 is more onerous on the contractor.

¹ See clauses 1.6 and 43.1 in the GCC2004
² See for example clauses 5.10.1 and 7.6.3
³ This is recommended by the Society of Construction Law Delay and Disruption Protocol

Introduction

On 18 May 2011 it was reported by www.Fin24.com¹ that Arcelor Mittal, the South African arm of the world’s largest steel producer, invoked the force majeure provisions in its supply obligation agreements with its customers due to Transnet’s ongoing wage demand strike. At the time it was reported that the strike was in its second week. Arcelor Mittal was quoted as saying that, due to the ongoing Transnet industrial action, “very limited raw material deliveries” including iron ore and coal were being received at ArcelorMittal’s facilities, “the company has informed its customers that it has invoked force majeure provisions provided for in the general conditions of sale,”  in a statement to the JSE (our emphasis).

It is important to take note here that Arcelor Mittal invoked a specific written contractual clause to excuse itself from performance under the contract while the strike was ongoing. This latest article from “First Aid For Contracts” explains why an event may be classified as a force majeure event.

• The position in South African law: impossibility versus force majeure

The term force majeure within the context of South African law does not have any precise definition, nor is it recognised as any special doctrine in South African law. Its significance in respect of our law depends on its use as an express provision in a contract. As a result of this, force majeure, and what can be defined as force majeure, is often a ground for confusion and misunderstanding in construction contracts (or other contracts for that matter). Typically, under a force majeure clause, where a party has been prevented from performing its obligations under the contract by an event beyond its control, it will be excused for its delay in performing its obligations under the contract, or, in an extreme case, it may be excused from having to perform the contract at all. In some cases, a party can recover the additional costs it had incurred as the result of the force majeure event as well but this depends on the terms of the contract². Traditionally contractors were excused performance of the contract or obligation effected by the force majeure event and were given an extension of time to avoid the imposition of penalties³. When they were excused by employers they would not get any financial recompense, but this has been changed in some modern contract forms.

The expression force majeure covers a wide range of events such as acts of God, strikes, wars, insurrection and so forth. Force majeure clauses in contracts (where they have been included) provide that the event in question must be beyond the control of the party relying on it (or the other party but this would usually be covered by another remedy in the contract) and the contractual provision relating to force majeure must release that party from performance in the event of the occurrence of force majeure. Each standard form contract adopts a different approach to force majeure and accordingly the definitions vary from form to form.

In the absence of an express force majeure clause in a contract governed by South African law, one will have to distinguish between various forms of impossibility. These forms govern the consequences should any such form of impossibility arise during the execution of the contract⁴.

Force majeure in FIDIC⁵

We turn now to examine the escape mechanism for contractual performance provided in the form of a force majeure clause in FIDIC. Clause 19 of any FIDIC contract sets out what constitutes a force majeure event and this clause can be split up into two parts. The first part sets out the 4-point test for an event to fall within the scope of a force majeure event. It reads as follows:

“19.1    In this clause, “Force Majeure” means an exceptional event or circumstances:

(a) which is beyond a Party’s control,

(b) which such Party could not reasonably have provided against for 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.” (Our emphasis)

From this wording it is demonstrated that the inquiry is a factual one and you may be expected to be asked certain pertinent questions if you claim that this exceptional event or circumstances has prevented you from performing under the contract:

• Why could you not control the event or circumstance?
• Did you examine the political, social, economic, healthcare, climatic, geological  circumstances prevailing in the country at the time of tender which may have impacted on your ability of performing your obligations? Did you make reasonable allowance for it? If not, why not? This is most probably the most difficult hurdle to clear to establish the presence of a force majeure event.
• What actions did you take in an attempt to avoid or overcome the event or circumstances? This relates back to your common law duty to minimise your damages.
• Why do you aver that you are not in some way or at all responsible for the event occurring?

The second part of this clause lists a series of events as examples (but is not a comprehensive list) which may qualify as a force majeure event, provided that the 4-point test above is satisfied. The events listed are:

“(i)         War, hostilities (whether war be declared or not), invasion, act of foreign enemies,

(ii) Rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,

(iii) Riot, commotion, disorder, strike or lock-out by persons other than the Contractor’s Personnel and other employees of the Contractor or Subcontractors,

(iv) Munitions of war, explosive materials, ionising radiation or contamination by radio activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio activity, and

(v) Natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.”

Bearing in mind the position in our law, it should become clear why force majeure provisions have made their way into our contracts. There is nothing to prevent the parties making specific provision in their contract for happenings that would otherwise discharge the contracting party and excuse non-performance. One could say that, by mentioning the possibility the parties have removed the unforseeability element, and by making provision for such events, they have removed the unavoidability element from it. This means that it no longer falls in the rule as set out in the reported court judgment explained earlier and effect will be given to the force majeure clause and each party’s rights should it occur⁶. Accordingly, when the event satisfies the 4-point test set out in FIDIC the parties can be excused from performance for the duration of that event or may even terminate the contract.

Conclusion

If a contract does not contain a force majeure clause it does not render our law powerless in the face of an unforeseen change of circumstances falling short of a form of impossibility, however. In some cases one may be able to prove a tacit term or condition. In construction or relational contracts (such as a service level agreement for example) contracts, which are especially vulnerable to unforeseen changes or circumstances, draftsmen can protect their clients by including in the contract a force majeure, hardship or intervener clause⁷.

Disclaimer: The content of this newsletter does not constitute legal advice. If you have a specific problem please contact MDA on 011 648 9500, at our Durban office on 031 764 0811 or by email on ncoertse@mdaconsulting.co.za

² Christoper R. Seppala, International Business Law Journal, 2000, FIDIC’s new standard form contracts, force majeure and termination.

³ Anecdotal. Usually informal without reference to the contract.

⁴ RH Christie, “The law of contract in South Africa” 5^th edition, LexisNexis sets out the distinction between absolute, initial, legal, physical and supervening impossibility. Compared to that, force majeure may altogether discharge a party’s obligations under the contract. South African law has a very uncompromising stance with regard to impossibility, especially the fact that vis ,maior or casus fortuitous has made it uneconomical for a party to carry out his obligations⁴. To illustrate this we refer to the matter of Compaignie Interafricaine de Travaux v South African Transport Services⁴ where the following was recorded:

“In a civil engineering contract adverse physical conditions were encountered, resulting in claims by the contractor for additional payment of R65 million. The employer argued that in these circumstances the engineer on its behalf was entitled to terminate the contract. At 253-B-G the Appellate Division rejected this argument.”

⁵ There are no force majeure clauses in the NEC, GCC 2004 and 2010 and JBCC although other clauses deal with force majeure type events.

⁶ Christie, RH supra.

⁷ Christie, R.H p 473.

Introduction

Generally speaking, under most standard form construction contracts the issue of a payment certificate by the employer or the employer’s agent is a condition precedent to the contractor’s entitlement to payment. However this is not always the case. In certain bespoke contracts, payment is made to the contractor on a monthly basis without any requirement for a payment certificate to be issued by the employer prior to payment being made. The legal principles which apply to payment certificates are unique and require a sound understanding when assessing the risk of payment.

The payment certificate’s function is to record the factual situation existing at a point in time during the progress of the works and for the certifier to give, in effect, his opinion as to the item / s being certified i.e. the value of the work performed to a certain point in time. Most standard forms contain provisions stating that payment certificates issued prior to the final payment certificate are interim, can be adjusted in subsequent certificates and do not constitute acceptance of the work certified.

The issued payment certificate: its status and meaning

Once a payment certificate has been issued it acquires a special status in our law. The payment certificate constitutes a promise to pay the amount so certified. As such, if an employer fails or refuses to pay a correctly issued payment certified, the contractor acquires a special set of remedies in our law. These remedies include:

• Order of specific performance¹ ;
• Provisional sentence summons; and
• Summary judgment².

The case of Randcon (Natal) (Pty) Ltd v Florida Twin Estates Ltd³ neatly sets out the law’s view on payment certificates. In this case, the court held that a final payment certificate is treated as a liquid document since it is issued by the employer’s agent, with the consequence that the employer is in the same position it would have been in if it had itself signed an acknowledgment of debt in favour of the contractor. The certificate thus embodies an obligation on the part of the employer to pay the amount contained therein and gives rise to a new cause of action subject to the terms of the contract. It is regarded as the equivalent of a cash cheque.

In the South African case of Joob Joob Investments (Pty) Ltd v Stocks Mavundla Zek Joint Venture⁴, the Supreme Court of Appeal dismissed an appeal against an order of the Durban High Court and in so doing summarised the contemporary legal thinking in respect of our law’s approach to payment certificates.

In this case, and on 27 September 2007 the Durban High Court granted Stocks Mavundla Zek Joint Venture summary judgment in the amount of approximately R27 million.

The litigation between the parties followed on the cancellation by Stocks, of a contract in terms of which it undertook to build a resort hotel at Ocean View site, Zimbali Coastal Forest Resort, Ballito for Joob Joob investments.

Stocks sued Joob Joob for amounts certified by the latter’s agent to be due and payable. The first certificate related to the value of work done and materials supplied. The second related in part to such work and materials. The second and third certificates certified damages due to Stocks.

After Joob Joob entered an appearance to defend, Stocks applied for summary judgment ─ a procedure that creditors who hold liquid documents can resort to when a debtor’s defence is not bona fide and is entered merely to delay matters. The Durban High Court considered a number of defences raised by Joob Joob, held them to be without any substance and consequently granted summary judgment.

The appeal court agreed with those conclusions. It held that the defences raised were cast in dubious terms and were entirely without merit. It scrutinised the certificates in question and found that they were issued and completed in terms of the agreement between the parties. It discussed the nature of such certificates and held that Stocks was entitled to judgment on all three.

Remedies for non payment

From the above quoted case law it appears that in most cases it is a pre requisite to adopting a summary procedure to collect payment that the contractor (or subcontractor) be in possession of a payment certificate.

If a contractor is in possession of a certified payment certificate, then it has the following remedies to collect payment, as stated earlier:

• Seeking an order of specific performance;
• Provisional sentence summons; and
• Summary judgment.

Where the contractor does not hold a certified payment certificate then the contractor’s rights will be to pursue the contractual dispute resolution procedure or, if the contractor does not contain a dispute resolution procedure, to refer the matter to court (trial action). It is common knowledge that both court trial actions and arbitration take a considerable period of time and as such these remedies are not appropriate in the eyes of party seeking payment. It is for this reason that adjudication has become a popular inclusion into most (if not all) standard form contracts. Adjudication promises to provide an expedited dispute process which, many argue, is ideally suited to resolve issues concerning non payment / certification of interim payment certificates⁵.

Conclusion: ‘pre-emptive remedies’

In addition to the speedy and litigious remedies that a contractor has as set out above, the parties may, at the time of concluding the contract, include further remedies to deal with non-payment which would include:

• Payment of an advanced payment to the contractor;
• Provision of a payment guarantee by the employer;
• Non waiver of lien;
• Including a right to suspend (or slow down) the progress of the works in the event of non certification by the engineer (note many contracts contain this right for non payment of a certificate but not for non certification); and
• Excluding or limiting the employer’s right of set-off.

Disclaimer: The content of this newsletter does not constitute legal advice. If you have a specific problem please contact MDA on 011 648 9500, at our Durban office on 031 764 0811 or by email on ncoertse@mdaconsulting.co.za

In the UK the concept of adjudication dates at least to the 1970’s. In response to a widespread problem of labour contractors not making proper and timeous payment to subcontractors, the industry itself introduced provision for adjudication for some limited purposes into certain building subcontracts.

In the report entitled “Constructing the Team” (produced in July 1994) Sir Michael Latham reported his findings and recommendations following his investigation into the state of the UK Construction Industry. Latham recommended, among other things, that “… a system of adjudication should be introduced within all standard forms of contract (except if comparable arrangements already existed for mediation or conciliation) and that should be underpinned by legislation …”.¹

Latham’s recommendation was adopted in the UK through section 108 (1) of the Housing Grant, Construction and Regeneration Act 1996 (the HGCRA) which provides:

“A party to construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with the section. For this purpose “disputes” includes any difference.”

The effect is quite simply that parties to a written construction contract in the UK have no escape and are obliged to submit disputes to adjudication. Furthermore, the Woolf reforms introduced into the UK judicial system in the late 1900’s made adjudication a mandatory step to litigation in certain instances. Similar statutory obligations have been introduced in Australia and New Zealand through similarly worded legislation. Presently the South African construction environment is not regulated by similar legislation. Referral of disputes to adjudication is not (by application of such legislation) mandatory.

Initiatives have been implemented by the Construction Industry Development Board (the CIDB) to introduce adjudication as an alternative method for resolving disputes into the broader South African construction environment.

The general nature of adjudication was summarized by Mr. Justice Diyason (as he was then) in the landmark British case of Macob Civil Engineering Limited vs Morris Construction Limited [1999] BLR 93, TCC, at page 97:

“…The intention of Parliament in enacting the Act was plain. It was to introduce a speedy mechanism for settling disputes in construction contracts on a provisional interim basis and requiring the decision of the adjudicators to be enforced pending the final determination of disputes by arbitration, litigation or agreement: see Section 108(3) of the act and paragraph 23(2) of part 1 of the Scheme …”

The practical aims of Adjudication (as an Alternative Dispute Resolution process) are quite simple. A dispute, which may affect the relationships between the parties, is quickly resolved (in real time relative to execution of the Project) in such a manner that the parties are forced to put it behind them and get on with the contract or with the remainder of the relationship (if either still exist).

There are, therefore, three fundamental characteristics of adjudication:

• the process is contractual in nature;
• the procedure to be followed is for the Adjudicator to decide in each case – it may be inquisitorial, adversarial, investigatory or a mixture of all three – above all it is speedy; and
• although binding on the parties, the Adjudicator’s decision is provisional, i.e. it can be challenged through litigation or arbitration.

In Practice Guideline Number 3: Adjudication (March 2004: Edition 1 of CIDB document 1011) the CIDB has detailed a set of principles, which underpin the adjudication process².

In addition to providing (at least in relation to public sector construction contracts) that “… adjudication shall be applied to all categories of construction contracts, (viz., engineering and construction works, services and supplies) at both prime and subcontract level, and be a mandatory requirement for the settlement of disputes before the completion of the contract …” the CIBD implies (in relation to private sector construction contracts) that provision should be made within the contractual framework for dispute resolution by adjudication as a matter of best practice in construction contracts.

Enforcing (or challenging) an Adjudicator’s decision …

In Carillion Construction Ltd vs Devonport Royal Dockyard (TCC 26 April 2005) the British Technology and Construction Court recently clarified four basic principles that a Court should apply in deciding any application for the enforcement (or challenge) of an adjudicator’s decision.

Devonport Royal Dockyard refits and refuels warships and nuclear submarines for the Royal Navy. In early 1997, the dockyard was privatized and at the time it was decided that the existing facilities should be upgraded and new facilities provided. Part of the purpose of these works was to enable the dockyard to refit and refuel the most recent classes of submarines employed by the Royal Navy. The Ministry of Defence engaged Devonport to carry out these works under a cost reimbursable contract with a target cost mechanism.

Devonport in turn engaged Carillion as subcontractor to carry out the upgrading of one of the docks, which included replacing the dock walls and base and constructing four new buildings. One of the new buildings was a decontamination building, which would contain apparatus for removing nuclear contamination.

The contract between Devonport and Carillion included an “Alliance Agreement” which supplemented the provisions of the subcontract in order to promote partnering and harmonious relations between the parties in executing the Project. The Alliance Agreement included a dispute resolution procedure, which provided that disputes would first be referred to the “Alliance Board” and then to the incongruously named “Star Chamber”. (The original Star Chamber was an English court of law active in the Tudor and early Stuart periods, which was abolished by parliament in the 1600’s, by which time its name had become synonymous with secret and irresponsible court proceedings).

Plainly, neither the Alliance Agreement, the Alliance Board nor the Star Chamber proved up to the task of maintaining harmonious relations between the parties. The target cost, which was initially set at £56 million, rose by a series of steps contained in amendments to the contract to approximately £96 million. This was well below the figure of £114 million that Carillion was arguing for.

In addition, disputes existed concerning the reimbursable costs due under the contract, including claims for defective works presented in a sum upwards of some £21 million. With nowhere left to turn under the terms of the Alliance Agreement, Carillion served on Devonport a notice of adjudication in respect of these disputes.

Faced with the unenviable task of adjudicating the disputes within 42 days, the Adjudicator directed the parties to provide written summaries of their cases limited to four pages in length. The remaining referral and response documents were considerably more extensive. Each party served numerous witness statements, expert reports andsupporting documentation which in all amounted to some 29 lever arch files.

The Adjudicator found substantially in favour of Carillion and ordered an immediate payment to Carillion of a sum in excess of £10 million. Devonport declined to pay Carillion the sum due under the Adjudicator’s decision. In order to justify their respective positions, both parties commenced proceedings in the Technology and Construction Court, Carillion claiming an order enforcing the Adjudicator’s decision and summary judgment on its claim and Devonport claiming declarations that the Adjudicator’s decision be regarded as invalid.

The Honourable Mr. Justice Jackson carefully reviewed recent British case law on the question of enforcement of (and challenge to) Adjudicators’ decisions and went on to clarify four principles that a Court should apply in considering any action for the enforcement (or challenge) of an Adjudicator’s decision:

1. The adjudication procedure does not involve the final determination of anybody’s rights, unless all parties specifically agree;
2. The British Court of Appeal has repeatedly emphasised that an Adjudicator’s decisions must be enforced, even if the decision results from errors of procedure, whether in fact or in law;
3. Where an adjudicator has acted in excess of his jurisdiction or in serious breach of the rules of natural justice, the Court will not enforce his decision; and
4. The Court must astutely examine technical defences with a degree of scepticism consonant with the policy of the HGCRA (particularly relevant in the UK context). Errors of law, fact or procedure by an Adjudicator must be examined critically before the Court accepts that such errors constitute excess of jurisdiction or serious breaches of the rules of natural justice.

On an application of these four principles Mr. Justice Jackson found that the fact that the adjudicator’s approach to the assessment of the target cost might have embodied certain errors of fact and law was, on its own, not an excess of jurisdiction or a serious breach of the rules of natural justice.

The evidence showed that the Adjudicator had not simply carried out a judgment of Solomon, but had reviewed the material put forward by both parties in a manner that was perfectly appropriate considering the time constraints under which he was operating and the sheer volume of evidence and intricate submissions which were thrust upon him.

Ultimately Mr. Justice Jackson was satisfied that the Adjudicator had properly considered and addressed Devonport’s claims for defects and, whether he was right or wrong in his decision, it could not be said that he had exceeded his jurisdiction or acted in serious disregard of the rules of natural justice.

In conclusion, Carillion obtained judgment in respect of the entirety of the Adjudicator’s decision, which enabled Carillion to enforce the Adjudicator’s decision against Devonport.

Adjudication in the UK is generally regarded as having kicked off to a good start. Parties to adjudication proceedings are increasingly accepting adjudication decisions as a blue print for, if not the final resolution of, their disputes.

It remains to be seen whether adjudication (which is not a mandatory process in the South African construction environment) will produce the benefits it aspires to yield, only time will tell.

¹ Sir Michael Latham, Constructing the Team, dated July 1994, see note 1, page 91, paragraph 9.14
² See Practice Guideline Number 3: Adjudication (March 2004: Edition 1 of CIDB document 1011) at page 2

The old adage “fail to plan and you plan to fail” has never been more true in the modern contracting environment we operate in today. Certainly, a common factor on many of the contracts we get involved with and where claims have arisen is that there is a problem with the programme. It may not have been competently compiled in the first place, not agreed to by the engineer or simply not kept up to date.

It is also surprising how often the programme is not properly referenced in contract progress meetings. Notes like “the programme has been submitted” are meaningless when assessing the status of a project. Contractors should insist that the actual programme position is discussed and correctly recorded in the meeting minutes. This is a vital part of the communication process. How else will design office personnel, for example, be aware of when construction information is required?

All modern forms of contract as they are recommended by the CIDB¹ have a programming requirement.The principle behind this requirement is that the contract either establishes an obligation to provide access or the programme creates such an obligation to provide construction information by a given time.

Our law requires that the employer or the employer’s agent,(in this case the Engineer) is placed in mora to perform; this is the finding of the well known McAlpine² case. Unless this obligation is created and accepted, the contractor has no recourse against the employer in the event that he is delayed or incurs additional expense.

Different contracts deal with this requirement in different ways and sometimes the result is, at first sight, illogical and unfair. The situation can arise under some forms of contract where the requirement that, for example, a drawing is required by a given date, is shown on the programme but the contract still requires a notice to be given. If the contractor fails to comply with the condition precedent (to his being entitled to make a claim) he will still have no right to make his claim.

A clear understanding of the contract is therefore essential.

Under the Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) 1999 First Edition, Conditions of Contract for Construction (the Red Book), the requirement to programme the work is contained in clause 8.3³.

Access to the site for the contractor is a requirement of clause 2.1 ⁴. This is required by the dates stipulated in the appendix to tender or if there are no such stipulations, access must be given in such a way as to allow the work to proceed in accordance with the programme submitted under clause 8.3. Where a delay occurs as a result of late access the contractor is entitled to claim but he must give a notice in accordance with clause 2.1 and comply with the requirements of clause 20.1⁵ which is an administrative clause, not conferring any right but which imposes further obligations on the contractor. This clause contains a time barring provision should the contractor fail to comply with the requirements of this clause.

The requirement to provide construction information by a given time ideally needs to be stated in the programme. However, should the contractor consider that the potential late provision of construction information could delay the work or increase the contract price if a drawing or instruction is not received, he is required to give notice to this effect under clause 1.9⁶ . The contractor then has recourse in terms of clause 1.9 to cost plus a reasonable profit and extension of time to recover any costs incurred if and when such drawings requested in the notice are late and provided he gives a further notice in accordance with clause 1.9 and he complies with clause 20.1.

It can be seen that under the FIDIC contract forms that reliance is only partially placed on the requirements of the programme. Provided the contractor gives his notices he is still in with a chance to claim.

In conclusion, programming clauses are vital under any form of contract but the contractor can survive by relying on the other rights conferred on him in terms of the contract. It must however be noted that the NEC form requirements are different. This will be dealt with in future editions of the FAFC.

¹ Construction Industry Development Board
² Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration 1974 (3) SA (A), 1977 (4) SA 310(T)
³ “Programme”
⁴ “Right of Access to Site”
⁵ “Contractor’s Claims”
⁶ “Delayed Drawings or Instructions”

Project management is essentially the management of risk. Some risks we know will occur, some are likely to occur and some are unlikely to occur. The article discusses risk identification and management and the tools that are available for this purpose.

When we manage projects we are managing risk.

There is a popular misconception that risks are possible or probable events that have yet to occur. In fact all aspects of projects contain risk. Let’s use the example of concrete. The cost of procuring materials to make concrete is a risk. Maybe the supplier will require a different price for his materials than we have allowed in the budget? Maybe his plant breaks down and we have to use an alternative supplier? The labour necessary to mix and place the concrete is also a risk. Assumptions have been made about what the employment cost will be. Assumptions have also been made about what the productivity will be to mix and place the concrete. If these assumptions prove to be wrong, we are at risk of the contract costing more and/or taking longer to complete.

So what we have in fact are risks that are occurring or threatening to occur all the time by virtue of simply carrying out the work.

We manage these risks (material supply and labour) by entering into formal contracts with our suppliers and sub contractors and formalising our wage structures directly with our labour force or with the unions. This wage agreement may also deal with such things as absenteeism and productivity.

Because we don’t rationalise what it is we are doing and why we are doing these things, like buying materials or employing labour, we very often don’t allocate the priority to these functions that they deserve. For example most construction projects operate on purchase orders even when entering into agreements with sub contractors. This can have disastrous consequences. Purchase orders provide little protection and contain insufficient risk management facilities for anything but the most simple of purchases.

Careful consideration therefore needs to be given when placing purchase orders for critical supply items and a hybrid purchase/sub contract agreement developed to ensure that such aspects as performance and quality are adequately addressed in important supply contracts.

Other risks may have less certainty of occurring.

We need at the outset of a project to identify what these might be, what the likelihood of their occurring is and what is their potential impact. Risks that have little likelihood of occurring and/or which have a small potential impact are ignored. Risks that are likely to occur and which have a relatively high impact (cost or delay) need to be managed. We need to put measures in place to identify when the risk begins to manifest itself. (Sometimes this will be obvious, like for example ground water, other times we may need to measure trends like for instance traffic intensity). We then need to have devised a response to the risk. For example, we have stand by pumps available to handle increased ground water, or temporary traffic lights to manage increased traffic flows. By anticipating what risks we need to manage (both the risks that we know will occur as well as the risks which we think may occur) we empower the project implementation team to manage all eventualities on a project. This is particularly important in an environment like South Africa where skills are at a premium and there is high likelihood of project staff being less experienced than would be optimal.
So much of what we do is simply part of our day to day operation “standard procedures” that we don’t appreciate how important these are and why we are doing them.

Generally speaking, when we manage contracts, time risks are addressed because we are forced by the terms of the contract to compile a programme. In practice however, programming procedures employed on most contracts fall far short of what should be done to properly manage the time risks, the resource levels and the productivity either to be achieved or actually achieved. It is a fact that whenever a contract gets into trouble, deficiencies in the programme will be found.

Similarly, most contractors have some form of cost reporting system where they compare their revenue earned with the costs that they have incurred. In reality however, these cost reporting exercises are for the benefit of the accountants at head office and are of little or no assistance to the site team in managing their contracts.

Invariably, the cost break down structure and the work break down structure do not talk to one another and this is another major deficiency in the effective management of projects.

The tools available to us to effectively manage our contracts are (these are the building blocks of the project):
• The programme
• The budget
• The specification
• The commercial terms of the Contract

We will see that the commercial terms of the contract stipulate the payment entitlement and procedures, the time requirements of the contract and the quality requirements and procedures. So the commercial terms are effectively the mortar that binds the whole together.

In project management terms these tools (the building blocks) are used to manage and implement the other aspects of the project management process namely integration, scope, human resources, communication and procurement management.

Each of these functions have their own discrete risks (as we have seen from the discussion above).
So the process to be followed is to identify the risks that will occur and decide how these are going to be managed. Examples are key material supplies and high risk sub contracts (like geotechnical works). Having decided to pass a risk onto another specialist contractor (like in our example above, a geotechnical contractor), it is vital that appropriate contract documentation is utilised and that proper records are kept of the risks as they arise and the impact that they have on the cost and time of doing the work. Invariably, specialist sub contractors are left to their own devices and records are incomplete or not kept at all.
Each risk has to be assessed in terms of the four building blocks of the contract as regards cost, time, quality and commercial impact and the implementation plan for the project developed, taking each of these requirements into account.

Risk management is not confined to the physical implementation of the project but also embraces commercial requirements like notices ( both conditions precedent to making claims for time and cost recovery, preservation of the contractors right to make a claim once it has been earned and avoiding falling foul of time bar provisions) as well as record keeping. We make sure that the records that are kept are in relation to the risks that we have identified.

The construction industry is often criticized for commencing with project implementation far too early in the project cycle at a time when scope is ill defined and the design is still in an embryonic state. Criticism should also be levelled at contractors , engineers and project managers who do not adequately plan the work to be carried out. Planning is generally confined to the contract requirements, usually a critical path network instead of a comprehensive risk analysis and response plan. Our projects are the poorer for this short coming.

This article will examine the situation where the Project Manager removes or adjusts certified and paid compensation events for such things as: re-measurement of storm water and sewer trenches and associated backfill material sources, and the measurement and payment of oversize material.

Let’s assume the situation described is based on an unamended version of the Second Edition of the New Engineering Contract 1995 (“NEC2”). If the Project Manager is using clause 50.5 as the basis upon which he is re-adjusting the above items, clause 50.5 states as follows:

“The Project Manager corrects any wrongly assessed amount due in a later payment certificate.”

The following other clauses are worth pointing out before we begin discussing the issue. The amount due to the Contractor is determined by clause 50.2, which states as follows:

“The amount due is the Price for Work Done to Date plus other amounts to be paid to the Contractor less amounts to be paid by or retained from the Contractor. Any value added tax or sales tax which the law requires the Employer to pay to the Contractor is included in the amount due.”

The Price for Work Done to Date is defined in Main Option B as:

“The Price for Work Done to Date is the total of

• the quantity of the work which the Contractor has completed for each item in the bill of quantities multiplied by the rate and
• a proportion of each lump sum which is the proportion of the work covered by the item which the Contractor has completed.
• In this clause, completed work means work without Defects which could either delay or be covered by immediately following work.”

The Prices are defined as follows:

“The Prices are the lump sums and amounts obtained by multiplying the rates by the quantities for the items in the bill of quantities unless later changed in accordance with this contract.”

The definition of Actual Cost is as follows:

“Actual Cost is the cost of the components in the Schedule of Cost Components whether work is sub-contracted or not excluding the cost of preparing quotations for compensation events.”

It must be noted that payment under clause 50 is solely concerned with the Price for Work Done to Date and not Actual Cost. On this structure alone it is clear that compensation events are dealt with on a completely separate basis to “normal” payments.

Compensation events are dealt with by the submission of a quotation which is then assessed and implemented by the Project Manager. The NEC2 does not contain a separation of work done and work yet to be done as the NEC3¹ does, however, it is possible to extrapolate this from the contract itself. Essentially whenever the Contractor is required to forecast into the future, the date the forecast is made should, at the latest, separate work that is known and immediately quantifiable, from work that is forecast.

The effect of this is critical when taking into account clause 65.2 which states as follows:

“The assessment of a compensation event is not revised if a forecast upon which it is based is shown by later recorded information to have been wrong.”

The Contractor therefore takes the risk of forecasting the effects of a compensation event. It is not necessary for the contract to deal with other costs and time effects as these would have already been incurred and easily quantifiable from records. Accordingly, clause 65.2 read with Actual Cost, clearly places compensation events into a separate system to “normal” payments.

The only time a compensation event can be re-evaluated is where the Project Manager states his assumptions about a compensation event because the effects of the compensation event are too uncertain to be forecast reasonably under clause 61.6. However, for clause 61.6 to be operative, it has to be used by the Project Manager when he instructs the submission of quotations. It cannot be used in retrospect.

It is clear therefore that the Project Manager has no authority whatsoever to re-assess a compensation event. To do so is outside of the contract and an attempt to enforce it would be a breach of contract.

Insofar as such items as the re-measurement of storm water and sewer trenches, a source of backfill materials, and oversize materials, the Project Manager has to give his full reasons why he has done so under clause 50.4 which states, inter alia, as follows:

“… The Project Manager gives the Contractor details of how the amount due has been assessed.”

Accordingly, the Project Manager must fully explain himself in order for his assessment to be contractually proper. It is not sufficient for the Project Manager to only quote clause 50.5 without giving effect to clause 50.4.

If the corrected amounts were “wrongly assessed”, the Project Manager must accordingly identify the mistake which has required the use of clause 50.5.

Insofar as the agreed method of measurement is concerned, clause 60.6 in Main Option B states as follows:

“The Project Manager corrects mistakes in the bill of quantities which are departures from the method of measurement or are due to ambiguities or inconsistencies. Each such correction is a compensation event which may lead to reduced Prices.”

Therefore the only time that the Project Manager can interfere with the bill of quantities is if there is an error in the calculation of the rate or lump sum which offends the method of measurement, or there is an ambiguity or inconsistency which has caused the error.The Project Manager cannot use clause 50.5 to effect any corrections however, as a compensation event is mandated by clause 60.6, this compensation event would accordingly allow the contractor to submit a new rate for the affected item in his quotation. Unfortunately the only route to follow if the Project Manager persists in this fashion is to declare a dispute and proceed to adjudication.

¹Third Edition of the New Engineering Contract 2005 (“NEC3”)