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The builder and the lien

A lien is the right of X to retain possession of Y’s property, either movable or immovable. This right arises when X spends money or incurs costs with respect to this property, and comes to an end when the money or cost is reimbursed to X.

Liens may be divided into two general categories:

  1. Enrichment liens; and
  2. Debtor and creditor liens.

An enrichment lien arises when X spends money or incurs cost in preserving or improving the property, in order to maintain or enhance its market value. Y, as the owner of the property, is enriched by X’s actions. An example of this would be repairing a damaged water pipe or upgrading the external facade of an old building.

A debtor and creditor lien arises when X spends money or incurs cost that neither preserves nor improves the property. Y is not enriched by X’s actions and the only way in which X can claim reimbursement is if there is a contractual agreement in terms of which Y agrees to reimburse X for such expenditure. An example would be where a builder incurs expense in mobilising its resources to site, but the contract is terminated before any work can commence.

The main difference between the two types of lien, is that when X has an enrichment lien, the right to retain possession of Y’s property is enforceable against the whole world. An example would be where Y bought property off-plan from a developer, who, in turn, contracted with X to build a house on the property. In building the house, X enhanced the market value of the property. If the developer doesn’t pay X for the cost of building the house, X can hold an enrichment lien over the property, regardless of the fact that Y didn’t actually contract with X.

On the other hand, when X has a debtor and creditor lien, the right to retain possession of the property is only enforceable where Y, as owner of the property, contracted with X for the expenditure. In combining the two examples given above, this would mean that X could not hold a lien over Y’s property, for the cost of mobilisation alone, where X had contracted with the developer and not Y.

When considering holding a lien over Y’s property, X must, therefore, consider:

  1. Whether there is a contract between X and Y? and
  2. If not, whether Y has been enriched at X’s expense?

If the answer to both questions is “no”, then X has no right to retain possession of Y’s property.

If X does have a right to retain possession of Y’s property, then s/he must perfect his/her lien. This means that X must take some special step to show the world that s/he is holding a lien over the property. In the case of a construction site, this would require evidencing possession of the site. For example, this could be done by stationing a representative, in charge, on the site, securing it, putting up signage and generally making it clear that X is in physical control of the site.

If X gives up possession of the site, the lien will fall away. If Y takes back possession of the site by force, X can make application to the courts for a spoliation order, returning possession to him/her.

Y can offer security for the sum claimed by X, pending resolution of any dispute over the matter, in exchange for the return of possession of the site. If X refuses to accept such security, the courts have a discretion, upon application by Y, to order return of possession of the site to Y, in exchange for such security.

The situation is more complicated where public property is concerned as, although it has not definitively been decided, there is some authority for the proposition that a lien cannot be held over public property. [See Loots, Construction Law and Related Issues, 1995, pages 422 – 426]

A wavier is the voluntary giving up of a right. X may waive his/her lien. Certain construction contracts may, in fact, include a clause expressly agreeing to such waiver [See Clause 3.3 of the JBCC Principal Building Agreement, 5th edition and Clause 9.2.1.3 of the GCC 2010].

The waiver of X’s lien does not, however, have to be express. It could also be tacit, meaning that it is conveyed by X’s actions. These actions would have to show a clear and unambiguous intention not to hold a lien over Y’s property. An example would be where X, as a contractor, removes his/her labour, equipment and materials from the site and returns possession of the property to Y.

Author: Michelle Kerr, Senior Associate.

Natural Justice in Adjudication – How is it determined?

When involved with construction adjudication, you often hear and come across the use of the term ‘natural justice’, i.e. the adjudicator is obliged and should always ensure that natural justice prevail. But what exactly does this entail and when is natural justice breached?

A recent UK judgment “Dawnus Construction Holdings Limited v Marsh Life Limited [2017] EWHC 1066 (TCC) (11 May 2017)” (“Dawnus case”), dealt with an application brought by the claimant (Dawnus Construction Holdings Limited) for summary judgment for the enforcement of an adjudication decision and in defending the application, the defendant (Marsh Life Limited) argued that the adjudicator failed to apply the rules of natural justice by failing to consider and deal with certain of the defendant’s defences that was put forward. This article is not intended to deal with the facts of this particular case, but mainly to clarify principles of ‘natural justice’ as was determined by the courts (most of which are from the UK, but can be cited and referred to when dealing with similar issues and disputes in South Africa).

In the Dawnus case, dealing with natural justice, the court referred to a matter, “Hutton Construction v Wilson Properties [2017] EWHC 517 (TCC)” (“Hutton case”). In this case the judge inter alia stated that “the starting point… is that, if the adjudicator has decided the issue that was referred to him, and he has broadly acted in accordance with the rules of natural justice, his decision will be enforced” (Macob Civil Engineering Limited v Morrison Construction Limited [1999] BLR 93), and it was further said that “Adjudication decisions have been upheld on that basis, even where the adjudicator has been shown to have made an error” (Bouyques (UK) Limited v Dahl-Jensen (UK) Limited [2000] BLR 522.). In “Carillion Construction Limited v Devonport Royal Dockyard Limited [2006] BLR 15), the judge stated that “the need to have the ‘right’ answer has been subordinated to the need to have an answer quickly.”

As you note from the above, few matters have dealt with this issue regarding the principles of natural justice.

The Dawnus case further confirmed that the authorities have consistently emphasised that, for a breach of natural justice to be a bar to enforcement, the breach must be “plain“, “significant“, “causative of prejudice” or “material“.

In considering earlier authorities, in “Cantillon v Urvasco [2008] BLR 250” (“Cantillon case”), the applicable principles related to breaches of natural justice in adjudication were summarised to be the following:

a) It must first be established that the adjudicator failed to apply the rules of natural justice;

b) Any breach of the rules must be more than peripheral; they must be material breaches;

c) Breaches of the rules will be material in cases where the adjudicator has failed to bring to the attention of the parties a point or issue which they ought to have given the opportunity to comment upon which it is one which is either decisive or of considerable potential importance to the outcome of the resolution of the dispute and is not peripheral or irrelevant.

d) Whether the issue is decisive or of considerable potential importance or is peripheral or irrelevant obviously involves the question of degree which must be assessed by any judge in any case such as this.

e) It is only if the adjudicator goes off on a frolic of his own, that is wishing to decide a case upon a factual or legal basis which has not been argued or put forward by either side, without giving the parties an opportunity to comment on or, where relevant put in further evidence, that the type of breach of the rules of natural justice with which the case of Balfour Beatty Construction Company Ltd v The Camden Borough of Lambeth was concerned comes into play. It follows that, if neither party has argued a particular point and the other party does not come back on the point, there is no breach of the rules of natural justice in relation thereto.”

Based on the above, it does seem straight forward. If you are an adjudicator or looking to become one, stay updated with most recent cases on these type of topics, whether to be found under our own South African law, UK or otherwise. It is important to keep ahead with the game to prevent that you fall subject to a possible review of your adjudication decision/ruling.

Author: Barry Herholdt – Associate

BBB-BEE and the construction sector

An entity’s Black Economic Empowerment (“BEE”) score and recognition status is measured either in terms of the Broad Based Black Economic Empowerment Generic Codes of Good Practice (“BB-BEE Codes”), or in terms of a specific sector code. The main difference between the two is that the BB-BEE Codes address empowerment and transformation for all sectors where there is no sector code. At the same time, the BB-BEE Codes provide guidance regarding the measurement principles to be applied, and incorporated into sector codes. A sector codes addresses empowerment and transformation within a defined sector and is more alive to a sector’s challenges and requirements.

During October 2013, the amended generic BB-BEE Codes of 2013 (“Amended Codes of 2013”) were gazetted, providing for revised principles of measuring transformation and empowerment. In the circumstances, all sector charter councils were required to amend their respective sector codes and submit these to the minister. The construction sector was no different and was required to prepare a draft construction sector code and submit it to the minister, however, failed to do so timeously. As a result, in February 2016, the Construction Sector Codes of 2009 (“Construction Codes”) were repealed.

The consequence of the minister’s decision to repeal the Construction Codes was that all entities previous falling within the scope and application of the Construction Codes would now to be measured in terms of the amended Codes of 2013. As mentioned, in some instances a generic code fails to adequately address sector specific challenges and consider whether it may become onerous to apply it measurement principles in a specific sector.

A draft of the revised construction sector codes (“Revised Codes”), gazetted in terms of Section 9 (5) of the Broad Based Black Economic Empowerment Act 53 of 2003 as amended by B-BBEE Act 46 of 2013 (“the Act”), was issued for public commentary. For a sector code to become applicable to a specific sector, in place of the prevailing BB-BBE Codes, it must be gazetted in terms Section 9(1) of the Act. Until this happens entities falling within construction sector continue to be measured against the Amended Codes of 2013.

The period within which to submit comments to the Revised Code has elapsed, yet the minister has not provided indication of his intention to gazette the Revised Codes under Section 9(1) of the Act. Furthermore, unlike the previous Construction Codes that had a transitional period when they were first published, the Revised Codes propose no transitional period. A transitional period would provide the sector with an opportunity to plan and adjust to the revised requirements prior to being compelled to apply the revised measurement principles. On publication, in terms of Section 9(1) of the Act, all entities falling within their scope of application may be forced to undertaken their measurement of BEE in terms of the Revised Codes. Such a provision has the potential to further stall the progress made by the sector.

The industry remains in an uncertain position, addressing transformation and empowerment in terms of the Amended Codes of 2013 which do not necessarily appreciate the sector’s challenges, similarly, aware that the Revised Codes await the minister’s gazetting whereafter application may be an immediate requirement.

Author: Tsele Moloi, Associate

Transparent and Accountable Public Procurement under the Constitution

The importance of a transparent and accountable public procurement process cannot be understated. It impacts the public, in general, in terms of service delivery and a failure to comply therewith can result in the wasting of tax payer’s funds.

What happens where it is obvious that public officials involved in a public procurement process have been corrupt, grossly negligent or otherwise did not apply their minds during the tender adjudication and arbitration process?

This issue is regularly raised, resulting in frequent referrals to Tender Appeal Tribunals and the various courts for a decision and evaluation of the process followed.

One such case is Westwood Insurance Brokers (Pty) Ltd v eThekwini Municipality (8221/2016) [2017] ZAKDHC 15 (5 April 2017). In short, a company by the name of NC South West Brokers CC (South West) was awarded a tender, by eThekwini Municipality, in the sum of approximately R 81 000 000.00, for the provision of insurance for water loss through underground leaks for individual dwelling units. The Conditions of Tender required that a letter of undertaking from an insurance company licensed to operate in South Africa, accompany the tender, and that the underwriter must be registered with the Financial Services Board (FSB). South West, however, submitted a quotation for professional indemnity insurance from Marsh (Pty) Ltd whose registration with the FSB, as an insurer, had not been established.

The tender award was challenged on this basis. The court found that

“whatever [eThekwini’s] motives were the irrationality of their choice of South West is so obvious and egregious that it ineluctably leads me to conclude that the officials knowingly acted unlawfully, unconstitutionally and unethically”.

When the court considered the far-reaching effects of the decision of awarding the tender to South West (i.e. vulnerable people occupying, for instance, municipal and other sub-economic housing schemes having no insurance for water leaks), the court came to the conclusion that it was not advisable for South West to retain the contract.

The court, however, did not stop there. It considered whether the eThekwini officials, involved in the procurement process, had failed to uphold the values of the Constitution and the guidelines provided to them when considering offers from tenderers. The court also considered the obligation of all persons performing public services, to be accountable and transparent.

The court found that both South West and the officials in question must be held accountable for their actions, by way of being held liable for the costs of the proceedings. As such, the court ordered as follows:

  1. South West was held liable for 50% of the legal costs:
  2. The 16 public officials ranging from the City Manager, Members of the Bid Adjudication Committee, Bid Evaluation Committee, the Head of eThekwini Water and Sanitation, Deputy Head Supply Chain Operations, Divisional Manager for Regional Customer Services Water and Sanitation, and the Contracts Administrator were held liable for the remaining 50% of the legal costs, to be paid out of their own pockets.

This case sounds a warning to all public officials who act unlawfully and unethically to the disadvantage of the general public and other suitably qualified tenderers who would have benefited from the process.

Author:  Nombuso Shange, Associate.

Favourable business ethics & pushing up your construction company's CIDB grading

Last year, I am sure as most will agree, various companies, in particular within theconstruction industry (as well as other institutions / organisations) felt the sting of a tough economical period. However, as the fight goes on, it made me think about an old song by Judy Collins called the “Liverpool Lullaby”, with a lyrical line that states “Although we have no silver spoon, Better days are coming soon”.

With that in mind, we remain hopeful and positive that this year will make a turn for the better. With economic rehabilitation and growth, will come new opportunities, new developments etc. This will then hopefully open the doors wide again for existing construction companies, big or small and even new players to the game to get on the tender playing field. Therefore, with this article I felt it necessary to remind current players and for those who are unfamiliar, what is expected ethically wise and what can be done to grow your CIDB grading.

As you would know, and as stressed and promoted by inter alia the Constructio Industry Development Board (CIDB), it remains crucial that all players in the construction industry should strive in upholding high standards of ethics in all business dealings, especially at the start, when participating from tendering stage.

On the CIDB’s website, a “Code of Conduct” is provided for all parties engaged in construction procurement and I invite all to familiarise yourselves with this Code of Conduct, see link below: http://www.cidb.org.za/publications/Documents/Code%20of%20Conduct.pdf

Further, what I think a lot have wondered about or have asked in the past (especially for the smaller or new construction companies coming into the game), what can be done to grow that CIDB grading and gunning for the giants (i.e. your bigger budget projects etc.)?

Your CIDB grading gets determined by some factors, such as your companies’ works capability and further your financial capabilities. To be able to get financially stronger and to better works capability, participate and keep tendering for projects at your specific qualified level, then work it up from there, increasing works capability and by doing so, getting paid by satisfied clients (hopefully the ones that do pay) to grow financially.

If you are small, attempt to build subcontractor relationships with other higher grading contractors or seek for possible Joint Venture opportunities. Trust and good relations is important in this regard. In light of the above, continue and endeavour to do business in good faith, upholding good business ethics and by doing so, building strong trusting relationships with others in the industry in order to grow yourself into one of the big players.

Author: Barry Herholdt, Associate

Standing adjudication and replacement of members

The GCC 2010 Adjudication Board Rules (the Rules) define standing adjudication as a flexible procedure available to the parties, from the outset of the contract, for its full duration.  The intention is to have the adjudication board members (the members) on hand for the duration of the contract, to assist the parties in reducing conflict.

The parties are required, at the outset of the contract to jointly select one or three persons from the SAICE panel of standing adjudication members.  Failing selection by the parties, the president of SAICE, on application of either of the parties, will nominate the required person/s.

These persons are required to provide disclosure statements to the parties.  Once both parties are satisfied with these disclosure statements, the member/s are appointed by entering into the Adjudication Board Agreement (the Agreement) with the parties.

If a three-member adjudication board is required, the parties will jointly pick the chairman.  Failing agreement by the parties, the members will select their chairman, amongst themselves.

Clause 4 of the Agreement permits the parties to jointly terminate it.  This must be done individually with respect to each member.

But what happens if only one of the parties lose confidence in a member or members?  This is not specifically catered for in either the Rules or the Agreement.

The only guidance provided by the Rules is that in Rule 3.7, which states:
“If an Adjudication Board Member for any reason cannot or ought not to continue as Adjudication Board Member, the new Adjudication Board Member shall be appointed in the same manner as the Adjudication Board Member who is being replaced.” [Emphasis added]

While this explains the procedure to be followed in appointing new members, it does not establish the criteria for when a member “ought not to continue” as such.

The answer to this may be found, it is suggested, in Rule 6.3, which requires the adjudication board to conduct its proceedings in accordance with:
  1. The contract and the Rules;
  2. The principles of fairness and impartiality;
  3. Consideration for the wishes of the parties; and
  4. The rules of natural justice.

Rule 6.4.11 of the Rules authorised the members to settle any dispute regarding the Agreement and decide on their own jurisdiction.

While a loss of confidence in one or more of the members, should in and of itself lead such members to seriously consider whether they “ought” to continue acting or not, this could be countered by the knowledge that such allegations may be used by intractable parties to delay proceedings.  Should a party, however, be able to make a sufficiently strong case for the members’ failure to comply with the requirements of Rule 6.3, this may be more likely to sway the members in question.

Should they, despite being furnished with such argument, refuse to recuse themselves, it will support an objecting party’s case for damages for any future infractions, on the basis that the members were acting in bad faith, as per Rule 10.1.

Author: Michelle Kerr, Senior Associate

Real time technology provides an alternative method of managing risks on construction projects

In an industry where new projects are limited and profits margins are severally depressed, it is important for the industry to consider innovative ways to weather the storm.

The ability of a project team to identify and manage issues, without delay as work progresses, is increasingly becoming important to reduce the, actual and time related, costs incurred to remedy defective work, address issues, and to ensure work is completed timeously.

The traditional approach of identifying and remedying defective work or issues is a delayed process. It is has also become inefficient in an environment where the loss of time has consequences for both the employer and the contractor. The risks can be managed more effectively if issues can be identified and communicated accordingly, and in real time. In other words, reducing the passage of time between identifying the issue and addressing it.

Real time technology provides an alternative method of managing risks on construction projects. An article recently published on the Engineering News website, reviews the uses of google glasses and drones to do this.

Procore and drones are real-time software application, and hardware, respectively, being used by professional teams to identify issues on construction sites, assessing the issues against the scope of work and communicating deficiencies to the contractor promptly to be remedied. The benefits are to lessen the time wasted identifying, communication, and addressing, the issues.

The result is an efficient means of managing the risks of costs overruns and avoidance of failing to complete the work within the construction period due to time taken to remedy issues.

To view the full article, click here.

Author: Tsele Moloi, Associate

Adjudicator decisions when deciding on disputes (referred or not referred) made in error and the subsequent enforcement thereof by courts

The Society of Construction law recently released an article by Mr. Daryl Royce, titled “Errors in Adjudicator’s Decisions: Right Questions, Wrong Answer”, which I thought is an interesting piece to share.

Briefly, the article turned around a dispute where the subcontractor claimed certain monies from the main contractor and the adjudicator deciding the dispute, decided in favour of the subcontractor by deciding that a certain amount is to be paid to the subcontractor. The issue turned around the calculation of the amount. At the time of the dispute, the works had not been completed, but the adjudicator in his decision dealing with the amount due to be paid to the subcontractor by the main contractor, deducted sums paid that “excluded retention from a gross sum that included retention”. What is the issue? Well seeing that the works had not been completed at time of dispute, no retention could have been due to the subcontractor.

The adjudicators decision had the effect that retention was released to the subcontractor. When the subcontractor then approached the court to enforce the adjudicators decision, various questions came into play, raised by the opposition, which were dealing inter alia regarding circumstances when an adjudicator makes a decision on a point that was never referred for decision, meaning issue on jurisdiction and or, as was held by the Court of Appeal later when this matter was referred to it, the adjudicator had not exceeded its jurisdiction, but gave the wrong answer to the question referred to him. It deals further whether such decision can still be binding and be enforced.

This article canvasses over very interesting topics for discussion, inter alia various tests that has been applied over the years by courts hearing enforcement applications, advantages and or disadvantages on courts’ intervention to make a further ruling on adjudicator’s decisions and or correcting and adjudicator’s errors made in adjudication proceedings.

For the full article, Click here and follow the instructions (in particular for non-registered individuals).
Author: Barry Herholdt, Associate

Late Payment by Organs of State and State Owner Entitles – National Treasury coming to the assistance of the suppliers/contractors

As of 1 July 2016, National Treasury Instruction 5 of 201/17 came into effect. What this instruction does is come to the aid of any contractors or suppliers currently working for Organs of State (Government Departments) and Public Owned Entities (the likes of Eskom and Transnet). The Instruction is issued to all Accounting Officers of Departments and Constitutional Institutions, Accounting Authorities of Public Entities and Head officials of Provincial Treasuries and deals specifically with payments due to suppliers / creditors exceeding 30 days after submission of a valid invoice.

The instruction states that it aims to resolve non-payment to those suppliers exceeding 30 days and informs that a dedicated call centre is being established to assist affected suppliers in resolving non-payments.

Once a complaint is lodged with the call centre, the Accounting Officer/ Authority will be notified and required to settle payment within 5 days from receipt of the complaint if there is no dispute.

The Accounting Officer/ Authority must report to National Treasury within 5 working days of being so notified on the resolution of the outcome, in case of a dispute this reporting requirement remains and the reasons for non-resolution must be stated.

National Treasury will investigate any dispute and provide recommendations, should the National Treasury decide that payment is in fact due, the Accounting Officer / Authority has 5 working days within which to implement this decision, if it does not do so the National Treasury may invoke the provisions of S216(2) of the Constitution which allows the Treasury to enforce compliance. Further to all the above, the instruction allows National Treasury to release publicly every month all details of outstanding creditors per Department and Entity.

Once the call centre is in place, it will most certainly be of assistance to contractors and suppliers who are suffering hardships due to late or non-payment where there is no dispute regarding such payment.

To view the full instruction, click here.

Author: Taryn van Deventer, senior associate

When is a dispute a dispute?

It is inevitable, considering the many features of a construction project, and the expensive risks associated therewith, that disagreements will arise between contractors, employers and their agents. The way these disagreements are managed will determine how easily they may be overcome. More and more often, parties are turning to adjudication for this.

In order for an adjudicator to have jurisdiction, however, a dispute must actually exist between the parties. Determining whether a dispute is, in fact, a dispute which is ripe for adjudication is more complex than it first appears.

It is typical that in construction projects parties will raise issues which will be discussed at length, usually over a protracted period of time. The question is, when do these issues crystallise into disputes which are capable of being referred to adjudication.

A number of construction contracts provide for the issuing of a notice of dispute which signifies that at least one of the parties to the contract believes that a dispute has come into existence. The issuing of such notice does not, however, automatically mean that a dispute exists and further interrogation may be required.

Where the term “dispute” is not defined, regard must be had to the common law. The definition of a dispute has been thoroughly considered in the United Kingdom and the applicable case law is of persuasive value.

In the English case of Halki Shipping Corp v Sopex Oils [1998] 1 W.L.R. 726 it was held that a “dispute” means any claim of which the opposing party has been notified, which that party has refused to admit or pay.

In the English case of AMEC Civil Engineering Limited v Secretary of State for Transport [2005] B.L.R. 227, [2005] 1 W.L.R. 2339 the Court of Appeal approved the following seven propositions:

  • The word dispute should be given its normal meaning;
  • Judicial decisions on particular situations where the word “dispute” was in dispute, produce helpful guidance;
  • The mere fact that one party notifies the other of a claim does not automatically give rise to a dispute. A dispute will only arise if the claim is not admitted;
  • The circumstances under which a claim is not admitted are numerous and variable;
  • The period of time for which a party may remain silent before a dispute is to be inferred depends upon the facts of the case and the contractual structure;
  • If a deadline is imposed by a party for responding to a claim, that deadline, although a relevant consideration, does not automatically curtail what would otherwise be a reasonable time for responding; and
  • If the claim is so vague that it cannot be reasonably responded to, neither silence by the other party nor an express non-admission is likely to give rise to a dispute for the purposes of adjudication.

Author: Michelle Kerr, senior associate