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FAQ contractual2

Our Legal & Contractual FAQs provide an invaluable resource of information for the industry.

WHAT ARE THE ESSENTIALS OF A CONTRACT?

A contract can be described as "an agreement binding in law between two or more persons in which one or each one promises the others(s) to do nor not to do something." It is first necessary to analyse the meaning of "agreement". Before parties arrive at an agreement there is often some preliminary discussion as to what each is going to give or do for the other.

A contract can be described as "an agreement binding in law between two or more persons in which one or each one promises the others(s) to do nor not to do something."

It is first necessary to analyse the meaning of "agreement". Before parties arrive at an agreement there is often some preliminary discussion as to what each is going to give or do for the other.

Every such discussion resulting in an agreement boils down to a simple statement embodying an offer and a simple answer accepting that offer.

Agreement, then, is generally a matter of offer and acceptance. An offer is a proposal by one party, known as the offer or, of the terms upon which he is prepared to enter into a binding contract. An acceptance is an indication by the other party, known as the offeree, that he is prepared to be bound by the terms proposed. The offer which ultimately results in a contract need not necessarily come from the party who makes the first approach. There may be lengthy negotiations before one party makes an offer which is acceptable to the other. Acceptance of such an offer leads to a binding contract.

But to be turned into an agreement by acceptance, an offer must have been firmly and deliberately made with the intention that it should be so turned into an agreement.

The offer must be certain and definite in its terms.

Before an offer can be turned into a binding agreement it must be clear that it is intended to be the whole offer and it must define all the terms on which agreement is sought.

It often happens that an offer is made as to one or more terms of an intended agreement, leaving others outstanding for further discussion. Pending agreement on such outstanding points, even though they may appear to be of minor importance, neither party may have any rights against the other.

The acceptance of an offer must be defined and unqualified. If it is conditional, such conditional or qualified acceptance is not an acceptance at all, but is in fact a counter offer for the original offeror to accept or reject.

If the original offeror in turn accepts such a qualified acceptance, he is then bound by the terms of the qualification.

An offer is deemed to lapse if acceptance does not take place within a reasonable period. What is reasonable will depend on the type of contract and the peculiar circumstances of each case.

Before acceptance, an offer may be withdrawn unless the offer or has bound himself to keep the offer open for a given period.

After acceptance the agreement is complete and there is no escape for either party

WHAT IS THE EFFECT OF A LETTER OF INTENT?

Fast track construction methods often leave in their wake the procedure for drawing up the contract which in many instances lacks the necessary urgency it merits.

Fast track construction methods often leave in their wake the procedure for drawing up the contract which in many instances lacks the necessary urgency it merits.

This has led to an increase in the use of letters of intent, the original purpose of which is little more than a method of informing the Contractor or Sub-Contractor that his tender is successful and that a contract is to be entered into at some stage in the future.

The original purpose of the letter of intent has changed in recent times. It is now common practice to include in a letter of intent an instruction to order materials, fabricate and even start construction on site in anticipation of a contract being entered into.

Arguments can arise as to whether the letter of intent itself constitutes a contract and if not, whether the negotiations which follow result in a concluded contract. If it is held that there was never a contract entered into, further disputes can arise as to the basis on which payment is due for the work carried out in accordance with the instruction contained in the letter of intent.

In British Steel Corporation -v- Cleveland Bridge Ltd [984] 1 ALL ER 504, the Court had to deal with the question as to whether a particular letter of intent created a contract. In the context of the case the judge, Robert Goff, said:

"Now the question is whether in a case as the present, any contract has come into existence must depend on a true construction of the relevant communications which have passed between the parties and the effect (if any) of their action pursuant to those communications. There can be no hard and fast answer to the question whether a letter of intent will give rise to a binding agreement; everything must depend on the circumstances of the particular case."

Robert Goff went on to say that if work is done pursuant to a request contained in a letter of intent, it will not matter whether a contract did or did not come into existence because, if the party who has acted on the request is simply claiming payment, his claim will usually be based on a quantum meruit. Unfortunately, it seems Robert Goff took a rather simplistic view as there is no hard and fast rule as to what constitutes a quantum meruit payment.

It is of little advantage to a Contractor or Sub-contractor to learn that he is entitled to payment if there is no agreement as to how much the payment will be.

In the case of Kitsons Insulation Contractors Ltd -v- Balfour Beatty Buildings Ltd (1989) the Court had to decide whether a letter of intent sent by the main Contractor to a Sub-Contractor created a contract.

Balfour Beatty was appointed main contractor for Phase 1 of the White City Development for the BBC. Kitsons submitted a tender to Balfour Beatty on the 28 October 1987 in the sum of £1,109,303.00 for the design, manufacture, supply and installation of modular toilet units and accessories. In the period which followed, a large number of variations were made by Balfour Beatty to the details of the work required by them and as a result Kitsons revised their tender to £1,179.379.00.

Balfour Beatty sent a letter of intent to Kitsons dated 23 March 1988. The general gist of the letter was that Balfour Beatty intended to enter into a Sub-Contract with Kitsons using a standard Sub-Contract form, amended to suit Balfour Beatty's particular requirements, which was to be forwarded in due course.

The approximate Sub-Contract amount was £1,162,451.00 less 2½% discount on a fixed price lump sub basis.

Finally a letter of intent requested Kitsons to accept the letter as authority to proceed with the Sub-Contract works.

Kitsons, as requested, signed and returned the letter as acknowledgement of receipt and then commenced work.

It was not until 22 August 1988 that Balfour Beatty drew up and submitted a formal Sub-Contract to Kitsons. Accompanying the Sub-Contract was a letter indicating an acceptance of Kitsons' offer. The letter went on to say that payment was not to be made until the Sub-Contract had been signed by Kitsons and returned.

Kitsons did not sign and return the Sub-Contract. Their stated reasons being twofold. Firstly, the amount in the Sub-Contract received for signing from Balfour Beatty included a number of variations not provided for in the price. Secondly, the main item of cost related to off site fabrication and to safeguard their cashflow, Kitsons had included with their tender an Activity Schedule for interim valuations and payments. No provision had been made for including this Schedule in the Sub-Contract.

Following commencement of the work by Kitsons payments totaling £992,767.00 were made to them by Balfour Beatty during the period October 1988 to January 1989. These payments were based upon the Sub-Contract conditions (with amendments) which Balfour Beatty considered applied. Kitsons claimed that no binding Sub-Contract had been concluded by the parties and claimed to be entitled to be paid on a quantum meruit basis. In other words, a reasonable sum for the work. It was Kitsons' opinion that the amount paid by Balfour Beatty fell £660,000.00 short of what constituted a reasonable amount.

Kitsons commenced an action against Balfour Beatty and the court had to decide a preliminary point as to whether Balfour Beatty in sending a letter of intent to Kitsons dated 23 March 1988 created a contract.

The court held that no contract had been concluded as the parties had not arrived at the stage where it could be said that full agreement had been reached between them. It was considered that the matters outstanding, in particular the method of payment, were too significant for a contract to come into place.

Whilst this decision settled the question of whether a contract had come into being, it left unanswered how much Kitsons were entitled to be paid.

In C J Sims Ltd -v- Shaftesbury Pic [1991] 25 Con LR 72, the plaintiff Contractors sought payment of more than £1m which they alleged was reasonable remuneration for undertaking work on the erection of an office building for the defendants or, alternatively, damages. They applied for summary judgement and an interim payment under rules of the Supreme Court. Shaftesbury maintained that Sims had failed to comply with a condition precedent to the contract. Whether such a condition precedent existed was tried as a preliminary issue. Sims had tendered for the work under a standard form of building contract and, in response to their tender, was sent a letter of intent. Although the standard contract was not signed, Sims was asked to commence work immediately. The letter of intent provided that Sims would be reimbursed for reasonable costs, including loss of profit and overheads, incurred in the event of the contract not proceeding, all of which was to be substantiated in full to the reasonable satisfaction of the Quantity Surveyor.]

Work commenced and whilst negotiations continued as to the precise terms of the contract, no agreement was ever reached. Sims claimed for what it considered to be "reasonable costs to 31 July" and its probable future costs, arguing that the statement in the letter of intent gave them an unqualified right to such payment. Shaftesbury disagreed with this interpretation of the phrase "all of which must be substantiated in full to the reasonable satisfaction of our quantity surveyor" in the letter of intent. They maintained that the last part of the statement obviously applied to everything that had preceded it, and created a condition precedent which had to be complied with before Sims could recover any costs. Further, it was only commonsense that any claim should be itemised. The Court considered that the wording had to be considered in its context and the circumstances of the contract and its object.

The circumstances here were that the plaintiff had been engaged to erect an office block, and it was common practice in the construction industry for Contractors to submit claims. It was expected that the letter of intent would be replaced by a form of contract which made provision for the submission of claims. The purpose of the last part of the statement in the letter of intent was to make sure that a detailed claim was submitted supported by documentation for consideration, and this last part applied to the whole of the statement. "All" meant "all of the plaintiff's claims" and "all of their reasonable costs". A condition precedent was created by this since the words used were mandatory and took account of construction industry standard practice.

The moral of both these cases is clear. Parties to a contract should make sure that all the terms are agreed before work commences. If this isn't possible, any letter of intent should be adequately worded as to the precise method of payment in respect of any work requested to be carried out.

WHAT IS THE PAROLE EVIDENCE RULE?

The courts lay great importance on the performance by the parties to a contract of their obligations under the contract and will always be ready to come to the assistance of a party who has been prejudiced by the other party’s failure to perform.

 The courts lay great importance on the performance by the parties to a contract of their obligations under the contract and will always be ready to come to the assistance of a party who has been prejudiced by the other party's failure to perform. To do so, the courts will need to now precisely what the respective rights and obligations of the parties under the contract are and to do so will rely heavily on any written agreement.

The courts have therefore evolved a rule, known as the parol evidence rule, which holds that, where there is a clear and unambiguous written agreement between the parties, this will be deemed to be the only and exclusive record of their agreement and neither party will be permitted to allege that the terms of the written agreement bearing his signature are not the true terms, and that he signed the document believing it to contain other terms or to mean something else.

This principle will be taken very far, and he will not be permitted to say that he had been mistaken about the meaning of certain terms which he did not understand, or even that the agreement was in a language he did not speak, because the courts will hold that he should have clarified all uncertainties before putting his name to the agreement.

Only where he can show that he was willfully deceived by the other party as to the meaning of the agreement or what it contained, and that pm the strength of this misrepresentation he put his name to the agreement, will he be held not to be bound to the terms of the contract. The onus on him to prove this will be a heavy one.

The consequence of this may be that in the case of a contractor who, in submitting his tender to carry out certain work, attaches conditions or qualifications to his tender (as contractors frequently do), and thereafter signs a written contract without ensuring that his qualifications are embodied in the document, and in fact they are not so embodied, it will probably be held that the conditions have fallen away.

WHAT ARE THE RULES FOR THE INTERPRETATION OF CONTRACTS?

The various standard or model forms of building contract and sub-contract in use today are normally documents of long standing and, having been revised over the years, should contain few errors, inconsistencies and ambiguities.

The various standard or model forms of building contract and sub-contract in use today are normally documents of long standing and, having been revised over the years, should contain few errors, inconsistencies and ambiguities.

These documents are however individually only one of the number which together form the documentation on which a building contract or sub-contract is based. The other documents are the drawings, schedules, bills of quantities, specification etc and these are not standard documents but are prepared specially for the particular contract.

Problems frequently arise when an ambiguity or vagueness or a question of the interpretation of the true meaning of the contract has to be decided and the parties are in dispute.

The adjudication of such a dispute often presents difficulties and the architect or principal agent or ultimately an Arbitrator or Court is faced with the task of determining what the parties had agreed, either explicitly or impliedly, when they entered into the contract; and, if there has been a genuine misunderstanding, which interpretation should prevail.

The general rules for the interpretation of contract may briefly be stated as follows:

(1) The first consideration is to establish the common intention of the parties. ‘The golden rule, applicable to the interpretation of all contracts, is to ascertain and to follow the intention of the parties; and if the contract itself...affords a definite indication of the meaning of the contracting parties, then it seems to me that a court should always give effect to that meaning' (Joubert v Enslin).

(2) Words are to be given their normal everyday meaning unless it appears quite clear from the context that both parties intended them to bear a different meaning, or if the normal meaning would lead to absurdity. If by trade usage or custom the words have a particular meaning, such meaning may be applied.

(3) Where wording in a contract may be interpreted in more than one way, an interpretation shall be used that makes the contract effective rather than void, illegal or impractical.

(4) A clause which is ambiguous shall be interpreted in such a way as to bring it into harmony with the whole of the contract. A contract must be interpreted as a whole.

(5) Where in a contract a general phrase or word follows a series of specific phrases or words, the general phrase or word is to be restricted in meaning to the same class as the specific phrases or words which precede it. This is the eiusdem generis rule. Thus, where a specification clause refers to ‘enamel, varnish, distemper and other finishes, ‘the term' other finishes' is to be restricted to other types of paint finishes, and not, for instance, to textured plaster.

(6) Words written at a later date take precedence over words written at an earlier date. Words that have been typewritten on a document take precedence over words that have been printed on the document, and handwritten words take precedence over both.

(7) Where none of the foregoing rules assists in the resolution of an ambiguity, the contra proferentum rule should be applied. This rule states that where two different meanings can equally well be ascribed to certain words in the contract, the meaning to be adopted is the one that is least favourable to him who wrote the offending words. The reason for this is that it lay within the power of the author of the contract to employ words that made the meaning clear, and if he failed to do so, he should not profit by his negligence. In the case of building contracts, the author is almost invariably the employer or his agents, the architect, quantity surveyor or engineer, so that where this rule is to be applied, any ambiguity will probably be resolved in the contractor's favour.

WHEN CAN IMPLIED TERMS BE READ INTO A CONTRACT?

The express terms of a contract may leave many things unsaid and the question often arises, can other terms and conditions which are not spelt out and recorded by the parties be implied?

Implied terms fall into two main categories.

Firstly, terms which are implied by law.

Terms are often implied by law in cases where it is by no means clear that the parties would have agreed to incorporate them in their contract, but such terms are not normally implied if they are in conflict with the express provisions of the contract.

Ready examples of such terms implied by law are to be found in the law of sale, e.g. the seller's implied guarantee or warranty against defects.

Secondly, terms which are unexpressed provisions of the contract which derive from the common intention of the parties, as inferred from the express terms of the contract and the surrounding circumstances. In other words, a Court would imply not only terms which the parties must actually have had in mind but did not trouble to express but also terms which the parties, whether or not they actually had them in mind, would have willingly expressed if the question, or the situation requiring the term had been drawn to their attention.

In considering whether such terms should be implied in a contract, a Court or an Arbitrator would be guided by the following legal precedents.

"The agreement so constituted may be held subject to an implied or unexpressed term where the court is satisfied that there arises from the language of the agreement itself, and the circumstances under which it was entered into, such an inference that the parties must have intended the stipulation in question that the court is necessarily driven to the conclusion that it must be implied: Douglas v Baynes 1908 TS 1207. The word ‘necessarily' is emphasized; for an implied term is not be to added merely because the court thinks it would have been reasonable to have inserted it in the agreement, or even that only an unreasonable person would have objected to its insertion" : Rapp & Maister v Aronovsky 1943 WLD 68.

As was said in the English Court of Appeal" "A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated someone had said to the parties, ‘What will happen in such a case', they would both have replied, ‘Of course, so and so will happen; we did not trouble to say; it is too clear'. Unless the Court comes to some such conclusion as that, it ought not to imply a term which the parties themselves have not expressed".

"It follows from these principles that before a term can be implied it must be capable of clear and exact formulation substantially in only one way; for the moment alternative possibilities suggest themselves, it is certain that the parties cannot have impliedly agreed on anything in particular" : Rapp & Maister v Arnovsky.

"The circumstances to which the Court will have regard in determining whether or not a term is to be implied are those existing at the time of contract. Subsequent events will not be considered since prophetic powers will not be attributed to the parties" : Van der Merwe v Viljoen 1953 (1) SA 60 (AD).

"The rule to be applied by a Court in determining whether or not a condition should be implied, is well stated by LORD ESHER in the case of Hamlyn & Co. v Wood & Co. 1821 (2) Q.B.D. at 491, as follows: ‘ I have for a long time understood that rule to be that a Court has no right to imply in a written contract any such stipulation, unless, on considering the terms of the contract in a reasonable and business manner, an implication necessarily arises that the parties must have intended that the suggested stipulation should exist. It is not enough to say that it would be a reasonable thing to make such an implication. It must be a necessary implication in the sense that I have mentioned' - per Solomon JA in (Union Government )Minister of Railways and Harbours) v Faux Ltd 1961 AD".

WHAT ARE THE REMEDIES FOR BREACH OF CONTRACT?

When one of the parties to a contract commits a breach of that contract there are in principle three avenues open for the other to follow.

When one of the parties to a contract commits a breach of that contract there are in principle three avenues open for the other to follow. Firstly, he can enforce or uphold the contract and insist upon the agreed performance' i.e. he can insist upon specific performance. Secondly, he can uphold the contract but accept a defective performance. Thirdly, he can resile from the contract - i.e. cancel the contract. But whichever course the innocent party may decide on, he is in each case entitled to compensation for any damage which he may have suffered.

The choice which the innocent party has between specific performance and cancellation is not a free choice. Firstly, he can only insist on specific performance if specific performance is still possible. But even if specific performance is still possible a court has a discretion to refuse ordering it. Secondly, cancellation in only possible if the innocent party has stipulated for himself a right to resile or if the breach is so serious to justify cancellation.

The most difficult question which arises in connection with breach of contract, however, is often that relating to the amount of damages which should be awarded. The principle is simple enough: the innocent party must, by the award of an amount of money, be placed in the position in which he would have been had the breach not taken place - stated positively, in the position in which he would have been had the contract been carried out according to its terms.

It is in the application of the principle that the problem lies. The innocent party is, of course, only entitled to claim compensation for damage caused by the breach of contract: he therefore first has to prove a causal link between his loss and the breach. Secondly, however, it is not possible to recover compensation for all damage which is causally connected with the breach. In certain cases the damage is regarded as "too remote" to justify holding the guilty party liable to compensate it. In principle a party who breaches a contract ought to be held liable only for damage which was foreseen at the time of the breach of contract or which was then reasonably foreseeable and for damage which he undertook to compensate.

WHERE A SPECIFICIATION CALLS FOR MATERIAL FROM A NAMED SUPPLIER “OR OTHER APPROVED”, CAN THE PRINCIPAL AGENT OR ARCHITECT REFUSE TO APPROVE AN ALTERNATIVE SUPPLIER PROPOSED BY THE CONTRACTOR?

The question of an Architect’s right to refuse an alternative supplier proposed by the Contractor where the contract documents named a supplier “or other approved” was the subject of the dispute in Leedsford Ltd v The Lord Mayor, Aldermen and Citizens of the City of Bradford (1956) 24 BLR 45.

The question of an Architect's right to refuse an alternative supplier proposed by the Contractor where the contract documents named a supplier "or other approved" was the subject of the dispute in Leedsford Ltd v The Lord Mayor, Aldermen and Citizens of the City of Bradford (1956) 24 BLR 45. The defendant Council wished to have a new infants' school built. Contract documents including bills of quantities were prepared and submitted to contractors for pricing. Provision was made in the bills for artificial stone which was to be used in the following item:

"Artificial Stone ..... The following to be obtained from the Empire Stone Company Limited, 326 Deansgate, Manchester or other approved firm ......".

The successful Contractor proposed that the artificial stone should be supplied by HK White (Precast Concrete Works) Ltd and Spencer Parkinson and Sons Ltd and sought the Architect's approval. The cost of stone from Empire Stone was £1,250 compared with £500 from the alternative supplier.

The Architect refused to approve the alternative supplier insisting the stone be obtained from Empire Stone.

The matter was referred to the Court by the Contractor who claimed the difference in the cost of stone. The Contractor contended that those words had been inserted for the Contractor's benefit. It was argued that they had the right to put forward and obtain approval for any firm who would supply stone of the proper quality at a price less than the price which Empire Stone Company Ltd would charge. It was further argued that the Architect had broken the contract when he insisted that the stone be obtained only from the Empire Stone Company Ltd.

It was held in the Court of Appeal that the words "or other approved firm" did not give the Contractor an option to submit any firm of their choice for the Architect's approval. The words ".... to be obtained from the Empire Stone Company Limited.... or other approved firm" should be analysed in the following way:

"the builder agrees to supply artificial stone. The stone is to be Empire Stone unless the parties both agree some other stone, and no other stone can be substituted except by mutual agreement. The builder fulfils his contract if he provides Empire Stone, whether the Bradford Corporation want it or not; and the Corporation Architect can say that he will approve of no other stone except the Empire Stone".

Accordingly, the position was that there was an absolute obligation on the Contractor to supply Empire Stone unless the Architect should give his approval to some other stone. Moreover, the Architect was not bound to give any reasons for withholding approval of any other firm. The most that was required of the Architect was that he should act in good faith and no allegation against his good faith was made.

WHEN A CONTRACTOR REQUESTS A PAYMENT GUARANTEE FROM THE EMPLOYER, WHAT AMOUNT SHOULD IT BE FOR?

Clause 3.1 of the JBCC Series 2000 Principal Building Agreement requires the Employer, if the Contractor so requests, to “provide a payment guarantee for the fulfillment of the Employer’s liability” in terms of the agreement..

Clause 3.1 of the JBCC Series 2000 Principal Building Agreement requires the Employer, if the Contractor so requests, to "provide a payment guarantee for the fulfillment of the Employer's liability" in terms of the agreement.

This provision is interpreted to mean that the amount of the guarantee shall be sufficient to cover the Contractor's exposure to risk in the event of non-payment by the Employer.

The amount of the guarantee is not stated, simply because no standard amount could be agreed by the JBCC constituents.

For this reason the JBCC Series 2000 Tender Form now requires each tenderer to state the amount of the Payment Guarantee he requires at the time of tender, thus quite rightly making the Employer aware of all the terms of the Contractor's offer which he is considering for acceptance.

Contractors tendering under these conditions have to decide what the amount of the Payment Guarantee should be and to assess the Contractor's exposure to the risk of non-payment, the following is offered:

- In normal circumstances where interim certificates are issued within 10 days of the end of the monthly valuation period, payment to the Contractor should be effected for the first 4 weeks' turnover in week 7 or 8.

- In the event of late payment by the Employer, a further 2 weeks' work can easily have been done before the Contractor decides to write giving notice of default, resulting in him only being in a position to cancel the contract and cease work in week 12.

- The risk exposure to the Contractor could therefore be equal to 3 months' turnover at peak. On most projects peak turnover is during the latter stages, and this is when the payment guarantee is really essential.

- Where tender documents specify amended periods for certification or payment the risk exposure of the Contractor will correspondingly increase.

- Contracs of very short duration will introduce a greater risk exposure to the Contractor than on longer contracts, and in such situations the Contractor is often required to hand over possession of the works, thereby giving up his lien, at a stage when 50% or more of the contract value has yet to be paid. Without an adequate guarantee the Contractor has only to hope that payment will be made!

The calculation of risk exposure at tender stage based on peak turnover will not always be practical, and for this reason the following procedure is recommended which is based upon 3 times average turnover which is easily calculated by dividing the tender price by the duration in months.

Contract Duration Payment Guarantee

3 months 100% of contract sum

4 months 75% of contract sum

6 months 50% of contract sum

9 months 33.3% of contract sum

12 months 25% of contract sum

Circumstances will often prevail where the tenderer has confidence that the Employer will effect payment as required by the agreement, and in such circumstances the tenderer is at liberty to state in the tender form that no payment guarantee is required.

Contractors should note that they are not obliged to waive their lien in terms of Clause 3.2 of the agreement unless or until the Employer has provided the payment guarantee in terms of 3.1. Failure to provide the required payment guarantee constitutes a ground for cancellation by the Contractor in terms of 38.1.3

DOES A CONTRACTOR HAVE A DUTY TO INFORM THE EMPLOYER OR HIS AGENT OF DEFECTS IN DESIGN?

The answer to the question may well lie in the express terms of the contract.

The answer to the question may well lie in the express terms of the contract. For example clause 4.1 of the JBCC Series 2000 Principal Building Agreement states that "The Contractor shall not be responsible for the design of the works other than the Contractor's or his Subcontractor's temporary works."

However, where the contract is silent on the matter the position is not so clear.

In the following case strict compliance with drawings and the instructions of a professional consultant proved not to be a complete defence for the Contractor.

In Lindenberg v Canning and Others (1992), a property developer, Edward Lindenberg, entered into an oral agreement with Mr Canning, a builder with considerable experience of conversion work in old buildings. That agreement required Mr Canning to carry out some preparatory work for the conversion of the basement of a block of flats in Hyde Park Gate, Kensington. Mr Lindenberg employed a building surveyor who prepared a drawing describing the work to be carried out by Mr Canning which included the demolition or certain walls. The plan showed the external and some internal walls in continuous lines, but other internal 230mm brick walls and a chimney breast were marked with broken lines.

A note which was linked by a wavy line to one of the walls shown with a broken line, read "include for removing non-load-bearing walls where indicated and allow to make good all disturbed surfaces." Mr Canning interpreted the plan as meaning that the walls shown with broken lines were non-load-bearing and should be removed. Mr Canning's men began to demolish the 230mm walls using hand tools and manual labour. They did not provide any temporary propping for the ceiling because the plan had indicated that the walls were non-load-bearing and showed no permanent replacement for them. In fact the walls were load-bearing and their collapse caused damage to the floor.

Mr Lindenberg claimed damages in respect of sums he had paid out to the owners of the building under an indemnity agreement, together with fees paid to a consultant engineer and solicitors. He also claimed money he had already paid Mr Canning in advance of his carrying out the work. The basis of Mr Lindenberg's claim was that Mr Canning was in breach of an implied term in his contract to carry out his work with due care and skill.

His Honour Judge John Newey QC held that, in view of the inadequacy of the plan and the likelihood that walls which were 230mm thick were supporting the floor above,

Mr Canning should have proceeded with the greatest caution.

Although the judge found that the plan with which Mr Canning was supplied showed tha all of the walls marked with broken lines were non-load-bearing, this was such an obvious error, particularly in relation to the chimney breast wall, that Mr Canning should have had grave doubts about the plan. He should have realized that the 230mm walls had not been erected simply to separate stores, but to carry the weight of the floor above them. He should therefore have at least raised with the surveyor doubts as to his plan and asked whether the surveyor was sure that the walls were not load bearing. Even if assurances had been given, Mr Canning would have been prudent to put up temporary propping, but in the absence of such assurances, he should undoubtedly have done so. By failing to do so, he behaved with what the judge described as "much less care than was to be expected of the ordinarily competent builder" and he therefore acted in breach of contract.

As a result, Mr Lindenberg was entitled to recover damages from Mr Canning. However, the judge held that the surveyor should bear 75 per cent of the responsibility for the damages under the rules of contributory negligence, and so Mr Canning was liable to pay only 25 per cent of the damages suffered by Mr Lindenberg.

Commentary

It is particularly instructive that the judge in this case commented that, as no assurances had been received from the person who had prepared the plan that the walls were in fact not load-bearing as the note indicated, the Contractor should, on his own initiative (and presumably at his own cost), have taken his own precautions.

There is doubt that even a provision such as clause 4.1 of the JBCC Series 2000 Principal Building Agreement would have come to the aid of the Contractor in this case, since he would remain responsible for his own temporary works (propping), the absence of which caused the collapse.

WHERE MATERIALS ARE UNIQUELY SPECIFIED BY NAME AND PROVE TO BE UNSUITABLE FOR THEIR PURPOSE OR ARE  DEFECTIVE, WHO IS RESPONSIBLE – THE EMPLOYER OR THE CONTRACTOR?

In the case of Young and Marten Ltd v McManus Childs Ltd (1968) 9 BLR 77, an action was commenced as a result of defective roof tiles being supplied and fixed on a housing site.

In the case of Young and Marten Ltd v McManus Childs Ltd (1968) 9 BLR 77, an action was commenced as a result of defective roof tiles being supplied and fixed on a housing site. The tiles supplied were referred to as ‘Somerset 13'. When supplied the tiles appeared sound and there was no complaint with regard to the fixing. However, within 12 months of being fixed considerable numbers of the tiles began to disintegrate in consequence of a latent defect. The dispute was referred to the House of Lords which held that there will be an implied term in the contract for the supply of work and materials that the materials used will be of merchantable quality. A further term could be implied that the materials used will be reasonably fit for the purpose intended.

The circumstances of the particular case however could result in these terms not being implied and it was conceded by counsel that as the product was specified by its patent or trade name ‘Somerset 13', the circumstances were sufficient to exclude the implied terms as to fitness for purpose intended, but this was however not sufficient reason to exclude the implied term of merchantable quality. The Contractor was therefore liable regarding roof tiles which were substandard and contained a latent defect.

Hudsons Building and Engineering Contracts (tenth edition) at page 295 states, "The basic warranty in regard to materials is that they shall be of good quality, that is to say good of their kind described, and this warranty is not displaced by the stipulation of a branded product or of the source of supply in the original contract documents or, it is submitted if the supplier is nominated under a provision in the contract. Beyond any doubt this basic warranty is independent of fault.............. Undoubtedly however, as a general rule the Contractor's obligation will not extend beyond supplying a material of good quality conforming to the express description of it in the contract documents, if the description is precise and the choice of the material is indeed the architect's or engineer's".

In summary then, where the goods or materials are specified by a unique name, patent or trademark, the Contractor is liable if the goods are substandard - the term used is merchantable quality.

If however the goods are good of their kind but are not suitable for their intended use or the circumstances for which they are specified, then liability rests with the Employer.

Clause 8.5.10 of the JBCC Series 2000 Principal Building Agreement relieves the Contractor of any liability for a latent defect in material and goods specified by trade name, provided that the Contractor cedes to the Employer any right of action that may exist against the Supplier or Manufacturer.

DEFINITION

- A patent defect is a defect which a reasonable examination at final completion would disclose.

- A latent defect is a defect which a reasonable examination would not disclose but which manifests itself at some later date.

WHAT IS A BUILDERS LIEN?

A building lien is a right conferred by law and is the most powerful tool a building contractor has to ensure payment. In South Africa the lien is regulated by common law, in terms of which a lien will always apply unless there is agreement otherwise.

A building lien is a right conferred by law and is the most powerful tool a building contractor has to ensure payment. In South Africa the lien is regulated by common law, in terms of which a lien will always apply unless there is agreement otherwise. This waiving of the lien is fairly common, particularly where the contractor obtains a payment guarantee from the employer.

Where there has been no waiver of the lien a builder has a lien or "jus retentionis" over the structure or article he has built until paid for his work and labour. He does not, however, have a lien on any retention money.

The lien may be effective against any of the following parties:

  • The bondholder;
  • The employer's insolvent estate;
  • The purchaser at a sale in execution who at the time is also a bondholder;
  • A purchaser under a judicial sale;
  • A third party who has acquired the employer's property.

For a lien to be effective there must be actual possession on the part of the builder. There must be both physical control or occupation ("detentio") and the intention of exercising possession ("animus possidendi"). Possession must be clear but temporary absence will not constitute loss. A trespassing notice is not sufficient to protect the lien. If loss of possession occurs this destroys the lien and recovery of possession does not revive it.

Separate persons who have separate contracts with the employer, and perform different kinds of work in the building, may each have a valid right of retention against the employer, but will have to establish that the employer has been enriched.

Where a builder is deprived of possession by force, fraud, a clandestine act on the part of the owner or judicial pressure he will be entitled to have possession restored by an order of the court.

A Contractor who waives his lien without exchanging it for a suitable guarantee of payment gives up a very important common law right.

The JBCC Series 2000 Principal Building Agreement deals with payment guarantees and the Contractor's lien in clauses 3.1 and 3.2 and provides that before the Employer can require the Contractor to waive his lien he must provide the Contractor with a payment guarantee.

Some Employers call on the Contractor to waive his lien but insist that they will not provide him with a payment guarantee.

Contractors would be well advised to investigate the financial profile of Employers who refuse to provide security in such a case.

Since a builder's lien enjoys priority over a mortgage bond, it is understandable that banks and institutions advancing funds in the form of mortgage loans require by way of fairly general practice that the Contractor must waive his lien in favour of the mortgagor as a condition precedent to the operation of a loan.

In many instances the Employer needs this money to remunerate the Contractor and the Contractor is, therefore, compelled to waive his lien. Although this procedure has almost become standard practice, the Contractor should nevertheless exercise the utmost care in waiving the lien and special attention should be paid to the wording of the document, commonly called "waiver of contractor's lien".

It is also of primary importance for such a waiver to be coupled to an acceptable cession by the Employer in favour of the Contractor, of the proceeds of the loan. This cession is aimed at reinstating the Contractor for his loss of security and the following basic form of cession is suggested:

"In consideration of the Contractor (name) having renounced his builder's lien in favour of

(the mortgagee), on theproperty situated at I, the undersigned Employer cede to (the Contractor) all monies due to me from the loan granted to me by the Mortgagee against the security of the said property and the buildings to be erected thereon. The above monies shall be paid direct to the Contractor by the Mortgagee in installments as the work proceeds against production of payment certificates."

Understand that it is not a good idea, (as some Contractors seem to think), to make an arrangement whereby the Contractor will waive his lien in exchange for not having to produce a construction guarantee. This is not a good exchange!

CAN A BANK LEGALLY EJECT A CONTRACTOR FROM SITE WHO HAS INVOKED HIS COMMON LAW BUILDER’S LIEN AGAINST THE DEVELOPER, BECAUSE THE BUILDER HAS SIGNED THE BANK’S WAIVER OF LIEN?

The Courts were called upon to answer this question in NBS Bank Bpk v Dirma BK en n Ander 1998 (1) SA 556 (T).

The bank had advanced money for the development of a sectional title scheme to the developer, who in turn appointed the builder. The loan was secured by a mortgage bond over the property belonging to the developer.

At the time of the conclusion of the loan agreement the bank and the developer had agreed that the bank's standard terms and conditions" as well as its "additional conditions" should apply. In terms of the "additional conditions" the developer undertook to ensure that the builders working on the site renounce their rights of lien in favour of the bank in writing. The additional conditions were not however incorporated into the bond deed.

In compliance with the developer's undertaking the builder signed a "waiver of builder's lien". In it the builder agreed that the bond to be passed by the developer in favour of the bank should take priority over any lien of the builder for work done and that in so far as any rights conferred on the bank by the said bond are concerned, the builder would not enforce its right of lien against the bank or against the developer to the detriment of the bank.

Early in 1997 the developer and the builder became involved in a dispute. The result was that the builder refused to continue performing until he was paid for the work already done, while the developer refused to pay the builder because, so he claimed, the building contract had been legitimately cancelled and no money was due to the builder by the developer.

The builder thereafter invoked his common law builder's lien and refused to vacate the site. The bank applied for the ejectment of the builder from the building site. The developer supported the application.

In considering the bank's application the Court held that the question whether the bank was entitled to the order ejecting the builder depended on the correct interpretation of the "waiver of builder's lien" read with the provisions of the mortage bond.

The applicable clause in the "waiver of builder's lien" reads "... We Dirma CC hereby agree that the bond passed by the....owner in favour of the NBS Bank Ltd...shall take priority to any lien...to us as building contractor for work done or to be done by us... We agree to bind ourselves not to enforce our aforesaid right of lien...against NBS or against the owner to the detriment of the NBS.

The applicable clause in the "additional conditions" reads "...The borrower undertakes that all contractors...engaged in the works who might have or be entitled to acquire any lien...on the property shall renounce and waive such right in favour of the NBS in writing..."

The Court held that it was clear that the "waiver of lien" did not amount to a general renunciation of its rights by the builder, but rather to waiver of its right of lien with respect to those rights acquired by the bank under the bond, coupled to an undertaking not to exercise any such right against the bank or the developer to the detriment of the bank, once again with reference to the rights acquired by the bank in terms of the bond.

The Court decided, that the waiver would accordingly apply only if the bank decided to foreclose the bond, in which case the waiver would mean that the builder would be unable to enforce its right of lien to the detriment of the bank. The builder's right of lien would normally, have enjoyed precedence over the bank's rights under the bond, so that the waiver meant that the builder had agreed to relinquish those rights should the bank decide to enforce its rights under the bond.

Furthermore, the effect of the waiver was not however also to strip the builder of his right of lien so as to enable the bank to implement the provisions of the ‘additional conditions'. If that had been the intention the waiver would have referred to those conditions. The waiver signed by the builder referred only to the provisions of the bond and to the bank's rights thereunder.

The Court concluded that because the bank did not exercise its rights under the bond, the application for the ejectment of the builder had to be dismissed.

The rationale of this case is clearly that the builder's waiver of lien in this instance did not amount to a general renunciation of its rights of lien but only to waiver of such rights with respect to those rights acquired by the bank under the mortgage bond. The waiver of lien is accordingly only applicable where the bank has enforced its rights under the bond and as the bank failed to call up the bond, it was therefore not entitled to rely on the builder's waive of lien in its attempt to eject the builder from site

WHERE A CONTRACTOR SUBMITS A PROGRAMME, IS HE OBLIGED TO FOLLOW IT OR CAN HE AMEND IT AT HIS OWN DISCRETION?

Some forms of contract not only require the Contractor to submit a programme but specifically give the Employer’s Agent powers in relation to the programme.

Some forms of contract not only require the Contractor to submit a programme but specifically give the Employer's Agent powers in relation to the programme.

The JBCC Series 2000 Principal Building Agreement on the other hand contains little or no reference to the Contractor's programme.

The Preliminaries document, clause 4.2 addresses the programme and requires the Contractor to prepare and be responsible for a programme, in sufficient detail to enable the Principal Agent to assess the progress of the Works, and to implement and modify the programme where significant deviations take place.

The Contractor is required to provide copies of the programme for the Principal Agent, but noticeably, there is no requirement for the Principal Agent to approve or agree the programme.

Some forms of contract therefore, expressly require the Contractor to seek approval of his programme and amendments thereto, whereas others do not.

In the absence of an express requirement to seek approval, the Contractor can prepare and amend his programme at his own discretion.

However, Contractors should be aware that, if amendments are made without gaining the approval of the Principal Agent, then the Principal Agent may feel under no obligation to issue drawings, details, etc, in order to meet the revised programme.

A CONTRACTOR’S DUTY TO CARRY OUT THE WORKS‘REGULARLY AND DILIGENTLY’. WHAT DOES IT MEAN?

Many forms of construction contract place an onus on the Contractor to carry out the works “regularly and diligently” and contain provisions for cancellation of the contract if he fails to do this.

Many forms of construction contract place an onus on the Contractor to carry out the works "regularly and diligently" and contain provisions for cancellation of the contract if he fails to do this.

For example clause 15.3 of the JBCC Series 2000 Principal Building Agreement requires the Contractor to "proceed with due skill, diligence and regularity" to complete the works.

But what do the words "regularly and diligently" actually mean?

In the case of West Faulkner Associates v London Borough of Newham (1992) the Borough had employed William Moss as the main Contractor to carry out certain refurbishment works to one of their housing estates, under conditions which required them to perform the work "regularly and diligently".

Although Moss provided adequate quantities of materials and labour to the site, the work was not carried out in accordance with detailed schedules which had been prepared on behalf of the employer.

His Honour Judge John Newey CC held that Moss had failed to proceed "regularly and diligently" in accordance with the requirements of the contract. He held that a Contractor who merely showed that he was personally industrious according to his own standards, or who used his actual resources to the best of his ability, could nevertheless be in breach of an obligation to proceed regularly and diligently if he fell short of the general standard expected of Contractors in his position or did not satisfy the demands of the particular contract on which he was employed.

He found that the requirement to carry out works "regularly and diligently" meant that Contractors should:

"go about their work in such a way as to achieve their contractual obligations. This requires them to plan their work, to lead and manage their workforce, to provide sufficient and proper materials and to employ competent tradesmen, so that the works are fully carried out to an acceptable standard and that all time sequence and other provisions of the contract are fulfilled.

CAN AN EMPLOYER GET RID OF IT’S PRINCIPAL AGENT AND TAKE ON THE JOB ITSELF?

Can an employer dismiss its Project Manager or Principal Agent part way through a project and appoint itself instead?

Can an employer dismiss its Project Manager or Principal Agent part way through a project and appoint itself instead? This was the question that the judge had to answer in the British case of Scheldebouw BV vs St James Homes (Grosvenor Dock) Ltd. In many respects the decision is of general importance.

St James was the employer and it had decided to tackle a project using a project management method. This entailed employing a number of contractors and a professional team, which included a project manager, an architect and a cost consultant. Scheldebouw was the specialist cladding contractor and Mace was the project manager. After a substantial amount of work had been done, Scheldebouw received a letter from St James announcing that Mace was no longer to be the project manager and that it would itself undertake all the responsibilities of the project manager under Scheldebouw's contracts. Scheldebouw expressed concern. St James replied that there was no reason why it could not do so and it was entitled to replace the project manager. So, the argument went, there was no reason why St James should not step into Mace's shoes.

The judge did not agree. He analysed the role of the project manager. Under this contract it had two separate and distinct functions. First, it was the agent of the employer and gave effect to the employer's wishes and instructions; as in the case of variations. Its second function was quite different. It had to reach decisions on matters where the contractor and the employer might have opposing interests. The first role the judge called "the agency function", the second "the decision-making function", a similar function in fact to the Principal Agent in our own JBCC 2000 Series building agreement.

There is a long number of cases which have created a body of law on the duties of certifiers and others with decision-making functions in construction contracts. The judge drew two central propositions from these cases: first, the precise role of the decision-maker depended on the terms of the contract; and secondly; generally, the decision-maker in performing its function has to act independently, impartially, fairly and honestly.

The judge found that St James did have the power to dismiss and replace the construction manager but that it could not appoint itself.

He said that it was so unusual for the employer to be the certifier and decision-maker that it would need express term of the contract to bring this about. Furthermore the whole structure of the contract was built on the premise that the employer and the project manager or principal agent were separate entities. In addition, the project manager had to make decisions in a fair, impartial and honest manner. While not impossible, this would be much more difficult for the employer than for a professional agent. While it was true in one sense that both the employer and the contractor have a common interest in ensuring the project manager's decisions are correct, anyone who has had experience of construction disputes will have seen how each party is often driven by its own commercial interests.

The judge also pointed out that under most forms of construction contract the contractor has dual protection. Decisions are made by a professional who, though employed by the employer, is separate from it. And that professional has to act fairly, impartially and honestly. If the employer becomes the project manager, one of those protections is lost. Other professionals might be involved in the decision -making but that was not a sufficient protection. Finally, although there are reported cases where the decision-maker was a direct employee of the employer, the judge's research showed that this had only occurred when the contractor had known of this situation from the outset. That was not so in this case.

The lesson here is that Members should never enter into an agreement using the JBCC Series 2000 documentation or similar contracts where the employer wishes to appoint himself as Principal Agent.

HOW SHOULD A PRINCIPAL AGENT DEAL WITH REVISIONS TO THE DATE FOR PRACTICAL COMPLETION WHEN THERE ARE MULTIPLE CAUSES OF DELAY?

Clause 29.0 of the JBCC Principal Building Agreement deals with delays and revisions to the intended ate for practical completion.

Clause 29.0 of the JBCC Principal Building Agreement deals with delays and revisions to the intended ate for practical completion.

Clause 29.1 and 29.2 both list causes of delay which can be called ‘excusable' delays for which the Contractor is entitled to an extension of time in which to complete the Works.

Clause 29.1 lists those causes which are excusable but for which the Contractor will receive no monetary compensation.

Clause 29.2 on the other hand lists those causes which are also excusable but for which he will receive monetary compensation for his additional costs because the risk of these classes of delay are carried by the Employer.

But what if 29.1 type causes of delay and 29.2 causes of delay occur at the same time and/or overlap with each other?

It is important to both Employer and Contractor that the Principal Agent grants extra tome under the correct clause because of the question of monetary compensation.

The Principal Agent has a duty under clause 29.7.3 to "identify each circumstance and relevant subclause for each revision (of time) granted or give reasons for amending or refusing the (Contractor's) claim."

In "Delay and Disruption in Construction Contracts", the author Keith Pickavance favours the "Dominant Cause" approach to the problem.

The dominant cause approach to the allocation of damages arose from a shipping accident case, Leyland Shipping Co. Ltd v Norwich Union Fire Insurance Society Ltd, in which a ship was torpedoed by a German submarine and was subsequently taken to Le Havre for repair. Whilst it was in the deep-water harbour a storm blew up and the ship was towed to anchorage near a breakwater where it broke up and sank. The question was what caused the losses arising out of the ship sinking? Was it the war action for which the owners were not insured, or the perils of the sea for which they were insured? It was held that the ship sank because it was torpedoed and the losses were not recoverable from insurers. Lord Shaw said: "When various factors or causes are concurrent and one has to be selected... the choice falls upon the one to which may variously be ascribed the qualities of reality, predominance, efficiency..."

In the field of construction delay, determining what is the dominant cause is a matter of the application of common sense to construction logic. For example, if delay and extra costs are suffered because work is suspended on a Monday as a result of drawings not arriving in due time and, instead of arriving on Monday, they arrive the following Friday, then without more, the presumption may be that the delay and the costs incurred from Monday to Friday will have been caused by the absence of drawings.

Now if on Tuesday, the work could not proceed because of inclement weather or materials did not arrive, that would probably not upset the presumption because even without these events the subsisting delay in receiving design information would still prevent the work from proceeding and be the dominant cause of the loss.

However, supposing on Tuesday the building burnt down, could it then be reasonably be said that on Wednesday the reason that progress was disrupted was because the drawing information had not arrived? Or, is it more reasonable to say that even if the drawings had been supplied, there was no building left to which the design could be applied? The fire would then be the cause of the delay and the associated costs.

Supposing then, the same fire does not burn the entire building to the ground, but merely damages a few rooms on the ground floor whilst the design information which is lacking is required for work to the upper floor. Then, common sense dictates that, because the fire has not destroyed the relevant elements, the subsisting cause of disruption and costs in relation to the upper floor layouts is the absence of the design drawings.

Is this, then, the formula? If, discounting subsequent events, the work could proceed if the subsisting factor had not occurred, then the subsisting factor is the cause of the delay.

Similarly, if the next logical event in the sequence of construction is the completion of the design layout for wall partitions, which is delayed, then, for example, the late delivery of doors cannot logically be the cause of the disruption costs because, even if they had been delivered, without the layout of the walls the doors could not be installed. Similarly, if there is a delay in the delivery of the design of the wall layouts and the floor slab is condemned and has to be replaced, then, from the moment of the condemnation, the logical cause of the delay in regard to that element can no longer be the failure to provide the design layout for the internal walls, but logically, the cause is then the absence of a floor upon which to put the walls, even if the designs were complete.

WHEN DELAYS OCCUR, CAN A CONTRACTOR BE INSTRUCTED TO ACCELERATE THE WORK TO FINISH ON THE DUE DATE IN LIEU OF BEING GRANTED EXTRA TIME?

Inevitably there are contracts which suffer from delays which pose a threat that the contract competition date will be exceeded.

Inevitably there are contracts which suffer from delays which pose a threat that the contract competition date will be exceeded.

If the delays are not of the Contractor's own making, then under the provisions of most model forms of building contract, he will be entitled to an extension of time in which to complete the work.

For example, clause 29.0 of the JBCC Series 2000 Principal Building Agreement lists a number of circumstances which may cause delay, ranging from "inclement weather" to any other cause beyond his (the Contractor's) reasonable control, which will entitle him to receive a revision of the date for practical completion, in other words an extension of time.

This is the ONLY provision in the contract dealing with delays.

There is no facility whatsoever for accelerating or expediting the completion of the work and it is important to understand that a Principal Agent who instructs or requests the Contractor to accelerate or expedite the work, even if extra payment is promised, is exceeding the powers given to him under the conditions of contract.

Clause 17.0 of the JBCC Principal Building Agreement limits the powers of the Principal Agent to giving instructions only in regard to the items listed, none of which refer to accelerating or expediting the completion of the works.

To introduce such a provision, after the contract has been entered into would be an attempt to change the conditions of contract, an act which is not possible unless both parties agree and record their agreement in writing as provided for in clause 1.8.

Moreover there is no provision for any adjustment to be made to the contract value or any means of calculating that value which would arise from an instruction to accelerate.

Experience shows that where contractors have been persuaded to forego their entitlement to an extension of the contract period and to accelerate the work to an early finish:

  1. The exercise is often not successful because of other subsequent delays.
  2. The quality standard of the work deteriorates.
  3. Productivity efficiency is lost and costs escalate rapidly.
  4. Adjustments to the contract value are rarely adequate to compensate the Contractor and his Subcontractors for the extra costs they incur.

What steps can a Contractor take when he is asked to accelerate or expedite the work in lieu of being granted his entitlement to an extension of time?

  1. He should be careful to record that there is no provision in the contract for this event. There is only provision in the contract for an extension of time.

This would amount to a change in the conditions of contract which can only be agreed by the parties themselves and cannot be agree to by the agents of the Employer.

  1. He could approach the Employer directly and ascertain whether he in fact does require acceleration to take place.
  2. He should be careful to avoid any agreement which leaves the assessment of costs incurred by accelerating at the discretion of the Principal Agent or Quantity Surveyor - there are no rules or provisions in the contract to facilitate this

He should rather obtain an agreement for a "cost plus" reimbursement or agree a figure "up front". Always remembering that an estimate of the costs of acceleration is invariably inadequate at the end of the day.

  1. Great care should be taken in entering into such a venture - expediting or accelerating the work to an early completion can be a very difficult exercise and the effects on management, labour, productivity, quality and costs in general, can be considerable if not traumatic.

WHEN THE PRELIMINARIES AMOUNT IS TO BE ADJUSTED DUE TO EMPLOYER DELAYS, SHOULD THE EVALUATION RELATE TO THE PERIOD WHEN THE DELAY OCCURS OR TO THE OVERRUN AT THE END OF THE CONSTRUCTION PERIOD?

It is common practice for decisions concerning the award of an extension of time to be made before considering the matter of prolongation costs.

It is common practice for decisions concerning the award of an extension of time to be made before considering the matter of prolongation costs. Once an extension of time has been granted, the evaluation of the additional prolongation costs is often related to the period between the contract completion date and the extended completion date. Is this the correct method?

This is particularly relevant when making adjustments to Preliminaries under the provisions of the JBCC Series 2000 Principal Building Agreement and when the Contractor has selected Alternative B as his preferred method of adjustment.

Alternative B requires the Contractor to provide a detailed breakdown of his Preliminaries giving full particulars of administrative, supervisory and other personnel, plant, transport and other resources and charges. The breakdown shall show the periods to which the individual items relate.

The intention of most construction contracts is for the Contractor to be reimbursed the additional cost which results from Employer delays. This involves a comparison between the actual costs incurred and what the cost would have been had no delay occurred. Where, for example, time is lost awaiting details which causes a four-week delay to the critical path, evaluating the prolongation costs associated with the extra four weeks on site, following the revised contract completion date, would obviously not produce the correct answer. A more accurate evaluation would be achieved by reference to the costs incurred during the four weeks when the information was late in arriving.

The Delay and Disruption Protocol, published by The Society of Construction Law, with regard to this matter, states:

‘Arguments commonly arise as to the time when recoverable prolongation compensation is to be assessed: is it to be assessed by reference to the period when the Employer Delay occurred (when the daily or weekly amount of expenditure and therefore compensation may be high) or by reference to the extended period at the end of the contract (when the amount of compensation may be much lower)? The answer to this question is that the period to be evaluated is that in which the effect of the Employer Event Risk was felt.'

It is clearly intended that, once it is established that additional payment is due for prolongation resulting from employer delays, the evaluation should relate to the period when the effect of the delay occurs and not to the overrun period at the end of the contract.

WHEN A CONTRACTOR IS BEHIND PROGRAMME, IS HE ENTITLED TO AN EXTENSION OF TIME WHERE HE IS DELAYED BY INCLEMENT WEATHER BUT WOULD NOT HAVE BEEN AFFECTED BY THE WEATHER IF HE HAD BEEN ON PROGRAMME?

Many forms of building contract include provisions which entitle the contractor to an extension of time for completion of the works where he is delayed by inclement weather.

Many forms of building contract include provisions which entitle the contractor to an extension of time for completion of the works where he is delayed by inclement weather.

In the case of Walter Lawrence and Son Ltd v. Commercial Union Properties (UK) Ltd (1984), the progress and completion of the work was delayed due to adverse weather conditions. The progress of the work was behind programme and it was argued by the architect that, had work been carried out in accordance with the programme, the weather would not have affected the progress or completion of the works.

The court did not accept the architect's interpretation of the contract. It was clear from the wording of the contract that if the delaying event, which in this case was adverse weather, affects the progress and as a consequence the completion date, then a right to an extension of time arises. There is no reference in the extension of time clause in the contract to the programme and therefore the contractor's entitlement should not be affected if he is behind programme.

The governing factor to the contractor's entitlement is whether the adverse weather conditions actually delayed his progress and in turn affected the completion date.

CAN WORK BE OMITTED FROM A CONTRACT AND GIVEN TO SOMEONE ELSE?

Standard forms of contract in general provide for the work to be varied, including omissions, and a genuine omission of work is not a breach of contract giving rise to the claiming of damages.

Standard forms of contract in general provide for the work to be varied, including omissions, and a genuine omission of work is not a breach of contract giving rise to the claiming of damages.

However where work is omitted with the intention of giving it to someone else, perhaps at a lower price, this would constitute a breach entitling the Contractor to recover damages which , in this instance, would be the profit on the work removed from the contract.

This was the decision in Hydro Holdings (Pty) Ltd vs Minister of Public Works 1976(4)778 where McEwan, J. held:

"Where a building contract makes provision for the issue of variation orders by the Owner (or, the Owner's Agent) whereby the Owner may inter alia omit items of work from or add new items of work to, the contract, any omissions so ordered have to be genuine omissions in the sense that the Owner has decided not to go on with the particular items of work. The power cannot be used to take away items in respect of which the Contractor has tendered and then to award them to some other Contractor, If that was done it would amount to a breach of contract on the part of the Owner".

The South African court, while accepting that the power to order omissions could not be used to take way items in respect of which the applicant had tendered in order to award them to some other Contractor, and that any such action would amount to a breach of contract, relied heavily on Hudson and the judgement quotes the following passages from Hudson:

"It is self-evident that the building owner must permit the contractor to carry out the whole of the work and that, if he prevents the contractor from so doing, the contractor will have remedy either on a quantum meruit for what he has done or by way of damages...."

"....the point arises, however, in a more subtle way where there is a variation clause in the contract empowering the employer to omit the work, and the employer attempts to omit work under that clause because he wishes the work to be carried out by someone else than the contractor. Under the terms of most contracts, an employer who exercises a power to omit work must genuinely require the work not to be done at all, and cannot exercise such a power with a view to having the work carried out by someone else".

"The contractor, however, is entitled to perform all the contract work, so that a provision giving the employer or his agent, a power to make omissions only contemplates genuine omissions, that is, things that are to be entirely omitted from the works. The employer is not, it is submitted, entitled to use the power to omit work from the contract works in order to give it to another contractor to do, whether under a provision similar to the above clause or otherwise."

The court found that the propositions set out in Hudson were so clearly based on common sense and business morality that they hardly needed authority to support them.

Substitutions similarly may not be effected to change the conditions. Thus it would not be permissible to substitute a provisional sum for measured work. In this respect the Principal Agents' discretion is restricted.

CAN A CONTRACTOR BE FORCED TO CARRY OUT EXTRAS AFTER PRACTICAL COMPLETION?

Many instances occur where Contractors are instructed to carry out extra work after Practical Completion has been achieved and in many cases the Contractor is willing to oblige.

Many instances occur where Contractors are instructed to carry out extra work after Practical Completion has been achieved and in many cases the Contractor is willing to oblige.

But what if the Contractor is unwilling to carry out such instructions - can he be forced to do so?

Hudsons "Building and Engineering Contracts" tenth edition at page 326 states.

"......it is submitted that under most sophisticated contracts variations cannot be ordered after Practical Completion in the absence of express provision, unless of course the Contractor is willing to carry them out."

This view is based on the case of S.J. & MM. Price Ltd versus Milner (1968), where a specification omitted mention of many necessary items - tiles, kitchen fitments, wardrobes, garden walls, cupboards etc.

It was held by Blain J., that there was in implied term for sufficient instructions to be given to the Contractor. The Employer had failed to give instruction until after Practical Completion and the Contractor was entitled to rescind the contract.

What if the Contractor is willing to carry out the extra work, but not at the prices in the original contract?

‘Keating on Building Contracts' 5th Edition at page 92, deals with the situation where a variation of this type is issued and the work is carried out where it states:

"Extra work may be of the kind contemplated by clauses of the contract which provide for the ordering of extras or it may be so peculiar and so different that it is outside the contract. It may be work outside the contract if it is carried out after completion of the original contract work. Extra work outside the contract is not governed by the terms of the contract, and need not therefore be ordered in writing. The Employer is liable to pay a reasonable price for such work carried out at his request, but may exceptionally not be so liable if the original contract is not expressly or by implication replaced by a new contract and if there is no other basis for liability as, e.g. an implied promise to pay. "In order to make a person liable on a quantum meruit there has to be a necessary implication that the person liable is agreeing to pay." It is unlikely to be sufficient for a Contractor to claim after the works are completed that extra work is outside the terms of the contract."

Summary

A Contractor is not obliged to carry out variations/extras where the instruction is issued after Practical Completion unless there is a clause in the contract which gives the Employer or his agent power to issue an instruction of this nature.

For instance clause 17.2 of the JBCC Principal Building Agreement provides that the Contractor is not obliged to carry out any additional work after the date of practical completion other than making good damage which may have been caused to the works and attending to defects.

Where the Contractor is willing to carry out extra work, but only at a reasonable price, then he should make it clear that this is the only basis on which he is prepared to proceed and obtain the Employer's agreement before he proceeds.

WHERE THERE IS PROVISION IN A CONTRACT THAT AN ORAL INSTRUCTION SHALL BE OF NO FORCE OR EFFECT, WILL A CONTRACTOR BE DENIED PAYMENT IF HE OBEYS AN ORAL INSTRUCTION TO PERFORM ADDITIONAL WORK?

Clause 17.0 of the JBCC Principal Building Agreement provides for the issuing of contract instructions by the Principal Agent.

Clause 17.0 of the JBCC Principal Building Agreement provides for the issuing of contract instructions by the Principal Agent.

A contract instruction is defined as "a written instruction signed and issued by or under the authority of the Principal Agent to the Contractor."

Sub-clause 17.3 provides that "an oral instruction issued by the Principal Agent or any other agent shall be of no force of effect. Neither the contractor nor the employer may rely upon an oral instruction for any purpose."

It often occurs that contractors are nevertheless given oral instructions and on many occasions they proceed to obey them. If no written confirmation of the instruction is subsequently given, can the contractor be denied payment in strict compliance with the above provision?

The case of Bank v Grusd (1939) addressed a similar question.

A building contract concluded in writing between the parties included a clause providing that no extra work should be done unless upon the written instruction of the owner and that no claim for extra payment should be entertained unless supported by the written authority of the owner.

The owner, a married woman, sued the contractor in the magistrates court, Johannesburg, for various amounts arising out of the building contract. The contractor counterclaimed for the payment of extras.

The magistrate found in favour of the owner on the counterclaim as follows:

 " In view of the terms of the written contract, which I find was the whole contract between the parties, and in view of the clause providing that no extra work is to be done except on the written authority of the owner, and in view also of defendant's failure to prove the express waiver of that clause which he pleads, I am of the opinion that he is not entitled to claim any payment in respect of extras."

The matter was taken on appeal before judge Maritz who came to a different conclusion, as follows:

" "In my opinion the magistrate erred in so strictly construing this clause in the written contract. In Hill v. The South Staffordshire Railway Company (12 L.T.63) a somewhat similar clause fell for construction. It provided that it should not be lawful for the contractors to make alterations, additions, or omissions without the consent in writing of the engineer. TURNER, I.J., at page 65, said the following: "It cannot, I think, be disputed that there is much difficulty in the construction of this clause. Assuming, however, its construction to be more favourable to the appellants than it has seemed to me to be, I do not think that their case would be materially assisted by it, for whatever might be the effect at law. I think there has been such conduct on the part of the company as would raise an equity against them entitling the plaintiff to payment for the alterations, additions and omissions. In my opinion, companies must, no less than individuals, be answerable to the jurisdiction of this Court in cases of fraud; and I think that, in the eye of this Court at least, it would be a fraud on the part of this company to have desired, by their engineer, these alterations, additions and omissions to be made, to have stood by and seen the expenditure going on upon them, to have taken the benefit of that expenditure, and then to refuse payment on the ground that the expenditure was incurred without proper orders having been given for the purpose."

Further, in Gorfinkel v.Miller (1931, C.P.D.251), the head-note reads as follows: "Where in terms of a building contract a builder was required to put into five cottages merely one water-connection, but following the requirements of a municipal regulation he put in five connections. Held, that the owner was liable for payment of the extra connections in that he had full knowledge that these connections were being made and that he could not have had the benefit of the occupation of the cottages without these connections. It seems to me, therefore that if the defendant proves that the plaintiff agreed that the extra work should be done, or knowing that the defendant regarded the work to be performed as falling outside the contract, stood by and allowed him to do his work, well knowing that she was going to get the benefit, she ought not to be heard when she says "I refuse to pay because I had given no written authority to the defendant to supply these extras." "

His Lordship then proceeded to consider the extra items on the basis propounded above.

"The preponderance of probability is in favour of the defendants evidence that the extra work was done and supplied at the request of the plaintiff, who verbally undertook to pay a reasonable price for them. The prices given by Mr Kaplan in evidence have not been seriously challenged and we propose accepting them.

The defendant is, therefore, entitled to payment from the plaintiff (for the extra work) in all a sum of £76.15s.0d". 

WHAT ARE THE ESSENTIAL DIFFERENCES BETWEEN A SELECTED SUBCONTRACTOR AND A NOMINATED SUBCONTRACTOR?

Both Nominated and Selected Subcontractors are described in the JBCC Series 2000 Principal Building Agreement as Subcontractors who execute work which is provided for by a provisional amount in the Bills of Quantities.

Both Nominated and Selected Subcontractors are described in the JBCC Series 2000 Principal Building Agreement as Subcontractors who execute work which is provided for by a provisional amount in the Bills of Quantities. However, there are major differences in the manner in which these subcontractors are appointed.

A Nominated Subcontractor is chosen unilaterally by the Principal Agent who then instructs the Contractor to appoint the Subcontractor as a Nominated Subcontractor, subject to limited grounds for objection by the Contractor.

A selected Subcontractor however is very different. Clause 21.0 requires firstly, that the tender documents for such work shall be prepared in consultation with and to the approval of the Contractor; secondly, that the tender documents shall only be issued to a list of tenderers agreed upon between the Contractor and the Principal Agent; thirdly, that the Selected Subcontractor shall be chosen by the Principal Agent together with the Contractor; and fourthly, that the Contractor shall satisfy himself that the Selected Subcontractor can meet the requirements of the agreement which he will be required to enter into.

Why is it then necessary that the Contractor must be heavily involved in the selection and appointment of a Selected Subcontractor whereas he is not in the case of a Nominated Subcontractor?

The answer is that the Contractor carries a much greater risk in the case of a Selected Subcontractor and therefore he must be actively involved in the selection and appointment process.

The Contractor is protected in the case of a delay or default by a Nominated Subcontractor where he is not in the case of a Selected Subcontractor.

Clause 20.9 provides that if the Nominated Subcontractor's contract is cancelled because of his default, then all costs of employing others to complete the work shall be for the Employer.

Clause 21.10 on the other hand provides that in the case of a Selected Subcontractor those costs will be for the Contractor.

Clause 29.0 allows the Contractor to obtain an extension of the construction period if delay is caused by a Nominated Subcontractor but not if delay is caused by a Selected Subcontractor.

Because they carry these added risks, Contractors must be fully aware of their rights to participate in the selection and appointment of Selected Subcontractors and should resist any attempts by the Employer or his agents to unilaterally seek tenders from subcontractors and then appoint them as Selected Subcontractors.

Contractors should take care to accept subcontractors on a selected basis only when:

(a) They have been properly consulted with regard to the selection of subcontractor firms to be invited to tender, prior to the tender enquiries being distributed.

(b) They have satisfied themselves by scrutiny of the subcontract documents that the proposed terms and conditions are acceptable and not in conflict with the provisions of the Principal Agreement.

(c) They have knowledge of the "track record" of the chosen subcontractor and are not in doubt that he is capable of carrying out the work satisfactorily, and

(d) That they are confident that the subcontractor has adequate resources to enable him to complete the Subcontract work.

If these conditions cannot be fulfilled and the Contractor has not been involved in the selection process then the Principal Agent should appoint the subcontractor on a nominated basis.

WHEN MIGHT A MAIN CONTRACTOR BE ABLE TO ARGUE THAT A SUBCONTRACTOR SHOULD PROPERLY BE CLASSIFIED AS NOMINATED RATHER THAN SELECTED?

Our courts or an arbitrator may be persuaded to follow the British case of St Modwen Developments & Kirkland Limited (1996).

Our courts or an arbitrator may be persuaded to follow the British case of St Modwen Developments & Kirkland Limited (1996). Here the contract between the parties stipulated a fairly standard procedure for the procurement of domestic subcontractors:

- The main contractor could choose whichever subcontractor it wished; or

- A list of potential subcontractors may be inserted into the Bills of Quantities by the employer and the main contractor may at its sole discretion choose a subcontractor from that list. But the procedure was not followed. "The general practice was for the architect or engineer on behalf of St Modwen Developments to obtain quotations from specialist subcontractors for supply and installation of the specialist work. When the appropriate subcontractor was identified by the design team, an instruction was given by Bowmer & Kirkland (B&K) to expend the relevant provisional sum by placing an order with the specialist subcontractor chosen exclusively by the design team."

The judge did not go so far as to say that they were actually nominated subcontractors, but the procedure used meant that they were treated as though they were.

Given this case and general legal principles, the label attached to a particular subcontractor may not necessarily determine that subcontractor's status. What may be of greater significance is the actual procedure used in the procurement process. The key question is the level of control the main contractor was able to exercise in relation to the choice of subcontractor. If the main contractor is allowed to make an unfettered decision, then any subcontractor engaged will properly be a domestic (or selected) subcontractor.

However, the waters become muddied where:

- A list is provided consisting of a small number of potential subcontractors

- The employer interferes with the procurement process, and/or

- The employer ignores objections from the main contractor as to the engagement of a particular subcontractor.

In the above scenarios, the main contractor's control over the selection and subsequent performance of particular subcontractors is lessened and it becomes more difficult to justify placing responsibility on the main contractor for the performance of the subcontractor. Given the decision in Bowmer & Kirkland, and the general principle that a spade doesn't become a shovel by calling it a shovel, the circumstances leading to the appointment of any subcontractor may be as important, if not more so, than the actual label attached to the subcontractor.

WHERE A CONTRACTOR’S/SUBCONTRACTOR’S DRAWINGS ARE “APPROVED”, “CHECKED” ETC. BY THE EMPLOYER’S AGENT AND SUBSEQUENTLY AN ERROR IS FOUND, WHO BEARS THE COST?

In general terms when an Employer appoints an Architect or Engineer to design a building or work of a civil engineering nature, he is entitled to expect the Architect or Engineer to be responsible for all design work.

In general terms when an Employer appoints an Architect or Engineer to design a building or work of a civil engineering nature, he is entitled to expect the Architect or Engineer to be responsible for all design work.

This basic principle was established in the case of Moresk Cleaners Ltd -v- Thomas Henwood Hicks (1996) 4 BLR 50.

The plaintiffs were launderers and dry cleaners who appointed the defendant Architect to undertake the design work of an extension to their laundry. Instead of designing all the work himself, the Architect arranged for the contractor to design the structure and the Employer brought an action against the Architect who argued that his terms of engagement entitled him to delegate the design of the structure to the contractor.

It was held that an Architect has no power whatever to delegate his duty to anybody else. His Honour Sir Walter Carter QC had this to say:

"Mr Stockdale, in a very powerful argument, asks me to say alternatively that the architect had implied authority to act as agent for the building owner to employ the contractor to design the structure and to find that he did just this. I am quite unable to accept that submission. In my opinion he had no implied authority to employ the contractor to design the building. If he wished to take that course, it was essential that he should obtain the permission of the building owner before that was done."

The Architect or Engineer in his terms of engagement may however include a term which permits him to use a specialist contractor, subcontractor or supplier to design any part of the works, leaving the Architect or Engineer with no responsibility if the design work undertaken by others contains a fault.

Where a part of the design work is carried out by a subcontractor or supplier in accordance with an express term in the Architect's or Engineer's conditions of appointment, it is in the Employer's interests to obtain some form of design warranty from the subcontractor or supplier.

The Employer would then be able to seek the recovery of any loss or damage resulting from design faults by the subcontractor or supplier through the agency of the warranty.

If however an Architect or Engineer, having excluded his responsibility for a subcontractor's design in terms of his appointment, approves, checks or inspects a subcontractor's drawing, does he then take on any responsibility for any failure of the design?

It is essential for the Architect or Engineer to make it clear to both Employer and subcontractor exactly what he is doing with the drawings if not checking the design. If he is checking the design carried out by the subcontractor or supplier he may find that even though the terms of his appointment exclude responsibility he may have adopted a post contract amendment to the conditions and at the same time cloaked himself with responsibility.

If the Architect or Engineer is not checking the design then he must make it very clear what he is doing. Ideally it should be set out in the Architect's or Engineers terms of appointment as to what his duties are with regard to design work undertaken by a contractor, subcontractor or supplier.

A different slant was placed upon acceptance of drawings by the Engineer in the case of Shanks and McEwan (Contractors) Ltd -v- Strathclyde Regional Council (1994) which arose out of the construction of a tunnel for a sewer. A method of construction was employed using compressed air to minimise water seepage. The tunnel and shaft segments in compliance with the specification were designed by a supplier to the main contractor who was to be responsible for the adequacy of the design insofar as it was relevant to his operations. It was also a requirement of the specification that design calculations were to be submitted to the Engineer. In the course of construction fine cracks appeared in the prefabricated tunnel segments due to a design fault. The Engineer was prepared to accept the work subject to the segments being made reasonably watertight and confirmed the same in a letter to the contractor dated

21 September 1990. Clause 8(2) of the ICE 5th Edition which governed the contract states that the contractor shall not be responsible for the design of the permanent works. There seemed to be a conflict between clause 8(2) and the specification which placed responsibility for the design of the tunnel segments onto the contractor.

The contractor levied a claim for the cost of the repair work. It was the view of the Court of Session in Scotland that following acceptance by the Engineer of the design of the segments, the contractor was entitled to expect that the approved design would not crack. The letter from the Engineer dated 21 September 1990 which accepted repair work to the segments was held to be a variation and therefore the contractor won the day.

Summary

The approval of a contractor or subcontractor's drawings by the Architect or Engineer will not usually relieve the contractor or subcontractor from liability. Employers who incur costs due to this type of error will normally commence an action jointly against the contractor or subcontractor who prepared the drawings and the Architect or Engineer who gave his approval. The court will decide on the apportionment of blame.

In Shanks and McEwan -v- Strathclyde Regional Council the contractor's design which proved faulty was approved by the Engineer. The contractor was held to be entitled to recover from the Employer the cost of remedial works. This case seems to cut across the accepted legal principle that one cannot benefit from one's own errors

WHAT IS THE IMPORTANCE OF THE CERTIFICATE OF PRACTICAL COMPLETION?

Where the conditions of contract agreement provide for the issuing of a certificate of practical completion by the Architect, Principal Agent or Engineer, Contractors should take great care to ensure that the certificate is issued properly and timeously by the person required to issue it.

Where the conditions of contract agreement provide for the issuing of a certificate of practical completion by the Architect, Principal Agent or Engineer, Contractors should take great care to ensure that the certificate is issued properly and timeously by the person required to issue it.

Certificates of practical completion in all model forms of construction contracts are issued to signify that the work has been completed for all practical purposes, albeit that there may be some small items of work in progress, and that the Employer can now take possession and use the works for their intended purpose.

But the importance of the issuing of a certificate of practical completion extends beyond the mere indication that the works have reached a certain state of completion.

It is important to the Contractor to have this certificate issued timeously and properly because it normally triggers or records:

  1. The transfer of the responsibility for the care of the works from the Contractor to the Employer;
  2. The commencement of the patent defects liability period;
  3. The date when the contract works insurance cover comes to an end;
  4. The Contractor's entitlement to have his performance guarantee/surety returned to him, or to have the amount of the construction guarantee reduced;
  5. The Contractor's entitlement to the payment of the first moiety of retention monies (where retention in provided for).
  6. The beginning of the period of time allowed for the preparation of the final account;
  7. The end of any period of delay for which the Contractor may be paying penalties.

The late of non-issue of certificates of practical completion is therefore entirely to the detriment of the Contractor and contractors should pursue their proper issue with vigour.

CAN A PRINCIPAL AGENT OR ARCHITECT CONDEMN LARGE AREAS OF WORK AT THE TIME OF FINAL INSPECTION, HAVING VISITED THE SITE REGULARLY AND HAVING INCLUDED PAYMENT FOR THE WORK IN EARLIER CERTIFICATES?

It is not uncommon for Principal Agents or Architects to regularly inspect work, certify same for payment and at a later date condemn large areas of work.

It is not uncommon for Principal Agents or Architects to regularly inspect work, certify same for payment and at a later date condemn large areas of work. This often leaves Contractors in a difficult position particularly when they have passed on payment for the work to Sub-contractors which in many instances cannot be recovered.

The Principal Agent is appointed to protect the interests of the Employer. The courts take the view in the absence of wording to the contrary that a contract has been entered into under which the Contractor undertakes to carry out and complete the work in accordance with the terms of the contract. This is paramount and no action on the part of the Principal Agent should water down this obligation.

In this respect Hudsons Building and Engineering Contracts has this to say at page 379:

"Even though a building owner may have accepted the work so that a liability to pay the price of it arises, that will not (in the absence of a provision in the contract making acceptance binding on the Employer) prevent the building owner from showing that the work is incomplete or badly done; he may either counterclaim or set off damages in an action by the builder, or he may pay or suffer judgement to be obtained against him for the full price and later bring a separate action for his damages......."and again at page 583:

"Equally, it should not be forgotten that waiver of a breach, or a renunciation of the right to damages, or a liability to pay for the work, will not, in general, and in the absence of express provision, be implied from acceptance of the work by the building owner or his Architect, even in the case of patently defective work."

The English Court of Appeal having previously held that the Architects' obligation to inspect the Works was an obligation to be exercised from time to time, in East Ham Borough Council v Bernard Sunley & Sons Ltd 1965 (3) all ER619, the House of Lords reversed the decision of the Court of Appeal and held that examination at the end of the defects liability period was reasonable.

It is submitted that this is the position that would be followed by South African Courts in interpreting the provisions of similar contracts.

However, it is suggested that in the JBCC Principal Building Agreement the precise wording of clause 24.1 creates an entirely different situation and provides an excellent example of where a contractual term has been drafted to place the onus on the Principal Agent to inspect regularly, as follows:

"The Principal Agent shall from time to time inspect the Works to give the Contractor interpretations and guidance on the building standards and state of completion of the works the Contractor will be required to achieve for practical completion."

Finsen in "The New Building Contract" comments at page 83:

He (the Principal Agent) is required to inspect the works from time to time, and in the course of such inspections he must acquaint the Contractor with the standard of workmanship that he will require as well as the extent of completion before he will be prepared to certify practical completion. The Contractor must know in good time what will be acceptable and what will not."

It is suggested that the express wording of clause 24.1 of the JBCC Principal Agreement placed an entirely new onus on the Principal Agent and his failure to comply would be a breach of contract which could, in certain circumstances, lead to the Contractor having a claim for loss and expense.

WHERE AT THE END OF THE DEFECTS LIABILITY PERIOD THE ARCHITECT DRAWS UP A DEFECT LIST AND, AFTER THESE DEFECTS HAVE BEEN ATTENDED TO BY THE CONTRACTOR, PREPARES ANOTHER LIST, WILL THE CONTRACTOR BE OBLIGED TO MAKE THESE DEFECTS GOOD?

Most forms of building contract include a defects liability period. The purpose of the defects liability period is to allow the Contractor an opportunity of making good his own defects.

ost forms of building contract include a defects liability period. The purpose of the defects liability period is to allow the Contractor an opportunity of making good his own defects. Whilst it may not be obvious to many Contractors, these clauses bestow a benefit upon them. In this context ‘Keating On Building Contracts' 5th Edition at page 247 states:

"The contractor's liability in damages is not removed by the existence of a defects clause except by clear words, so that in the absence of such clear words the clause confers an additional right and does not operate to exclude the contractor's liability for breach of contract...... But it is thought that most defects liability clauses will be construed to give the contractor the right as well as to impose the obligation to remedy defects which come within this clause."

In other words defects in construction work amount to a breach of contract entitling the Employer to claim damages H W Nevell (Sublest) -v- William Press and Son (1981). In the absence of a defects clause and where defects in the work appear after practical completion the Employer would be within his rights to employ others to make good the defects and to charge the Contractor with the cost. The presence of a defects clause gives the Contractor the right to remedy his own defects, the cost of which should be less than would be the case if others carried out the work.

Hudson's ‘Building and Engineering Contracts' 10th Edition at page 394 says:

"Since maintenance work can be carried out much more cheaply by the original contractor than by some outside contractor brought in by the building owner, defects clauses in practice confer substantial advantages on both parties to the contract."

Most forms of contract require the Employer's Agent to prepare a schedule of defects after the end of the defects liability period.

A question often raised is whether a Contractor is obliged to make good defects if the Agent, having issued a schedule with which the Contractor has complied, produces a second schedule which lists more defects. When answering the question the comments made earlier should be borne in mind. Defects in the Contractor's work amount to breaches of contract for which the Employer is entitled to damages and is not excluded by the defects clause. All the defects clause does is to give the Contractor the right to make good defects.

In terms of the JBCC Principal Building Agreement what puts an end to the Contractor's obligation to remedy patent defects is the issuing of the certificate of final completion.

Clause 26.6 provides that "A certificate of final completion issued in terms of 26.0 shall be conclusive evidence as to the sufficiency of the works and that the Contractor's obligations in terms of 2.0 and 15.0 have been fulfilled other than for latent defects."

After the issue of this certificate the Contractor is only liable for latent defects, i.e. defects which a reasonable inspection of the works by the Principal Agent (at the end of the defects liability period) would not disclose.

Eyvind Finsen in "The NEW Building Contract" comments at page 88 on the importance of the certificate of final completion as follows:

A certificate of final completion is the architect's written confirmation that the contractor has completed everything that he contracted to carry out, including variations and additional work contained in architect's instructions, and has done so to the complete satisfaction of the architect. It moreover signifies that the work is free from all defects, save for possible latent defects.

The certificate shall be conclusive evidence that the contractor has discharged all his obligations, and it cannot therefore be impeached by the employer. Nor can it be withdrawn, because, having issued it, the architect has become functus officio. It will not avail the architect to say that he inadvertently overlooked certain patent defects; he will be deemed to have condoned these defaults, and the contractor cannot be compelled to attend to them.

The architect carries a very heavy responsibility in issuing a certificate of final completion, and he may be held liable if he negligently overlooks anything. It should therefore be issued only after the works have been thoroughly and meticulously inspected and checked against the various contract documents and instructions. As he may be held vicariously liable for negligence on the part of the other agents, he should ensure that they have made similar inspections and checks before he issues the certificate of final completion.

IF A DELAY IS RECORDED IN THE MINUTES OF A SITE MEETING, IS THIS REGARDED AS AN ADEQUATE NOTICE FOR THE PURPOSE OF EXTENDING THE CONSTRUCTION PERIOD?

The JBCC Principal Building Agreement provides in clause 29.0 for the Contractor to serve written delay notices.

The JBCC Principal Building Agreement provides in clause 29.0 for the Contractor to serve written delay notices.

Within a limited number of days from when the Contractor becomes aware of a circumstance which in his opinion, could cause a delay to completion, then the Contractor must give notice of his intention to request an extension of time, failing which no extension of time shall be entertained.

Clause 1.5.2 provides that the work "notify" calls for an act to be carried out in writing.

Can this need for an "act in writing" be satisfied by recording the existence of a delay in the minutes of a site meeting?

If a notice is expressly a condition precedent, which is the case with the JBCC agreements, where it states that the right to any extension of time shall depend upon the giving of written notice, the question is often asked as to whether minutes of site meetings constitute good notice.

In the Scottish case of John L Haley Ltd v Dumfries and Galloway Regional Council (1988) the Court had to decide whether site meeting minutes constituted a good notice.

The contract where this matter arose employed a British JCT 63 agreement under which the claimant undertook certain building works to a school with the contract period set at 78 weeks. This was overrun by 31 weeks with a 6-week extension of time granted. When further extensions were refused the matter was referred to arbitration. The claimants argued that they were entitled to an extension of time as the cause of the delay fell within those contemplated by the extension of time clause.

The respondents maintained that the claimants were not entitled to an extension of time as they had not given written notice of the delay as expressly required by the same extension of time clause.

The claimants argued that the fact that the delay had been recorded in the minutes of the regular site meetings fulfilled the need for written notice.

At the respondent's instigation, the Arbitrator stated a case for the opinion of the Court of Session as to whether the minutes constituted a notice as required by the express conditions of contract.

The Court held that the minutes did not constitute good notice. The claimants conceded that a notice was a condition precedent to an entitlement to an extension of time and lost their case.

Whether site meeting minutes constitute a good delay notice will depend upon the precise wording of the contract. It would seem however that where written notice is required to be given, the site meeting minutes will not constitute good notice.

IF THE EMPLOYER’S AGENT ISSUES AN ORDER FOR EXTRA WORKS AFTER THE EXTENDED COMPLETION DATE BUT BEFORE PRACTICAL COMPLETION, WILL TIME BECOME AT LARGE RENDERING PENALITIES NO LONGER ENFORCEABLE?

The case, Balfour Beatty Ltd -v- Chestermount Properties Ltd (1993) heard before Mr Justice Colman deals with the subject matter of the question.

The case, Balfour Beatty Ltd -v- Chestermount Properties Ltd (1993) heard before

Mr Justice Colman deals with the subject matter of the question.

The works comprised the construction of the shell and core of an office block. Work commenced on 19 September 1987, the completion date being 17 April 1989, later extended to 9 May 1989. The Architect issued a certificate stating that the works should be reasonably have been completed by this date. By January 1990 the work had still not been completed.

During the period 12 February 1990 to 12 July 1990 the Architect issued instructions for the carrying out of fit out works as a variation to the contract. Practical completion of the shell and core was achieved on 12 October 1990 with the fit out works not finished until 25 February 1991. The Architect issued two extensions of time to give a revised completion date of 24 November 1989. The variation with regard to the fit out works were issued after the revised completion date but prior to practical completion, during the period when the Contractor was in default.

The Contractor argued that the effect of the issue of variations during a period of culpable delay was to render time at large, leaving the Contractor to complete within a reasonable time. This being the case, the Employer would lose his rights to levy penalties.

Alternatively, the Contractor argued that the Architect should have granted an extension of time on a gross basis. In this case it was argued that the fit out work should have taken 54 weeks, this period to be added to 12 February 1990, when the fit out variation was issued.

It was the Employer's contention that the correct approach should be a net extension of time, that is to say, one which calculated the revised completion date by taking the date currently fixed for completion and adding to it the 18 weeks that the Architect considered to be fair and reasonable for the fit out work.

The main plank in support of the Contractor's argument was that if the net method were adopted the extended completion date would expire before the variation giving rise to the extension of time had been instructed, which was logically and physically impossible. If the Contractor's line were followed it would provide him with a windfall which swept up his delays. While recognising this, the Contractor considered the problem resulted from the Employer's own voluntary conduct in requiring a variation during a period of culpable delay.

Mr Justice Colman did not agree. He found in favour of the Employer on a number of grounds:

"The objective of the extension of time provisions is for the Architect to assess whether any of the relevant events have caused a delay and if so by how much. He must then apply the result of his assessment to give a revised completion date. It would need clear words in the contract to allow the Architect to depart from a requirement to extend the completion date by the period of delay caused by the relevant event."

The final nail in the Contractor's coffin came when Mr Justice Colman said:

"...in the case of a variation which increases the works, the fair and reasonable adjustment required to be made to the period for completion may involve movement of this completion date to a point in time which may fall before the issue of the variation instruction".

Where an Employer's Agent issues an order for extra work after the contract completion date but before practical completion, it is appropriate where resultant delays occur for an extension of time to be granted. Such extension of time will be calculated by extending the completion date by the net period of delay.

WHAT IS MEANT BY “TIME AT LARGE”?

Time at large is when a contract is entered into with no period of time fixed for completion. Where this occurs the Contractor’s obligation is to complete work within a reasonable time.

Time at large is when a contract is entered into with no period of time fixed for completion. Where this occurs the Contractor's obligation is to complete work within a reasonable time.

Where a contract contains a requirement for completion by a definite date, circumstances can arise which render the time for completion no longer operable, again rendering time at large. An example is where a delay is caused by the Employer and the terms of the contract make no provisions for extending the completion date due to delays by the Employer.

The Contractor successfully used this argument in the case of Peak Construction (Liverpool) Ltd -v- McKinney Foundations Ltd heard before the Court of Appeal in 1970. It was held that as delays on the part of the City Council in approving remedial works to the piling were not catered for in the extension of time provisions, the right to penalties for delay was lost, leaving the Corporation with an entitlement to claim such common law damages as it was able to prove.

The more recent case of Rapid Building Group -v- Ealing Family Housing was heard before the Court of Appeal in 1984. Due to the presence of squatters the housing association was unable to give possession of the site to the Contractor on the due date. There was no provision in the contract for extensions of time for late possession. The Contractor was therefore able to successfully argue that time became at large. His obligation was altered to completing within a reasonable time and the Employer lost his rights to levy penalties.

If time does become ‘at large', the Contractor's obligation is to complete within a reasonable time. What is a reasonable time is a question of fact: Fisher -v- Ford (1840). Calculating a reasonable time is not an easy matter and, as Emden's Building Contracts', 8th Edition, vol.1,p.177, puts it:

"Where a reasonable time for completion becomes substituted for a time specified in the contract ... then in order to ascertain what is a reasonable time, the whole circumstances must be taken into consideration and not merely those existing at the time of the making of the contract."

In Charles Rickards Ltd -v- Oppenheim (1950), Rickards agreed to supply a Rolls Royce motor car chassis and to build a body on it within seven months. They failed to complete the work by the agreed delivery date, but Oppenheim waived the original delivery date and new dates were promised and accepted by him. Eventually, Oppenheim gave written notice to Rickards stating that unless he received the car by a firm date, four weeks away, he would not accept it. The car was not delivered within the time specified and was not completed until some months later when Oppenheim refused to accept it.

The Court of Appeal held that he was justified in doing so. After waiving the initial stipulation as to time, Oppenheim was entitled to give reasonable notice making time of the essence again, and on the facts the notice was reasonable.

Vincent Powell Smith in his book ‘Problems in Construction Claims' has this to say concerning ‘time at large'.

"In building context it is clear that the same principles apply. If for some reason time under a building contract becomes ‘at large', the employer can give the Contractor reasonable notice to complete within a fixed reasonable time, thus making time of the essence again: Taylor -v- Brown (1839). However, if the Contractor does not complete by the new date, the employer's right to penalties does not revive, and he would left to pursue his remedy of general damages at common law.

IF THE PROPER NOTICES ARE NOT GIVEN, DO YOU LOSE YOUR RIGHT TO CLAIM?

The case of Edward L Bateman vs Brown Projects (Pty) 1995 (4) SA 128 (T) answers this question.

The case of Edward L Bateman vs Brown Projects (Pty) 1995 (4) SA 128 (T) answers this question.

The judgement clearly and concisely sets out the legal, procedural and contractual requirements which a Contractor claiming in terms of a contract must follow.

The court held that if the contractual procedures are not strictly adhered to, the Contractor will not have a claim and that compliance with the provisions of the claims procedure of a particular contract must be pleaded clearly, failing which the essential averments necessary in order to disclose a cause of action will not have been made.

The Contractor's claims arose from a contract in terms of which the Contractor was to perform civil works for a fly ash silo and auxiliary works in connection with a fly ash separation plant.

It was alleged in the pleadings that during the performance of the works the Employer failed timeously to provide the Contractor with the required construction drawings, furnished the Contractor with incorrect drawings which subsequently required rectification, changed the design in certain instances, issued instructions which revoked or varied previously issued instructions, and instructed the Contractor from time to time to accelerate the performance of the works. As a consequence of these factors, the Contractor claimed that the works were extensively increased in value and that it required additional time for completion. By reason of the increase in the value of and the time required for completion of the works, the delays in the performance of the works and the acceleration of the works by the Contractor, it claimed that it became entitled, inter alia, to payment for escalation during the contract as well as the extended contract period, the net increased costs in respect of the prime cost allowable, and company overhead and profit.

In dealing with various clauses of the contract prescribing the procedures which the Contractor had to follow the court held that if there was non-compliance with such procedures, the Contractor would not have a claim. The relevant clause obliged the Contractor to give written notice with 7 days after the happening of any event which the Contractor believed might give rise to a claim for an increase in the contract price and in the time for completion. This 7 day notification was thereafter to be followed within 28 days, or any extended period agreed to in writing by the Employer, by the Contractor furnishing the Employer with a statement supported by a detailed estimate of the claim and change in contract price and time for completion occasioned thereby. The clause clearly stated that the Employer would not be liable for and that the Contractor waived any claims or potential claims which the Contractor knew or should have known about and which had not been notified by the Contractor to the Employer in accordance with the relevant clause. In commenting on that clause, de Villiers J stated:

"In my view these provisions again underline the fact that it is an essential element of plaintiff's claim that he should have complied with the provisions of clause 23. Unless he does so, such dispute cannot be decided by arbitration or by the courts"

In summary, it is essential for Contractors to comply strictly with contractual provisions which prescribe a mechanism for the founding of any claims. Contractors should therefore keep a tight reign on the administration of a contract and be vigilant in ensuring that procedures prescribed by a particular contract are scrupulously followed.

IS AN EMPLOYER STILL ENTITLED TO DEDUCT PENALTIES IF IN FACT HE SUFFERS LITTLE OR NO LOSS AS A RESULT OF THE LATE COMPLETION OF THE WORKS?

Where a material term of a contract provides that the works must be completed by a certain date (or an extended date), then failure to complete by the due date is a breach of contract.

Where a material term of a contract provides that the works must be completed by a certain date (or an extended date), then failure to complete by the due date is a breach of contract.

Such a breach could give rise to the injured party claiming such damages as he can prove he has suffered as a result.

The assessment of the amount of the damages however is a most difficult question of fact.

To avoid this difficulty the parties to a contract often agree at the time the contract is made on a sum on money which is to be paid to the injured party in the event of breach.

Such an agreement is a "penalty stipulation" and is defined by the Conventional Penalties Act (1962) as:

"a stipulation.............whereby it is provided that any person shall, in respect of an act or omission in conflict with a contractual obligation, be liable to pay a sum of money.........either by way of penalty or as liquidated damages".

An example of such a penalty stipulation is Clause 30.0 of the JBCC Series 2000 Principal Building Agreement which states that:

"Where the contractor fails to bring the works or sections thereof to practical completion on the date or dates stated in the schedule or revision thereof in terms of 29.0, the contractor shall be liable to the employer for the penalty per calendar day for noncompletion of the works or each section thereof at the rate stated in the schedule. The principal agent shall calculate the penalty due from the date or revised date in terms of 29.0 up to and including the actual date of practical completion of the works or section thereof or cancellation in terms of 36.3"

Such a clause is valid and enforceable and the Employer is entitled to the penalty irrespective as to whether or not he has suffered any loss as a result of such late completion. If the penalty is expressed as an amount per day, then the penalty may be deducted for every day after the day the works were to have been completed until such time as they are brought to practical completion or alternatively the contract is terminated, whereafter the Employer may have a claim for damages for any uncompleted portion of the works.

However the Conventional Penalties Act (1962) also provides in Section 3 that wherever a person seeks to enforce a penalty and it appears to the Court that the penalty is out of proportion to the prejudice suffered, the Court may reduce the penalty to such extent as it may consider equitable in the circumstances.

The words, ‘out of proportion to the prejudice' do not mean that the penalty must be outrageously excessive. The penalty would be reduced if it has no relation to the prejudice, if it is markedly, not infinitesimally, beyond the prejudice, if the excess is such that it would be unfair to the Contractor not to reduce the penalty.

Such an application to the Court would have to be motivated by the Contractor who would bear the onus of proving that the Employer had suffered little prejudice compared to the penalty applied.

It is a matter entirely within the discretion of the Court which will only interfere if, bearing in mind that an object of a penalty clause is to compel the Contractor to implement his obligations by providing harsh consequences should he default, it nevertheless is of the opinion that the penalty is unduly severe to the extent that it offends against a sense of justice and equity.

WHAT IS THE SITUATION WHEN A CERTIFICATE FOR PAYMENT IS ISSUED BUT THE EMPLOYER REFUSES TO PAY?

Clause 31.1 of the JBCC 2000 Principal Building Agreement provides that:

The main legal principles concerned here are that, in addition to the remedies for breach of contract, the creditor may in certain circumstances have a defence, the exeptio non adimpleti contractus. This is available where the contract imposes obligations on both parties: neither party can, in the absence of a special agreement to the contrary, sue the other for performance unless he himself has performed or is willing to perform his side of the contract. But where, although his performance is in fact defective, a party institutes an action for performance by the other party in the honest belief that he has duly performed his side of the contract, he is entitled to such performance less the cost of remedying the defect. This applies only when the other party has taken the benefit of the defective performance.

This judgement of Lord De Villiers C.J. in the case of Hauman v Nortje 1914 A.D. 293 illustrates these principles.

This is an appeal from a judgement of the Orange Free State Provincial Division, dismissing the defendant's appeal from a judgement of the resident magistrate of Philippolis. The action was to recover the balance of the contract price alleged to be due to the plaintiff on a building contract and the judgement was for such balance less the sum of ₤10 which the magistrate considered would be required to remedy some defects in the building. In his reasons he said:-

‘I found that a portion of the work was not carried out satisfactorily and I considered it fair to deduct R10 from the amount of the claim and gave judgement for the balance as a quantum meruit, with costs.'

"There was no evidence that the defendant accepted the work as having been performed in terms of the contract, but he took possession of the building although he disapproved of some portion of the work. He has the benefit of the work done on his property by the plaintiff, and the question to be decided is whether the plaintiff is entitled to claim the balance of the contract price or any portion thereof so long as there are any defects in the work done by him."

"The general principle applicable to all bilateral contracts undoubtedly is that the one party can not, in the absence of any special agreement, call upon the other party to perform his contract without himself having performed or being ready to perform his part of the contract. (This general principle is, however, subject to several exceptions)."

"Where a person has contracted for the performance of a piece of work as a whole he is clearly not entitled to any part of the contract price, if, before completion, he abandons the work. Even if he does not deliberately abandon the work his manner of performing it might be inconsistent with any honest intention to carry out his contract and no equitable principle would come to his relief. But cases are of frequent occurrence in which the contractor honestly believes that he has performed his part of the contract whilst the employer relies upon some alleged defects of construction or omissions as reason for refusing to pay for the work. If, in such circumstances, the contractor institutes his action in good faith and proves that the employer enjoys the benefit of the work and labour done, is the employer entitled to say: ‘ You shall receive no payment until the work has been completed in strict accordance with the contract'? There is a bona fine dispute between the two which can only be decided by the arbitrament of law, and the practice, in such a case, of the old French law, as stated by Pothier, appears to offer a most reasonable solution of the difficulty, ‘When the contractor, ‘says Pothier, ‘does not admit the defects of which the employer complains and maintains on the contrary that his right of action has accrued, the judge orders an inspection in loco, and if the work is defective he condemns the contractor to repair the defects, and unless he does so within a definite time the judge authorises the employer to have it done by anyone he pleases at the expense of the contractor.''

‘I am not aware that there is any authority in our law for the adoption of the old French practice, but there is ample authority for the view that if the contractor has acted in good faith and has by his work, labour and materials benefited the employer the latter will not be allowed, in the absence of any special agreement to that effect to reap the benefit without making compensation to the contractor. This compensation he must make, because of the application of the equitable principle of our law that no one shall be unjustly enriched at the expense of another. The mode of enrichment provided against is not the attainment of benefits stipulated for in the contract, but the unjust absorption by the one party of the expenditure or of the fruits of the labour of the other party in a manner not contemplated by the parties to the contract. In the present case I am satisfied that the plaintiff brought the action in the bona fide belief that he had performed his work according to the contract."

"The magistrate who heard the case in the first instance found, as a fact, that the work had not been done satisfactorily, but he also found that by an expenditure of ₤10 the defendant could put right whatever was amiss in the work. It was rightly held, therefore, that the plaintiff was entitled to recover the contract price, less the sum of ₤10. The appeal is dismissed."

CAN A CONTRACTOR CLAIM PAYMENT OF AN INTERIM CERTIFICATE AFTER THE BUILDING CONTRACT HAS BEEN TERMINATED?

The question has been answered by the Appellate Division in two judgements reported as:

  1. Thomas Construction (Pty) Limited (In Liquidation) vs Grafton Furniture 1998 (2) SA 546 (A); and
  2. Shelagatha Property Investments CC vs Kellywood Homes (Pty) Limited, Shelferie Property Holdings CC vs Midrand Shopping Centre (Pty) Limited 1995 (3) SA 187 (A).

In the Thomas Construction case interim payment certificates were issued on 29 October and 4 November 1985. These certificates fell due for payment on 12 and 18 November respectively. On 8 November the Employer issued a written notice calling upon Thomas Construction to proceed with the works with due diligence. Failure to comply with that notice within a period of fourteen days would result in the termination of the builder's employment under the building contract.

On 12 November a provisional winding up order was granted. On 26 November the Employer terminated the contract.

The liquidators of Thomas Construction did not contest the termination of the building contract. They instituted proceedings for payment of the amounts certified in the interim certificates.

The matter eventually went to the Appellate Division which decided that the Employer was not obliged to pay the amounts certified.

The appeals in the Shelagatha Property Investments CC and Shelfaerie Property Holdings CC cases were heard together because the facts were similar. In both cases the Employer defaulted in the payment of an interim certificate and this default resulted in the builders terminating their employment under the building contracts.

Relying on the decision in Thomas Construction the Employers in both cases contended that the builders were not entitled to enforce payment under the interim certificates after the contracts had been cancelled.

The Appeal Court decided that the interim certificates survived the cancellation of the contracts and that the builders were entitled to enforce payment of the amounts certified.

It follows from these decisions of the Appellate Division that a builder is not entitled to enforce payment of an interim certificate after the building contract has been validly terminated by the Employer. If, on the other hand, the building contract is validly terminated by the builder, an interim certificate may be enforced against the Employer notwithstanding the termination of the contract.

The reason for the two decisions may be summarised as follows:

  1. A claim based on contract survives the cancellation of the contract if, prior to the cancellation, the claim was accrued, due and enforceable as a cause of action independent of any executory part of the contract, that is independent of any part of the contract which has still to be performed.
  2. An interim certificate does not represent compensation for a completed segment of work. It is a medium for making progress payments, which payments represent an approximate and proportional value of the work done and materials on site at a specified date. The purpose of the progress payment is to supply the builder with working capital as an advance on the contract sum.
  3. Payments made in respect of interim certificates are conditional upon the builder's willingness and ability to complete the rest of the work.
  4. If the builder had demonstrated his unwillingness to complete the work with the result that the contract is cancelled, then the condition upon which the interim payment certificate was issued will not have been fulfilled. The Employer is entitled to withhold payment until completion of the works by another contractor. The amount, if any, which will be payable to the builder is dependent upon the cost of completing the works.
  5. If, on the other hand, the contract is terminated by the builder, the builder is released from any obligation which he would otherwise have had to complete the work. In these circumstances the interim certificate becomes unconditional because it is not related to the completion of the contract, the builder being released from any obligations which he might have had in that regard. In these circumstances the builder can enforce payment of the interim certificate notwithstanding the termination of the contract. Payment of the interim certificate, however, does not remove the requirement for a final accounting. On the settlement of the final account it may be shown that either more or less than the amount certified is owed to the builder. If there has been an overpayment the Employer will be entitled to a refund. That consideration, however, does not entitle the Employer to withhold payment of the amount certified in the interim certificate in circumstances in which the contract has been validly terminated by the builder

WHAT IS THE SITUATION WHEN A BUILDING IS COMPLETED AND THE OWNER TAKES POSSESSION BUT REFUSES TO PAY BECAUSE OF SOME ALLEGED DEFECT?

The main legal principles concerned here are that, in addition to the remedies for breach of contract, the creditor may in certain circumstances have a defence, the exeptio non adimpleti contractus.

The main legal principles concerned here are that, in addition to the remedies for breach of contract, the creditor may in certain circumstances have a defence, the exeptio non adimpleti contractus. This is available where the contract imposes obligations on both parties: neither party can, in the absence of a special agreement to the contrary, sue the other for performance unless he himself has performed or is willing to perform his side of the contract. But where, although his performance is in fact defective, a party institutes an action for performance by the other party in the honest belief that he has duly performed his side of the contract, he is entitled to such performance less the cost of remedying the defect. This applies only when the other party has taken the benefit of the defective performance.

This judgement of Lord De Villiers C.J. in the case of Hauman v Nortje 1914 A.D. 293 illustrates these principles.

This is an appeal from a judgement of the Orange Free State Provincial Division, dismissing the defendant's appeal from a judgement of the resident magistrate of Philippolis. The action was to recover the balance of the contract price alleged to be due to the plaintiff on a building contract and the judgement was for such balance less the sum of ₤10 which the magistrate considered would be required to remedy some defects in the building. In his reasons he said:-

‘I found that a portion of the work was not carried out satisfactorily and I considered it fair to deduct R10 from the amount of the claim and gave judgement for the balance as a quantum meruit, with costs.'

"There was no evidence that the defendant accepted the work as having been performed in terms of the contract, but he took possession of the building although he disapproved of some portion of the work. He has the benefit of the work done on his property by the plaintiff, and the question to be decided is whether the plaintiff is entitled to claim the balance of the contract price or any portion thereof so long as there are any defects in the work done by him."

"The general principle applicable to all bilateral contracts undoubtedly is that the one party can not, in the absence of any special agreement, call upon the other party to perform his contract without himself having performed or being ready to perform his part of the contract. (This general principle is, however, subject to several exceptions)."

"Where a person has contracted for the performance of a piece of work as a whole he is clearly not entitled to any part of the contract price, if, before completion, he abandons the work. Even if he does not deliberately abandon the work his manner of performing it might be inconsistent with any honest intention to carry out his contract and no equitable principle would come to his relief. But cases are of frequent occurrence in which the contractor honestly believes that he has performed his part of the contract whilst the employer relies upon some alleged defects of construction or omissions as reason for refusing to pay for the work. If, in such circumstances, the contractor institutes his action in good faith and proves that the employer enjoys the benefit of the work and labour done, is the employer entitled to say: ‘ You shall receive no payment until the work has been completed in strict accordance with the contract'? There is a bona fine dispute between the two which can only be decided by the arbitrament of law, and the practice, in such a case, of the old French law, as stated by Pothier, appears to offer a most reasonable solution of the difficulty, ‘When the contractor, ‘says Pothier, ‘does not admit the defects of which the employer complains and maintains on the contrary that his right of action has accrued, the judge orders an inspection in loco, and if the work is defective he condemns the contractor to repair the defects, and unless he does so within a definite time the judge authorises the employer to have it done by anyone he pleases at the expense of the contractor.''

‘I am not aware that there is any authority in our law for the adoption of the old French practice, but there is ample authority for the view that if the contractor has acted in good faith and has by his work, labour and materials benefited the employer the latter will not be allowed, in the absence of any special agreement to that effect to reap the benefit without making compensation to the contractor. This compensation he must make, because of the application of the equitable principle of our law that no one shall be unjustly enriched at the expense of another. The mode of enrichment provided against is not the attainment of benefits stipulated for in the contract, but the unjust absorption by the one party of the expenditure or of the fruits of the labour of the other party in a manner not contemplated by the parties to the contract. In the present case I am satisfied that the plaintiff brought the action in the bona fide belief that he had performed his work according to the contract."

"The magistrate who heard the case in the first instance found, as a fact, that the work had not been done satisfactorily, but he also found that by an expenditure of ₤10 the defendant could put right whatever was amiss in the work. It was rightly held, therefore, that the plaintiff was entitled to recover the contract price, less the sum of ₤10. The appeal is dismissed."

WHERE WORK IS OMITTED FROM THE CONTRACT CAN A CONTRACTOR CLAIM FOR LOSS OF PROFIT?

Contractors sometime argue that where work is omitted from the contract they lose an opportunity of earning the profit element which was built into the value of the work which was omitted.

Contractors sometime argue that where work is omitted from the contract they lose an opportunity of earning the profit element which was built into the value of the work which was omitted. They then attempt to claim from the Employer the loss they allege they have suffered.

In the JBCC Series 2000 form of contract, Clause 32.2.4 addresses the valuation of work which is omitted:

"Items of work omitted shall be valued at the rates in the bills of quantities/lump sum document, but where the omission of such work varies the circumstances in which the remaining work is carried out, the value of the remaining work shall be determined by the method in terms of 32.2.2".

Clause 32.2.2 provides that:

"Items of additional work not of a similar character or not executed under similar conditions shall be priced, where applicable, at rates based on those in the bills of quantities/lump sum document and adjusted to suit the changed circumstances".

Similar provisions are to be found in most standard forms of building contract.

The intent is to provide for the circumstances where, for instance, in a contract for a three-storey concrete frame building with brickwork on all levels, the Principal Agent issues an instruction which omits all the brickwork on the ground floor level.

The brickwork left behind on the two upper levels is more expensive to execute and the price in the bill of quantities for the remaining brickwork will now have to be adjusted to suit the changed circumstances.

There is no provision however for the Contractor to recover the profit he would have made on the work omitted.

Conversely, if the brickwork on the top level was omitted, the owner could argue that the rates for the remaining brickwork should be reduced.

Standard forms of contract in general provide for the work to be varied, including omissions, and a genuine omission of work is not a breach of contract giving rise to the claiming of damages.

WHAT HAPPENS WHEN A RATE IN A BILL OF QUANTITIES IS TOO HIGH OR TOO LOW?

Somehow, the contractor has priced an item in the bills at a rate that is fundamentally wrong. Nobody spotted it and negotiations get a bit heated when a variation is instructed which increases the quantity of the item in question.

Somehow, the contractor has priced an item in the bills at a rate that is fundamentally wrong. Nobody spotted it and negotiations get a bit heated when a variation is instructed which increases the quantity of the item in question. If the rate is way too high, the Employer or his agents may feel that applying it to extra work would be unfair. If it is way too low, the contractor will lose money and therefore feel aggrieved.

The English case of Henry Boot Construction vs Alstrom Combined Cycles solved this back in 1999. The facts were that Alstom had employed Henry Boot to carry out civil engineering work on a power station. Because of a mix-up, the contractor's rates for temporary steel sheet piling were effectively twice what they should have been. When a variation order was issued to add more sheet piling, the contractor argued that the rates were contract rates and should apply. The Employer contended that the contract rate should be disregarded because of the error and that a fair valuation should be made.

The case ended up in the courts. The rules for the valuation of variations were similar to our standard forms of contract. Where the work is of similar character and executed under similar conditions to work priced in the bill of quantities, the contract rates will apply. The fact that they are too high or low is irrelevant. The parties to the contract have agreed in the contract that they will be used to value variations.

You can imagine Quantity Surveyors reaching for the escape clause and trying to show that the work is not of similar character and executed under similar conditions. But they should not try too hard. In Boot vs Alstrom, it was held that piling rates from one area of the site applied to additional piling instructed elsewhere.

The judge also made the point that "executed under similar conditions" did not refer to economic or financial conditions. In other words, the profitability or otherwise of a rate cannot be taken into account. Work is not executed under dissimilar conditions simply because the rate results in the contractor being paid more or less than might be considered fair. The only get-out is if the work really does not qualify to be valued under this heading.

Where work is not of similar character and executed under similar conditions to work priced in the bill of quantities, the contract rates have to be adjusted for the effect of the difference in character or conditions. If an instruction were issued for additional work that was 10% more labour intensive, the correct way to deal with this would be to analyse the original rate, establish the element of it that relates to labour, and add 10% of that to the rate. What should not be done is to correct any error in the original rate. The fact that the resulting rate may not be "reasonable" is irrelevant.

Where there is a change in the quantity of work, this may mean it is correct to change the rate. But again, the reworking of the rate should follow the same methodology and be based on the original high or low rate.

CAN EXPENSE AND LOSS CAUSED BY ISSUING OF CONTRACT INSTRUCTIONS BE RECOVERED BY THE CONTRACTOR?

Clause 32.5 of the JBCC Series 2000 Principal Building Agreement provides the Contractor with the right to recover any extra expense or loss which he suffers arising from the Principal Agent issuing contract instructions or failing to issue contract instruction or issuing them late.

Clause 32.5 of the JBCC Series 2000 Principal Building Agreement provides the Contractor with the right to recover any extra expense or loss which he suffers arising from the Principal Agent issuing contract instructions or failing to issue contract instruction or issuing them late.

The issue of a contract instruction usually calls for a change of materials or a change of a method of construction or a variation to the design involving additional work.

Clause 32.2 lays down the procedure for pricing this additional work, either using the rates in the bills of quantities, adjusted to allow for varying conditions under which the work is executed or priced at new rates with a 10% markup.

Clause 32.12 calls for the Contractor's Preliminary and General items to be adjusted where these have been affected by extra value of work done or extra time taken to do the work.

Even after the additional work has been valued in this way and the required adjustments to the contract value have been made the Contractor may still be facing a loss situation.

The Contractor has undertaken to carry out the work according to the original contract documents and he may well find that the issue of contract instructions will now involve changes to his methods, sequence of work, and staffing, plant and scaffolding requirements, accompanied by an interference with the normal progress of the works and costly disruption for which he cannot be properly remunerated under the provisions of clauses 32.2 and 32.12.

Clause 32.5 comes to his assistance because it is expressly provided that, if compliance with contract instructions involves expense or loss - which is something quite apart and additional to the cost of executing extra work - beyond that reasonably contemplated by the contract, then the Contractor is to be compensated.

Thus the position is made quite clear. The Employer is entitled, through his Principal Agent, to issue instructions for additional or varied work. The Contractor must comply with any such instruction but, if in doing so he suffers loss or expense not contemplated by the original scheme of work, then he is entitled to be compensated.

In this important respect it is clearly recognised that the arbitrary powers of the Principal Agent to alter the work ought not to be exercised to the financial detriment of the Contractor.

The Contractor importantly, when he finds himself facing a loss and expense situation must give proper notice in terms of clause 32.6 in order to avoid the time barring provisions.

DOES THE JBCC SERIES 2000 PRINCIPAL BUILDING AGREEMENT PROVIDE FOR INCREASED COSTS OF LABOUR AND MATERIALS TO BE RECOVERED ON A ‘FIXED PRICE’ CONTRACT?

Many contracts today are described as “fixed price contracts” meaning that the contract value is not subject to adjustment for price increases using the Contract Price Adjustment Provisions (CPAP (Haylett formula) or other such methods and that the Contractor has allowed for such increases in his tender offer.

Many contracts today are described as "fixed price contracts" meaning that the contract value is not subject to adjustment for price increases using the Contract Price Adjustment Provisions (CPAP (Haylett formula) or other such methods and that the Contractor has allowed for such increases in his tender offer.

But what if the contract is delayed by the action or inaction of the Employer or his Agents, the construction period is extended and as a result the Contractor suffers added expense due to rising costs of materials and/or labour?

Can the Contractor recover these expenses?

The answer lies in clauses 32.5 and 32.6 of the JBCC Principal Building Agreement.

The Contractor is entitled to recover expense and loss under the provisions of clause 32.5 where the circumstances causing the expense and loss are the same ones which caused the delay.

For example:

- Failure to give possession of the site to the Contractor on the date

- Issuing contract instructions

- Issuing contract instructions late

- Default by the Employer which causes a nominated or selected Sub-Contractor to suspend work or cancel

- Delays caused by direct Contractors

Any claim for the recovery of such expense and loss has to be made in terms of clause 32.6 which contains important time barring provisions.

The Contractor is required to give written notice to the Principal Agent within forty (40) working days from becoming aware or from when he ought reasonably to have become aware of any expense or loss in terms of clause 32.5. If he does not do this, then no compensation will be made and his claim will be rejected.

Once this notice has been given, the time bar provisions have been satisfied.

HOW DOES A CONTRACTOR OR SUBCONTRACTOR RECOVER THE EXTRA COSTS INCURRED WHEN VARIATIONS OR CHANGES IN DESIGN OR MATERIALS DISRUPT THE REGULAR PROGRESS OF THE WORK?

It may well be that a Contractor who has undertaken to erect a building according to certain plans and specification will find that instructions involving changes to the design or materials will impose upon him extra costs for which he cannot be properly remunerated by the application of revised unit costs for the work performed.

t may well be that a Contractor who has undertaken to erect a building according to certain plans and specification will find that instructions involving changes to the design or materials will impose upon him extra costs for which he cannot be properly remunerated by the application of revised unit costs for the work performed.

The issuing of such instructions or, sometimes worse, the delay in issuing such instruction can have a disruptive effect on progress on site; it can lead to work being performed out of the planned sequence, delays, uneconomical performance of work, loss of productivity and many other costly consequences.

The Architect or Principal Agent is normally given very wide powers to order extra work, to omit work or to change the nature or character of the works and it has long been recognised that these arbitrary powers ought not to be used to the financial detriment of the Contractor or his Subcontractors.

In the JBCC Series 2000 Principal Building Agreement and it's related Sub-contract agreements, clause 32.5 comes to the rescue and provides Contractors and Subcontractors with the right to recover any expense or loss for which reasonable compensation has not been made in the revaluation of the unit prices for the varied work.

The ability to recognise situations quickly where such loss or expense is being incurred is essential because notice in writing must be given in terms of clause 32.6 within forty working days of becoming aware of the event, otherwise the time bar operates to deny the right to compensation.

Once this notice has been given, the time bar is overcome, and the Contractor or Subcontractor can now take their time in carefully quantifying their claim, which should encompass all the loss and or expense which has been incurred and for which they have not been recompensed under any other provision in the contract.

WHAT METHODS OF EVALUATING DISRUPTION HAVE BEEN ACCEPTED BY THE COURTS?

Many forms of contract entitle the Contractor to recover expense or loss caused by compliance with Architect’s instructions or delay in the issue of such instructions or failure to issue such instructions.

Many forms of contract entitle the Contractor to recover expense or loss caused by compliance with Architect's instructions or delay in the issue of such instructions or failure to issue such instructions.

Clause 32.5 of the JBCC Series 2000 Principal Building Agreement for example entitles the Contractor to recover such costs, provided the proper notices are given timeously.

But the difficulty which many Contractors face under these circumstances is how to evaluate the effect of such disruption - the problem usually being caused by a lack of accurate records or the difficulty of interpreting or using what records do exist.

The English courts have given some assistance in the manner in which disruption should be evaluated.

In the case of Whittal Builders Company Ltd -v- Chester-Le Street District Council (1985), difficulties were experienced by the Employer in giving possession of dwellings on a rehabilitation scheme. The court found that during the period when these problems existed the Contractor was grossly hindered in the progress of the work and as a result ordinary and economic planning and arrangement of the work was rendered impossible. However, a stage was reached in November 1974 when dwellings were handed over in an orderly fashion and no further disruption occurred. The court had to decide upon the appropriate method of evaluating disruption. Mr Recorder Percival QC in his judgement had this to say:

"Several different approaches were presented and argued. Most of them are highly complicated, but there was one simple one - that was to compare the value to the Contractor of the work done per man in the period up to November 1974 with that from November 1974 to the completion of the contract. The figures for this comparison, agreed by the experts for both sides, were ₤108 per man week while the breaches continued, ₤161 per man week after they ceased.

At one stage I thought that some adjustment should be made in the figure of ₤161 to allow for inflation, but Mr Collins satisfied me that was not appropriate as both figures had been calculated at contract rates.

It seemed to me that the most practical way of estimating the loss of productivity, and the one most in accordance with common sense and having the best chance of producing a real answer was to take the total cost of labour and reduce it in the proportions which those actual production figures bear to one another - i.e. by taking one-third of the total as the value lost by the contractor.

(161 - 108 )

--------------- x 100 = 33%

( 161 )

I asked both Mr Blackburn and Mr Simms if they considered that any of the other methods met those same tests as well as that method or whether they could think of any other approach which met them better than that method. In each case the answer was no. Indeed, I think that both agreed with me that that was the most realistic and accurate approach of all those discussed. But whether that be so or not, I hold that that is the best approach open to me, and find that the loss of productivity of labour which the plaintiff suffered is to be quantified by taking one-third of the total. That gives a figure of ₤21,479.35."

There should be little difficulty in calculating the productivity per man week using the build up for interim certificates. The productivity per man week could be calculated by dividing the number of man weeks worked during a valuation period into the value of work carried out giving an output per man week.

It may not be possible due to the nature of the disrupting matters and the complexity of the project to employ the simple approach used in the Whittal Builders case. It may therefore be appropriate to attempt to isolate the additional hours of labour and plant and to draw up a detailed schedule of all matters causing disruption and to apportion those costs to each item.

Difficulties may be encountered isolating the additional hours of labour and plant which result from each and every disrupting matter. Inevitably some form of assessment will be necessary.

The courts again have provided assistance in dealing with this problem. In the case of Chaplin -v- Hicks heard as long ago as 1911, it was held:

"Where it is clear that there has been actual loss resulting from the breach of contract, which it is difficult to estimate in money, it is for the jury to do their best to estimate; it is not necessary that there should be an absolute measure of damages in each case."

Two years later, Justice Meredith in the Canadian case of Wood -v- The Grand Valley Railway Co, had this to say:

"It was clearly impossible under the facts of that case to estimate with anything approaching to mathematical accuracy the damages sustained by the plaintiffs, but it seems to me to be clearly laid down there by the learned Judges that such an impossibility cannot ‘relieve the wrongdoer of the necessity of paying damages for his breach of contract', and that on the other hand the tribunal to estimate them whether jury or Judge must under such circumstances do ‘the best it can' and its conclusion will not be set aside even if ‘the amount of the verdict is a matter of guess work'."

The Canadian case of Penvidic Contracting Co Ltd -v- International Nickel Co of Canada Ltd (1975) also provides some guidance on the manner in which disruption should be evaluated where anything like an accurate evaluation is impossible. The dispute arose out of a construction agreement to lay ballast and track for a railroad. The owner was in breach in several respects of its obligation to facilitate the work. The Contractor, who had agreed to do the work for a certain sum per ton of ballast, claimed by way of damages the difference between that sum and the larger sum that he would have demanded had he foreseen the adverse conditions caused by the owner's breach of contract. There was evidence that the larger sum would have been a reasonable estimate.

At the hearing, damages were awarded on the basis claimed, but on appeal to the Court of Appeal this portion of the award was disallowed. On further appeal the Supreme Court of Canada, held, restoring the trial judgement, that where proof of the actual additional costs caused by the breach of contract was difficult, it was proper to award damages on the basis used at trial. The difficulties of accurate assessment cannot relieve the wrongdoer of the duty of paying damages for breach of contract.

IF A CONTRACTOR MAKES CLAIM FOR LOSS AND EXPENSE UNDER A JBCC CONTRACT, CAN HE INCLUDE HIS COST IN PREPARING THE CLAIM?

It is generally accepted that a contractor is not entitled to reimbursement for any costs incurred in preparing a loss and expense claim unless it can be shown that he has been put to additional cost as a result of the unreasonable actions or inactions of the employer.

It is generally accepted that a contractor is not entitled to reimbursement for any costs incurred in preparing a loss and expense claim unless it can be shown that he has been put to additional cost as a result of the unreasonable actions or inactions of the employer. The rationale behind this is that the contractor is only doing what he has agreed to in the contract: to provide information to demonstrate that he has suffered actual loss as a result of an event over which the employer had control.

There is little case law, but the case of Michael A Johnston vs WH Brown Construction (Dundee (2000) does apply such reasoning in the context of a defects claim. Here, the employer sought to recover the cost of preparing a schedule of defects served on a contractor. The Scottish court held that the contract provided its own remedy for a contractor's breach, namely to serve a schedule of defects and to require the contractor to rectify them at no cost to the employer. Where the contract provided its own method by which breaches can be remedied, it did not follow that the cost of operating that mechanism could be recovered. The court stated: "What is being sought here is not true consequential loss but is simply the cost of operating the mechanism specifically contemplated by the contract".

WHERE A FINAL ACCOUNT AND/OR CLAIM HAS BEEN SIGNED IN FULL AND FINAL SETTLEMENT BUT SUBSEQUENTLY IT IS DISCOVERED THAT AN ENTITLEMENT HAS NOT BEEN INCLUDED, CAN THE MATTER BE REOPENED?

It is common procedure for contractors and subcontractors to be expected to sign a statement to the effect that they agree to payment of the balance due on the final account on a “full and final settlement” basis.

It is common procedure for contractors and subcontractors to be expected to sign a statement to the effect that they agree to payment of the balance due on the final account on a "full and final settlement" basis.

Frequently the contractor or subcontractor is informed that payment will not be made unless the form is signed. The contractor or subcontractor often signs, as he needs money, even though he considers a greater entitlement is due.

Where one party, (i.e. the contractor or subcontractor), has completed his side of the bargain and agrees to forego an entitlement to full payment, there must be consideration if the agreement is to be binding. In other words the contractor or subcontractor must have received some benefit. For example, if the payment were to be made earlier than contractually required this would amount to consideration for payment of the lesser sum to which agreement was given.

This is sometimes referred to as accord and satisfaction. The acceptance of a sum less than the contractor or subcontractor's due entitlement would be considered as a variation to the contract. If an agreement is made whereby the contractor or subcontractor agrees to forego part of his entitlement in the absence of consideration the agreement will not be binding.

It may be however that the final balance includes a sum which was disputed and the contractor considers the amount in respect of the disputed sum is less that he considers due. Hudsons ‘Building and Engineering Contracts' 10th Edition as at page 22 states:

"However, consideration may be present in such a case if some bona fide dispute exists and a claim is given up in return for the promise to accept less."

This being the case the agreement will be binding.

In the case of D & C Builders Ltd -v- Rees (1966), an Employer told decorators that unless they agreed to accept a sum substantially less than the amount of their account, she would pay them nothing at all. They signed a written document agreeing to accept the reduced payment in full satisfaction of their claim. Later they sued for the full amount. It was held by the Court of Appeal there was no true accord, because the plaintiffs had acted as a result of a threat which was without any justification, and there was no consideration present.

For accord and satisfaction to be effective one party must have foregone some part of his obligations, e.g. payment in full of all entitlements in return for some form of consideration. Where an agreement is reached but unknown to both parties an entitlement has not been provided for, it could be argued by the contractor or subcontractor that the common intention is not reflected by the agreement. A court under those circumstances, may order that the agreement be rectified to reflect the intention of its signatories - Craddock Bros Ltd -v- Hunt (1923).

Summary

An agreement including a balance due on a final account and claim which due to financial pressure is signed by a contractor or subcontractor even though he considers he is entitled to more, will be binding as accord and satisfaction provided the contractor received some benefit such as payment earlier than otherwise would be the case.

If no benefit is derived then the argument will not be binding.

However, where a bona fide dispute exists and a claim or part of a claim is given up in return for a promise to accept less, the agreement may be binding.

In the event of a contractor or subcontractor signing in full and final settlement and it is subsequently discovered that a further entitlement exists, a Court may order rectification of the agreement to include the additional item on the basis that the agreement was intended to cover all financial entitlements and didn't.

WHAT ARE THE LEGAL CONSEQUENCES OF THE ISSUING OF A “FINAL CERTIFICATE” IN TERMS OF A BUILDING CONTRACT?

In Ocean Diners (Pty) Ltd v Golden Hill Construction cc 1993 (3) SA 331 the courts were called upon to determine issues relating to an architect’s final certificate.

In Ocean Diners (Pty) Ltd v Golden Hill Construction cc 1993 (3) SA 331 the courts were called upon to determine issues relating to an architect's final certificate.

The employer and the contractor entered into a written agreement for the construction of a restaurant complex at Beach Road, Gordon's Bay. The contract was in standard form approved and recommended by the Institute of South African Architects and other related bodies (the white form). Provision was made in the contract for the appointment of an architect and a quantity surveyor to represent the employer in all matters concerning the works and their completion.

A clause in the contract provided that the contractor was entitled to receive from the architect interim certificates at intervals not greater than one calendar month, a penultimate certificate and a final certificate stating therein the amount due to the contractor, and to payment of such amount by the employer within the period set out in the agreement.

Various interim certificates based on the progress of the works were issued from time to time by the architect. A penultimate certificate was issued and upon completion of the works the architect issued a final certificate.

The final certificate reflected the total value of work done by the contractor. From this was deducted the amount previously certified, as well as certain retention moneys, leaving a balance owing to the contractor.

The final certificate contained an acknowledgement of the employer's indebtedness to the contractor and included a promise to pay such amount within seven days. The employer sought to challenge the status of this certificate, and questioned before the court, whether or not the certificate by the architect was a final certificate in terms of the contract.

In deciding the matter the court held that a final certificate by an architect in terms of a building contract depends in the first instance on the proper interpretation of the agreement. Thus, where the agreement provides that a final certificate issued in terms of the contract shall be conclusive evidence as to the sufficiency of the said works and materials, and of the value thereof, the effect of such a certificate is to determine the respective rights and obligations of the parties in relation to matters covered by the certificate. This final certificate constitutes (in the absence of a valid defence) conclusive evidence of the value of the works and the amount due to the contractor. The certificate embodies a binding obligation on the part of the employer to pay that amount. The failure of the employer to pay within the time stipulated entitles the contractor to sue on the certificate.

If the effect of a building contract is to confer finality upon a certificate, a certificate validly issued cannot, in the absence of a contractual provision to the contrary or agreement or waiver by the parties, be withdrawn or cancelled by an architect in order to correct mistakes of fact or value in it. Therefore once the architect has issued the certificate, he is functus officio (has discharged his office) insofar as the certificate and matters pertaining thereto are concerned. That being so, the architect is not entitled unilaterally to withdraw or cancel the certificate.

A final certificate is not open to attack because it was based on erroneous reports by the agent of an employer or the negligence of his architect. The failure of the employer's quantity surveyor properly to scrutinise the claims put forward by the contractor, and his failure to rectify any errors, and the possible negligence of the architect in failing to satisfy himself as to the correctness of the claims and valuations before issuing the certificate, will accordingly not provide a defence to an action on the certificate, nor will it allow the architect to cancel or withdraw the certificate.

An undertaking by an employer in a building contract that a final certificate issued by a responsible agent (the architect) shall be conclusive evidence of the employer's indebtedness is not in the least offensive to public policy. For a party contractually to abandon his ordinary right to prove that an admission which he made (through his representative) was wrongly made is not in itself contra bonos mores (against the convictions of society). The whole purpose of a provision such as described above is to bring about finality in the respective rights and obligations of the parties and to obviate the need for expensive litigation over what are (or may be) minor issues. To ensure this they contractually bind themselves to accept as final and conclusive the certificate of a professional person who they are entitled to expect will act fairly and impartially. Its provisions cannot therefore be said to be inimical to the public interest.

When it is known that the final certificate is not entirely accurate in relation to either the valuation reflected therein or the amount due to the contractor, it would not be contrary to public policy to enforce it. Public policy is largely concerned with the potential for manifest unfairness or injustice within a given situation. Where, therefore, the employer has suffered damage through a negligent failure on the part of either his quantity surveyor or architect to act in his best interests, he would have an action for damages against them. The situation where the certificate is known to be inaccurate as aforesaid is therefore not one inherently fraught with unfairness or injustice as far as the employer is concerned.

The court, however, found that it was not necessary, by reason of the facts in the present case, to decide whether the negligent or innocent misrepresentations did constitute a defence to an action on a final certificate. But the court did mention that none of the leading writers on building or other contracts mentioned negligent or innocent misrepresentation (relating to an architect's certificate as such) as a defence to a claim on a final certificate. The clear impression of the authorities is that such misrepresentations are not available as defences. The reason could be that they are not appropriate defences, having regard to the functions of the architect who issues the certificate and the scrutinizing mechanisms available to him before issuing a final certificate, as well as for the need for finality.

The appeal was dismissed with costs

CAN A CONTRACTING PARTY CANCEL THE CONTRACT IN THE EVENT OF THE INSOLVENCY OF THE OTHER PARTY?

Many building contracts and subcontracts contain provisions which purport to give the right to one contracting party to cancel the contract in the event of the insolvency or voluntary or compulsory liquidation of the other.

Many building contracts and subcontracts contain provisions which purport to give the right to one contracting party to cancel the contract in the event of the insolvency or voluntary or compulsory liquidation of the other.

A number of commentators however have pointed out that the provisions of the Insolvency Act appear to make this right unenforceable. The Act gives the appointed trustee the right to carry on the business of the insolvent and it is therefore the trustee who has the choice whether or not to proceed.

As stated by McKenzie in The Law of Building and Engineering Contracts and Arbitration, fourth edition at page 41, "...the trustee has the right to decide whether to abide by the contract or not. If the trustee elects to hold the other contracting party to his obligations under the contract; he must tender complete performance of all the insolvent's obligations. If the trustee intends to abide by the contract he should give timeous notice to the other party failing which the latter may treat it as being at an end".

Similarly, Finsen in The Building Contract, A Commentary on the JBCC Agreements at page 185 states "...where an agreement provides that either party may cancel on the insolvency of the other, it is doubtful whether such provision would be valid, because it will probably be held to be contrary to the provisions of the Insolvency Act and to the right of the liquidator to decide whether or not to proceed with the contract".

If such provision in contracts should indeed be invalid in the light of the insolvency provisions, and this seems reasonably certain, its retention as one of the terms of performance of the contract would appear to be objectionable on the grounds that it creates confusion in the minds of the parties as to the legal rights of each. It is also objectionable on the grounds that a party, although the innocent party, and believing that it has the right to do so, might wrongfully repudiate the contract and in so doing give rise to a substantial claim for damages by the other party.

In practice it is highly probable that a party facing insolvency would inevitably find itself in breach of some other material terms of the contract which would provide the other party with the necessary grounds for cancellation e.g. failure by the contractor or subcontractor to proceed with due diligence, regularity and expedition or failure by the employer to make payment.

HOW DOES ARBITRATION WORK?

Most contracts in the Construction Industry are concluded satisfactorily - the project is completed to the client's requirements and the correct amount of money changes hands.

Most contracts in the Construction Industry are concluded satisfactorily - the project is completed to the client's requirements and the correct amount of money changes hands.

But not always.

One or both of the parties are not happy. The work is not satisfactory, or there are complaints about the amount due and payable and the parties to the contract are at loggerheads.

A dead-lock ensues and thoughts turn to how to resolve the problem. The party who is claiming something the other party refuses to agree to, and in most cases this is the Contractor, arrives at a point where he says - "I want to go to arbitration".

The problem is - he often does not know how to get there.

The first question he must ask himself is "Have I got an agreement with the other party to refer disputes to arbitration?"

If he has not or cannot obtain this agreement he cannot proceed to arbitration and he has to decide whether to pursue the matter through the Courts.

Arbitration is chosen by the parties as an alternative to litigation. Parties cannot be compelled to take their dispute to arbitration. It is a consensual arrangement adopted willingly by both of the disputants.

The Arbitration Act 1965 defines an arbitration agreement as "a written agreement providing for the reference to arbitration of any existing dispute or any future dispute relating to a matter specified in the agreement, whether an arbitrator is named or designated therein or not."

The agreement has to be a written agreement.

Where the parties to a contract have signed a contract agreement which contains an arbitration clause or where they have, by reference, clearly agreed that these conditions are applicable to them, even though the contract documents are not signed, this requirement is satisfied.

Let us assume that our Contractor in this case has surmounted this first hurdle - he has a contract with the other party which contains an agreement to refer disputes to arbitration.

The second question he must ask himself is, "is the matter suitable for arbitration?"

Wille and Millin in their "Mercantile Law in South Africa" say that "Arbitration is the process by which parties to a dispute are, with the approval and encouragement of the law, enabled to arrange for taking and abiding by the judgement of a selected person or persons instead of carrying the dispute in the ordinary course to the established courts of justice".

The issue must be one of a dispute or difference. Arbitration cannot be employed, for example, where the issue is that one of the parties is failing to comply with a legal or contractual duty, e.g. failing to pay an admitted debt. If a Contractor should seek arbitration as a means of compelling payment on a certificate in a building contract, he will be unsuccessful because there is no dispute as the debt has been admitted and certified by the Employer's agent. Consequently the Arbitrator will have no authority to act. If, however, the Contractor's claim has not been certified but is denied by the Employer or his agent, a dispute exists and it is a proper matter for arbitration.

Having satisfied himself that the matter is definitely a dispute or difference between the parties the Contractor must now consider whether he has followed the correct procedure to bring the matter to arbitration. He must turn to the arbitration clause in his contract and understand and follow it's provisions.

Frequently the arbitration clause will provide that, unless the parties jointly agree on who they wish to appoint as their Arbitrator, the Arbitrator will be appointed by a named organisation, such as the KZNMBA. The Contractor will have to make a written application for this appointment.

Once the Arbitrator has been appointed and he has accepted the appointment, all further arrangements can be left to him.

But the Contractor has never been involved in an arbitration before! He now begins to ask himself - but what are the rules? What will the Arbitrator need? How does the arbitration get started? How do I prepare? What are the costs?

There are really only two fundamental rules that must be observed:

  1. Each party must know what the other's case is; there must be no surprises.
  2. The Arbitrator may not hear one party without giving the other opportunity to be present and to answer; there must be no private communication.

Even in the most informal arbitrations these rules must be strictly observed. Apart from these rules, the parties and the Arbitrator are free to make whatever rules they think will be the most suitable to resolve the particular dispute.

The Association of Arbitrators has drawn up recommended rules of procedure and published these in a booklet entitled "Rules for the Conduct of Arbitrations".

The Arbitration Agreement in many standard form contracts provides that the arbitration shall be conducted in accordance with these rules.

Probably the Arbitrator's first action will be to convene a preliminary meeting with the parties at which the procedure can be discussed and agreed upon, timetables drawn up and arrangements made for the arbitration hearing.

An Arbitrator can only form an opinion and make his award when he has been given all the facts. Consequently, the preliminary stages, and the hearing itself, will be directed towards establishing what the relevant facts are and their significance in the claims of the respective parties.

Understandably the parties will be anxious to put their arguments to the Arbitrator, and each will want to try to persuade him why he should uphold their particular point of view. Usually the Arbitrator will not wish to hear their arguments until all the facts have been laid before him in writing and he is in a position to form his own opinion and test this against the arguments of the parties.

It will be the duty of the parties to lay all relevant facts before the Arbitrator; unless it has been specifically agreed to the contrary, it will not be his function to make any investigation, or to establish any facts for himself. This is a very important point that all too frequently is not appreciated. The Arbitrator will not seek out the facts himself, nor will he tell the parties what evidence he requires of them to lead. He will leave it to them to provide him with whatever facts each considers necessary to prove his case.

One would have thought that by the time they arrived at the point of arbitration, each party would be thoroughly aware of the other's case, but even in the simplest disputes this is not always so. Very often disputes are based on mutual misunderstanding.

It is therefore necessary that disputes are clearly defined, so that each party knows what matters are in dispute, and where proof is necessary for his case, and which matters are not disputed and therefore need not be proved. This understanding will save considerable time and cost. It will also greatly assist the Arbitrator to appreciate the issues between the parties, and what disputes he must determine.

The traditional procedure is based on similar procedure in courts of law and requires the Contractor, who is now called the Claimant, to produce a written statement in which he sets out his claim, and a summary of the relevant facts that give rise to the claim. A copy of this is submitted to the Arbitrator and to the Defendant, who prepares an answering statement of defence in which he takes each point raised in the statement of claim and states whether he admits or denies it, and indicates briefly what his defence is. Again, a copy of this document is submitted to the Arbitrator and the Claimant, who may, if he wishes, prepare an answering reply in which he takes each point raised by the Defendant in the statement of defence and states whether he admits or denies it.

It will be seen that reading these three documents together will reveal which facts the parties are agreed upon, and will therefore need not to be proved, and which they dispute and will need to prove their version in order to win their case.

These documents should contain the statements of what each considers to be the facts; and the parties are required to attach to their statements copies of any relevant documents, correspondence etc.

It should now be clear to each party what the other's case is, and what it must prove in order to establish it's case.

Proof is provided by evidence, which can be oral or written, or in the form of actual objects. If the evidence is believable, it offers proof of the disputed facts.

It is therefore necessary to assemble as much evidence as possible in support of the disputed facts.

The term "hearing" is used for the procedure when evidence is laid before the Arbitrator to prove the parties' respective cases.

Nearly always the hearing will be the traditional type where the parties and their witnesses appear in person before the Arbitrator to give their evidence. However, the Arbitrator may be able to make a finding merely by studying the documents submitted to him by each party. This is referred to as a "documents-only" hearing.

An oral hearing is an occasion when both parties appear before the Arbitrator in person, together with their witnesses, to give oral evidence in support of their respective cases. Each party must have the opportunity to hear what the other says and to cross-examine him and his witnesses.

Cross-examination is a process of putting questions to the other party or his witnesses to try to show what he has said is unreliable.

The Claimant will normally be called upon to begin. He may start by giving his own evidence in the form of an oral statement to the Arbitrator in which he states in full detail all the relevant circumstances and facts that form the basis of his claim. Thereafter he may call witnesses and put questions to them intended to bring forth answers that will tell the Arbitrator more about the facts on which the claim is based and corroborate evidence that has already been given.

The Defendant will be given the opportunity to cross-examine the Claimant and each witness when he has given his evidence. After each witness has been cross-examined the Claimant will have the opportunity of putting further questions to him, limited to the topics on which he has been cross-examined, the answers to which he hopes will correct any misleading impressions that may have been made.

When the Claimant has led all the evidence which he considers to be necessary, he closes his case, and the Defendant then has the opportunity to lead evidence and be cross-examined in exactly the same manner.

During these proceedings the Arbitrator does not normally question either the parties or their witnesses, although he may put a few questions to clarify points where the evidence has been uncertain or ambiguous. In general, however, he leaves it to the parties to lead whatever evidence they consider necessary to prove their respective cases.

When both parties have led all their evidence, the Claimant will be given the opportunity to argue his case. Where there has been conflicting evidence he will advance argument why the evidence of his own witnesses should be believed rather than that of the Defendant's. He will also try to show how his evidence proves that he is entitled to his claim.

After he has finished, the Defendant will be given a similar opportunity to argue his case, and when he has concluded, the Claimant will be given the chance to reply to the arguments raised by the Defendant.

This will then bring the hearing to an end.

In a documents-only hearing, there will be no formal hearing. Each party will submit to the Arbitrator the documents which he considers prove his case. Each party must, of course, be aware of the documents that the other is submitting and he is entitled to be provided with copies of these.

There may nevertheless be a brief informal hearing to give the Arbitrator the opportunity of putting any questions to either party that he may wish, and for the parties to argue their cases. Alternatively, the parties may choose to submit written argument, and once again each party must be provided with a copy of the other's argument and given the opportunity of replying to it.

The Arbitrator is unlikely to give his decision at the end of the hearing. Usually he will require a number of days at least to consider the issues and make up his mind.

His decision is conveyed in a written document known as an "award", and a copy of this is handed to each of the parties, usually only after the Arbitrator's fees have been paid in full.

The Arbitrator is entitled to a fee for his services and he will advise the parties of his charges at the time of his appointment.

The Arbitrator will also decide on which party should bear the costs of the proceedings. The basic principle in awarding costs is that a party who is substantially successful is entitled to be awarded costs. If the Claimant is awarded substantially more than the Defendant was prepared to pay him, even if the award is much less than the original amount claimed, the Claimant has achieved substantial success because he has recovered substantially more than he would otherwise have obtained, by taking his claim to arbitration.

The Arbitrator will state in his award who is to pay the costs and how the costs are made up. The costs comprise his own fees and any attendant expenses, and any professional fees incurred by the parties in presenting their cases, such as the fees of attorneys and expert witnesses.

The award will normally require one party to pay to the other a certain sum of money. The Arbitrator has no power to compel a defaulting party to pay, but the other party has the right to have the award made an order of court. This is normally a simple, quick procedure.

Arbitrations are intended to bring disputes to an end and for this reason there is no appeal. However, the courts have the power to set aside an award if it can be shown that the Arbitrator acted with gross irregularity or impropriety, such as by accepting a bribe.

Once completed, arbitration proceedings can seldom be re-opened. For this reason parties should be sure that during the hearing they lead all the evidence they wish; they will not get a second chance.

Summary

1) There must be an arbitration agreement between the parties.

2) There must be a dispute or a difference arising out of the contract.

3) The precise procedure set down in the arbitration agreement must be followed.

4) Any written notices must be given within the time specified.

5) Unless it is specifically agreed between both parties and the Arbitrator, the Arbitrator will not make any investigation or seek out facts for himself. The onus is on the parties to lay all the evidence before him.

6) At the hearing each party has the opportunity to submit oral evidence in support of his case and the other party has the opportunity to cross-examine to test the validity of this evidence.

7) The Arbitrator will require his fees to be paid in full before he delivers his award.

8) The party who is substantially successful will be awarded costs.

9) There is no appeal and the award is final and binding on the parties.

HOW DOES THE LAW OF PRESCRIPTION LIMIT YOUR RIGHT TO SUE?

Legal actions have to be brought within a specified period of time. If you fail to do so, your right to sue for damages or to recover a debt or to make reference to Arbitration proceedings etc.

Legal actions have to be brought within a specified period of time. If you fail to do so, your right to sue for damages or to recover a debt or to make reference to Arbitration proceedings etc. will be lost.

These periods of time (known as prescription periods) differ according to the basis of your legal action. In most cases you have to institute your action within three years of the event which gave rise to your action. So, for example, if your car is damaged in an accident which occurred on 1 January 1997, you would have until midnight on 31 December 2000 (being three years from the accident) to institute your action.

There are, however, certain causes of action where the prescription period is either less or more.

For instance, if you are suing the police you have one year to institute action. A further requirement, when suing the police is that you have to give notice of your intention to sue, before actually instituting the action.

This notice must be sent to either the national or provincial commissioner of police no less than one month before action is instituted.

Prescription periods are not only governed by Acts of parliament. Contracts can also provide for specific prescription periods. An example is the prescription or time bar clause which appears in most of our insurance policies. Be well aware of such a provision if your insurance company repudiates your claim.

The clause generally provides that if you fail to institute action against the insurance company within a specified period of your claim being repudiated (usually 90 days) then your right to claim from the company is forfeited.

It is also important to note when prescription starts to run. After all, it is no good knowing that you have one year to institute an action if you are not sure when that one year period starts.

Generally, prescription will start to run when you know (or ought reasonably to know) the identity of the person from whom you are claiming and the facts on which your cause of action is based.

In our motor accident example, it will be safe to assume that prescription would run from the date of the accident.

Things would be different in the case of a person who is operated on by a surgeon but doesn't find out that the surgeon had been negligent until complications arise six months after the operation.

In that case, prescription would start to run six months after the operation, and not on the date of the operation itself (even though that is when the act of negligence was committed).

In the case of minors' claims, prescription starts to run when the minor reaches the age of 21.

Be aware of the fact that there are certain time limits on your right to sue and, if in doubt, consult an attorney for guidance.