Construction Law – Governance of the architectural professions as a whole and the legislative framework determining inter alia architects’ scope of practice and registration requirements

1. In terms of the Council for the Built Environment Act, 43 of 2000 (hereinafter referred to as “the Built Environment Act”), a “registered person” means a person registered in terms of any of the professions’ Acts. These professions’ Acts are defined as the following:

1.1 The Architectural Profession Act, 2000.

1.2 The Project and Construction Management Professions Act, 2000.

1.3 The Engineering Profession Act, 2000.

1.4 The Landscape Architectural Profession Act, 2000.

1.5 The Property Valuers Profession Act, 2000.

1.6 The Quantity Surveying Profession Act, 2000.

2. The Council for the Built Environment thus to a certain extent oversees the architectural, engineering, landscape architectural, project & construction management, property valuators and quantity surveying professions. Each of these professions also have their own professional council and legislation governing them.

3. In terms of section 20(1) of the Built Environment Act:

The council must, after receipt of the recommendations of the councils for the professions submitted to it in terms of the professions’ Acts, and before liaising with the Competition Commission in terms of section 4(q) –

(a) Determine policy with regard to the identification of work for the different categories of registered persons;
(b) Consult with any person, body or industry that may be affected by the identification of work in terms of this section.”

4. In terms of section 20(2) of the Built Environment Act, “the council must, after consultation with the Competition Commission, and in consultation with the councils for the professions, identify the scope of work for every category of registered persons”.

5. The Council for the Built Environment is thus responsible for determining scope / identification of work for each of the professions overseen by it. This will, however, be done based on inter alia the submissions of each of the professional councils in respect of what work persons registered with them may do.

6. The Architectural Profession Act, No 44 of 2000 (hereinafter referred to as “the Architects Act”) provides in section 18(1) that the categories in which a person may register in the architectural profession are as follows:

6.1 Professional architect;

6.2 Professional Senior Architectural Technologist;

6.3 Professional Architectural Technologist; or

6.4 Professional Architectural Draughtsperson.

7. The section also provides for candidates that may be registered in each of the mentioned categories, who must perform work in the architectural profession only under the supervision and control of a professional registered in a specific category.

8. In terms of section 18(2) “a person may not [our emphasis added] practise in any of the categories contemplated in subsection (1), unless he or she is registered in that category”.

9. It is an offence for a person to perform architectural work if he or she is not registered in the appropriate category.

10. In terms of section 26(1):

The council must consult with –
(a) All voluntary associations;
(b) Any person;
(c) Any body; or
(d) Any industry

That may be affected by any laws regulating the built environment professions regarding the identification of the type of architectural work which may be performed by persons registered in any of the categories referred to in section 18, including work which may fall within the scope of any other profession regulated by the professions’ Acts referred to in the Council for the Built Environment Act, 2000.”

11. In terms of section 26(2), “after the process of consultation the council must submit recommendations to the CBE regarding the work identified in terms of subsection (1), for its consideration and identification in terms of section 20 of the Council for the Built Environment Act, 2000”.

12. In terms of section 26(3)(a), “a person who is not registered in terms of this Act, may not perform any kind of work identified for any category of registered persons”.

13. In terms of section 26(4), “subsection 3(a) may not be construed as prohibiting any person from performing work identified in terms of this section, if such work is performed in the service of or by order of and under the direction, control, supervision of or in association with a registered person entitled to perform the work identified and who must assume responsibility for any work so performed”.

14. A person may thus perform work falling within the identification of work of a specific professional under the direction, control and supervision of that registered professional but only if that registered professional assumes the ultimate liability and responsibility for any work so performed.

15. In terms of section 41(1), “a person contravening section 18(2) [our emphasis added], 23, 25(8) or 31(8)(a), (b), (e) or (f) is guilty of an offence”.

16. In terms of section 41(3), “a person convicted of an offence in terms of section 18(2), may be liable to a fine equal to double the remuneration received by him or her for work done in contravention of section 18(2) or to a fine equal to the fine calculated according to the ratio determined for three years imprisonment in terms of the Adjustment of Fines Act, 1991”.

17. In terms of the definitions contained in the Code of Conduct published under the Architectural Act, members of closely allied professions are once again defined as persons registered in terms of the following:

17.1 The Architectural Act;

17.2 The Engineering Profession Act No 46 of 2000;

17.3 The Landscape Architectural Profession Act No 45 of 2000;

17.4 The Project and Construction Management Professions Act No 48 of 2000;

17.5 The Quantity Surveying Profession Act No 49 of 2000;

17.6 The Planning Professions Act No 36 of 2002;

17.7 The Property Valuers Profession Act No 47 of 2000.

18. In terms Rule 2.1 of the Code of Conduct published under the Architectural Act, “a registered person shall only undertake architectural work which is identified for the category of registration in which he/she is registered in terms of section 18 of the Act and in accordance with the registration categories in force”.

19. Practising outside a registration category is thus not only an offence in terms of the Architectural Act but may also form the subject of disciplinary action by the Council.

20. Each of the Acts listed in paragraphs 17.2 – 17.7 contain substantively similar provisions to those of the Architectural Act as discussed above i.e.:

20.1 There are specific categories of registration.

20.2  A person may not practise in any of these categories unless he / she is registered and it is an offence to practice without being properly registered.

20.3 The council must make submissions w.r.t identification of work to the Council for the Built Environment.

20.4 A person who is not registered in terms of the specific Act may not perform any kind of work identified for any of its categories of registered persons, unless such work is performed under the direction, control and supervision of a registered person entitled to perform the work identified. It is imperative that such registered person must assume responsibility and liability for any work so performed.

20.5 A person who practices in a category without being registered may be liable to a fine.

21. Similarly, each of the Codes of Conduct published under the Acts listed in paragraphs 17.2 – 17.7 contain some manner of provision stating that registered persons shall undertake only work which falls within their applicable registration category and failure to comply therewith may result in disciplinary action.

22. In terms of an Interim Policy on the Identification of Work for the Architectural Profession, published by the South African Council for the Architectural Profession and dated 12 June 2013, the following:

22.1 Regulation 2.1 provides that “no person who is registered in any category referred to in Section 18 of the Act, may undertake architectural work unless such work is demarcated for the relevant category of registration in accordance with Schedules 1 and 2, provided that a person registered in any particular category may perform the work demarcated for any lower category. Where work is not specified in the schedules, SACAP should be consulted”.

22.2 Regulation 2.3 provides that “subject to Section 26(4) of the Act, any person who undertakes identified architectural work without being registered with SACAP, is contravening the Act and is guilty of an offence”.

22.3 In terms of Regulation 3(b), “work which falls within the scope of a profession regulated by the different Built Environment Acts and which may be performed by a person registered in terms of section 18(1)(a) of the Architectural Profession Act will be recorded in the applicable CBE Board Notice after it has been confirmed by the relevant council. This will include for aspects of work common to more than one Council and / or discipline, where recognised requisite skill and competence permit the professional within one Council to undertake work demarcated within the scope of work of another Council, without need for dual registrations”.

22.4 Schedule 1 contains a “demarcation of architectural work matrix”, Schedule 2 sets out “specialised services” and Schedule 3 sets out the “definition of architectural work and competencies”.

23. It is thus important for registered persons to familiarise themselves with the identification of work in order to ensure that they are performing work which falls within that of their registration category.

24. In terms of a draft Board Notice published by the Council for the Built Environment during November 2011:

24.1 Section 11(1) states that “a person registered as a professional architect in terms of the Architectural Profession Act, principal consultant or principal agent may perform the scope of services or any one or combination of the services determined in Annexure B which falls within the scope of services of the project and construction management professions regulated by the Project and Construction Management Professions Act, 2000 (Act No. 48 of 2000) if the qualification, training and experience of that person have specifically rendered him or her competent to perform those services and the services are performed within the framework of architectural work”. Annexure B is, however, marked as “to be completed” and no work is listed there as yet.

24.2 Section 11(2) states that “a person registered in a category of registration in terms of the Architectural Profession Act may perform the scope of services relating to costing determined in Annexure C which falls within the scope of services of the quantity surveying profession regulated by the Quantity Surveying Profession Act, 2000 (Act No. 46 of 2000), if the qualification, training and experience of that person have specifically rendered him or her competent to perform those services and the services are performed within the framework of architectural work”. Annexure C is, however, marked as “to be completed” and no work is listed there as yet.

24.3 Section 12 states that “a person registered in a category of registration may perform the scope of work determined in Annexure D which falls within the scope of the engineering profession regulated by the Engineering Profession Act, 2000 (Act 46 of 2000), if the qualification, training and experience of that person have specifically rendered him or her competent to perform that work and the work is performed within the framework of architectural work”. Annexure D does, however, not list any such work.

25. Bearing in mind that the Board Notice mentioned in paragraph 24 supra is only a “draft”, it is not of legal force and effect as yet. It appears that the process of identifying overlapping areas of work is still ongoing. There are, however, not such identified areas as yet and members of the architectural profession would be best serve by adhering to their identification of work.

26. There appear to be similar identifications of work and board notices published by and in respect of the councils for the various associated professions, some of which deal in more detail with inter-council overlap of work and the work that those registered persons may perform although it may be regarded as part of other registered persons’ identification of work. This does, however, not apply to architectural professionals and will not be discussed in more detail here.

27. In conclusion, the following:

27.1 The Council for the Built Environment has a mandate to assess identification of work of the various registration categories of the various professions regulated by the Act set out in paragraph 17.1 – 17.7 supra.

27.2 There may potentially be an overlap in respect of the various professions’ scope / identification of work but this has not been dealt with in so far as the architectural profession is concerned.

27.3 Architectural professionals may thus perform the work identified in their identification of work policy. Work falling within the identification of work of any other professional (such as engineers, quantity surveyors etc.) must be done by said professional, who must assume the responsibility therefor.

27.4 Architects performing work for which they are not registered (whether in the architectural profession or in one of the associated professions) may be found guilty of an offence and may be liable for fines / disciplinary action in respect thereof.

27.5 In addition, any assumption of liability / responsibility for work which falls to be performed by another professional in terms of identification of work will be contrary to legislative provisions and as such unlawful and may therefore be uninsurable.

Construction Law – Certain instances where the NHBRC could be held liable by a home owner for the rectification of major structural defects in a new home

INTRODUCTION:

1. In the unreported matter of Stergianos v National Home Builders Registration Council 2012 JDR 1982, the Plaintiff, Mr Stergianos, issued summons against the National Home Builders Registration Council (“NHBRC”), alleging that the NHBRC is obliged to remedy the defects evident in his home.

2. In our law the Housing Consumers Protection Measures Act 95 of 1998 (“the Act”) protects home owners in certain circumstances from the effects of poor workmanship on the part of home builders who are registered with the NHBRC.

3. Before we delve into the facts of the aforesaid matter, the following relevant Sections of the Act should be taken into consideration where a home owner wishes to hold the NHBRC liable for defects evident in a home resulting from defective workmanship on the part of a home builder:

3.1. Section 3 of the Act specifies the objectives of the NHBRC which include, inter alia, the following:
3.1.1. Representing the interests of housing consumers by providing warranty protection against defects in new homes;
3.1.2. Regulating the home building industry;
3.1.3. Providing protection to home owners where home builders fail to comply with their obligations in terms of the Act; and
3.1.4. To establish and promote ethical and technical standards in the home building industry.

3.2. In terms of Section 10(1) of the Act, a “home builder” is required to be registered with the NHBRC prior to the commencement of construction and if not, no payment may be received from a housing consumer in respect of the sale or construction of a home.  Section 10(2) determines that where a “home builder” is not registered with the NHBRC, he is prohibited from constructing a home.

3.3. The NHBRC is required, in terms of Section 12, to publish a Home Building Manual (“HBM”) which contains technical standards with which home builders must comply.

3.4. Further, Section 14(1) of the Act determines that a home builder is not allowed to commence building a home before:
3.4.1. the prescribed documentation, information and fee have been submitted to the NHBRC;
3.4.2. the NHBRC has accepted the aforesaid and entered same into its records; and
3.4.3. a certificate of proof of enrolment has been issued.

3.5. Section 15(2) states that the NHBRC is allowed to disburse any amount contemplated by Section 17(1) of the Act.  In terms of Section 17(1) the NHBRC shall pay an amount for rectification from the fund established for that purpose in terms of Section 15(4), where:
3.5.1. within:
3.5.1.1. five years of the date of occupation, a major structural defect has emerged in a home as a result of non-compliance with the NHBRC Technical Requirements and the home builder has been notified accordingly within that period;
3.5.1.2. twelve months of the date of occupation, a roof leak attributable to workmanship, design or materials has manifested itself in respect of a home and the home builder has been notified accordingly within that period;
3.5.2. the home builder is in breach of the home builder’s obligations in terms of Section 13(2)(b)(i) regarding the rectification of such defect;
3.5.3. the relevant home was constructed by a registered home builder, had been enrolled with the Council and, at the occupation date, the home was enrolled with the Council subject to Section 14(4), (5) and (6);
3.5.4. the home builder no longer exists or is unable to meet his obligations; and
3.5.5. in the case of a home that has been enrolled with the Council on a project basis in terms of Section 14(2), the application has been made by the MEC pursuant to an agreement in terms of Section 15(4)(c).

3.6. In terms of Section 17(2) the NHBRC is empowered to either reduce any amount that may be expended in terms of Section 17(1), in exceptional circumstances, make a payment to a home owner in full and final settlement instead of rectifying the defect, or refuse any claim.

BACKGROUND FACTS:

4. In the aforesaid matter, the Plaintiff concluded a contract with the Contractor, Herrington Construction CC, for the building of a home for the Plaintiff.  The home was constructed with a number of difficulties along the way, where after the Plaintiff took occupation thereof.

5. During the first year of occupation, cracks began to develop in the concrete floor slab which worsened progressively.  Attempts to fill the cracks failed as they continued to open.  The Plaintiff appointed a structural engineering expert, Mr Kleinhans, to determine the cause of the cracks.  Mr Kleinhans was of the view that the cause was structural.

6. The Plaintiff then issued summons against the NHBRC in terms of Section 17 of the Act, seeking orders that the NHBRC was responsible for the rectification of the structural defects in the home, and to rectify the defects within 180 days and to pay its costs.

7. The NHBRC refused the Plaintiff’s claim.  All the elements of the cause of action set out in Section 17(1) of the Act have either been admitted by the NHBRC or were not in dispute.  The only element in dispute, which had to be determined by the Court, is the cause of the defect.  If it were to be found that the cracks in the floor slab were caused by a major structural defect, the Plaintiff would be entitled to the relief contemplated by Section 17(1), otherwise the action will fail.

8. Section 1 of the Act defines the term “major structural defect” as:
“a defect which gives rise or which is likely to give rise to damage of such severity that it affects or is likely to affect the structural integrity of a home and which requires complete or partial rebuilding of the home or extensive repair work to it, subject to limitations, qualifications or exclusions that may be prescribed by the Minister.”

9. According to Kleinhans, the site on which the home was built had, right from the start, presented certain technical challenges as the home was built on a primary dune and the characteristics of the site signalled that special precautions had to be taken when building on a dune as same is mobile.

10. Kleinhans required to assess the relevant documentation in order to determine whether the home complies with technical requirements and prescribed standards, however, very little documentation could be found in this regard.  Kleinhans regarded a record of three Dynamic Cone Penetrometer (“DCP”) tests conducted before building commenced as most likely to classify the soil type in order to designate a class to the site as required in terms of the Home Building Manual.  According to Kleinhans, the said results raised concern, as well as a need to take remedial measures.

11. He then conducted a DCP test to determine the density of the fill below the slab and also evaluated the “health of the structure” by taking relevant photographs of the cracks, recording them on a plan and examining same for a pattern.  Most cracks were in the floor slab, while some were in the ceiling and walls.

12. Mr Kleinhans came to the conclusion that the defects in the concrete floor slab of the home were indeed caused by major structural defects in the substructure of the home and consequent settling of the slab.  The test results also confirmed that the fill beneath the slab was not sufficiently compacted to bear the weight of the slab.

13. The NHBRC also appointed an expert, Mr Mathibeli, who was of the view that the cracks were caused by shrinkage as a result of poor workmanship when the concrete slab was poured and secondly, the builder’s failure to place expansion joints in the slab where required.  Mr Mathibeli, who has not conducted any tests, came to the conclusion that the defects in the slab were not structural in nature.

CONCLUSION:

14. After assessing both experts’ views, the Court ordered the NHBRC to rectify the structural defects in the Plaintiff’s home in terms of Section 17 of the Act, subject to the maximum amount prescribed by regulation 13(1), read with regulation 13(2), of the regulations promulgated in terms of the Act.  The Court also ordered the NHBRC to pay the Plaintiff’s costs.

Construction Law – The nature of on-demand guarantees

1.  In construction contracts, on-demand guarantees or unconditional performance bonds are a means of guaranteeing the performance of the contractor to its employer. 

2.  On-demand guarantees are similar to letters of credit or promissory notes payable on demand.

3.  In Lombard v Landmark & Others  the following was held:

“… The guarantee creates an obligation to pay upon the happening of an event. …The guarantee was to protect the Academy in the event of default by Landmark and it is to the guarantee that one should look to determine the rights and obligations of the Academy and Lombard.”

4.  Lord Denning in Edward Owen Engineering Ltd v Barclays Bank International Ltd stated the principle as follows:

“A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions.  The only exception is where there is a clear fraud of which the bank has notice.”

5.  Similarly, Donaldson LJ held in  Intraco Ltd v Notis Shipping Corporation (The Bhoja Trader) that:

Irrevocable letters of credit and bank guarantees given in circumstances such as that they are the equivalent to an irrevocable letter of credit have been said to be the lifeblood of commerce. Thrombosis will occur if, unless fraud is involved, the Courts intervene and thereby disturb the mercantile practice of treating rights thereunder as being the equivalent of ‘cash in hand”.

6.  In Compass Insurance Company Ltd v Hospitality Hotel Developments (Pty) Ltd  this ratio was taken further when it was held that:

the reason for requiring strict compliance with a letter of credit is that it is an instrument that compels a bank to pay on demand irrespective of the status of the underlying debt” .

7.  This allows for international commerce to take place.

ON-DEMAND BONDS AND CONDITIONAL BONDS (SURETYSHIPS)

8.  The distinction between an on-demand bond and a conditional bond was dealt with by Brand JA in Minister of Transport & Public Works, Western Cape & Another v Zanbuild Construction (Pty) Ltd & Another as follows:

“In the parlance of the English authorities the dispute can be usefully paraphrased as being whether the guarantees are ‘conditional bonds’ (as suggested by Zanbuild) or ‘on demand bonds’ (as suggested by the department). The essential difference between the two, as appears from these authorities, is that a claimant under a conditional bond is required at least to allege and – depending on the terms of the bond – sometimes also establish liability on the part of the contractor for the same amount.  An ‘on demand’ bond, also referred to as a ‘call bond’, on the other hand, requires no allegation of liability on the part of the contractor under the construction contracts. All that is required for payment is a demand by the claimant, stated to be on the basis of the event specified in the bond.”

9.  In the absence of fraud, or the demand somehow being deficient as measured against the terms of the bond, the Guarantor is obliged to pay the Applicant irrespective of any disputes between the Second Respondent and the Applicant. The Court does not look behind the demand.

THE FRAUD EXCEPTION

10.  What would constitute a fraud has been dealt with in a number of cases, the most recent of which is the Guardrisk Insurance Company Ltd v Kentz (Pty) Ltd where Theron JA held:

“It would be useful to briefly consider the legal position in relation to the fraud exception. It is trite that where a beneficiary who makes a call on a guarantee does so with knowledge that it is not entitled to payment, our courts will step in to protect the bank and decline enforcement of the guarantee in question. This fraud exception falls within a narrow compass and applies where:

‘… the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his (the seller’s) knowledge are untrue.’

Insofar as the fraud exception is concerned, the party alleging and relying on such exception bears the onus of proving it.  That onus is an ordinary civil one which has to be discharged on a balance of probabilities, but will not lightly be inferred.  In Loomcraft Fabrics CC v Nedbank Ltd and another, it was pointed out that in order to succeed in respect of the fraud exception, a party had to prove that the beneficiary presented the bills (documents) to the bank knowing that they contained material misrepresentations of fact upon which the bank would rely and which they knew were untrue. Mere error, misunderstanding or oversight, however unreasonable, would not amount to fraud.  Nor was it enough to show that the beneficiary’s contentions were incorrect. A party had to go further and show that the beneficiary knew it to be incorrect and that the contention was advanced in bad faith. …

Guardrisk contended that the demands under the guarantees were fraudulent as Kentz had not given Brokrew adequate notice within which to remedy the breaches alleged by it. It was argued that Kentz had elected not to rely on its right to summarily terminate the construction contract. Instead, and in terms of the letter dated 24 February 2010, it gave Brokrew seven days written notice to remedy its alleged breaches, when it was, in terms of clause 15.2(d) of the contract, obliged to provide 28 days written notice to Brokrew.  Furthermore, so the argument went, Kentz had failed to comply with the provisions of clause 2.5 of the construction contract in that it had not given notice to Brokrew of the clause it intended to rely upon and the amount that was to be paid to it in terms of clause 2.5. For these reasons, it was contended that the termination of the contract by Kentz was premature and unlawful.”

11.  These allegations proved to be insufficient and/or irrelevant with the result that payment under the guarantee was enforced by the Court.

12.  In Balfour Beatty Civil Engineering v Technical General Guarantee Co Ltd the Court held that:

“In this assessment one is entitled to remind oneself that the question is not whether Leadrail or its liquidator might be able to show that the sum claimed under the bond was in fact due. Nor is the question whether the beneficiary in the light of the evidence might not have some anxiety as to whether the sum was due and have some anxiety about whether Leadrail might not have a good claim to the return of the money if it is paid by the surety. The question is whether when the demand was made the persons acting on behalf of the plaintiffs knew that the sum claimed was not due from Leadrail, and dishonestly made a demand despite that knowledge.”

13.  The SCA’s finding in Coface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association is also significant in this context:

“[15] … At paragraph 63 Cloete JA said the following:

‘The appellant complied with the provisions of clause 5. It was not necessary for the appellant to allege that it had validly cancelled the building contract due to the second respondent’s default. Whatever disputes there were or might have been between the appellant and the second respondent were irrelevant to the first respondent’s obligation to perform in terms of the construction guarantee.’

[16] Cloete JA recorded that there was no suggestion of fraud on the part of the employer at paragraphs 64 and 65 he said:

‘[64]   Once the appellant [the beneficiary] had comply with clause 5 of the guarantee, the first respondent [the guarantor] had no defence to a claim under the guarantee. It still has no defence. The fact that an arbitrator has determined that the appellant was not entitled to cancel the contract, binds the appellant – but only vis-à-vis the second respondent [the employer]. It is res inter alios acta so far as the first respondent is concerned. As the cases to which I have referred above make abundantly clear, the appellant did not have to prove that it was entitled to cancel the building contract with the second respondent as a precondition to enforcement of the guaranteed given to it by the first respondent. Nor does it have to do so now.

[65]    For these reasons, it is not in my view bad faith for an employer, who has made a proper demand in terms of a construction guarantee, to continue to insist on payment of the proceeds of the guarantee, when the basis upon which the guarantee was called up has subsequently been found in arbitration proceedings between the building owner and the contractor to have bene unjustified. I would add that the fact that the arbitrator’s award is final as between the appellant and the second respondent does not mean that it is correct, or that the appellant would have to set it aside before calling up the guarantee, much less that the appellant is acting in bad faith in seeking to enforce payment under the guarantee against the first respondent.’

[17] At this stage it is necessary to consider cases that have come before this Court after Dormell dealing with letters of credit and construction guarantees.

[18]  In Casey v First Rand Bank Ltd (608/2012) [2013] ZASCA 131 this court, in relation to a letter of credit, had to deal with an assertion that the principal debt had prescribed. The guaranteeing bank’s client sought a declarator to that effect, submitting that the claim that the client had made upon the bank knowing that the claim had prescribed was fraudulent. It was contended that the effect of a declarator that the debt had prescribed was to extend the ambit of legitimate challenges to a letter of credit beyond the narrow confines of the fraud exception. In Casey, Swain AJA noted that:

‘(12)   … An irrevocable letter of credit is not accessory to the underlying contract and is distinguishable in law from a suretyship which is accessory to the principal obligation. See ABSA Bank Bpk v De Villiers 2001 (1) SA 481 (HHA).’

Later, he confirmed:

‘(14)   The distinction sought to be drawn on behalf of Casey and Kimberley is without merit. The issue of the irrevocable letter of credit by the Bank of America in favour of Firstrand, established a contractual obligation on the Bank of America to pay Firstrand as beneficiary, provided that the conditions specified in the credit were met. Reciprocal obligations in these terms were created by the letter of credit between the Bank of America and Firstrand. An order declaring that Firstrand had no right to draw-down on the letter of credit, must inevitably have as a consequence that the Bank of America was not obliged to honour this draw-down claim. Such an order would infringe upon the autonomy of the irrevocable letter of credit. The argument was advanced simply to circumvent the autonomy of the letter of credit.’

[19] In First Rand Bank Limited v Brera investments CC (385/2012 [2013] ZASCA 25, this court was faced with a situation where the guaranteeing bank sought to rely on events that occurred after demand had been made in terms of the guarantee. In that regard the decision in Dormell was relied upon. Malan JA, preferred the minority view in Dormell. At paragraph 11 of Brera, the autonomy of letters of credit, demand guarantees, performance bonds and similar documents was restated. The dictum in Lombard referred to above was reaffirmed.”

14.  In Turkey IS Banhasi v Bank of China it was found that even the likelihood that it would be found that the creditor had no right to claim on the bond was insufficient to establish fraud.

15.  The aforementioned cases have now clarified the current legal position in our jurisdiction in relation the onus of proof of the available defences to on-demand guarantees.

Construction Law – Homebuilders must register with the NHBRC before commencement of building works to claim payment

1. The judgment in the matter of Cool Ideas 1186 CC (Cool Ideas) v Anne Christine Hubbard (“Hubbard”) & Minister of Justice and Constitutional Development confirms finally that an homebuilder is not entitled to receive compensation for a house constructed for a housing consumer unless registered in terms of the Housing Consumer Protection Measures Act. 

BACKGROUND

2. Cool Ideas and Hubbard entered into a building contract on 13 February 2006 in terms of which Cool Ideas undertook to construct a residence for Hubbard for consideration of R2 695 600.00. The building project was however executed by Velvori Construction CC (Velvori) in terms of its appointment by Cool Ideas.

3. The building project was enrolled by Velvori, as required in terms of the Act.  Velvori was duly registered as a home builder as required by section 10 the Act.  Cool Ideas was not.

4. The building works were completed in October 2008, but Hubbard took issue with the quality of the works and refused to make payment to Cool Ideas. Hubbard instituted arbitration proceedings in terms of the building contract, claiming the costs of the remedial works. Cool Ideas accordingly instituted a counter-claim for the balance of the contract price. The arbitrator found in favour of Cool Ideas i.e. that Hubbard had to make payment to Cool Ideas. Hubbard failed to comply with the arbitral award.

5. Cool Ideas approached the High Court for an order enforcing the arbitral award, which application Hubbard opposed on the basis that Cool Ideas was not registered as a home builder in terms of the Act. Cool Ideas argued that it, in fact, registered as a home builder during the litigation proceedings and that construction was done by Velvori, a registered home builder. The High Court granted the order and made the arbitral award an order of court.

6. Hubbard appealed to the Supreme Court of Appeal. The majority upheld the appeal submitting that the purpose of the Act is to protect consumers and therefore Cool Ideas was required to register before commencing with construction. The Court further submitted that enforcement of the arbitral award would disregard a prohibition in law. The dissenting judgment of the Supreme Court of Appeal submitted that Cool Ideas did not intentionally fail to register and that refusing to enforce the award would be unjust.

7. Cool Ideas applied to the Constitutional Court for leave to appeal the judgment by the Supreme Court of Appeal, which application was granted. The appeal was, however, dismissed in terms the majority judgment handed down by Majiedt AJ (Moseneke ACJ, Skweyiya ADCJ, Khampepe J and Madlanga J).

MAJORITY JUDGMENT

8. The majority judgment held that the interpretation given by the Supreme Court of Appeal in terms of section 10(1)(b) of the Act, namely that registration is a prerequisite for building works to be undertaken by a homebuilder, must be upheld. It further held that the failure to register would result in the home builder being ineligible to seek consideration for the work done in terms of the building agreement.

9. It held that the underlying building agreement remains valid, notwithstanding that Cool Ideas was not entitled to consideration as a result of its failure to register as required in terms of section 10(1)(b) of the Act. It held that the legislative scheme does not suggest that the building contract be invalidated by statutory prohibitions.

10. According to the judgment it is difficult to conceive how the entire agreement must be invalidated as a result of the conclusion that an unregistered home builder is not entitled consideration for work done in terms of section 10(1)(b) of the Act. It further held that it is inconceivable that the Legislature would enact provisions incorporating various protective measures for the benefit of consumers but then render their contract invalid. Therefore, the parties are entitled to retain what has been done or rendered in terms of the agreement. i.e. In these circumstances, restitution is not legally sound, as would have been the case with an invalid agreement. Therefore Cool Ideas would also not be entitled to file a suit against Hubbard based on unjust enrichment. 

11. In light of the aforementioned the Court dismissed the appeal with costs.

DISSENTING JUDGMENT

12. The judgment written by Froneman J (Cameron J, Dambuza AJ, and Van der Westhuizen J) opposed the conclusion of the majority judgment dismissing the appeal.

13. The fundamental difference in this judgment as opposed to the majority judgment lies in the constitutional principle. It held that public policy in the interpretation, application and enforcement of contracts embrace the principle of fairness. This judgment therefore disagrees that with the finding that a private arbitration award may not be enforced conflicting to a statutory provision. It held that the inevitable result of the reasoning of the main judgment is that Cool Ideas will be deprived of its right to payment for work fairly and properly done. The provisions of the Act should be interpreted in a manner that embrace the principle of fairness and avoids an unjust and unfair result.

14. The majority judgment found that the building contract between the parties remain valid, but that Cool Ideas are however disentitled to claim or enforce payment for any work done in terms of such agreement. This result, is in terms of the dissenting judgment on any standard, prejudicial and unfair to Cool Ideas. If the building contract was held to be invalid, Cool Ideas, could in terms of the common law, enforced an enrichment claim. By clothing the contract with validity, an enrichment claim is avoided.

15. The Court raised the following question: How can it be that Cool Ideas’ contract with Hubbard is valid, but its claim is unenforceable?  The Court argued that the Act employed various measures to protect housing consumers and therefore it would be reasonable to interpret the provisions of the Act in a manner that is fair and does not deprive Cool Ideas of its right to reasonable consideration.

16. According to the judgment, Hubbard did not sought the Act’s protection to attain proper building or correction of building works by Cool Ideas, but to escape payment of what she had been fairly found to owe to Cool Ideas.

17. The dissenting judgement further argued that there were various ways of achieving the purpose of the Act (i.e. enforcement of proper performance by home builders for housing consumers) and striking the correct balance between the interest of housing consumers and those who have performed construction work. In other words, the Act can be read to protect consumers without barring Cool Ideas’ claim for performance.

Construction Law – The Binding Nature of Interim Adjudication Awards

In the matter of Stefannuti Stocks vs S8 Property the Court reconfirmed the enforceability of an adjudicator’s decision by court prior to final arbitration.  It also confirmed that an agreement between the parties that a decision is binding and shall be given effect to without delay, unless and until it is revised, requires immediate implementation.

Stefannuti Stocks sought an order compelling S8 Property to comply with its obligations in terms of a building agreement, more specifically for specific performance under the terms of the agreement by S8 Property by paying amounts determined by an adjudicator to be due and payable to Stefannuti Stocks.

The agreement between the parties was a standard written Joint Building Contracts Committee (‘JBCC’) Services 2000 Principal Building Agreement.

Clause 40 of the agreement provides that:

40.0 DISPUTE SETTLEMENT

40.1 Should any disagreement arise between the employer or his principal agent or agents and the contractor as to any matter arising out of or concerning this agreement either party may give notice to the other to resolve such disagreement.

40.2 Where such disagreement is not resolved within ten (10) working days of receipt of such notice it shall be deemed to be a dispute and shall be submitted to:

40.2.1 Adjudication in terms of the edition of the JBCC Rules for Adjudication current at the time when the dispute is declared. The adjudicator shall be appointed in terms of such Rules. …

40.3 The adjudicator’s decision shall be binding on the parties who shall give effect to it without delay unless and until it is subsequently revised by an arbitrator in terms of 40.5. Should notice of dissatisfaction not be given within the period in terms of 40.4, the adjudicator’s decision shall become final and binding on the parties.

40.4 Should either party be dissatisfied with the decision given by the adjudicator, or should no decision be given within the period set out in the Rules, such party may give notice of dissatisfaction to the other party and to the adjudicator within ten (10) working days of receipt of the decision or, should no decision be given, within ten (10) working days of expiry of the date by which the decision was required to be given.

40.5 A dispute which is the subject of a notice of dissatisfaction shall be finally resolved by the arbitrator as stated in the schedule. Where such person is unwilling or unable to act, or where no person has been stated, the arbitrator shall be chosen and appointed by mutual agreement within ten (10) working days of such notice, the arbitrator shall be the person appointed at the request of either party by the chairman, or his nominee, of the Association of Arbitrators (Southern Africa). The adjudicator appointed in terms of 40.2.1 shall not be eligible for appointment as the arbitrator.”

Stefannuti Stocks, being the building contractor, referred a dispute between the parties to an adjudicator. The adjudicator issued his decision in terms of which he determined, inter alia that “the Contractor is entitled to be paid the full original preliminaries value of R2,439,677.98.

S8 Property contended that it is not obliged to give effect to the adjudicator’s decision as it had given notice of its dissatisfaction therewith pursuant to clauses 40.3 to 40.5 of the agreement.

In a recent judgment of Tubular Holdings (Pty) Ltd v DBT Technologies (Pty) Ltd handed down on 03 May 2013, the Court interpreted the following contractual provision:

“The decision shall be binding on both parties who shall promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitrated award as described below.”

The Court stated that “the effect of these provisions is that the decision shall be binding unless and until it has been revised as provided. There can be no doubt that the binding effect of the decision endures, at least, until it has been so revised. …

The scheme of these provisions is as follows: the parties must give prompt effect to a decision. If a party is dissatisfied he must nonetheless live with it but must deliver his notice of dissatisfaction within 28 days failing which it will become final and binding. If he has given his notice of dissatisfaction he can have the decision reviewed in arbitration. If he is successful the decision will be set aside. But until that has happened the decision stands and he has to comply with it.”

In the unreported decision of Esor Africa (Pty) Ltd/Franki Africa (Pty) Ltd JV and Bombela Civils JV (Pty) Ltd, the parties had referred a dispute to the DAB in terms of clause 20.4 of the FIDIC Conditions of Contract. The DAB gave its decision in favour of the contractor.  The employer refused to make payment in terms of the decision relying, inter alia, on the fact that it had given a notice of dissatisfaction and the contractor approached the Court for an order compelling compliance with the decision.  The Court commented that it regarded the wording of the relevant contractual provisions to be clear and that the effect thereof is, that, whilst the DAB decision is not final, the parties are bound by it.  It held that the key to comprehending the intention and purpose of the DAB process is the fact that neither payment nor performance could be withheld when the parties are in dispute:

“the DAB process ensures that the quid pro quo for continued performance of the contractor’s obligations even if dissatisfied with the DAB decision which it is required to give effect to is the employer’s obligation to make payment in terms of a DAB decision and that there will be a final reconciliation should either party be dissatisfied with the DAB decision…”

The Court further held that the employer was not entitled to withhold payment of the amount determined by the adjudicator and that he “is precluded by the terms of the provisions of clause 20 (and in particular clauses 20.4 and 20.6) from doing so pending the outcome of the Arbitration.”

In the case of Stocks and Stocks (Cape) v Gordon the Court could find no objection to giving effect to an agreement in terms of which interim payments are to be made which may later be followed by an adjustment of account and a claim for repayment of what has been paid should the opinion of the mediator be set aside in arbitration.  The contract referred to mediation as opposed to adjudication. It provided that the parties could obtain the opinion of a mediator but if dissatisfied, it could refer it to arbitration. The wording of the agreement read:

“The opinion of the mediator shall be binding upon the parties and shall be given effect to by them until the said opinion is overruled in any subsequent arbitration or litigation.”

In Freeman NO and another v Eskom Holdings Limited the Court considered the NEC form of contract, which provides for adjudication and for notification by the dissatisfied party to a tribunal who has the power to settle the dispute referred to it. The contract also provides that the adjudicator’s decision is binding upon the parties “unless and until” revised by the tribunal as enforceable as a matter of contractual obligation between the parties and not as an arbitral award.

In Basil Read (Pty) Ltd v Regent Devco (Pty) Ltd, Clause 40 of the JBCC Principal Building Agreement deals with dispute resolution and allows a referral of a dispute to an adjudicator. Any party dissatisfied with the adjudicator’s decision was entitled to give notice of dissatisfaction within a stipulated time and may then refer the dispute to arbitration. It stipulates, however, that “the adjudicator’s decision shall be binding upon the parties who shall give effect to it without delay unless and until it is subsequently revised by an arbitrator”. The Court construed these provisions as imposing an obligation on the dissatisfied party to give effect to the decision without delay unless and until it is subsequently set aside by the arbitrator. The dissatisfied party’s remedy is to procure set-off or adjustment in the following payment certificates should he succeed in having the decision set aside after he had performed.

In the United Kingdom the matter is dealt with by statute which gives the same effect as the clauses referred to above. The Court of Appeal remarked in the Carillion matter that:

In short, in the overwhelming majority of cases, the proper course for the party who is unsuccessful in an adjudication under the scheme must be to pay the amount that he has been ordered to pay by the adjudicator. If he does not accept the adjudicator’s decision as correct (whether on the facts or in law), he can take legal or arbitration proceedings in order to establish the true position. To seek to challenge the adjudicator’s decision on the ground that he has exceeded his jurisdiction or breached the rules of natural justice (save in the plainest cases) is likely to lead to a substantial waste of time and expense – as, we suspect, the costs incurred in the present case will demonstrate only too clearly.” 

The Court also referred to the United Kingdom case of Bouygues (UK) Limited v Dahl-Jensen (UK) Limited which concerned a dispute arising from a sub-contract, which provided for dispute resolution by adjudication pursuant to the Rules of the CIC Model Adjudication Procedure (2nd edition) which provided that:

“The object of adjudication is to reach a fair, rapid and inexpensive decision upon a dispute arising under the contract and this procedure shall be interpreted accordingly. … The Adjudicator’s decision shall be binding until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement. The parties shall implement the Adjudicator’s decision without delay whether or not the dispute is to be referred to legal proceedings or arbitration. …”

Having regard to these Rules, Justice Dyson held as follows:

the purpose of the scheme is to provide a speedy mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring the decisions of adjudicators to be enforced pending final determination of disputes by arbitration, litigation or agreement, whether those decisions are wrong in point of law and fact. It is inherent in the scheme that injustices will occur, because from time to time, adjudicators will make mistakes. Sometimes these mistakes will be glaringly obvious and disastrous in their consequences for the losing party. The victims of mistakes will usually be able to recoup their losses by subsequent arbitration or litigation, and possibly even by a subsequent arbitration.”

In the present case, the terms of the relevant contractual provisions are perfectly clear: the parties are obliged to promptly give effect to a decision by the DAB. The issue of a notice of dissatisfaction does not in any way detract from this obligation; whilst such a notice is necessary where the dissatisfied party wishes to have the decision revised it does not affect that decision; it simply sets in motion the procedure in which the decision may be revised. But until revised, the decision binds the parties and they must give prompt effect thereto.

Having regard to the purpose of the provisions of the agreement by introducing a speedy settling of disputes in construction agreements on a provisional, interim basis, the Court could find no reason not to follow the judgment in Tubular Holdings, which is in harmony with the decisions of Bombela and Basil Read referred to above. The purpose of the policy to implement the adjudicator’s decision is also to obviate the tactical creation of disputes with a view to the postponement of liability. For these reasons Stafannuti Stocks was successful and the order was granted in its favour.

Construction Law – Where the employer fails and/or refuses to make payment of a certified amount to the contractor

The standard JBCC Principal Building Agreement (“the Agreement”), more specifically Clause 31.1, determines that the principal agent should issue an interim payment certificate each month until the issue of a final payment certificate.

The Agreement defines a “payment certificate” as a document issued by the principal agent on a monthly basis certifying the amount due and payable by the employer to the contractor or vice versa in terms of the JBCC Payment Certificate form.

In terms of Clause 31.9 of the Agreement the employer should pay the contractor the amount certified in a payment certificate (final or interim) within seven calendar days of the issued date of the payment certificate.  But what if the employer fails to make payment of the certified amount?

Where the contractor does not receive payment of the certified amount by the due date as determined in Clause 31.9, Clause 31.11 provides that the employer shall be liable for default interest on the certified amount, calculated from the due date for payment up to and including the date on which the contractor receives payment, without prejudice to any other rights the contractor may have.

Clause 31.15 determines that in the aforementioned instances, the contractor may give three working days’ notice to suspend the works to the employer.  The contractor should then also provide the principal agent with a copy of the said notice.

Clause 31.16 provides certain remedies on behalf of the contractor where the employer failed to make payment or only made partial payment of the certified amount.  In such instances, the contractor may:

“31.16.1 Issue a demand to the employer in terms of the payment guarantee where such is provided (3.1); or

31.16.2 Exercise his lien or right of continuing possession where this has not been waived in terms of the contract data and where practical completion has not been achieved; or

31.16.3 Give notice of suspension of the works (31.15).  Where the employer fails to act in relation to such notice the contractor may give notice of termination (38.1.4,6)”

In Joob Joob Investments (Pty) Ltd v Stocks Mavundla Zek Joint Venture 2009 (5) SA 1 (SCA) the Supreme Court of Appeal (“SCA”) provided clarity regarding one of the possible processes to enforce payment of certified amounts.  In this matter the respondent, Stocks Mavundla Zek Joint Venture (“the contractor”), concluded a written JBCC Agreement (“the Agreement”) to build a resort hotel for the appellant, Joob Joob Investments (Pty) Ltd (“the employer”).

The principal agent issued various certificates in respect of work completed.  The employer refused to make payment of the amounts certified in the aforesaid certificates.  The contractor cancelled the agreement and instituted action against the employer in the High Court in which it claimed payment of the certified amounts set out in the aforesaid certificates.  The contractor then applied for summary judgment after the employer entered appearance to defend the matter.

The employer opposed the application for summary judgment by raising the following defences:

1. Certificate 10 was not due and payable as the contractor had failed to deliver a tax invoice that complies with Clause 31.9 of the Agreement, as the date of valuation of the work done differed from the date of valuation that appeared in the tax invoice in question; and

2. Certificates 11 and 12 related to damages and the principal agent’s mandate did not extend to certification of damages, i.e. because the certificates were for the damages, they were illiquid.

In respect of the first defence, the court a quo found that there was no requirement in the agreement that a tax invoice had to include a date of valuation.  All that was required in terms of the Agreement was a tax invoice for the amount due.

In respect of the second defence, the Court a quo found that the employer had not shown that the certification of damages was not in accordance with the Agreement.

The Court a quo therefore dismissed the employer’s defences and granted summary judgment on all three certificates.

The employer appealed against the aforesaid decision of the Court a quo to the SCA.  On appeal, the following submissions were made on behalf of the employer:

1) After cancellation, the principal agent was limited to preparing a final account and final payment certificate and there was thus no room for an interim certificate such as certificate no. 11; and

2) Even in the absence of a bona fide defence, the High Court ought, in the exercise of its discretion, to have refuse summary judgment.

The SCA ruled that, in relation to certificate no. 10, the employer’s main contentions were without merit.  There is no requirement in terms of the Agreement that a tax invoice should follow any particular format.  The Agreement also did not prescribe what information the tax invoice had to contain and there was a direct correlation between certificate 10 and the tax invoice in question.  The SCA also stated that Clause 31.9 was complied with and the Court a quo could not be faulted in that conclusion.

In relation to certificate no. 11, the SCA held that the submission on behalf of the employer was wrong and that certificate no. 11 was issued in accordance with the Agreement.

The SCA also held, with relation to certificate no. 11 and 12, that the employer’s submission was without foundation and that on a proper construction of the agreement, it was clear that the principal agent was not only entitled, but was obliged, in appropriate circumstances, to certify damages.

Further, the SCA held that both final and interim payment certificates are liquid documents, because they were issued by the employer’s agent, with the consequence that the employer was in the same position it would have been if it had itself signed an acknowledgment of debt in favour of the contractor.  The certificate thus embodies an obligation on the employer to pay the certified amount.  The certificate gives rise to a new cause of action and is also regarded as the equivalent of cash.

The contractor therefore held three liquid documents which were the equivalent of acknowledgments of debt.

In conclusion, the SCA held that no sustainable defence had been put up by the employer and that the Court a quo’s judgment was fully justified.  The Appeal was consequently dismissed with costs.

Construction Law – Liability of the Agent to Compensate Contractor for its loss in terms of the JBCC Principal Building Agreement

In the matter of Hyde Construction CC v Blue Cloud Investments 40 (Pty) Ltd 2011 JDR 0954 (WCC) the Court had to decide whether a contractor can succeed with a delictual claim against an agent to compensate the contractor for its loss.

The main dispute arose between the contractor and the first defendant, the employer, who concluded a written JBCC Principal Building Agreement (“the Agreement”) on 25 July 2005.  In terms of the Agreement, the contractor would undertake certain building work at the employer’s premises, including alterations and additions to an existing shopping centre.  The principal agent was a registered architect and was appointed in the capacity of a principal agent of the Agreement.

The contractor alleged that it duly performed its obligations under the Agreement and that the employer was indebted to it for an amount that exceeds R7 million.  The amount is comprised of R4.4 million allegedly due to the contractor together with various interest components calculated under the Agreement.

The contractor’s claim against the principal agent was brought in the alternative, in that, if the Court found that the employer was not liable to the contractor for the compensatory and/or default interest, then the principal agent would be liable to it.

The contractor alleged in its particulars of claim that, in terms of Clause 34.5 and/or Clause 38.5.7 of the Agreement, there was a legal duty owed by the principal agent to the contractor.  According to the contractor the principal agent breached such legal duty by negligently failing to comply with its alleged contractual obligations and the contractor subsequently suffered damages as a result of the alleged loss of the compensatory interest and the default interest.

EXCEPTION FILED BY THE PRINCIPAL AGENT:

The principal agent filed an exception to the contractor’s particulars of claim, objecting on the following grounds:

1. The principal agent, in its capacity as principal agent of the employer, did not have locus standi in judicio to be sued in his own name;

2. The “legal duty” alleged by the contractor was not competent in law; and

3. The contractor’s particulars of claim lacked averments necessary to sustain a cause of action against the principal agent.

LOCUS STANDI OF THE PRINCIPAL AGENT:

Locus standi in judicio is the capacity or ability of a party to participate in litigation proceedings.

The objection of the principal agent is based on the fact that, in terms of the Agreement, he was at all material times acting as agent for the employer.  Therefore the suit should more properly be brought against his principal, the employer.

The Court did not agree with the aforesaid and decided that this first basis for exception must fail.

LIABILITY FOR PURE ECONOMIC LOSS:

Fundamental to a delictual claim for pure economic loss is the necessity to plead and prove wrongfulness.  The court had to consider whether the contractor made out a case for the extension of delictual liability.  To do so, it was necessary for the court to consider the Agreement.

CONSIDERATION OF THE AGREEMENT BY THE COURT:

Clause 5 of the Agreement determined that the principal agent would be the only person with the authority to bind the employer.  As such, he was liable to the employer for any negligence on his part which may cause financial loss to the employer.

In terms of Clause 34.1, one of the principal agent’s duties was to prepare the final account for submission to the contractor within 90 days of practical completion of the works.  Clause 34.5 determines that in the event that there is no objection from the contractor to the final account, the principal agent was required to issue a final payment certificate within seven days.

Clause 34.11 states that the employer was obliged to pay the contractor so called “compensatory interest” on the net amount certified by the principal agent in the final payment certificate.  Clause 34.12 determined that in the event that the contractor did not receive timeous payment of the amount due in the final payment certificate, the employer would be liable for so-called “default interest”.  This amount would be recoverable by the contractor from the employer’s payment guarantee which the contractor was entitled to request in terms of Clause 15.4.2 of the Agreement.

According to the contractor the principal agent did not comply with its obligations under the Agreement by negligently failing to issue further interim payment certificates and failed to issue the final account and/or the final payment certificate.  The contractor was of the view that the aforementioned omissions resulted in it suffering damages in the form of loss of interest. 

DOES THE PRINCIPAL AGENT HAVE A LEGAL DUTY TO AWARD THE CONTRACTOR?

There was no contract concluded between the principal agent and the contractor.  Accordingly, in formulating a delictual claim against the principal agent, the contactor sought to rely on a legal duty purportedly owed to it by the principal agent.

The contractor’s view that the failure by the principal agent to certify in terms of Clause 38 of the Agreement, constituted a breach of a legal duty owed to it, was assessed by the Court.  The claim against the principal agent is brought in the alternative.  The Court found that the contractor had a contractual claim against the employer under the Agreement to recover the lost interest and emphasised that the principal agent was appointed in terms of an agreement with the employer.  The Court also remarked that, when the contractor elected to contract with the employer on the basis of the JBCC Agreement, it knew of the merits and demerits inherent in that form of agreement.  The contractor was not obliged to contract in terms of the JBCC Agreement and had it wished to protect itself against the principal agent’s potential negligence, it was free to contract on that basis.

CONCLUSION:

The Court found that the contractor has advanced no cogent grounds for the extension of delictual liability to the principal agent in the circumstances.  The Court also found that the claim against the principal agent is bad in law to the extent that it is alleged that the principal agent bore a legal duty towards the contractor.

The architect’s exception to the contractor’s particulars of claim was upheld with costs.

Construction Law – The Legal Principles underlying the Builder’s Lien

In terms of common law a builder has a right of retention over the building or structure (site) or portion thereof that he has constructed, enhanced or repaired to secure payment of the contract price, by means of retaining physical control of the site, until such time as his claim has been satisfied or the contractor has been provided with appropriate alternative security in respect of his claim.

The following general requirements must be satisfied in order for a valid builder’s lien to arise and be enforceable by the contractor:

•    The owner of the property must be enriched and the amounts owing to the contractor must be due to him (and not merely owing or accrued). It was held in FHP Management (Pty) Ltd v Theron and Another 2004 (3) SA 392 (C) that the purported expenditure must in fact have been incurred and the improvements must have been necessary or useful, or must have maintained or enhanced the market value of the property.

•    The contractor must be and remain in possession of the site or the section thereof forming the subject matter of the builder’s lien. Such possession is made up of two elements: the contractor’s physical control or occupation of the site and the contractor’s intention to hold and exercise that possession over the site so as to secure some benefit for himself against the owner. The lien does not automatically revive if the contractor relinquishes its possession and subsequently regains it. The only exception to this rule would be if the contractor is deprived of his possession by force, the threat of force or as a result of fraud.

The contractor must be mindful of the fact that it is not enough for him to contend symbolic possession in that he has employees and/or a security guard on site or that he has stored materials and equipment belonging to him on site, although on the facts of the case this might well be sufficient evidence of natural possession. Rather, it is necessary for the contractor to prove that the site (or the relevant sections of the site) over which the builder’s lien is asserted is occupied and under the control of the contractor at all material times. A temporary absence, as occurs at the end of a working day, will not interrupt the lien provided that the contractor remains engaged in the work and in his assertion of his occupation of the site.

Possession need not be exclusive to one person. Where the employer engages several independent contractors to complete different sections of the work, whether as principals or as subcontractors, each one of them may enjoy a lien over the whole or a severable part of the structure, provided each retains possession and asserts his right thereto against the employer or owner as seen in Beetge v Drenka Investments (Isando) (Pty) Ltd 1964 4 SA 62 (W).

In Wightman v Headfour (Pty) Ltd 2008 (3) SA 371 SCA the Supreme Court of Appeal held that possession is not ipso facto lost where a contractor exercising a lien over a property allows the owner of the property access for limited purposes. In such instances the court will consider both the giving and receiving of access in context to determine if the physical possession was actually given up.

According to the Court, in the event that the contractor comes to an agreement with the owner in terms of which he allows the owner access to the property physical possession will only be lost if the contractor intends to abandon the control which he had hitherto exercised exclusively.

In this case the contractor delivered a duplicate set of keys to the owner because he had come to an agreement with the owner in terms of which he would allow the owner access to the property. At no stage did the contractor intend to relinquish control to the owner, and the owner had ostensibly received the keys on the same basis.

However, the owner then used the duplicate keys to obtain entry and in doing so manifested a state of mind to possess the premises despite the terms of the agreement. This was done by giving access to his own contractors and causing entry to be refused to the contractor.

The Court held that there was no doubt that the owner’s true intention was withheld from the contractor in order to gain control of the premises and that the owner accordingly took occupation without the contractor’s knowledge. The Court further held that this constituted spoliation and the owner was ordered to provide the contractor with satisfactory security or alternatively restore possession of the property to the contractor.

Accordingly, it can be seen from the above that the intention to maintain possession of the site will be of tantamount importance when the Court considers the existence of a builder’s lien.

Construction Law – Reservation of Ownership Clause – JBCC Lump Sum Building Contract

In the Judgment of A D Pellow NO & S Williams NO vs Club Refrigeration CC the Supreme Court of Appeal had to consider the effect of a reservation of ownership clause in a contract between a building contractor and an employer that became insolvent prior to the works being completed.

The contractor submitted a tender that was accepted by the employer, of which certain clauses relevant to this article read as follows:

PRICES

Fixed price for all items as specified R10 991 000.00

PAYMENT TERMS

Interim progress payments during the site work schedule to up to 90% of the contract price, 10% on completion and before commercial use.

ACCEPTANCE

The price is fixed for a period of 28 days from the date of quotation.  All items of equipment remain the property of Club Refrigeration CC until they are paid for in full.

CONTRACT TERMS

As per JBCC principle building agreement, code 2101, July 2000

The employer was liquidated before the final outstanding amount due to Club was paid and Club submitted a claim consisting of movable goods.  Club’s claim was based on it’s ownership of the goods and not for payment in terms of the contract.

Afgri Operations Limited purchased the goods after the liquidators, Club and a third party who laid claim to the goods signed an agreement whereby they agreed that the proceeds of the sale will be held by the liquidators until a Court determined who was entitled thereto.

The liquidators (the Appellants) opposed the claim on inter alia the following grounds:-

  1. The contract between the employer and Club contained no reservation of ownership clause and that the JBCC agreement alone governed the contract between them, referring to clause 1.8 of the JBCC which stipulates that “This agreement is the entire contract between the parties…”, thus arguing that Club’s tender document did not form part of the agreement between Club and the employer;
  2. That since the contract was a lump sum contract, there was no mechanism whereby it could be determined which portion of the contract price pertained to which movable assets;
  3. That the value of the goods was not specified in a payment certificate and therefore Club was not entitled to payment in terms of the JBCC agreement.

On the first argument the Court found that Club’s tender was incorporated into the JBCC agreement.  Following Club’s tender submission it received a document entitled “Order” from the employer confirming acceptance of the tender, with various requirements. The order document defined “Agreement” to include the JBCC agreement and other contract documents; the definition of “Contract documents” included the lump sum document and other documents identified in the schedule.  The Court found that the tender document was attached to the employer’s order where it was referred to as a “lump sum document” in the schedule and the definition of “lump sum document” in the order document referred to the document that reflected the contract sum.

The second argument was also found to be inaccurate since the JBCC agreement provides in clause 31.4 that a reasonable estimate of the value of the work executed and value of materials and goods be separately specified in an interim payment certificate.  Further, in terms of clause 31.7 (which corresponds with the Acceptance clause above in the tender) the contractor remains the owner of goods until paid for and clause 31.9 provides that the employer becomes the owner once the goods are paid for.

The Court also rejected the third argument since Club did not rely on the JBCC agreement but on the agreement which it signed with the liquidators and a third party prior to the application being brought when the goods were sold to Afgri Operations Limited.

In its judgment the Court recognised that Club’s claim was based on its ownership of the goods and that it was therefore entitled to payment of the proceeds of the sale held by the liquidators since the goods never formed part of the employer’s assets in the first place.

Although the agreement between the employer and Club was a lump sum agreement, the order of the employer specifically required that payments be made in terms of the JBCC agreement and therefore it was possible to determine the value of the goods Club was not paid for.

The Court accordingly found in the contractor’s favour dismissed the appeal.

By specifying in its tender that unpaid items of equipment remained its property and incorporating the JBCC agreement into the contract with the employer, Club reserved ownership of the movable goods the employer failed to pay for due to it being liquidated.

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Construction Law – Substance is key in Notifications of Claim

The leading role in the execution of the contract as “Engineer” (under the GCC) or “Principle Agent” (under the JBCC) requires frequent decisions and rulings on the activities on site.   This function is also often underestimated and can attract significant liabilities.

Professionals in the construction and engineering industry are often appointed as the Engineer or Principle Agent.  It is required of the professional fulfilling this critical function to be au fait not only with the terms of the contract, but also the execution thereof.

What are the implications of poor decision making by the Engineer or Principle Agent under these construction contracts?   One instance where the courts discussed the yardstick with which the Engineer or Principle Agent is to be measured is in the case of Hawkins Hawkins & Osborn (South) (Pty) Ltd V Enviroserve Waste Management.  The decision not only sets the current benchmark in this regard, but also sounds a warning to Engineers and Principle Agents to act in a reasonable manner when conducting themselves as the Employer’s representative on site.

In this case, as in many other instances in the construction and engineering industry, the Employer (Enviroserve Waste Management) concluded an oral agreement with the Engineer.  The Engineer was appointed to supervise and administer certain contract works.

The Employer then entered into a written agreement with a Contractor to do excavations on a particular site. The written agreement between the Employer and the Contractor incorporated the General Conditions of Contract for Works of Civil Engineering Construction – 6th edition.

The contractor raised a dispute in relation to a “notification” of potential claims communicated to the Engineer in a letter.  The Engineer did however not regard the letter as proper notification.  The result of the Engineer’s decision was a deadlock between the Employer and the Contractor which had to be resolved by an Arbitrator.  The Arbitrator ruled that the letter was indeed proper notification and that the contractor was entitled to claim as notified therein.

Resulting from the Arbitrator’s ruling, the Employer had to pay the Contractor’s claim, but then claimed damages for breach of contract from the Engineer in the High Court.  The Employer based its claim on an allegation that the Engineer breached the agreement by failing to construe the Contractor’s letter as an appropriate notice of the intention to claim payment for additional work as contemplated in clause 50(1) of the GCC.

The initial court determined that no breach of contract had occurred as the Contractor’s letter did not constitute proper notice as contemplated in clause 50(1) of the GCC.

However, it was held by the Supreme Court of Appeal that:

“…there was no reason why the notice contemplated in GCC 50(1) could not be in the form of a letter provided the letter was so framed as to communicate unequivocally to the addressee that the writer was invoking, or relying upon, the provisions of the contract which provided for the giving of notice. It could do so expressly or by implication. In the present case, the contents of the final paragraph of the Contractor’s letter were so closely related to the substance of clause 50(1) that it satisfied that standard.  The letter furnished the information required by clause 50(1) (a) and (b).”

 The Contractor’s letter therefore complied with the requirements of the the agreement in that it contained all the information that was needed to represent a notification as required by clause 50(1) of the GCC. The technical approach adopted by the Engineer in dealing with the “notification” by the Contractor was not regarded as reasonable by the Court on appeal.   On the contrary, the Court found that the Engineer’s conduct in this regard was not acceptable as measured against the standard of the “reasonable engineer”.

The letter therefore constituted a notice which any reasonable engineer would have construed as such.  The Engineer’s failure to do so therefore constituted a breach of the Engineer’s duty of care and, consequently the agreement with the Employer.  The Engineer was found liable to the Employer in the amount due and payable to the Contractor under the award of the Arbitrator in the initial arbitration between the Employer and the Contractor.

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Construction Law- Calling up Guarantees…or are they suretyships?

Insurers, guarantors, contractors and employers should take note of two recent judgments from the Supreme Court of Appeal developing the law governing Construction Guarantees.

The first, Dormell Properties 282 Cc V Renasa Insurance Co Ltd And Others is a matter where the employer made a claim on the guarantee against the guarantor, following upon the employer’s cancellation of the building contract on the grounds of the contractor’s alleged breach of contract.

The guarantor refused to pay the guaranteed amount and the employer instituted action in a High Court against both the guarantor and the contractor for payment of the guaranteed amount. The court found against the employer.

In an appeal to the Supreme Court of Appeal by the employer it was held that the employer had properly demanded payment of the guaranteed amount and that payment should, in terms of the guarantee, have been effected within seven days of demand.

It appeared, however, that subsequent to the judgment in the High Court, the dispute between the employer and the contractor had been the subject of an arbitration in which it had been found that the appellant had not been entitled to cancel the building contract.

New evidence during appeal regarding the arbitration and its outcome was allowed which also convinced the Court that in the circumstances it would amount to an academic exercise without practical effect if the employer were to be granted the order it sought. The employer would immediately have to repay the full amount to the guarantor or the contractor. Such an order would, at best, cause additional cost and inconvenience to the parties, without any practical effect. It was held further that in terms of the Supreme Court Act 59 of 1959, the court should exercise its discretion against the employer. The Appeal was dismissed.

The second case is Minister of Transport and Public Works, Western Cape v Zanbuild Construction. In this matter the Department of Transport and Public Works contracted with Zanbuild to construct two pathology laboratories. Following certain issues with the work, the department supposedly cancelled the construction contracts. Zanbuild accepted the cancellation as a repudiation by the department and the contracts came to an end before the projects could be completed. The department then demanded payment from the bank that had issued two construction guarantees at the behest of Zanbuild.

The department did not allege or contend that it had an recognizable monetary claim against Zanbuild, but maintained that the guarantees stood independent from the construction contracts, in a manner comparable to irreversible letters of credit. The department thus merely had to claim on the basis of the event specified in the wording of the guarantee.

Zanbuild however contended that the guarantees were intimately linked to the construction contract in a manner akin to a suretyship agreement, in which case the bank’s liability would extend only as far as the department could demonstrate a claim against Zanbuild under the construction contracts.

The Court found that the language of the guarantees in this particular case was similar to language normally associated with suretyships, and that, construing the guarantees as a whole, they gave rise to liability on the part of the bank of the same kind as suretyships.

The Court also found that the guarantees contained a provision that reserved the right to the bank to withdraw from the guarantees after 30 days’ notice. The provision expressly limited the liability of the bank to the amount owing by the contractor under the construction contract. The bank’s liability in terms of this provision was clearly similar to that of a surety.

The Court also found that the 30 days’ notice provision was one typically found in suretyships for an indefinite period. The surety’s liability for amounts owing by the principal debtor before expiry of the period remained unaffected. The bank remained liable, as it always was during the currency of the guarantee, for the amounts due to the employer by the contractor under the construction contracts. Since the department had established no amount due to it by Zanbuild during the currency of the guarantees, it was not entitled to demand payment under the guarantees from the bank.

Construction Law – Final Certification and Defences thereto

The issuing of a final certificate in terms of a building contract carries with it certain legal consequences for Employers and Principle Agents (normally Architects, Quantity Surveyors or Engineers). In the case of Ocean Diners (Pty) Ltd V Golden Hill Construction the Court clarified the legal position.

These consequences depend in the first instance on the proper interpretation of the applicable contractual terms. Where a building agreement provides that a final certificate shall constitute conclusive evidence as to the sufficiency of the works and materials, as well as of the value thereof, it is determinative of the respective rights and obligations of the parties in relation to matters covered by the certificate. The certificate therefore constitutes (in the absence of a valid defence) conclusive evidence of the value of the works and the amount due to the contractor.

STATUS OF THE FINAL CERTIFICATE

The Court found that the certificate embodies a binding obligation on the part of the employer to pay that amount and gives rise to a new cause of action (subject to the terms of the contract). The failure of the employer to make payment as contractually stipulated entitles the contractor to sue on the certificate.

If the effect of a building contract is to confer finality upon a certificate validly issued, it cannot be withdrawn or cancelled by an architect in order to correct mistakes of fact or value in it, unless the contract provides for it, alternatively such an arrangement is agreed to by the parties.

Therefore, once the architect has issued the final certificate, he is functus officio insofar as the certificate and matters pertaining thereto are concerned. That being so, the architect cannot withdraw or cancel the final certificate.

A final certificate is not even open to attack because it was produced on erroneous reports of the agent of the employer or the negligence of the employer’s architect. The failure of the employer’s professional team to properly scrutinise the claims put forward by the contractor and to rectify any errors, or their possible negligence in failing to satisfy themselves 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. It can also not provide a basis for the cancellation or withdrawal of the certificate by the architect.

PUBLIC POLICY

An undertaking by an employer in a building contract that a final certificate shall be conclusive evidence of the employer’s indebtedness is not in the least offensive to public policy. A party may also contractually agree to abandon his ordinary right to prove that an admission was wrongly made (on his behalf by his principle agent). Such a contractual term is not in itself against public policy.

The purpose of such a clause is to bring about finality in the respective rights and obligations of the parties. It also obviates the need for litigation over what are likely to be minor issues. To ensure this, the parties contractually bind themselves to accept as final and conclusive the certificate of a professional person they are entitled to expect will act fairly and impartially. Its provisions cannot therefore be said to be contrary to public considerations.

POSSIBLE DEFENCES TO THE CERTIFICATE

The certificate is, however, not indefensible. It is subject to all defences that may be raised in an action based on a final certificate. Any defence available to the employer, or on which the employer seeks to rely, ought to be pleaded.

All authorities indicate that negligent or innocent misrepresentation (relating to an architect’s certificate) would not be a valid defence to a claim on a final certificate. Possible defences to the certificate would be limited to considerations offensive to public policy, such as fraud.

EMPLOYER’S RIGHTS

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 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 (subject to prescription) have an action for damages against the specific member of the professional team. The situation where the certificate is known to be inaccurate is therefore not one inherently fraught with unfairness or injustice as far as the employer is concerned.

Construction Law – Contractor’s Lien and the Bona Fide Possessor

A lien can be described as the common law right of retention of property to secure payment for its improvement.  In a construction dispute, it is often available to the contractor to secure payment for work executed on a building site where the employer fails to make payment for building work executed.

This general principle was discussed and clarified in the recent case of Builder’s Depot cc v Damian. The matter was heard in the High Court on appeal from the Magistrates Court and, importantly, clarifies the legal position where property is transferred to a bona fide third party whilst the contractor is in possession and exercising its lien.

Background

Builder’s Depot alleged that it had performed building works for one Yan Bin Wu, the owner of a property, who failed to make payment therefore. The Builder’s Depot accordingly exercised its builder’s lien by taking possession of the property, locking it and proceeding to institute action against Wu.

In due course, a warrant of execution was obtained and the Sheriff was instructed by Builder’s Depot to sell the property in execution. The property was attached by the Sheriff during February 2010.

A bond was registered over the property in favour of ABSA Bank Limited, who also obtained a judgment against Wu. A second warrant of execution was issued instructing the same Sheriff to sell the property on ABSA’s behalf. The property was again attached during August 2010. Builder’s Depot was not aware of the second warrant of execution against Wu.

The Sheriff issued a notice which referred to the case number of the matter where ABSA obtained judgment against Wu. The Sheriff, who intended to sell the property on behalf and for the benefit of both Builder’s Depot and ABSA, sold the property in execution to Damian on 28 October 2010. Builder’s Depot gained knowledge of the sale on the same day.

Builder’s Depot’s attorney subsequently advised the Sheriff that Builder’s Depot was in possession of the property and that it intended to retain possession until the full amount of its judgment debt had been paid.

After the sale in execution the locks were changed and Damian gained access to the property. This caused Builder’s Depot to believe that its peaceful and undisturbed possession of the property had been lost and that it was entitled to a Spoliation order against Damian. Builder’s Depot claimed that the spoliator was Damian, and not the Sheriff.

The Conditions of the Sale in Execution contained a clause which read as follows:

“The property may be taken possession of immediately after payment of the initial deposit, and shall after payment be at risk and profit of the purchaser.”

The Sheriff accordingly advised Damian that possession of the property could be taken immediately after the necessary payments had been made.

The Court found that there was no evidence that Builder’s Depot was in possession of the property at the time when Damian took possession of the property. Prior to the letter received by the Sherrif from Builder’s Depot’s Attorney, nothing indicated that it had possession of the property and that it had obtained the judgment whilst exercising a builder’s lien. Builder’s Depot also did not allege that Damian was aware of its possession of the property. Builder’s Depot accepted that Damian obtained possession in a bona fide manner which it derived from the Sheriff’s actions following the sale in execution.

In terms of the Rules of Court it is not a requirement that the Sheriff must take immovable property into his possession. The property is attached by notice as prescribed by the Rules and, as such, does not dispossess the possessor.  The Conditions of the Sale in Execution required and obliged the Sheriff to give possession of the property to Damian once all payments had been received.

The Court determined that Builder’s Depot had lost its possession on the day the Sheriff sold the property in execution (28 October 2010) by accepting payment from Damian and by authorising the latter to take possession of the property by changing the locks. The Court also ruled that the Sheriff was not taking the law into his own hands and that he was bona fide when he gave possession of the property to Damian. Thus possession of the property passed onto a bona fide possessor. The Sheriff also acted on ABSA’s instructions to sell the property in execution and, knowing of Builder’s Depot’s claim, had the intention that it would also benefit from the sale.

If the Sheriff had dispossessed Builder’s Depot in a mala fide manner, the question arises whether a Spoliation Order could be granted against him. The current position seems to be that a Spoliation Order cannot be granted where possession has passed to a bona fide third party.

The Court ordered that a Spoliation Order cannot be granted against a spoliator who has given possession to a bona fide possessor.  It also ruled that Builder’s Depot cannot seek the return of the property from the bona fide third party. Damian did not take the law into his own hands, was entitled to remain in possession and did not perform an act of spoliation.  The Appeal was dismissed with costs in favour of Damien.

Construction Law- Considering Prescription – The Construction Law Perspective

INTRODUCTION

As in all legal disputes, extinctive prescription is an important factor to be considered when evaluating the merits of a claim and formulating a defence. Construction law cases, in many instances, involve not only complex contractual relationships, but also difficult technical aspects. Determining the date on which prescription starts to run involves careful factual analysis and when the actions of the reasonable person are to be factored into the debate, things can get even more difficult.
 

PRESCRIPTION

The 1969 Prescription Act provides for four different basic prescription periods. The periods are 30, 15, 6 and 3 years respectively.

Most of the cases I will be referring to relate to debts which are subject to a 3 year prescription period. I will also refer briefly to a scenario towards the end of the presentation where the 30 year period finds application.
 

WHEN DOES PRECRIPTION BEGIN TO RUN?

Section 12 of the Act provides as follows:

(1) … prescription shall commence to run as soon as the debt is due…

(3) A debt shall not be deemed to be due until the creditor has knowledge of the identity of the debtor and of the facts from which the debt arises:

… a creditor shall be deemed to have such knowledge if he could have acquired it by exercising reasonable care.”

WHEN IS THE DEBT DUE?

The decision in Martin Harris & Seuns OFS (Pty) Ltd v Qwa-Qwa Regeringsdiens 2000 (3) SA 339 (A) provides an excellent illustration of when a debt becomes due for the purposes of Section 12(1) of the Act.

The facts of this matter are briefly as follows:

– The building contract provided that the appellant would be paid after a progress certificate was issued by an architect (the principal agent) in respect of work already performed. Such certificates were issued and the appellant was duly paid.
– Within three years after completion of the works as a whole, but more than three years after uncertified sections of work was done, the appellant instituted action for an outstanding balance in respect of “uncertified” work.
– The respondent alleged that the claim had prescribed because the entitlement/debt arose when each section of work had been completed.

The Court held in the contractor’s favour and I summarise the position as follows:
– The issuing of progress certificates was only a contractual mechanism to place the contractor in a position to finance the continuation of the completion of the works.
– The completion of each specific section of the work did not entitle the appellant to receive payment for the work.
– Only upon completion of the work as a whole would the appellant have such entitlement.
– The appellant’s claim would rest upon a certificate as a separate and self-supporting cause of action, where a certificate had already been issued.
– The would then be for payment of the percentage of the value of the works for which the architect had certified.
– Prescription of the appellant’s claim (for payment for all sections which had not appeared in any certificate) began to run at the earliest when the work as a whole was completed.

The debt had therefore not become due and respondent accordingly failed in its prescription argument.

In LTA Construction v The Minister of Public Works and Land Affairs 1992 (1) SA 837 (C) the court also shed more light on the same question.

The claimant claimed for losses sustained in consequence of the delay in the commencement of the works. The building contract provided for the completion of the works within 33 months from date of acceptance of the tender. A further term was that the employer would hand over the site within a certain period. The progress on site and completion of the project were adversely affected by:

The employer’s late handover of the site (7 working days delay).

Completion delayed due to causes beyond the contractor’s control (320 working days).

The defendant then raised a prescription argument and said that the plaintiff’s claim had become prescribed because the debt claimed for became due 33 months and 10 days (7 working days and 3 non-working days) after acceptance of the tender.

This argument resulted in 16 July 1986 being calculated as being the date on which the debt was to have become due.

Summons was served on 5 December 1989.

The defendant’s argument however did not take into proper consideration that a further term of the contract provided for the contract period to be extended in the event of delays due to causes beyond the contractor’s control.

This provision extended the date on which the debt became due with a further 320 working days. The defendant was unsuccessful.
 

KNOWLEDGE AND DEEMED KNOWLEDGE

As we have seen Section 12(3) of the Act provides that a debt is not deemed to be due until the creditor has knowledge or is deemed to have knowledge of the identity of the debtor, as well as of the facts from which the debt arises.

In Minister of Public Works and Land Affairs v Group Five Building Limited 1999 (4) SA 12 (SCA) counsel for the contractor contended that the employer’s claim had become prescribed in terms of Section 12(1) of the Prescription Act.

The employer had allegedly become aware of the relevant facts by 30 May 1991. The contract was terminated on 3 December 1991 and the employer’s counter-claim was delivered on 1 December 1994. The contractor had therefore to prove that prescription had begun to run.

In the instant case, the date on which the employer gained knowledge of the facts from which the debt arose (30 May 1991) was irrelevant as this particular contract contained a clause which entitled the employer’s engineer to require the contractor to remedy defective work. The very earliest stage when the employer’s damages could conceivably have become due was when the contractor, who had the duty to remedy the defective work, had the last chance to do so. This was the date on which the contract was cancelled (3 December 1991).

The employer’s counter-claim was delivered on 1 December 1994 and therefore fell within the three year prescriptive period. The contractor had accordingly failed to prove that prescription had run.
 

THE REASONABLE PERSON

In Drennan Maud & Partners v Pennington Town Board 1998 (3) SA 200 (SCA), the appellant was a civil engineering consultancy. It designed and recommended the construction of a reinforced concrete retaining wall as the Town Board wished to protect certain properties which became threatened by the Umzinto River in Kwa-Zulu Natal. The Town Board accepted design and proceeded to engage a contractor to build the wall.

During September and November 1989 heavy rains fell and the river came into flood. Sinkholes formed in the backfill material behind the wall during this period. These developed progressively and eventually became very substantial. By January 1990 the river was flowing freely under the whole length of the wall and the Town Board were back to where they had been before the appellant was consulted and claimed was for the wasted costs of building the wall.

It was alleged by the engineers that by no later than 13 November 1989 the Town Board had knowledge of the facts from which the alleged claim arose. It was later alleged that the Town Board acquired deemed knowledge in the light of the facts known to it by the above date. The Town Board should have exercised reasonable care.

In his judgement the Honourable Mr Justice Olivier made the following statement:

“… a creditor shall be deemed to have the required knowledge ‘if he could have acquired it by exercising reasonable care’. In my view, the requirement ‘exercising reasonable care’ required diligence not only in the facts underlying the debt, but also in relation to the evaluation and significance of those facts. This means that the creditor is deemed to have the requisite knowledge if a reasonable person in his position would have adduced … the facts from which the debt arises.”

It was clear from the subsidence of the backfill material behind the wall that the design had failed and could not withstand the scouring effect of the passing flood.

As the Town Board’s claim was for the wasted costs of building the wall, the loss claimed for had already occurred when the Town Board acquired deemed knowledge that the wall did not serve the purpose for which it was designed and built and that the related costs were wasted.

The consultant’s prescription argument was therefore well founded as the respondent’s summons was issued outside of the 3 year prescription period.

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