Construction Law – Certain instances where the NHBRC could be held liable by a home owner for 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 – Where 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 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 – 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.