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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