Construction Law & Engineering Law . 24 Aug 2017
Public sector infrastructure development is one of the most critical components to ensuring service delivery; employment opportunities in the country as well as economic transformation of those who were previously excluded from participating in the country’s economy. Such development is, however, often marred by delayed payments to contractors for work done. Apart from when the organ of state is disputing the amount being claimed by the contractor, there are numerous other reasons that can and do lead to delays in payment, in particular, budgetary limitations are often part of the problem.
Invariably, these payment delays have the unintended consequence of causing lengthy disputes and interruptions in delivering key infrastructure timeously. What follows, is a brief consideration of how South African law has developed in mitigating some of these undesirable circumstances, and how the recently promulgated Standard for Infrastructure Procurement and Delivery Management (“SIPDM”) issued by the National Treasury can assist organs of state in alleviating the problem at its core: budget overruns and unstructured financial planning.
In common law, a contractor cannot suspend the completion of the works and thereafter claim for payment. This is because such an action would be in breach of the contractual principle of reciprocity that governs all contractual relationships; which provides that Party A can only claim performance from Party B, once Party A has performed its full obligations. Historically, this common law position meant that, if a contractor attempts to claim performance after suspending the work, the employer can raise the defence of “exceptio non adimpleti contractus” a latin maxim denotating that no performance is due to one who has himself not performed in full.
In the case of Dalinga Beleggings (Pty) Ltd v Antina (Pty) Ltd 1979 2 SA 58 (A), the court decided that the burden of proof was on the claimant, to show that it had done all that was required of it in terms of the contract against which it claimed. In this context therefore, if a contractor stopped performing, it would not be able to demonstrate complete performance and would therefore not be able to claim.
Even after completing the work, the lack of funds in the business of the contractor (typically caused by non-payment) also meant it could not afford a long and drawn out litigation process and therefore often did not institute legal proceedings against the employer. Employers could then take-over the completed works even where they had significantly delayed payment with very little consequences.
The only remedy that contractors could use to prevent employers from taking over the completed works is the exercise of what is commonly known as s a builder’s lien. It is the common law right of retention over the property on which the contractor has performed work as security for payment, where the employer has not paid what is due.
A builder’s lien can, to date, still be invoked by a contractor who is party to a bespoke construction and engineering agreement (unless such agreement expressly excludes its application, which is not uncommon).
The Construction Industry Development Board (“CIDB”), forced a shift away from bespoke agreements, towards the use of the standard forms of contract prescribed by it i.e. the JBCC, GCC, FIDIC and NEC. In what seems to be an effort to aid contractors with the plight of delays in payment, some but not all of the recent versions of these standard forms of contracts allow contractors to stop the continuation of work where payment is due and not received. For example:
In terms of the JBCC Principal Building Agreement Edition 6.1 (2014), clause 28.1 states that the contractor may suspend execution of the works, after giving five working days’ notice, if the principal agent or the employer has failed to issue an interim payment certificate by the due date or has failed to make payment of the full amount by the due date, as certified in an interim payment certificate. The suspension can remain in place until the default has been remedied without prejudice to any other rights that the contractor may have.
The GCC for Construction Works Third Edition (2015) at clause 5.11.1 allows the contractor, after giving fourteen days written notice to the employer and agent, to suspend progress of the works in the case where the employer or its agent has failed to deliver a payment certificate or make full payment of the amount certified, without any prejudice to the contractor’s other rights. Previous additions of the GCC did not have such an empowering provision.
A similar clause can be found in the FIDIC Conditions of Contract for Construction, Red Book, (2010) at clause 16.1 which provides that the contractor may, after giving not less than 21 days’ notice to the employer, suspend work (or reduce the rate of work) where the engineer fails to certify an interim payment certificate or the employer fails to provide evidence that financial arrangements have been made and are being maintained or where the employer fails to make payment in respect of an advance payment, interim payment certificate or final payment certificate as the case may be. Again, this suspension of the works by the contractor shall not prejudice his entitlements to financing charges and termination of the contract.
The NEC3 Engineering and Construction Contract (2013) is the only one of these four forms of contract with no specific empowering provision for a contractor to simply “down tools” as a result of the employer having failed to make payment on a certified payment certificate. In terms of clause 91.4, however, the contractor may terminate the contract, after thirteen weeks of not being paid an amount due under the contract
While the standard forms of contract provide some solutions for the contractor, they do not aid employers in ensuring that they can indeed pay contractors for work done and avoid suspension of the works. They do not address or alleviate the reasons why contractors are not being paid timeously and are therefore suspending work. Employers still require a solution. With the forms of contract being prescribed by the CIDB, organs of state run the risk of having to take over incomplete works or paying much more than what is necessary for the works, due to the costs associated with the delays. The result is often diminished service delivery, job losses and an untransformed economy. It is clear then, that it is in government’s best interests to mitigate these risks by ensuring that there are sufficient funds to pay all contractors on all projects, timeously. In this way, contractors will not need to stop work.
One of the most effective ways to ensure payment of contractors, is to guarantee that organs of state can realistically afford every single infrastructure project on which they embark upon. With funds and the distribution thereof being at the centre of this problem, National Treasury has come up with a solution for organs of state in the form of the Standard for Infrastructure Procurement and Delivery Management.
The SIPDM seeks to promote efficient infrastructure planning and budgeting by prescribing a 9-stage infrastructure delivery process that includes detailed planning, design and execution with definite accountability and the necessary checks and balances. National Treasury issued the SIPDM under Instruction Note number 4 of 2015/2016 (“Instruction Note”) in terms of Section 76(4)(c) of the Public Finance Management Act 1 of 1999 (“PFMA”) and was made applicable and obligatory from 1 July 2016 for all organs of state. The Instruction Note prescribes that affected organs of state must implement the prescripts of the SIPDM by developing and implementing a separate and suitable supply chain management policy for infrastructure procurement and delivery management.
The foundation of the SIPDM is its Control Framework for Delivery Management which sets out the infrastructure delivery management process in 9 stages (i.e. Infrastructure Planning; Strategic Resourcing, Pre-feasibility, Feasibility, Design Development, Design Documentation, Works, Handover, and Close-out). These stages are developmental, in that the success of one stage hinges on the successful completion of the preceding stage. The stages that are relevant for the purposes of curbing budgetary problems are Stage 1(Infrastructure Planning) and Stage 4(Feasibility) which seek to ensure, amid other objectives, that there is adequate budget for a particular project.
The conclusive approaches to planning, budgeting and reporting put forward by the SIPDM, if correctly implemented, are set to minimise project failure caused by financial constraints. If every infrastructure project embarked on by organs of state is linked to an overarching strategy with well thought-out plans, realistic budgets and consistent reporting, the risk of non-payment can be significantly reduced.
It is therefore essential that affected organs of state wholly understand the SIPDM, and lead the industry shift, in mind-set.
Small to medium sized contractor and sub-contractor businesses have often closed down or undergone business rescue due to cashflow problems caused by delayed payments. Contractors employed by government should therefore also understand the SIPDM and cooperate with government, where for example, they are required to submit information to the organ of state to ensure project progress, and eventually timeous payment.
The SIPDM has the potential to be the much-needed solution for not only government but contractors as well.