Contributed By Fasken Martineau DuMoulin LLP
Construction contracts in South Africa are regarded as regular commercial contracts to which the general principles of the law of contract apply. However, there are two principal forms of construction contracts produced in South Africa, which are the GCC (General Conditions of Contracts for Construction Works) forms of construction contracts which are produced by the South African Institution of Civil Engineering, and the JBCC forms of construction contracts which are produced by the Joint Building Contracts Committee.
South Africa does not have specialist construction courts. The South African High Courts, Regional Courts and Magistrates Courts have the jurisdiction to hear all construction matters dependent on the monetary value of the claim or the nature of the dispute. However a well-used option for resolution of construction disputes in South Africa is alternative dispute resolution, ie DABs (Dispute Adjudication Boards), mediation and arbitration. The majority of construction contracts have dispute resolution mechanisms incorporated into the terms of the contract which provide for the resolution of all disputes that arise out of or that relate to the respective contract, with an eventual referral to arbitration for resolution .In most cases the decision of the arbitrator is final and binding.
The process of interpretation of contracts entails, essentially, determining the meaning of the particular words used and the grammatical construction of the sentences and identifying the facts and objects to which the relevant provisions relate.
The fundamental object is to ascertain and give effect to the common intention of the parties. The South African courts' general approach to the interpretation of contracts is to determine the intention of the parties by assessing the language which the parties used in the contract rather than from what either of them may actually have had in mind. If the meaning of the relevant provision is clear and unambiguous, effect is given to that meaning.
According to recent case law (Natal Joint Municipality Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA)) the present state of the law can be expressed as follows: Interpretation is the process of attributing meaning to the words used in a document, be it legislation, some other statutory instrument, or contract, having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence.
Whatever the nature of the document, consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed; and the material known to those responsible for its production. Where more than one meaning is possible, each possibility must be weighed in the light of all these factors.
The process is objective, not subjective. A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document. The 'inevitable point of departure is the language of the provision itself', read in context and having regard to the purpose of the provision and the background to the preparation and production of the document.
If interpretation is, as all agree it is, an exercise in ascertaining the meaning of the words used and is objective in form, it is unrelated to whatever intention those responsible for the words may have had at the time they selected them.
South African law applies the “parol evidence rule” when interpreting contracts and determining as to when extrinsic evidence is permissible. Parol evidence is evidence outside of the written contract, comprising what parties did or said before, during or even after the conclusion of the contract.
The parol evidence rule is a principle that preserves the integrity of written documents or agreements by prohibiting the parties from attempting to alter the meaning of the written document through the use of oral or written evidence that is not referenced in the document. The rule governs the extent to which parties to a case may introduce into court evidence of a prior or contemporaneous agreement in order to modify, explain or supplement the contract in question.
The rule states that where the parties to a contract intended their written agreement to be the full and final expression of the terms of the agreement between the parties, other written or oral agreements that were made prior to or simultaneous with the writing are inadmissible for the purpose of changing the terms of the original agreement.
The parol evidence rule applies to all written contracts whether it was stated in the contract or not. The rule has two components: the integration rule and the interpretation rule. In terms of the integration rule, the written agreement is the “exclusive memorial” of the agreement between the parties. The written agreement contains all the express terms of the contract and as such the contents of the document may not be contradicted, altered, added to or varied by parol evidence.
There are exceptions to the integration rule, such as that a party may bring evidence if it goes to the validity of the contract. In terms of the interpretation rule, the court looks to ascertain the meaning of the terms. If the contract is able to clearly and unambiguously define the terms of the contract, the court will interpret those terms according to the contract.
Where the contract does not give a clear meaning to the terms of the contract then the court may engage in the surrounding circumstances and pre-contractual negotiations of the case to ascertain the meaning of those terms. However, this approach must be used as conservatively as possible.
In general, parties to a contract may agree to any terms to be incorporated into a contract as long as there is consensus between the parties as to the inclusion of such terms. In certain contracts statute requires the inclusion of specific provisions in the contract in order for the contract to be valid.
Should the parties to the contract incorporate terms into the contract which result in it being contrary to a statutory prohibition such contract is void, if the statute expressly or implicitly says the contract will be nullified as the sanction for the invalidity.
Contracts can likewise be declared void if the provisions of the contract are illegal or unenforceable and if the terms of such contract are against moral principles or public policy.
For a contract and the terms incorporated therein to be valid and enforceable, the parties must have the necessary contractual capacity, the performances undertaken in terms of the contract must be possible at the time of contracting, the contract itself, its performance and object must be lawful and the constitutive formalities, if any, for that type of contract must have been complied with.
In terms of the Prescription Act 68 of 1969 the periods of prescription of debts, which is inclusive of those that derive from construction disputes, are the following:
In terms of construction contracts in particular such contracts may prescribe that should a party have a claim in terms of the respective contract, such party is to provide a notice of such claim within a certain period of time. Should the party fail to do so the party is prohibited from pursuing such claim. Other than such provisions the parties may not shorten or extend the prescription periods provided for by the Prescription Act.
South African law does not provide for pre-contractual duties between the parties prior to entering into a contract. A tender is normally construed as an offer made by a tenderer to the employer to complete the work on the terms contained in the attendant documentation.
As the tender is regarded as an offer, a tender is governed by the normal rules relating to offers in respect to their qualification, lapse, revocation or acceptance.
A tender has to be accepted by the employer before it can be binding on the parties and before it can result in damages as a result of a breach of such agreement which stemmed from the tender. The assessment of damages in such a claim would be the same as in the case of damages arising from a breach of a normal contract.
However, should the employer be aware that the tenderer when making the offer is unaware of information that would probably have an adverse influence on either the fact or terms of the offer, the employer may be under a duty to disclose it, failing which it may entitle the tenderer, if its tender is successful, to withdraw from the ensuing contract on the grounds of a material pre-contractual non-disclosure.
Where it can be shown that the tender process was not what it was represented to be, it is conceivable that each frustrated tenderer may have a claim in delict for the recovery of the wasted expenses incurred in participating in a flawed and futile exercise.
The formal requirements that pertain to contracts in general apply to construction contracts. However, South African law does not prescribe additional requirements that relate solely to construction contracts.
Construction contracts can be concluded, like agreements generally, expressly or tacitly, by implication or by incorporation, by conduct and orally or in writing. The agreement is complete as soon as there has been an interactive meeting of the minds between the respective parties.
However, should the parties elect to utilise one of the standard forms of construction contracts, such contracts may have their own formal requirements.
For a contract to be valid in South African law, the parties must have the necessary contractual capacity, the performance undertaken in terms of the contract must be possible at the time of contracting, the contract itself, its performance and object must be lawful and the constitutive formalities for that contract (should such formalities be applicable) must have been complied with.
In South African law, effect can be given to other sources of documents, other than formal contracts, to establish an agreement between parties, ie letters of intent. If the parties accept the terms of such letter of intent, act in accordance therewith, and the requirements set out therein for the conclusion of a valid contract have been complied with, such letter of intent can be regarded as the basis of an agreement between the parties.
A signature by both parties to a construction contract is not necessary to conclude a contract between the parties. Construction contracts can be concluded, like agreements generally, expressly or tacitly, by implication or by incorporation, by conduct and orally or in writing. The agreement is complete as soon as there has been an interactive meeting of the minds between the respective parties.
If a contractor does work in anticipation of a construction contract without the prior knowledge and consent of the employer, the employer may not be liable to the contractor for payment for such work.
If the contractor undertakes such work with the full knowledge of the employer and the employer, knowing that such work was being performed that would benefit it, allowed the contractor to proceed with the work without protest, then the contractor may have a claim for payment for such work by the employer.
Such claim for payment will in principle have to be based on enrichment, or should the performance of the pre-contractual work and the acceptance of such work by the employer be regarded as a tacit agreement between the parties the contractor may have a claim based on breach of the agreement.
Some contracts, such as construction contracts, are so often used that the common law has developed terms to be implied into all construction contracts, whether these terms are expressly stated in such contracts or not. This is generally done as a matter of course, without referring to the actual intentions of the parties to the contract, unless it conflicts with an express provision of the contract.
What South African courts have held is that the law imposes a legal duty on one or other of the parties to a contract to behave in a certain way, whether the contract expressly states this or not. This gives rise to a correlative right by the other party to the contract to expect and enforce such behaviour. This legal duty and correlative right amount to the term implied into the contract.
In general, a contractor’s principal duties, implied into the contract if not expressly incorporated into the contract, are to complete the work in accordance with the contract and any plans and specifications attached to it or incorporated into it, and to complete the work within the time stipulated in the contract or, in the absence of any time stipulation, within a reasonable time, and to complete the work in a proper and workmanlike manner and with suitable materials. An employer’s legal duty, implied into the contract or expressly incorporated therein, is to pay the contractor for the work the contractor has performed.
In addition, legislation regulates the content of certain kinds of contracts. The consequences of this legislation cannot, generally, be excluded from a contract, even by agreement between the parties, for example certain provisions of the Consumer Protection Act provide that an employer (who is not a juristic person with an asset value or annual turnover which equals or exceeds ZAR2 million) may, if a contractor does not perform a service or supply goods to the standards required by the Act, require the contractor to either remedy any defect in the quality of the services performed or goods supplied or, at its discretion, require a refund of a reasonable portion of the price paid for those services or goods. This is not an obligation which a contractor can avoid.
There may in addition be implied terms that arise from trade usage. These terms will have all of the characteristics of terms implied by law except that they are only applied to the particular market or trade in which they are in use.
However, it may be difficult to prove implied terms that arise from trade usage. Should a party wish to rely on an implied term that has been incorporated into the contract as a result of trade usage the party must show that it is universally and uniformly observed within the particular trade concerned, long established, reasonable and certain, and does not conflict with positive law or with the clear provisions of the contract. If parties who are engaged in a trade which has its own trade usages wish to exclude a particular usage, they should do so expressly.
Most formal contracts that are incorporated in South Africa will include a standard clause which states that the agreement and the terms incorporated therein amount to the entire agreement between the parties.
Should such a clause apply to and be incorporated into the respective contract, then the courts are reluctant to include any extrinsic evidence that would result in there being any amendments to the formal contract unless it is clear that it was the intention of both parties to include such provisions.
Contracts may contain exclusive remedy clauses, and generally courts will give effect to such clauses. However, such a clause does not deprive a party of the remedies that may be available to it under common law, such as specific performance, interdicts, declaration of rights, cancellation and damages.
In the case of a construction contract the contractor is to be paid the agreed remuneration for work done. Should it arise that the contract does not expressly state the amount of the remuneration, the contractor is then entitled to reasonable remuneration or compensation for the work undertaken which, if it cannot be agreed to by the parties taking into account the nature of the work performed and the market-related value associated with such work, will have to be determined through litigation.
In the situation where a contractor has a claim for payment for work done or services rendered in the absence of an express term governing such payment, the principle of quantum meruit applies. In terms of such principle the contractor would be entitled to the reasonable fee for work properly done.
The onus rests with the contractor to prove that the agreement was indeed silent on the payment terms, that it was not agreed that the work would be done free of charge and what a reasonable remuneration would be, taking into account the nature of the work undertaken.
South African law does not presently provide mandatory payment terms which are to be included in construction contracts. In general, construction contracts are entire contracts and in the absence of agreement to the contrary a contractor is not entitled to payment until the work has been completed.
Should a construction contract not contain an express payment provision then an implied term is incorporated into the contract which provides that payment is then due to the contractor immediately upon the completion of the work and at the place where the work was performed. The standard construction contracts utilised in South Africa incorporate their own payment terms, which the parties are to comply with unless they agree otherwise.
There was a proposed amendment to the Construction Industry Development Board Act 2000 regulations that had not been promulgated at the time of writing, which once promulgated will regulate payment terms in construction contracts.
As South African law does not provide for a distinct set of terms for construction contracts, the general terms that apply to commercial contracts apply to construction contracts and such general provisions apply to all types of construction contracts entered into by private parties, public entities or government agencies.
The standard form construction contracts utilised in South Africa cater for different types of construction contracts, the terms of which can be standardised within particular segments of the construction industry and which provide for the elements and characteristics of that particular construction contract.
Parties to a construction contract are free to agree on any payment terms that they deem appropriate for the contract, as long as such terms do not result in impossibility of performance, uncertainty and unlawfulness.
Parties to a construction contract can agree that the subcontractor will only be paid once the contractor has received payment by the employer. Likewise the parties may agree that should the contractor not be paid by the employer then the subcontractor will not be paid by the contractor, as long as there is consensus on such agreement.
In the case of insolvency of the paying party, the party which has a claim for payment under the contract will then generally have the right to claim against the insolvent estate.
However, the proposed amendment to the Construction Industry Development Board Act 2000 regulations contains provisions that would prohibit conditional payment provisions such as the ones referred to above.
The contractor does not have a general right or entitlement under South African law to suspend performance on the grounds of non-payment by the employer.
However, construction contracts may contain provisions that regulate if and when a contractor may suspend works under the contract, in which case the provisions of the contract prevail.
In construction contracts there is a duty by the certifier to act impartially, fairly and objectively when assessing a contractor’s interim or final entitlement under the contract.
Any improper, including negligent, certification by the certifier of work done by the contractor would be a breach of contract entitling the employer or the contractor to appropriate relief, depending on the nature of the certifier’s conduct.
Failure by the employer or its agent (the certifier) to issue or assess a contractor’s interim or final entitlement under the contract may likewise be regarded as a breach of the contract, depending on the terms of the contract. The certifier’s rights and obligations are derived from the terms of the contract.
Should the certifier be an engineer, architect or quantity surveyor their conduct is also regulated by legislation pertaining to that specific profession.
The certifier’s legal status and obligations will depend on the terms of their own contract with the employer and the contract between the employer and contractor.
The certifier is normally an agent of the employer and not an employee, and although the certifier’s role is normally to serve the interests of the employer, the certifier is nevertheless expected to act independently, objectively and fairly not only towards the employer but also towards the contractor.
Should the certifier fail to act impartially, fairly and/or honestly such conduct can be regarded as a breach of their obligations under the contract and result in the aggrieved party being able to claim for breach of contract.
As the certifier acts as the employer’s agent, the employer may be liable for the certifier's breach if the certifier was acting in the scope of their employment and with the employer’s authority.
In the matter of Sasfin v Beukes 1989 (1) SA 1(A) the court pronounced on the effect of a provision in a cession agreement that stated that a certificate was conclusive proof of the debtor's indebtedness and the amount thereof and that such certificate cannot effectively be challenged on any grounds except fraud.
It was held that such a clause purported to oust the court's jurisdiction to enquire into the validity or accuracy of the certificate, to determine the weight to be attached thereto or to entertain any challenge directed at it other than on the grounds of fraud.
As such it runs counter to public policy. Therefore the parties may not agree that the contents of a certificate are conclusive and may not be reviewed. The certificate may be seen as prima facie proof but not conclusive proof.
The parties to a construction contract may agree that disputes that arise from a certificate are only to be determined in a particular forum such as arbitration. A clause in the contract to that effect will be enforced by the courts. However, an arbitration clause does not preclude a court, in the exercise of its inherent jurisdiction, from granting relief when it deems it appropriate to do so.
Even after the arbitrator’s award is finalised it can be challenged by means of a review in terms of the Arbitration Act 42 of 1965. Failing any such challenge, the final award stands and can be enforced by a subsequent order of court. At that stage it can no longer be challenged on the merits.
Where a contract does not stipulate a time for performance, the contractor is required to complete the works within a reasonable period of time. The contractor must be placed on notice to complete within a reasonable period.
The reasonableness of the period for completion will be determined with reference to the nature of the works and their complexity. Each case is determined on its merits.
Where a contract does not contain an extension of time clause, grounds which at common law would serve as an excuse for non-performance would apply. These would include grounds of impossibility or delay caused by the employer which prevents the contractor from completing in good time.
Where an extension of time clause exists, if such clause provides for extensions of time in circumstances where the employer acts lawfully (eg issuing variations) and contains a further ground covering 'any other causes beyond the contractor’s control' (see Group Five Building Ltd v Minister of Community Development 1993 (3) SA 629 (A)), such clause is likely to be interpreted as wide enough to encompass acts of breach of contract.
Accordingly, the contractor would be entitled to an extension of time for employer breach, and such breach would not render time 'at large'. In the absence of such a catch-all provision, breach by the employer causing delay would result in time being 'at large'.
Liquidated damages for delay are recognised in South Africa. Since the promulgation of the Conventional Penalties Act 15 of 1962 it is no longer a requirement that such liquidated damages constitute a genuine pre-estimate of the damages suffered by the employer, as was the position at common law.
However, the Act empowers a court to reduce the amount of liquidated damages in circumstances where such amount appears to be wholly disproportionate to the prejudice suffered by the employer.
The grounds of prejudice are, however, wide and not limited to financial prejudice. Accordingly, having the amount of liquidated damages reduced in terms of the Act is not an easy onus to discharge.
There is no reported judicial authority on the issue of concurrent delay in South Africa. The position which is likely to be followed is that which prevails in terms of the English authority of Walter Lilly & Co Ltd v Mackay and another (No 2)  EWHC 1773 (TCC), namely that the contractor is entitled to an extension of time notwithstanding the existence of a concurrent cause of delay. However, insofar as financial compensation is concerned, a contractor is unlikely to succeed in this regard in circumstances of concurrent delay.
Under South African law there is a general duty on a party to mitigate its damages suffered by reason of a breach of contract by the other party. Such duty requires the innocent party to take reasonable steps to mitigate its loss.
In circumstances where a contractor employs additional resources in order to overcome delay and disruption caused by an employer, then insofar as the cost of such additional resources exceeds the general duty of reasonable mitigation, such costs could be recoverable as part of the damages which flow naturally from the breach by the employer.
There is no reported judicial authority in South Africa on the issue of 'global' or 'total loss' claims. Specialist construction adjudication or arbitration tribunals may be open to following the position which prevails in terms of the English authority of Walter Lilly & Co Ltd v Mackay and another (No 2)  EWHC 1773 (TCC), namely that there is nothing in principle wrong with a global or total loss claim. However, as South African courts are not specialist construction law courts they may take a more strict approach to causation and require a proper causal link between each claimed event and the alleged loss.
Whether a notice provision is intended to operate as a bar to a claim in circumstances of a failure to give such notice will depend upon a proper construction of the clause concerned. Time bar clauses which expressly exclude liability for a claim for failure to give notice are generally valid and enforceable, subject to considerations of reasonableness and fairness (Barkhuizen v Napier 2007 (5) SA 323 (CC).
Provided they are clear and unambiguous in their intention to exclude liability for failure to give timeous notice, notice of claims clauses are valid and enforceable, and South African law will hold parties to such clauses.
In circumstances of breach of contract, the innocent party can elect to either claim damages or seek specific performance. The latter is a discretionary remedy which a court may, in its discretion, refuse to grant if the relief is deemed inappropriate by the court. For example, courts may be reluctant to order specific performance where the counter-party is unable or unwilling to cooperate with the party seeking the relief.
Generally, damages are assessed as at the date when the cause of action, typically the date of the breach, arose. In non-contractual (delictual/tort) claims, damages are assessed as at the date of the occurrence of the conduct complained of.
If events occur after the date of the relevant breach and such events cause the innocent party to suffer loss and such events are not too remote from the breach, in so far as causation is concerned, then those events would be relevant to assessing the innocent party’s damages.
In accordance with the principle of pacta sunt servanda, parties are generally free to agree whatever limitations they wish, including in regard to the exclusion of recoverability of certain losses which may arise under a contract. It is very common for parties to agree to exclude liability for consequential damages. Provisions seeking to exclude liability for negligence are also valid and enforceable.
Where the contract is silent with regard to interest, a party is entitled to statutory interest on outstanding amounts as from the date of demand in terms of the Prescribed Rate of Interest Act 55 of 1975. Interest in terms of this Act is at the South African Reserve Bank repurchase rate plus 3.5% per annum.
Currently the rate is 10.5%. This rate also applies to judgment debts. The parties are free to regulate the manner in which damages are calculated and paid.
At common law, termination is justified if a breach of contract amounts to a repudiation (an unequivocal intention not to be bound by the contract) or a material breach of an essential term. Termination, irrespective of the nature or materiality of the breach, is also permissible where it takes place in terms of a clause which provides a right to terminate in the stated circumstances.
The innocent party can always elect whether to terminate or abide by the contract. The election must be made within a reasonable time or strictly in accordance with the requirements of the termination clause. A failure to enforce a right of termination may amount to a waiver of such right, depending on the circumstances.
There must be strict adherence to the requirements of a clause granting a right to determine the contract upon the giving of notice. Clear and express notice must be given to the other party.
Where the construction contract gives the Contractor the right to terminate for non-payment of sums due or certified for interim payment, set-off can be raised by the employer and could, accordingly, affect the right of the contractor to terminate the contract.
A provision allowing termination for a material breach codifies the common right to termination which requires materiality. Material breach entitling a party to terminate must be a breach of a serious (rather than minor) nature and must be in respect of an essential term of the contract. The breach must go to the root of the contract.
Very few construction disputes are resolved through the courts. All of the standard form contracts provide for alternative dispute resolution methods such as adjudication and arbitration. In certain circumstances when contracting with the state, litigation in the courts is mandated. However, the vast majority of construction disputes are resolved through non-court means.
Arbitration is a statutorily recognised and widely used form of dispute resolution in South Africa. A number of independent arbitration bodies exist to administer and mange arbitrations conducted under their auspices.
The Arbitration Act 42 of 1965 recognises the right of parties to agree to arbitration and binds parties to their agreement while retaining a discretion to intervene in disputes subject to arbitration where deemed appropriate.
Arbitration awards may be made orders of court and then enforced in the same way as a court judgment. Section 20 of the Arbitration Act provides a mechanism for the referral to a court of a question of law.
A scheme of statutory adjudication has been recently suggested in proposed amendments to the CIDB Regulations. The envisaged adjudication scheme intends adjudications to be completed within 42 days.
Most of the standard form contracts in use in South Africa provide for compulsory adjudication as a dispute resolution procedure prior to the institution of formal litigation, whether by arbitration or court process.
Adjudication as a form of dispute resolution is less developed in South Africa than elsewhere and tends to still be more formal than, for example, that envisaged under the UK Housing Grants, Construction and Regeneration Act.
Various professional bodies (such as those for the quantity surveying and engineering professions) offer expert appointments for alternative dispute resolution purposes.
Mediation is an increasing form of alternative dispute resolution. There is no general requirement that disputes be mediated prior to formal litigation. However, the government has implemented a mediation pilot project in the magistrates’ courts which is aimed at encouraging the use of mediation.