South Africa: South Africa Construction And Construction Insurance Law Snippets

Updates on some recent developments in the construction, construction insurance and mining industries in South Africa

This newsletter contains updates on some recent developments in the construction, construction insurance and mining industries.  We look at:

  • Building Information Modelling ("BIM") - the risks which should be of interest to liability insurers and to consultants.
  • Considerations in relation to the level of design liability – which should be of interest to liability insurers and to consultants.
  • Proposed amendments to the recently introduced financial provisioning regulations published in terms of the National Environmental Management Act, and which should be of interest to the mining industry including guarantee insurers.
  • Developments in relation to the introduction of mandatory prompt payment and adjudication regulations – of interest to all participants in the construction industry.

Building Information Modelling ("BIM") – What are some of the risks?

BIM is a digital technology which allows for planning, design, construction and operation of a project/facility in an accurate virtual model. It is currently prescribed for use in the United Kingdom for mid-level centrally procured public sector construction projects, and its use is spreading throughout the world, including in South Africa.

The use of BIM in South Africa raises several potential risks for both insurers (particularly professional indemnity insurers) and insured parties alike.  These risks include:

  • whether insurance cover is sufficiently broad to cater for liabilities established under contracts and protocols;
  • increased exposure around data security and cyber liability;
  • increased risk for the party inputting data into the building information model; and
  • potential confusion surrounding responsibility for design and design errors.

A more detailed analysis of some of the potential risks is available here.

Design Professionals/Understanding the Level of Design Liability

The traditional obligation on design professionals is to use reasonable skill and care in their design.  This obligation, which is implied by law, requires proof of fault in the form of negligence before liability is established. 

The obligation is always implied where an agreement (appointment) is silent on the matter.  However the express terms of an agreement may override this implied obligation.  This will be so in circumstances where the express terms are capable of being interpreted as importing a strict obligation (or liability) to achieve a specific result (in other words one fit for purpose).

This was demonstrated in two decisions of the English Courts (Queens Bench Division (Technology and Construction Court)) handed down in the course of 2015.  The decisions bear out that it cannot be assumed that the level of reasonable skill and care is of universal application, and stand as a cautionary to drafters of agreements and consultants alike.  Drafters and consultants must give particular consideration to what effect the wording of the agreement has, or may have, on the traditional obligation.

From a professional liability insurance coverage point of view – both insurers and insureds must give consideration to the usual approach adopted by insurers that warranties, or other higher standards of care, are not usually covered. 

Thus in the case of Costain Limited v Charles Haswell & Partners Limited (ICL:20150096.20) the court held that the following clause:

"Any part of the works designed pursuant to this Agreement if constructed in accordance with such design, shall meet the requirements prescribed in the specification or reasonably to be inferred from the Tender Documents or the Contract or the written requirements of Costain ..."

"imposed an obligation of strict liability" on the consultant "in respect of its design" and this despite the express inclusion in the agreement of the traditional obligation as follows :

"In the provision of the services the consultant shall exercise all reasonable professional skill, care and diligence".

The Court added:

"It is perfectly normal, in any given case, for such a professional man to give express warranties which impose strict liability or a performance obligation such that the finished building will be reasonably fit for a specified purpose."

In a second decision (MW Hightech Projects UK Limited v Haase Environmental Consulting GmbH (ICL:2015 0096.36)) the agreement contained similar clauses in effect to the clauses referred to above in the Constain case.  In this second decision the Court held that the consultant was also strictly obliged to meet the specification requirement.

This concern as to the level of liability imposed by an agreement may be still further emphasized in the context of a designer led (architect, engineer, architectural technologist or other professional designers) design-build contract.  The design-build concept contemplates a single point of contact/responsibility, such that the employer enters into a contract with one entity that has the responsibility for both design and the construction of the project.  The concern is emphasized in view of the fact that the respective design and build phases are very often overlapped. 

While these two decisions referred to above are decisions of the English Courts, our Courts would adopt the same approach.

Department of Environmental Affairs Releases Proposed Amendments to the Financial Provisioning Regulations for Comment

Following a clarification note which was issued by the Department of Mineral Resources (DMR) at the end of August 2016, on 9 September 2016 the Department of Environmental Affairs (DEA) released a call for comments on proposed amendments to the Financial Provisioning Regulations which were published in terms of the National Environmental Management Act (NEMA) in November 2015. A copy of the proposed amendments is available here.

The proposed amendments come after widespread industry outcry in response to the Regulations, which changed the manner in which mines must make financial provision for rehabilitation of land, changed how the required provision must be calculated, and introduced requirements for financial provision for rehabilitation of latent environmental impacts and indefinite water treatment after the mine's closure.

Some of the major changes in the proposed amendments are the extension of the period for the review and adjustment of all existing financial provision from February 2017 until February 2018, an exclusion of existing trust funds from the limitation of the use of such funds for post-closure purposes only, and the deletion of Appendixes containing pro forma wording for financial guarantees and trust deeds. In addition, an attempt has been made to allow for a decrease of the financial provision towards the end of the mine's life.

Although the period for comments on the proposed amendments has now closed, it is expected that an additional period for comment may be announced, in light of the fact that these amendments do not address some major issues – such as their incompatibility with the Income Tax Act, the unhappiness with the restriction of the use of trust funds to post-closure rehabilitation, and the increased cost of mandatory auditing oversight – and the fact that it is unclear what will replace the deleted Appendixes. We foresee some further proposed amendments before the Regulations are finally amended.

A link to our previous article on the Financial Provisioning Regulations is available here. A more detailed analysis of the proposed amendments will be published shortly.

Statutory Construction Prompt Payment and Adjudication Regulations Still In The Pipeline

The Minister of Public Works proposed amendments to the Construction Industry Development Regulations in May 2015, intended to introduce prompt payment requirements into all construction works contracts (excluding home building contracts), and would have brought into effect mandatory statutory adjudication for the construction industry in relation to payment disputes. Our previous article on the proposed amendments can be found here

The introduction of the Regulations is set to have a profound impact on the construction industry.  The Regulations were expected to be introduced into law in 2016, and would have brought us into line other commonwealth jurisdictions, including the UK and Australia.

However, the process has ground to a halt following substantial objections to the initial draft and an indication by several large state-owned entities, including Eskom, the South African National Roads Agency Limited (Sanral) and Transnet, that they wished to be exempted from the proposed regulations.

In a move which may be seen as a compromise, the National Treasury has launched a walk-in payment call centre in order to help facilitate payments that are overdue by more than 30 days. This is an enforcement of section 38(1)(f) of the Public Finance Management Act (PFMA), read with the Amendment of Treasury Regulations in terms of Section 76, which was published on 15 March 2005, which already requires that all creditors must be paid within 30 days of receipt of an invoice (unless determined otherwise in a contract). Non-compliance with section 38 of the PFMA by an accounting officer is a criminal offence.

The walk-in payment call centre was launched in partnership with the Black Business Council, who donated computers and pay for five staff for a period of 2 years, in order to try to speed up payments to government's small and medium suppliers (and who make up a large contingent of the members in the Black Business Council). In conjunction with this, Treasury has announced that it will name and shame delinquent departments.

It now remains to be seen whether the Amended Regulations will indeed be introduced, in order to further assist contractors, sub-contractors and suppliers in the construction industry.

Future Construction and Construction Insurance Law Snippet Topics

  • State procurement – the nuclear question, tendering and administrative review of tender awards.
  • Composite single project construction all risks and liability policies; and the waiver of insurers' rights of subrogation.
  • The Amended Preferential Procurement Regulations – introducing a compulsory sub-contracting clause.
  • An update on strict compliance and the fraud defence in relation to construction guarantees.

South Africa Construction And Construction Insurance Law Snippets

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Nicole Gabryk
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