South Africa: GAR Construction Arbitration Know-How

Last Updated: 10 December 2013
Article by Adriaan Hoeben

NOTE TO AUTHORS AND READERS:

(A) Unless otherwise indicated, all questions assume (1) a construction contract between an employer and a contractor; (2) that the site for the permanent works is in the jurisdiction of the respondent; and (3) there are no relevant contractual provisions (or arbitral rules) on the matter in question.

(B) Unless otherwise indicated, all responses should address: (1) the application of the law of the respondent's jurisdiction where it is the governing law of the contract (while indicating which rules cannot be excluded or modified by agreement); and (2) the application of the law of the respondent's jurisdiction where a foreign law is the governing law of the contract. This is to help show which rules are mandatory as a result of the law of the respondent's jurisdiction governing the contract and which (if different) are mandatory as a result of the site being in the respondent's jurisdiction.

QUESTIONNAIRE

Legal system

Q1:         Is your jurisdiction primarily a common law, civil law, customary law or theocratic law jurisdiction? Are the laws substantially derived from the laws of another jurisdiction and, if so, which? What instruments have legal force and effect? Who are the lawmaking bodies? How and where are new laws published? Can laws be passed with retrospective effect?

A1:      The South African legal system is primarily based on common law derived from the Roman Dutch system but in certain fields (such as companies law) from the English system. The common law must be construed within the confines of the statutes of South Africa and the Constitution of the Republic of South Africa published by Parliament. Accordingly, the South African legal system can be classified as follows:

  • All law (whether common law or statutory) must comply with the prescripts of the Constitution of the Republic of South Africa.
  • Thereafter, regard is had to the common law, which the courts are enjoined by the Constitution to develop from time to time so as to accord with the requirements of the Constitution.
  • The common law can in turn be limited, varied or codified through statutes, provided those statutes comply with the prescripts of the Constitution.

Section 42 of the Constitution provides that Parliament (consisting of the National Assembly and the National Council of Provinces) has the legislative authority nationally and section 104 stipulates that the provincial sphere of government is vested in the provincial legislatures. The power so vested in Parliament is wide and empowers Parliament to pass legislation with respect to any matter subject to the qualification that Parliament is bound by the Constitution and must act in accordance with and within the limits of the Constitution. Any statutes passed or introduced by Parliament are presumed to obtain prospectively; there is a presumption against retroactively. There are exceptions where a statute will be permitted to operate retrospectively, provided it does not interfere with existing rights.

Contract formation

Q2:        What are the requirements for a construction contract to be formed? When is a 'letter of intent' from an employer to a contractor given contractual effect?

A2:      As set out above, provided it accords with the Constitution and the requirements of statute, the South African legal
system is primarily based on common law. In the case of the law of contract, it is based on the Roman Dutch law and is thus construed in accordance with the Roman Dutch authorities.

           South African law does not prescribe any formalities for the formation and conclusion of a construction contract. Accordingly, the common law requirements for the conclusion of a contract apply and a valid and binding construction contract will be formed when two parties have reached consensus on the essential terms of the agreement between them, whether orally, in writing or tacitly.

           Against this general background, construction contracts are typically concluded in one of the following manners:

  • The execution of a bespoke construction contract drafted for the purposes of the specific project in question.
  • The execution of a standard form construction contract such as the JBCC Principal Building Agreement or the FIDIC conditions of contract.
  • A letter of appointment which incorporates by reference the terms of one of the standard form contracts referred to above.

Accordingly, where an employer issues a letter of intent that identifies the essential terms of a proposed appointment to a contractor and the contractor accepts the terms of the letter, a construction contract will have been concluded.

Choice of laws, seat, arbitrator and language

Q3:        Are parties free to choose: (a) the governing law of their contract; (b) the law of the arbitration agreement; (c) the seat of the arbitration; (d) any arbitral rules; (e) anyone to act as arbitrator; and (f) the language of the contract and the arbitration? If not, what are the limitations on choice and what happens if the parties act contrary to them?

A3:      Parties are free to contract on such terms as they may require, provided the terms thereof are lawful and accord
           with public policy and the Constitution. Accordingly parties are free to choose:

  • the governing law of the contract;
  • the law that is to be applied to any arbitration agreement concluded between them;
  • the seat of the arbitration;
  • any arbitral rules; and
  • any person to act as arbitrator. There is no express prohibition on the appointment of any arbitrator under the South African Arbitration Act and that parties are generally assumed to appoint a person who is suited for the position.

Implied terms

Q4:        How might terms be implied into construction contracts? What terms might be implied?

A4:      A distinction is drawn between tacit terms and implied terms:

  • A tacit term of a contract (also referred to as a term implied by the facts) is an unexpressed provision of a contract that derives from the common contention of the parties, as inferred by the court from the express terms of the contract and its surrounding circumstances. A tacit term is therefore one that is based on the unexpressed or tacit common intention of the parties having regard to the express terms of the contract and all relevant surrounding circumstances.
  • An implied term is a term of a contract implied by law. Put differently, it is an unexpressed provision of a contract that the law imports therein as a matter of course without reference to the actual intention of the parties. It therefore does not originate in the contractual consensus but is imposed by the law from without. The parties to the contract do, however, retain the freedom to agree that such a term is excluded from their contract. A typical example of such a term, imported by law, is the obligation imposed upon a contractor who undertakes to do the work properly, to use suitable materials and to display the necessary knowledge and skill.
  • Thirdly, a term may be implied by trade usage. However, a term will not be implied by trade usage if there is no room to imply the term having regard to the express terms of a contract. Such an implication must be necessary and not merely a reasonable one. The requirements for implying a term by trade usage were set out in detail in Crook v Pedersen Ltd 1927 WLD 62 at p71.

Certifiers

Q5:        When must a certifier under a construction contract act impartially, fairly and honestly? To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)? Can the contractor bring proceedings directly against the certifier?

A5:      A certifier (usually the architect, quantity surveyor or engineer) is appointed by the employer. To the extent that he is charged with a certification function, he must at all times be honest and impartial in determining what is the contractor's due. The nature of the work conducted by the professional charged with certification depends upon what function has been fulfilled:

  • Where a function has been fulfilled in terms of which the professional acts as an agent of the employer, he may be held liable to the employer for damages in the case of negligence.
  • On the other hand, where acting as a certifier, in which event he must act in a way that is honest and impartial, the professional acts in a quasi judicial capacity. In those instances, he needs merely comply with his prescribed function.

It has long since been assumed that the certifier cannot be held liable to the contractor for damages merely because of an error in the certificate.

However, given that the certifier must be honest and impartial in making his determinations, the certificate issued will be of no force or effect and will not be binding on either the employer or the contractor where:

  • it is issued fraudulently;
  • the certifier places himself under the influence and control of the employer;
  • the certifier has closed his mind and is not prepared to give consideration to any evidence or argument which is produced before him; and
  • the inaccuracy of a certificate has been induced by the fraudulent misrepresentation of the contractor.

In the above circumstances, a court or arbitral tribunal will be empowered to set aside the impugned certificate and where appropriate, to review and revise the certificate.

Competing causes of delay

Q6:      If an employer would cause (eg, by variation) a two-week critical delay to the completion of the works (which by itself would justify an extension of time under the construction contract) but, independently, culpable delay by the contractor (eg, defective work) would cause the same delay, is the contractor entitled to an extension?

A6:      Where there are competing causes of delay, each cause must be independently assessed to determine the extent to which it had an impact upon the critical path. In so doing, a contractor is only entitled to an extension of time equivalent to the delay experienced in consequence of those matters not within its control. Moreover, should the employer cause the delay, he is not entitled to sue for damages if the contractor fails to complete within the stipulated time.

Disruption

Q7:      How does the law view 'disruption' to the contractor (as distinct from delay or prolongation to the completion of the works) caused by the employer's breaches of contract and acts of prevention? What must the contractor show for a disruption claim to succeed? If an entitlement in principle can be shown (eg, that a loss has been caused by a breach of contract) must the court or arbitral tribunal do its best to quantify that loss (even if proof of the quantum is lacking or uncertain)?

A7:      Where the employer is in breach of its obligations, in consequence of which the contractor is precluded from proceeding with the works or from meeting its obligations, it would constitute a material breach of the contract by the employer giving rise to an election in the hands of the contractor. Indeed, as explained earlier, it is a term implied by law that the employer is under a duty to make the site available within a reasonable time and must cooperate with the contractor to enable him to perform timeously.

           The contractor is in those circumstances entitled to exercise an election either to hold the employer to the agreement or to terminate the agreement, in which event the contractor will be entitled to claim damages. In proving its damages, the contractor carries the burden of proving the extent of its damages.

           Where the contractor elects to hold the employer to the agreement and enforces specific performance, the loss caused by the delay may be addressed in two ways:

  • Ordinarily, the delay will be addressed through an extension of time, in terms of which the time period for the completion of the works is extended and together with a revision to be preliminary and generals so as to address the financial consequences of such a delay.
  • In certain circumstances, a contractor may also be entitled to assert a claim for damages while at the same time seeking to enforce the agreement. The South African law has contradicting authorities on the point but the preferred view is that the two claims may be combined and both awards made.

Acceleration

Q8:      How does the law view 'constructive acceleration' (where the contractor incurs costs accelerating its works because an extension of time has not been granted that should have been)? What must the contractor show for such a claim to succeed? Does your answer differ if the employer acted unreasonably or in bad faith?

A8:      Where a contractor experiences a delay, it generally has two options: either to claim an extension of time or to accelerate the works. In certain instances the construction agreement may make provision for a process to agree to an acceleration instead of an extension of time and to calculate the costs that the contractor may claim in those circumstances.

           An acceleration and an extension of time claim are generally mutually exclusive. The contractor should therefore elect which remedy it prefers to exercise. Where it elects to claim for an extension of time that ought to be granted but is not, the contractor is required in those circumstances either to accept the determination and to bear the consequences or to place the determination in dispute and to seek a revision of the determination through the dispute resolution mechanisms of the contract.

           If the contractor elects not to apply for an extension or to dispute a claim for an extension that has been refused, but instead to accelerate the works, the contractor does so for its own account.

Force majeure and hardship

Q9:      What events of force majeure give rise to relief? Must they be unforeseeable and to whom? How far does the express or implied allocation of risk under the contract affect whether an event qualifies? Must the event have a permanent effect? Is impossibility in performing required or does a degree of difficulty suffice? Is relief available where only some obligations (eg, to make a single payment or carry out one aspect of the works) are affected or is a greater impact required? What relief is available and does it apply automatically? Can the rules be excluded by agreement?

A9:      Force majeure or a hardship that constitutes a supervening impossibility of performance is given the same meaning as that which applies to an initial impossibility of performance. The impossibility must be absolute as opposed to probable or relative. In addition, the impossibility must not be the fault of either party. If these criteria are met, the supervening impossibility of performance will discharge the contract. On the other hand, if these criteria are not met, the contract will remain enforceable. The fact that vis major or causus fortuitous has made it uneconomical for a party to carry out its obligations does not mean it has become impossible. The South African courts have held that there is no room for the English doctrine of frustration: the South African law is uncompromising in that the impossibility is either absolute and discharges the contract or it is insufficient to discharge the contract in which case the contract remains enforceable.

           Self-created impossibility, resulting from the act of one of the parties, does not discharge the contract but leaves the party whose act created the impossibility liable for the consequences. This will be so whether the impossibility is complete or partial and whether or not the act causing the impossibility is wrongful.

           The effect of partial impossibility depends on whether an obligation that is divisible from the rest of the contract has become altogether impossible of performance or whether an obligation forming an indivisible part of the contract has become impossible of performance. In the former case, the divisible contract must be divided, the possible part being discharged and the rest remaining in operation. In the latter case, the innocent party may have the option of cancelling the contract or accepting the reduced performance in exchange for a reduced counter performance. In these circumstances, our courts have held that in every case a value judgment, based on objective criteria, will be required to establish whether it is just that the contract should, to the extent still possible, be upheld and the obligations of the parties adjusted. To that end, our courts have held that neither party should be allowed to escape its obligations where the essence of the contract is still capable of performance. (See: World Leisure Holidays (Pty) Ltd v Georges 2002(5) SA 531 (W) at p534). In the circumstances, where it transpires that for reasons not attributable to the party an aspect of the construction agreement is impossible to give effect to, the contractor will be discharged from giving the effect to that provision of the contract but the rest will remain in operation.

           In circumstances of partial impossibility, the option of choosing between cancellation of a contract or reduced performance in exchange for a reduced counter performance only arises where the interruption continues or is likely to continue for an unreasonably long time. What constitutes an unreasonably long time is to be ascertained from the nature of the contract and the surrounding circumstances.

           It is therefore prudent, in order to deal with the strict application of South African law, to cater for unforeseen circumstances by including a force majeure or hardship clause. Furthermore, there is no prohibition against making provision in the contract for events that  would otherwise discharge the contract and excuse non-performance. Once it is catered for in the contract, a party cannot claim that the event was entirely unforeseen or avoidable.

           In the alternative to providing for events of force majeure in the contract, the arbitration clause could give the arbitrator the power of an amiable compositeur. In those circumstances, the amiable compositeur has the ability to handle a particular circumstance of the case by judicious departure from the strict law, without creating precedent.

Q10:    When is a contractor entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform and what relief is available? Can the rules be excluded by agreement?

A10:  See A9 above.

Impossibility

Q11:    When is a contractor entitled to relief if after the contract is concluded it transpires (but not due to external events) that it is impossible for the contractor to achieve a particular aspect of the contractual specification? What relief is available?

A11:  See A9 above.

Clauses that seek to pass risks to the contractor for matters it cannot foresee or control

Q12:    How effective are contractual provisions that seek to pass risks to the contractor for matters it cannot foresee or control, for example making the contractor liable for: (a) a specified event of force majeure; (b) ground conditions that no reasonably diligent contractor could have foreseen; or (c) errors in documents provided by the employer, such as employer's requirements in design and build forms?

A12:    The South African Law of Contract operates on the principle of sanctity of contract and thus the general principle of pacta sunt servanda – that is that courts will enforce contracts – applies. Moreover, in the decision of Bank of Lisbon and South Africa Ltd v De Ornelas 1988(3) SA 580 (A) the South African Court of Appeal held that the remedy of an exceptio doli generalis (which previously provided a remedy against the enforcement of an unfair contract) was held not to be part of South African law.

           Accordingly, unless the common law techniques that exist for ameliorating the hardship of enforcing an unfair bargain apply, the contract will be enforced. The common law techniques that may be called upon to assist in preventing the enforcement of an unfair contract are the following:

  • The relaxation of the caveat subscriptor (he who signs beware) rule. However, it is to be noted that the relaxation of this rule is limited.
  • Limitations on the enforcement of exemption clauses.
  • The construction of a contract contra proferentem and a last resort in interpreting a contract against the author of the document.
  • Considerations of public policy.

           In the circumstances, if a contractor has assumed risk or responsibility for certain matters (whether within the foreseeability or control of the contractor or not) the contractor will as a general rule be held liable. A contractor should therefore be careful to specify what risk is assumed and under what circumstances a contractor will be entitled to be released therefrom. By way of example:

  • In the case of an event of force majeure, we have already addressed the prudence of making provision for a force majeure clause in the contract.
  • Where ground conditions arise that could not have reasonably been foreseen, the contract should make provision for a revision of the contract sum and an extension of time for the completion of the works. In this regard, the standard form contracts frequently used contain a provision to the effect that the contractor will be entitled to a revision of the date for completion where delays are caused beyond the contractor's reasonable control and that could not reasonably have been anticipated or provided for.
  • Similarly, the contract should make provision for variations of both the time for performance of the contract and the contract sum where the employer has furnished erroneous design documents.

Duty to warn

Q13:    When must the contractor warn the employer of an error in a design provided by the employer?

A13:    There is authority on the point but it is generally accepted by the commentators that a contractor has a duty to notify the employer or the engineer of designs he considered defective or otherwise adequate.

Good faith

Q14:    Is there a general duty of good faith? If so, how does it impact upon the following (where they are otherwise permitted under the construction contract): (a) the level of intervention in the works that is allowed by the employer; (b) a party's discretion whether to terminate or suspend the contract; or (c) the employer's discretion to claim pre-agreed sums under the contract, such as liquidated damages for delay?

A14:    In the modern South African law all contracts are bonae fidei. However, as to the role of good faith, reasonableness and fairness in the law of contract, the Supreme Court of Appeal held in Brisley v Drotsky 2002(4) SA (1) SCA that:

  • although these abstract values are fundamental to our law of contract, they do not constitute independent, substantive rules that courts can employ to intervene in contractual relationships;
  • although these abstract values perform creative, informative and controlling functions through established rules of contract law, they cannot be acted upon by the courts directly;
  • when it comes to interference with contractual relationships courts can only do so if permitted by the rules of hard law and, although these abstract values support and justify the rules of hard law, they do not constitute rules of hard law themselves; and
  • past experience has shown that acceptance of the notion that judges can refuse to enforce a contractual provision, merely because it offends their personal sense of fairness and equity, gives rise to intolerable legal and commercial uncertainty.

           Accordingly, while there is a general duty of good faith, it merely lends force to the existing rules of contract law and cannot be elevated to substantive facets of contract law.

           Where a court is required to assess, in the context of a contractual dispute, whether the interference or intervention of the employer was warranted and whether the motive for termination or suspension of a contract was proper, regard will be had to whether they conducted themselves in good faith.

Time bars

Q15:    How do contractual provisions that bar claims if they are not validly notified within a certain period operate (including limitation or prescription laws that cannot be contracted out of, interpretation rules, any good faith principles and laws on unfair contract terms)? What is the scope for bringing claims outside the written terms of the contract under provisions such as sub-clause 20.1 of the FIDIC Red Book 1999 ('otherwise in connection with the contract')? Is there any difference in approach to claims based on matters that the employer caused and matters it did not, such as weather or ground conditions? Is there any difference in approach to claims for (a) extensions of time and relief from liquidated damages for delay and (b) monetary sums?

A15:    As has been addressed, the South African law of contract adopts the principle pacta sunt servanda. Accordingly, where a contract stipulates that claims of a particular kind must be made within a particular time failing which the claim is time barred, those provisions will be enforced. The question of what kinds of claims are hit by such a time barring provision depends on the wording of the clause and whether or not the claim falls within the ambit of such a provision.

           If the time barring provision applies to a specified type of claim and stipulates a catchall (such as that contained in clause 20.1 of the FIDIC Red Book contract), a claim will be barred by that provision if on a proper interpretation thereof it falls within the scope of the clause.

Suspension

Q16:    What rights does the employer have to suspend paying the contractor or performing other duties under the contract due to the contractor's (non-)performance, or the contractor have to suspend carrying out the works (or part of the works) due to the employer's (non-) performance?

A16:    The rights of either the employer to suspend payment or the contractor to suspend performance are generally dealt with in terms of the express provisions of the construction contract.

           Where a contract contains reciprocal obligations intended to operate as an exchange of performances (such as the timeous completion of work in return for payment) one party may be excused from performing until the other has performed. Accordingly, depending on the provisions of the construction contract regulating the relationship or alternatively, in terms of common law:

  • Where the employer has failed to perform by non-payment, the contractor will be entitled (after furnishing adequate notice and calling for the breach to be remedied) to suspend the works and exercise its lien over the property pending payment. This flows either from the terms of the contract or the common law rule on reciprocity of obligations.
  • The employer is obliged to pay amounts due to the contractor to the full extent of payment certificates validly issued in favour of the contractor. The granting of the certificate is considered to be conclusive evidence of the amount certified to be due and the contractor is entitled to be paid that amount. The fact that the contractor may not be performing does not excuse the employer from non-payment in the face of a validly issued payment certificate.
  • Either party may exercise their ordinary contractual remedies to enforce the agreement or to cancel the agreement.

Omissions and termination for convenience

Q17:    May the employer exercise an express power to omit work; or terminate the contract at will or for convenience, so as to give work to another contractor or to carry out the work itself?

A17:    There is no common law or other legal provision that would permit an employer to terminate the contact at will or for convenience so as to give work to another contractor. Such a provision will have to arise from an express provision of the construction agreement in which event the employer would be entitled to exercise the power by enforcement of the contract.

Termination

Q18:    What termination rights exist? Can a construction contract be terminated in part? What are the practical and financial consequences?

A18:    The innocent party in a contract will be entitled to cancel the contract where:

  • time is of the essence (either because the contract itself fixes a time for performance or because the defaulting party has been given notice to remedy the breach) and the counter-party has failed to remedy its breach; or
  • the counter-party has materially breached an essential term of the contract.

           Where a contract is cancelled, the contract is cancelled in its entirety and save for an arbitration provision which stipulates that it will survive cancellation, there is no part of the contract which will survive cancellation.

           In circumstances where the contractor cancels the contract for breach by the employer, the contractor is excused from all further performance and will be entitled to claim damages; namely, the profits which the contractor would have made but for the malfeasance on the part of the employer. Ordinarily, the construction contract will also stipulate that in those circumstances, the latent defect liability provisions fall away and the contractor is excused from performing in terms thereof.

           Where the contract is cancelled by the employer for material breach by the contractor, the employer is entitled to recoup its damages from the contractor being the costs incurred in securing an alternative contractor to complete the work and which would not have been incurred but for the contractor's breach. Ordinarily, the construction contract will then also stipulate that the latent defects liability provisions remain in full force and effect as against the contractor.

Q19:    If the construction contract provides for the circumstances in which each party may terminate the contract but does not expressly or impliedly state that those rights are exhaustive, are other rights to terminate available? If so, what are they and what are the practical and financial consequences?

A19:     Where the contract lays down a procedure for cancellation, that procedure must be followed failing which any purported cancellation will be ineffective. Where a contract contains a forfeiture clause entitling one party to cancel the contract if the other fails to perform a specified obligation, the materiality of the breach need not be determined. However, where a contract contains such a forfeiture clause and does not state that the grounds for cancellation are exhaustively stipulated in such a clause, a party will nonetheless be entitled to terminate the contract where the other party commits a material breach of the contract and fails to remedy same despite having been placed on notice to do so.

           On the other hand, where the forfeiture clause stipulates that it exhaustively lists the grounds upon which a party may be permitted to cancel the contract, the parties will be precluded from cancelling the contract for breach of an obligation not stipulated in the forfeiture clause.

Q20:    What limits apply to exercising termination rights?

A20:     As has been addressed, cancellation of a contract arises where time is of the essence in that the contractor has fixed a time for performance or alternatively the defaulting party has been called upon to remedy the breach and the breach is a material one of an essential term of the contract.

Completion

Q21:    Does the law of your jurisdiction deem the works to be completed (irrespective of what the contract says) if, say, the employer takes beneficial possession of the works and starts using them?

A21:     There is no provision in common law that determines whether or not the works are completed. It is therefore advisable for parties to have adequate procedures and organisation to cope with the administrative matters in monitoring, updating and managing programmes and assessing whether completion has been achieved. In practice:

  • the contract will provide a procedure for certification of completion of the works; and
  • the contracts generally contain a provision that where the employer takes occupation and possession of the works and starts to use them, the works will be deemed to have been completed. However, it is emphasised that this only arises as part of a contractual provision.

Q22:    Does approval or acceptance of work by or on behalf of the employer bar a subsequent complaint? What constitutes acceptance? Does taking over the work by the employer constitute acceptance? Does this bar subsequent complaint?

A22:     Where the works are certified as complete or so accepted by or on behalf of the employer, the works are regarded as having been satisfactorily completed. In those circumstances, a certificate of completion is regarded as conclusive evidence as to the sufficiency of the works, save for defects that a reasonable examination would not have disclosed. The employer will therefore have no further claim for patent defects that may have existed at the time of acceptance.

Liquidated damages and similar pre-agreed sums ('liquidated damages')

Q23:    To what extent are liquidated damages for delay to the completion of the works treated as an exhaustive remedy for all of the employer's losses due to (a) delay to the completion of the works by the contractual completion date; and (b) delays prior to the contractual completion date (in the absence of, say, interim milestone dates with liquidated damages for delay attaching to them)? What difference does it make if any critical delay is caused by the contractor's fraud, wilful misconduct, recklessness or gross negligence? If so, what constitutes such behaviour and can it be excluded by agreement?

A23:   Where the contractor is late in completing the project, the employer is entitled to liquidated damages if the contract provides for such remedy or to actual damages in the alternative. Where such provision for liquidated damages is made, it is regarded as the exhaustive remedy available to the employer for such delay.

           In the absence of a provision for sectional completion, in which case penalties would attach to the completion date for each section, the only punitive remedy for delays on the part of the contractor prior to the contractual completion date is the payment of the penalty applicable when completion is eventually achieved. However, if prior to the contractual completion date it is apparent that the contractor is causing delays, steps may be taken to put the contractor on notice and to remedy the delay utilising the provisions of the construction agreement.

           Where the delay on the part of the contractor arises from reckless conduct or gross negligence, his conduct is to be measured against the terms of his contract and the consequent contractual remedies will apply.

           However, where the contractor has committed a fraud, the contractor may be held liable for damages in delict outside of the ordinary contractual remedies.

Q24:    If the employer causes critical delay to the completion of the works and the construction contract does not provide for an extension of time to the contractual completion date (there being no 'sweep up' provision such as that in sub-clause 8.4(c) of the FIDIC Silver Book 1999) is the employer still entitled to liquidated damages due to the late completion of works provided for under the contract?

A24:     Section 1 of the Conventional Penalties Act, 15 of 1962 stipulates that a penalty is 'a stipulation ... whereby it is provided that any person shall, in respect of an act or omission in conflict with a contractual obligation, be liable to pay a sum of money or to deliver or perform anything for the benefit of any other person, hereinafter referred to as a creditor, either by way of a penalty or as liquidated damages'. It follows from this definition that a penalty for late completion constitutes a penalty within the meaning of the Conventional Penalties Act.

           Section 3 of the Conventional Penalties Act stipulates that the court may reduce the penalty to such extent as it may consider equitable in the circumstances and confers on the court an equitable jurisdiction, not merely in the form of a discretion but in the form of a power coupled with a duty to investigate the relationship between the penalty and the prejudice suffered. Accordingly, where the penalty is out of proportion to the loss in fact suffered by the employer or there exists proper reason to reduce the penalty, a court may do so, on application by the aggrieved party. However, the aggrieved party bears the onus of proving same.

           Section 2(1) of the Conventional Penalties Act states that a creditor shall not be entitled to recover in respect of an act or omission which is the subject of a penalty stipulation, both the penalty and damages. Furthermore, damages in lieu of the penalty may only be recovered where the contract expressly permits this. In asserting a claim, the employer will have to elect to assert either one or the other. Furthermore, once the penalty has been claimed and awarded, the employer is not permitted to tender return of the penalty in order to claim damages.

Q25:    When might a court or arbitral tribunal award less than the liquidated damages specified in the contract for delay or other matters (eg, substandard work)? What factors are taken into account?

A25:    See A24 above.

Q26:    When might a court or arbitral tribunal award more than the liquidated damages specified in the contract for delay or other matters (eg, work that does not achieve a specified standard)? What factors are taken into account?

A26:    See A24 above.

Assessing damages and limitations and exclusions of liability

Q27:    How is monetary compensation for breach of contract assessed? For instance, if the contractor is liable for a defect in its works is the employer entitled to its lost profits? What if the lost profits are exceptionally high?

A27:     Under the law of contract, damages may be awarded for losses suffered flowing generally and naturally from the breach. The damages that can be so claimed are the damages required to place the innocent party in the position they would have been in had the contract been lawfully carried out. This is regarded as general damages. Typically, therefore, where a contractor is liable for a defect and has failed to remedy the defect, the employer is entitled to recover from the contractor the cost of employing another to remedy the defect.

           However, an employer will not ordinarily be permitted to recover lost profits arising from its inability to use the premises due to the contractor's failure to have remedied a defect. This would be considered special damages. Special damages may only be claimed if:

  • the contract makes specific provision therefore; or
  • because the damages may go beyond what was foreseen by the parties, it must be shown that the parties actually or presumptively contemplated that the damages in question would probably result from the breach. This is referred to as the contemplation principle, which requires that the possible damages must have been in the contemplation of the parties not at the time of the breach but at the time of concluding the contract.

Q28:    If the contractor's work is technically non-compliant, is the contractor liable for remedying it if the rectification cost is disproportionate to the benefit of the remedy? Can the parties agree on a regime that is stricter for the contractor than under the law of your jurisdiction?

A28:     Where the contractor's work is deficient or technically non-compliant in the sense that it does not comply with the specifications set out in the construction agreement, the employer is entitled to call for the defect or non-compliance to be rectified. As such, the employer is entitled to demand specific performance.

           As a general rule specific performance will be granted. However, the grant of specific performance is a discretionary remedy that will not be granted where it would impose undue hardship on the party in default or on some third party or where specific performance could have become impossible. In those circumstances, the employer will be entitled to pursue a claim for damages in the alternative.

           Insofar as the remedying of defects is concerned, the parties are at liberty to put in place such regime as they desire by way of their contract and that will then override the common law provisions regulating the same.

Q29:    If there is a defects notification period (DNP) during which the contractor must or may remedy any defect in its works that appears during a certain period after their completion, if the construction contract is otherwise silent, does it affect the employer's rights to claim for any defects appearing after the DNP expires?

A29:     Where the contract is silent and does not make provision for a defects notification period, there is no defects liability period implied by law. However, any defect that manifests itself after final completion of the works, and which arises due to a defect in the construction (and thus a breach of the contractor's obligation) can be pursued by the employer by way of a claim either for rectification or for damages against the contractor and must be instituted within three years from the date of completion.

           Where the construction contract provides for a defects liability period, during which the contractor is obliged to remedy any defects of which it received notice during that period, it is generally accepted that after the lapse of that period the contractor will have no further liability. The rationale therefore is that the contractor's liability must at some point be made finite, failing which the contractor would be indefinitely liable for defects in the works.

Q30:    What is the effect of a construction contract excluding liability for "indirect or consequential loss"?

A30:     Where a construction contract excludes liability for 'indirect or consequential loss', it has the effect of excluding any liability for special damages as described more fully above.

Q31:    Are contractually agreed limits on – or exclusions of – liability effective and how readily do claims in tort or delict avoid them? Do they not apply if there is fraud, wilful misconduct, recklessness or gross negligence: (a) if the contract is silent as to such behaviour; or (b) if the contract states that they apply notwithstanding such behaviour? If so, what causation is required between the behaviour and the loss?

A31:     The South African Law of Contract recognises exemption clauses and will enforce their operation save in circumstances where the courts have found that the exemption clauses should properly be limited. Broadly stated, the courts will not enforce an exemption clause where it would be contrary to public policy to do so or where a party seeks to invoke the clause to protect itself from fraudulent conduct.

           Where two parties have concluded a contract and have elected to regulate their affairs through that contract, they will not be permitted to circumvent the terms of the contract by seeking to assert a claim in delict. In the circumstances, where the contractor's liability terminates under the contract after a specified period of time, the employer cannot thereafter hold the contractor liable for any claims based in delict.

           Where the employer was not aware of the claim due to fraud or wilful misconduct on the part of the contractor, and the claim only thereafter comes to light after the expiration of a time period limiting the contractor's liability, the contractor will not be permitted to hide behind the contractual exclusion to escape liability. In that event, and to the extent that the contractor is guilty of fraud, the fraud will constitute an independent cause of action in delict on which the employer may rely to recover losses suffered flowing from the fraud.

Liens

Q32:    What right does a contractor have to claim a lien (or similar) in the works it has carried out? If so, what are the limits of the right if, for example, the employer has no interest in the site for the permanent works? How is the right recognised and enforced?

A32:     In South African law a right of retention (otherwise known as the exercise of a lien) arises where the holder of the right may retain possession of the property until the expenditure of monies incurred by him in respect of that property is reimbursed to him. In the case of the contractor's lien, that lien is classified as an improvement lien that prevails against the world at large and not only the co-contracting party.

           In order to establish a lien, the contractor must show:

  • that he has improved the property and expended monies in doing so but has not been paid therefore; and
  • that the contractor has actual possession of the property and continues to exercise possession. If the contractor gives up possession, the right of retention is lost. Temporary absence of possession (such as overnight) is not regarded as a loss of possession for this purpose. However, absence for a considerable time would constitute loss of possession unless some special steps have been taken to maintain physical control of the property.

           The right of retention is thus a right that may be exercised until the work and labour on the property has been paid for.

           If the employer deprives the contractor of possession of the site through force or some clandestine act, the contractor will be entitled to an order restoring possession of the property.

           However, where the employer, in the context of a bona fide dispute regarding a claim for payment by the contractor, provides adequate security for the claim pending determination thereof, a court may order delivery of the property to the employer, depending on the facts of the case.

Subcontractors

Q33:    How do conditional payment (such as pay-when-paid) provisions operate under the law of your jurisdiction (including interpretation rules, any good faith principles and laws on unfair contract terms)?

A33:     A principal building contract or a subcontract may stipulate conditions that have to be fulfilled before the obligation to pay arises. By way of example, subcontracts frequently contain a condition to the effect that the principal contractor is not obliged to pay any amount to the subcontractor until such time as the employer has made payment of the amount claimed to the contractor.

           In South African law these contractual provisions and their enforcement are permitted. It may be that the provision results in an iniquitous position for the subcontractor. However, as indicated above, the South African law does not recognise a general remedy against the enforcement of an unfair contractual provision (the exceptio generalis).

Q34:    May a subcontractor claim against the employer for sums due to the subcontractor from the contractor? How are difficulties with the merits and proof of the subcontractor's claim addressed, including any rights the contractor has to withhold payment? What if aspects of the project suggest that the law of your jurisdiction should not apply (eg, the parties to both the main contract and the subcontract have chosen a foreign law as the governing law)?

A34:     There is no privity of contract between an employer and a subcontractor and the subcontractor can therefore assert no claim for payment against the employer directly. The subcontractor is obliged to look to the principal contractor, as its co-contracting party, for payment.

           In order to quantify claims payable by the contractor to the subcontractor from time to time with reference to the progress of the works, construction agreements will stipulate that an independent party such as the project architect or quantity surveyor certifies the progress of the works and the amount payable by the contractor to the subcontractor, which will be embodied in a subcontract payment certificate.

           Where the employer, contractor and subcontractor have elected not to apply South African law but the substantive law of another jurisdiction, the rights to claim for payment by the various parties will be assessed according to the substantive law of the chosen jurisdiction.

Q35:    May an employer hold its contractor to their arbitration agreement if their dispute concerns a subcontractor (there being no arbitration agreement between the contractor and the subcontractor or no scope for joining two sets of arbitral proceedings) or can the contractor, for example, require litigation between itself, the employer and the subcontractor? Does it matter if the arbitration agreement does not have its seat in your jurisdiction?

A35:     An arbitration agreement is binding on the parties and as a matter of general principle, a court will enforce the arbitration agreement. However, the High Court retains a discretionary power to prevent arbitration in certain circumstances and to require the dispute to be resolved by litigation before the court. One such instance is where all the parties to the dispute are not parties to the arbitration agreement and arbitration may result in multiplicity of proceedings with a danger of conflicting decisions and increased costs. In those circumstances, a court is unlikely to enforce the arbitration agreement and will permit the claiming party to require the litigation to be resolved in court. Accordingly, where a dispute arises between the employer, the contractor and the subcontractor, but an arbitration agreement exists only between the employer and the contractor, the employer may require the litigation between the parties to proceed to court and elect not to enforce the arbitration agreement.

           The seat of the arbitration prescribes the procedural law of the arbitration. However, the enforcement of the arbitration agreement is a matter of substantive law. Accordingly, even if the seat of the arbitration is outside South Africa, but the parties have elected to regulate their affairs under the substantive South African law, the position set out above will prevail.

Third parties

Q36:    May third parties obtain rights under construction contracts? How readily can those connected with the employer (such as future or ultimate owners) bring claims against the contractor in respect of (a) delays and (b) defects? To what extent are exclusions and limitations of liability in the construction contract relevant?

A36:     In the absence of any cession and assignment of rights or obligations, the obligations owed by the contractor to the employer may not be enforced by a third party. In the circumstances a third party is not entitled to assert claims against the contractor in respect of delays or in respect of defects which fall to be addressed in terms of the construction agreement.

           However, a contractor, who possesses and exercises a special skill and competence as a professional may attract a duty in delict to render its professional service in a manner so as not to cause financial loss to others. Accordingly, in certain circumstances, where a contractor is found to have breached its duty and has caused financial loss, a claim for pure economic loss in delict may be established by a third party. However, the scope and nature of such a claim is extraordinarily complex and beyond the scope of this publication.

Q37:    How readily (absent fraud, wilful misconduct, recklessness or gross negligence) can those connected with the contractor (such as affiliates, directors or employees) face claims in respect of (a) delays (b) defects and (c) payment? To what extent are exclusions and limitations of liability in the construction contract relevant?

A37:     In the absence of fraud, wilful misconduct, recklessness or gross negligence, the affiliates, directors, employees or other representatives of the contractor cannot be held liable for the debts and obligations of the contractor.

Limitation and prescription periods

Q38:    What are the key limitation or prescription rules for claims for money and defects (and insofar as you have a mandatory decennial liability (or similar) regime, what is its scope)? What stops time running for the purposes of these rules (assuming the arbitral rules are silent)? Are the rules substantive or procedural law? May parties agree different limitation or prescription rules?

A38:     Any claim for payment or for damages suffered pursuant to a breach of contract, in terms of a construction contract is regulated by the provisions of section 10(1) of the Prescription Act, 68 of 1969 which states that 'A debt shall be extinguished by prescription after the lapse of the period which in terms of the relevant law applies in respect of the prescription of such a debt'. In the case of the aforesaid claims, the relevant period is three years.

           The effect of prescription under section 10(1) of the Act is not merely to render the claim unenforceable but to extinguish the claim. Accordingly, it has been held that the effect of extinctive prescription under the Act is not merely procedural but substantive in nature.

           The running of the prescriptive period is interrupted by:

  • A tacit or express acknowledgement of debt by the debtor.
  • Judicial interruption. Judicial interruption entails service upon the defendant of a process by which legal proceedings are commenced for the payment of the debt in question. A letter of demand, invoice or other informal claim for payment will not suffice.
  • The running of the prescriptive period will also be interrupted by the commencement of arbitration proceedings as it constitutes a form of judicial interruption. For this purpose, our courts have held that where the dispute resolution clause provided not for formal arbitration but for referral of a dispute to an engineer, such referral constituted a referral of a dispute to arbitration for purposes of interrupting prescription. However, once so referred, a dispute referred to arbitration must be actively pursued as our courts have further held that in the absence of the reference actually proceeding, a mere referral would not serve to interrupt prescription.

           The South African courts have determined that a waiver of the right to rely upon prescription is contrary to public policy and will not be enforced. However, the courts have not yet determined whether an extension of the prescribed period is permissible and it has been suggested by the commentators that an agreed extension of the period will be found to be permissible.

Other key laws

Q39:    What laws apply which cannot be excluded or modified by agreement where the law of your jurisdiction is the governing law of a construction contract? What are the key aspects of – say – the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

A39:     It is not feasible to list all laws applicable to a given construction project within South Africa and each project would have to be assessed to ascertain what statutory approvals and requirements apply to it. However, all construction projects that take place in South Africa (irrespective of whether the construction agreement adopts South African or other law as the governing law of the contract) are subject to the following statutes that may not be excluded or modified by agreement:

  • Laws governing plan approvals in respect of building plans and other plans applicable to construction including the National Building Regulations and Building Standards Act, 103 of 1977 and the Regulations thereunder, the relevant local town planning and zoning scheme regulation, the National Heritage Resources Act, 25 of 1999.
  • All relevant environmental legislation including the National Environmental Management Act, 107 of 1998, which lays down requirements for when and how environmental impact assessments and approvals are required.
  • All applicable consumer protection legislation including the National Consumers Protection Measures Act, 95 of 1998 and the National Credit Act, 34 of 2005.
  • The Alienation of Land Act, 68 of 1981 governing the sale of immoveable property.
  • The Sectional Titles Act, 95 of 1986 governing the construction of sectional title buildings and the opening of sectional title schemes.

Q40:    What laws of your jurisdiction apply anyway where a foreign law governs a construction contract? What are the key aspects of – say – the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

A40:    See A39 above.

Enforcement of binding (but not finally binding) dispute adjudication board (DAB) decisions

Q41:    For a DAB decision awarding a sum to a contractor under, say, sub-clause 20.4 of the FIDIC Red Book 1999 for which the employer has given a timely notice of dissatisfaction, in an arbitration with its seat in your jurisdiction, might the contractor obtain: a partial or interim award requiring payment of the sum awarded by the DAB pending any final award that would be enforceable in your jurisdiction (assuming the arbitral rules are silent); or interim relief from a court in your jurisdiction requiring payment of the sum awarded by the DAB pending any award?

A41:     Where a construction agreement makes provision for an award to be made by principal agent or Dispute Adjudication Board (DAB) which may be disputed in arbitration by timeous delivery of a notice of dissatisfaction, the agreement will generally either stipulate expressly or tacitly whether the disputed award is capable of enforcement pending the determination of an arbitration. Where the agreement is silent on the enforceability of such an award, the party disputing the award would in all likelihood be able to resist enforcement thereof as it is contractually entitled to have the dispute determined in arbitration and should therefore not be required to suffer the prejudice of payment before determination of the dispute.

Courts and arbitral tribunals

Q42:    Does your jurisdiction have courts or judges specialising in construction and arbitration?

A42:     The South African courts have no divisions or judges specialising in construction or arbitration. A matter that appears before the High Court is allocated to a judge determined to be available for the matter by the Judge President of the relevant division.

Q43:    What are the relevant levels of court for construction and arbitration matters? Are their decisions published? Is there a doctrine of binding precedent?

A43:     Where a construction dispute does not proceed to arbitration, it will be dealt with through the High Court. It may thereafter be appealed either to a full bench (comprising three judges) of the High Court or to the Supreme Court of Appeal where the appeal raises issues of new law.

           The South African legal system accepts the principle of stare decicis in terms of which the court is bound by precedent set by the Supreme Court of Appeal and the Constitutional Court. Decisions of the High Court of another jurisdiction are of persuasive value.

           Judgments of the High Court, Supreme Court of Appeal and Constitutional Court regarded as being of reportable value are published and are publicly available.

Q44:    In your jurisdiction, if a judge or arbitrator (specialist or otherwise) has views on the issues as they see them that are not put to them by the parties, can they raise them with the parties? Is the court or arbitral tribunal permitted or expected to give preliminary indications as to how it views the merits of the dispute?

A44:     In the conduct of litigation either in the High Court or an arbitration, the judge or arbitrator may meru motu raise concerns with the parties regarding the issues in dispute before the tribunal.

Q45:    If a contractor, say, wishes to arbitrate pursuant to an arbitration agreement, what parallel proceedings might the employer bring in your jurisdiction? Does it make any difference if the dispute has yet to pass through preconditions to arbitration (such as those in clause 20 of the FIDIC Red Book 1999) or if one of the parties shows no regard for the preconditions (such as a DAB or amicable settlement process)?

A45:     Where a party has referred a dispute to arbitration, the other party may endeavour to invoke parallel proceedings such as negotiation or mediation. However, such dispute resolution mechanisms can only be introduced by agreement between the parties or where provided for in the dispute resolution provisions of the contract.

           Where the provisions of the construction contract require the parties to endeavour to resolve the dispute through mediation, negotiation or some other forum before being permitted to arbitrate, such a precondition constitutes a jurisdictional prerequisite for arbitration. In the absence of having complied with the prerequisite, a party cannot validly refer the dispute to arbitration.

Q46:    If the seat of the arbitration is in your jurisdiction, might a contractor lose its right to arbitrate if it applied to a foreign court for interim or provisional relief?

A46:     An arbitration agreement that seeks to exclude the jurisdiction of the courts altogether would be void as it is considered to be contrary to public policy. Accordingly, a party may, subject to the discretion of the court, apply for interim or provisional relief pending the determination of the dispute through arbitration without losing the right to proceed to arbitration. This also applies to any interim or provisional relief that may be sought in a foreign court, pending determination of an arbitration in South Africa.

Expert witnesses

Q47:    In your jurisdiction, are tribunal- or party-appointed experts used? To whom do party-appointed experts owe their duties?

A47:     In both litigation in the High Court as well as in arbitration the parties are required to appoint expert witnesses for purposes of tendering admissible opinion evidence. An expert witness, who is called by reason of their special knowledge and skill, is called in order to assist the court or the arbitrator and owes a duty to the court or arbitrator to do so objectively.

State entities

Q48:    Summarise any specific limitations or requirements that apply when the employer is a state entity or public authority (including, for example, public procurement rules, limits on rights to suspend or terminate, excluded lien rights and arbitrating – as well as enforcing an award – against such an employer)?

A48:     State entities or authorities are all subject to the provisions of the Constitution and associated legislation for purposes of procurement. Those entities are therefore subject to the provisions of the Public Finance Management Act, 1 of 1999 and the policies adopted by them pursuant to the mandatory provisions thereof. These policies require that procurement be pursued through a public tender process, which prescribes the process to be followed and the basis upon which tenders may be awarded. The procurement policies will also often indicate minimum contractual terms to be included in specific types of procurement contracts.

           There is no prohibition on state entities or parties regulating their dispute resolution processes through arbitration.

Settlement offers

Q49:    If the seat of the arbitration is in your jurisdiction, on what basis can a party make a settlement offer that may not be put before the arbitral tribunal until costs fall to be decided?

A49:     The Uniform Rules of the High Court provide in Rule 34 that a party may make a without prejudice offer of settlement, which offer shall not be disclosed to the court until costs fall to be decided. Where an arbitration agreement adopts the Uniform Rules of Court for purposes of conducting an arbitration, the same position will prevail.

           There are a number of other arbitration bodies with their individual rules, most of which cater for that possibility.

Privilege

Q50:    Does the law of your jurisdiction recognise 'without prejudice' privilege (such that 'without privilege' communications are privileged from disclosure)? If not, may it be agreed that a sum is payable if communications to try to achieve a settlement are disclosed to a court or arbitral tribunal?

A50:     Statements that are made expressly or impliedly without prejudice in the course of bona fide negotiations for the settlement of a dispute cannot be disclosed in evidence without the consent of the parties. Such statements are entirely inadmissible in evidence except with the consent of both parties.

Q51:    Is the advice of in-house counsel privileged from disclosure under the law of your jurisdiction? Is the relevant law characterised as substantive or procedural law?

A51:     The Constitutional Court held in the decision of Mohammed v President of the Republic of South Africa 2001(2) SA 1145 (C) that communications with in-house counsel are protected by the legal professional privilege and should in principle not be treated any differently from those with lawyers in private practice. The court did, however, enjoin in-house counsel to be scrupulously aware of the distinction between communications made in their capacity as legal adviser and other communications that would not be of a privileged nature.

           This forms part of the South African Law of Evidence and governs the admissibility of privileged communications.

Guarantees

Q52:    What are the requirements for a guarantee under the law of your jurisdiction? Are oral guarantees effective?

A52:     In terms of the General Law Amendment Act, 50 of 1956 (section 6 thereof) all suretyships have to be in writing and signed by or on behalf of the surety, failing which the suretyship is invalid and unenforceable.

           The National Credit Act, 34 of 2005 stipulates that a guarantee that falls within the purview of the Act must be in writing and must meet the minimum requirements provided for in Section 93 of the Act. Any such guarantee that fails to comply with the Act is unenforceable. In addition, if the credit provider is not registered as such in terms of the Act, the guarantee will similarly be unenforceable. However, a guarantee in excess of 1 million rand is not subject to the provisions of the Act.

           Although no other formal statutory regulation for the issue of guarantees exists, no financial institution will issue or give a guarantee other than one in writing that stipulates the terms and conditions thereof. Accordingly, the concept of an oral guarantee does not arise.

           Moreover, the standard form contracts require a guarantee to be provided in the prescribed format. The JBCC standard form agreements require both a construction guarantee and a payment guarantee to be furnished substantially in accordance with the prescribed JBCC documents. Similarly, the FIDIC Red Book General Conditions of Contract call for a written performance guarantee in clause 4.2.

Q53:    Under the law of your jurisdiction, will the guarantor's liability be limited to that of the party to the underlying construction contract, if the guarantee is silent? Can the guarantee's wording affect the position?

A53:     A guarantee is a document intended to constitute a contract between the guarantor and the recipient of the guarantee. It will therefore be interpreted in accordance with the Rules for Interpretation of Contracts to ascertain in favour of whom the guarantee was given. If the guarantee was intended by the parties to be given only to the party underlying the construction agreement, its ambit and scope will be limited accordingly.

Q54:    Under the law of your jurisdiction, in what circumstances will a guarantor be released from liability under a guarantee, if the guarantee is silent? Can the guarantee's wording affect the position?

A54:     A guarantee will ordinarily state for how long it remains binding and is rarely given indefinitely. However, where a guarantee is given indefinitely and therefore constitutes an agreement of indefinite duration, it may be terminated on reasonable notice. What constitutes reasonable notice will be determined with reference to the facts of the matter.

On-demand bonds

Q55:    If an on-demand bond is governed by the law of your jurisdiction on what basis might a call be challenged in your courts as a matter of jurisdiction as well as substantive law? Assume the underlying contract is silent on when calls may be made.

A55:     An on-demand bond (also referred to as a demand payment guarantee) stipulates that the guarantor will make payment on behalf of a party in prescribed circumstances. Typically it will require the creditor to provide the guarantor with copies of the relevant payment certificate, first and second written demands for payment in prescribed forms and formalities for lodgement of the claim with the guarantor. If the requirements for making a call on the guarantor have been complied with, the guarantor is obliged to make payment and is not permitted to place the correctness of the certificate in dispute.

Q56:    If an on-demand bond is governed by the law of your jurisdiction and the underlying contract restrains calls except for amounts which the employer is entitled to (like sub-clause 4.2 of the FIDIC Red Book 1999), when would a court or arbitral tribunal applying your jurisdiction's law restrain a call if the contractor contended that: (i) the employer does not have an entitlement in principle; or (ii) the employer has an entitlement in principle but not for the amount of the call?

A56:     In certain instances (such as clause 4.2 of the FIDIC Red Book 1999) the construction contract limits calls that may be made by the employer against the guarantee to identified failures by the contractor to comply with the provisions of the agreement. Accordingly, only in circumstances where the contractor has committed the failure in question is the employer entitled to make a call on the guarantee. In those circumstances, where the contractor disputes that it has committed the failure complained of, it is entitled to have the dispute resolved in terms of the dispute resolution provisions before allowing the payment to be made by the guarantor. Accordingly, a court or arbitrator would restrain a call on the guarantee pending the determination of the dispute.

Further considerations

Q57:    Are there any other material aspects of the law of your jurisdiction concerning construction projects not covered above?

A57:  Not applicable.

An extract from GAR Construction Arbitration know-howwww.globalarbitrationreview.com/know-how.

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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Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.