Contract savvy
prejudice it may suffer if the subcontractor is not paid and/or
exercises a lien over any of its works and materials provided
probably that there has been no supervening liquidation
of the contractor 14 , loss of manufacturers’ warranties and
maintenance, etc. It is incumbent on the subcontractor to
act swiftly and decisively to ensure that the employer has an
interest in and elects to make direct payment by exercising
liens, withholding product and other guarantees, rejecting any
calls for liability for latent defects, encouraging the employer
to continue to use the subcontractor’s services to complete
the works without delays, and the like or alternatively, where
the subcontractor is interested in completing the n/s works, by
allowing the subcontractor to effectively add it to its price for
completing the n/s works after termination.
CLAUSE 38.5.8
‘The security [14.5] shall expire and be returned by the employer to
the subcontractor’.
The security due in terms of clause 14.5 – advance payment
guarantee - must be returned to the subcontractor. This
guarantee is issued by the subcontractor to the employer
specifically to cover the value of advances by the employer which
would typically terminate when the principal building agreement
is terminated but it is submitted that there would simultaneously
have to be a form of delivery of all the goods covered by such
advance payment guarantee. As the principal contract and the
subcontract have been terminated the subcontractor no longer
carries the liability for the n/s works and has no further interest in
protecting them once delivered to the employer.
This clause makes no reference to the n/s construction
guarantee/retentions nor does it make reference to the payment
guarantees due in terms of clause 3.1, both of which have been
discussed under bullet 4 above.
CLAUSE 38.5.9
‘The latent defects liability shall end [27.2.2]’
According to Du Bois et al, Wille’s Principles of South African
Law 15 at p. 945 the principles of contracts of locatio conductio
operis in the Roman-Dutch common law provide that if the
employer approves the opus, he absolves the builder from liability
for all defects, latent as well as patent.
A latent defect is defined in clause 1 as ‘a defect that a
reasonable inspection of the n/s works by the principal agent
would not have revealed before the issue of the defects list.’ The
defects list is a list issued in terms of clause 26 Final Completion.
Clause 27.1 provides for a latent defects liability period of 5 years
from the date of the final completion certificate but sub-clause
27.2 distinguishes two different liability periods in the event of
termination. Clause 38.5.9 therefore provides that the latent
defects liability period ends on the date of termination in
accordance with clause 27.2.2.
14
15
16
17
It is incumbent on the
subcontractor to act swiftly and
decisively to ensure that the
employer has an interest in and
elects to make direct payment.
This provision can be used as a basis for negotiating direct
payment or as a negotiating tool in establishing the cost of
completing the n/s works. However, it is submitted that it
does not displace the provisions regarding the terminated
contractor’s obligation to ensure the work executed by
specialised trades is correctly done 16 and an entitlement for the
employer to recover any costs of making good defective work in
the work completed prior to termination by way of a reduction
to the value of the work completed 17 or by a claim for damages
against the contractor (see also discussion under bullet 4).
The purpose/consequence of the provision could be:
1. To provide a cut-off point placing the eventual latent defect
liability on the new contractor completing the works as it is
possible for this contractor to inspect the works, report work
that is defective and obtain a contract instruction for the
correction of the defect.
2. Alternatively, and possibly concurrently, it is also intended
to provide the employer and principal agent with a cut-off
which enables them to finalise and pay the n/s works final
account leaving the liability for any unobserved defective
work in the n/s works within the ambit of a reduction to the
price for the principal contractor’s works final account or
a recovery in the final payment certificate as between the
contractor and employer and thereafter a final recovery
statement adjustment as between the contractor and
the subcontractor which is patently the correct place for
these adjustments to keep the employer out of that [sub]
contractual relationship. The further benefit of this latter
interpretation is that the liability for correction of the
defects then resides in its proper place and, insofar as it
affects the employer, is subject to the principal building
agreement’s termination provisions which differ between
terminations resulting from either the employer’s or the
contractor’s default.
It is up to the subcontractor to price for this risk or to stipulate
for any limitation to its liability in a subsequent agreement for
completion of the n/s works.
*Note: This is not a legal opinion and no liability for reliance on its
contents attaches to the writer or sender. RACA
See Administrator Natal v Magill, Grant & Nell (Pty) Ltd (In Liquidation) 1969 (1) SA 660 (A), 672B and discussion under bullet 4.
9 th Edtn, Juta, Feb 2007.
See Minister of Public Works and Land Affairs v Group Five Building Ltd 1999 (4) SA 12 (AD)
Refer dicta in BK Tooling (Edms) Bpk v Scope Precision Engineering (Edms) Bpk 1979 (1) SA 391 (A) generally at pp. 438-440.
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RACA Journal I February 2020
65