CONSEQUENCES ARISING FROM TERMINATION OF A CONTRACT AFTER PRACTICAL COMPLETION (JBCC MINOR WORKS)

The below scenario relates to the construction of a residential property. The facts are as follows:

• The Contractor and the Client entered into a JBCC Minor Works (edition 5.1) form of contract (the Contract) in 2016.
  
• During the course of the works, the date for Practical Completion was revised. However, the Contractor still fell behind the programme and did not achieve Practical Completion by the revised date.
• Notwithstanding, Practical Completion was awarded in mid-2018, some two and a half months after the revised date for Practical Completion.
• After Practical Completion was awarded, the Client took occupation of the house.
• A List for Completion was issued upon Practical Completion (in terms of clause 16.2) however the Contractor did not complete these timeously and Final Completion was not achieved.
  
• Subsequent to Practical Completion being awarded and the List for Completion being issued, the Contract was terminated due to the Contractor’s breach. The Contractor has not disputed this termination.
• The Final Account has not been issued to the Contractor.
  

It is now some 4 years after Practical Completion was achieved and the Contract terminated. Final completion has not yet been achieved by the Client on the project- which delays are somewhat attributable to COVID-19- and the relationship between the Contractor and the Client has soured.

The Contractor is owed money by the Client in the form of outstanding retention money and interim Payment Certificates that were issued before the termination of the Contract.

The Client, however, denies that it owes this money. The Client alleges that the Contractor is liable for contractual penalties and the cost of the Client attending to various alleged latent and patent defects, the cost of which may be lawfully offset against those payments due to the Contractor.

The following queries have been raised:

• Would the Client’s right to impose Penalties have been prescribed;
  
• If the Client may impose penalties, to what extent may it do so;
• Is the Client entitled to withhold payments due to the Contractor in terms of interim Payment Certificates already issued and retention held, and then deduct from these payments alleged penalties imposed and costs for defective workmanship; and
• Would cracking plaster constitute a latent defect and what are the Contractor’s obligations in respect thereof?
  

APPLICATION OF PENALTIES

• In the event that the works are not completed by the (revised) date for Practical Completion, penalties may be imposed from the (revised) date for Practical Completion up to the date that Practical Completion was actually achieved or the date the contract was terminated, whichever is soonest.
• Penalties cannot be applied after Practical Completion is achieved [clause 18.2].
• It would seem that the right to impose penalties would not constitute a debt for the purposes of prescription and accordingly would not prescribe1. However, the right to impose penalties would cease after the Final Payment Certificate has been issued.
• The Contractor does have recourse available to him in order to ensure that the Final Account is issued and that payments due are paid, even though the Contract has been terminated.
• Importantly, the right to impose penalties arises by operation of the contract. Hence, the application and quantum of penalties requires certainty and accordingly must have been clearly setoutintheContractpriortothedelaybeingrealised. Thepenaltytermscannotbeintroduced once the project has already been delayed and then applied retroactively after the fact.
  Put more plainly, if the penalty clause did not specifically set out precisely how much the Contactor would be penalised for late Practical Completion, the Client may not unilaterally decide how much the Contractor will be penalised after Practical Completion is achieved.
• Accordingly, given that the contract has been terminated and the Final Payment Certificate not issued, it is likely that penalties may indeed be applied, but only for two and a half months and provided that the Contract specified how the penalties would be applied prior to the delays being incurred.
  

DEDUCTIONS & WITHHOLDING PAYMENT ON PAYMENT CERTIFICATES

• Where an interim Payment Certificate is issued during the operation of a contract but claimed after termination thereof, our courts presently hold the view that payment is enforceable before Final Completion only in the circumstances that the Contractor is an innocent party to the termination.
• Thus, in the event of termination due to the Contractor’s fault, the Client is entitled to withhold payment on interim certificates until such time as the works are completed by a third party and Final Completion is achieved.
• The Client is entitled to utilise any retention amounts to recover damages suffered through the termination of the Contract (where such termination is due to the Contractor’s fault). It goes without saying that any recovery of this nature would need to be justified and reasonable. This would be accounted for in the Final Account.
• Where payments in terms of interim certificates have been withheld subsequent to termination of the Contract, the Client is obliged to have the works completed within a reasonable period of time.
• In other words, the Client may not unreasonably delay the Final Completion of the works after termination of the Contract to the prejudice of the Contractor.
• In the circumstances, Final Completion may only be delayed in respect of patent defects identified in the List for Completion; in other words, those works that the Contractor would have been obliged to attend to in order to achieve Final Completion in the event that the Contract was not terminated.
• The Client is not entitled to delay Final Completion in lieu of latent defects.
• It is important to bear in mind that the latent defects period will begin to run from the date of termination and not the date of Final Completion.
• The Contractor is obliged to attend to all latent defects that manifest during the latent defects period and at his cost [clause 16.8]. No provision is made in the Contract for the deduction of costs in respect of latent defects from the Final Account
• Notwithstanding, were it the case that these deductions were permitted or the Contractor failed or refused to attend to any latent defects, the Client is restricted in terms of what it may deduct from payments due to the Contractor. Clause 20.3 of the Contract sets out how additional works are to be valued and paid. This principle will apply in the circumstances that the Client requires a third party to attend to latent defects by a third party, unless it is unreasonable to do so.
• Clause 20.3 states that:
  
  “20.3 The Principal Agent shall adjust the contract value resulting from a contract instruction determined as follows:
  
  20.3.1 Work of a similar character executed under similar conditions shall be priced at the rates in the priced document;
  
  20.3.2 Work not of a similar character shall be priced at rates based on those in the priced document and adjusted to suit the changed circumstances
  
  20.3.3. If the above methods do not apply, the work shall be priced on rates based on the necessary use of labour, construction equipment and/or materials and goods for executing the works plus an allowance of 10% markup”
• Accordingly, it is likely that the Client would likely be entitled to withhold payment until Final Completion.
  
• However, the Client must make a reasonable effort to achieve Final Completion timeously.
• Once Final Completion has been achieved, the Final Account must be issued to the Contractor which reflects the value of the works, less any deductions lawfully made. These deductions may include penalties in terms of the Contract (lawfully applied), the cost of attending to those defects identified in the List for Completion by a third party and the cost of attending to latent defects where the Contractor refuses or fails to do so.
• The Contractor will still be entitled to dispute this Final Account before the Final Payment Certificate is issued.
• If the Contractor has been requested to attend to the necessary works in order to achieve Final Completion despite the Contract being terminated, it is strongly advised that a formal agreement is entered into between the Client and the Contractor that regularises this relationship.

COMPLETION OF WORKS & DEFECTS

• Given that the Client has terminated the Contract, there is no obligation on the Contractor to achieve Final Completion, unless by subsequent agreement.
  
• The Contractor would be liable for those reasonable costs that the Client has incurred in attending to those patent defects identified in the List for Completion.
• The Contractor is obliged to attend to all latent defects for a period of five years from the date that the contract was terminated.
  
• The Contract defines a latent defect quite broadly, as “a defect that the reasonable inspection of the works by the principal agent would not have revealed”
• Whether a certain issue is a defect or not is a question of fact. In order to qualify as a latent defect, it must be caused by defective workmanship or the use of inferior-quality of materials, and this fault must be attributable to the Contractor. By way of illustrating the significance of the second requirement, if the employer provides material for the Contractor to use, and this material is inferior and leads to a defect, it cannot be held that the Contractor is solely liable for those latent defects.
• Notwithstanding, whether the cracking plaster will qualify as a latent defect will depend on what is causing the cracking. On a balance of probabilities, it is likely caused by poor workmanship or defective materials and therefore would be a latent defect.
• However, this must be qualified. The Client does have a duty to mitigate against the damage caused by any latent defects. If reasonable maintenance of the property by the Client would have prevented or reduced the plaster cracking, then this would not qualify as a latent defect or, at the very least, reduce the extent to which the Contractor is liable.
  

• Similarly, if the Client becomes aware of the cracking paster without taking reasonable steps to attend to it or notify the Contractor within a reasonable time, and this contributes to the worsening of the damage caused, then the Contractor’s liability would also be mitigated.
  
• Obviously, this needs to be assessed on the merits of each case.
  
• Assuming the cracking is a result of defective workmanship, whether it is reasonable for the Contractor to be compelled to repaint the entire house is arguable. Basically, the Contractor would be expected to attend to the defect in order to rectify it up to a reasonable standard, bearing in mind that the house was painted over four years ago.
• Whether the Client would now be entitled to a newly painted house at the expense of the Contractor is certainly debatable.