Payment, life blood of the industry

Without payment the construction industry or indeed any commercial venture, will cease to function. The majority of claims involve situations or debates about payment in some form or another. Either claims for payment for changed circumstances or perhaps delays and disruption or for some other entitlement arising under the contract. Rarely does a dispute arise which does not have, as part of the dispute, a claim for additional payment. However, payment itself is frequently not made in accordance with the provisions of the contract either because the parties to the contract are ignorant of the provisions thereof alternatively the Employer’s finances are such that it deliberately seeks ways and means to delay the payment of amounts legitimately earned under the contract.

Contractors seem to believe, mistakenly, that payment is an essential term of the contract which would automatically entitle suspension or termination of the contract and then proceed to take such steps frequently where there is no such entitlement and in doing so create a repudiatory breach of contract which can have disastrous consequences for the Contractor who far from being the innocent victim of a failure by the Employer to make payment, has now become the defaulting Contractor facing the threat or the actual cancellation of the contract as a consequence of repudiatory breach.

In this article I thought I would look at the payment provisions in the standard forms of contract and see precisely what rights the Contractor may have under those contracts.

A starting point for any discussion in this regard must be a review of the common law position in regard to payment. Under Roman Law interim payments and interim certification were not concepts recognised by the law. Contracts for construction of works were considered to be “entire” contracts in which the Contractor would only be entitled to a single balloon payment for the agreed contract sum once the work was completed and handed over free from defects. Generally speaking the modern forms of contract which have evolved over the past 100 years have recognised that Contractors are not expected to be, save in specific circumstances, the overall

financier of the project and consequently contracts generally provide mechanisms to allow for payment from time to time during the course of construction of the works notwithstanding that the Employer is deriving no use or benefit from those works until such time as completion has been achieved. Whether a failure to make payment on an interim basis gives the Contractor any rights will therefore be dependant upon the express terms of the contract since the common law itself is silent in this regard. Contractual provisions for interim payments and the consequences of failure to make interim payments or alternatively the consequences of short payment must be addressed within the terms of the contract. If there are no such terms then the Contractor’s only rights would be to demand payment in order to avail itself of the right to default interest from the date of expiry of the demand to the actual date of payment, the so called mora interest rate currently 15,5%, simple interest.

Any suspension or purported termination of a contract where the Contractor alleges that the Employer is in default due to failure to honour the payment terms, in the absence of express powers allowing such action by the Contractor, would therefore be a repudiatory breach which would entitle the Employer to accept the breach and cancel the contract with corresponding and possibly severe consequences for the Contractor. Those consequences could include picking up the difference in cost between completing the works himself and compensating the Employer for bringing in others to complete the work inevitably at a higher cost. These being the damages which the Employer might argue flow from the breach. Some contracts do however give the Contractor rights under these circumstances. Others give rights for additional financial compensation but do not provide a right to suspend and/or terminate. It is vital, if Contractors are not to place themselves in an exposed position, to ensure that they are fully familiar with the provisions of the contract giving rise to such rights alternatively are fully familiar with the fact that the contract does not entitle them to take action particularly by way of suspension, reduction in the rate of working alternatively termination.

 
GCC 2004 and 2010

The standard Civil Engineering domestic contract regulates interim payments through clause 49. The process is triggered by the Contractor submitting a monthly statement claiming payment which would then result in the Engineer issuing a signed payment certificate for the amount which the Engineer considers to be due to the Contractor. The Employer’s obligation to pay arises from clause 49.4 which requires the Engineer to deliver this certificate to the parties within 7 (seven) days of receipt of the Contractor’s statement and for the Employer to pay the amount due to the Contractor within 28 (twenty eight) days of receipt of the payment certificate.

The Contractor’s rights where the Employer fails to pay the amount due are regulated by clause 56 which not only deals with failure by the Employer to pay the amount certified (clause 56.1.1.2) but also the circumstances where the Contractor alleges, and presumably may in due course have to prove, that the Employer has interfered with or obstructed the issue of any certificates (clause 56.1.1.3). If either of these circumstances has arisen and following 14 days notice from the Contractor to remedy the default then the Employer may by further written notice to the Contractor cancel the contract. Importantly GCC 2004 provides no mechanism to suspend the contract or to reduce the rate of working under the circumstances. A Contractor’s sole remedy, save in respect of interest, as provided by the contract is to terminate following due and proper notice having been given. The right to interest on delayed payments is provided in clause 49.7.2 which allows the Contractor to claim interest at prime overdraft rate on overdue payments. The Contractor could of course elect not to pursue its rights of cancellation under clause 56 and instead simply claim the amount of interest due under clause 49.7.2. The two clauses are not mutually exclusive.

Payment under the new Blue Book, GCC 2010, is regulated by clause 6. Provisions for claiming interim payments under clause 6.10.1 are similar to the old form of contract and the payment certificate is also to be issued within the same 7 days of receipt by the Engineer of the Contractor’s statement. Payment is then also due

within 28 days of receipt by the Employer of the certificate. The Contractor’s rights in the event of failure to make payment remain the same as the older form of contract namely, termination after appropriate written notice is given to the Employer. Similarly late payment may also attract simple interest at the prime overdraft rate.
Importantly neither of these versions of the civil document provides an entitlement to suspend work or to reduce the rate of working during periods when the Employer is in default of payment.

New Engineering Contract Suite

In this document the contract data specifies an assessment date and the Project Manager is obliged to certify payment within one week of each assessment date. Payment is required to be made thereafter within three weeks of the assessment date and interest in this instance is payable either as a consequence of failure to issue a certificate alternatively as a consequence of a late payment or under payment. The interest rate is specified in the contract data and the amount is compounded annually.
Once again this suite of contracts does not provide any entitlement for the Contractor to suspend work or reduce the rate of working. The termination provisions of clause 91.4 of the Engineering and Construction Contract entitles the Contractor to terminate where the Employer has failed to pay an amount certified within thirteen weeks of the date of the certificate.

FIDIC Suite of Contracts

This suite of contracts provides for payment under clause 14 and requires the Contractor to apply for interim payment under clause 14.3 which then triggers a 56 day period within which the Employer must make payment to the Contractor. The Engineer is expected to issue an interim payment certificate within 28 days after receiving the Contractor’s application for payment but the trigger for payment is the application itself and not the date of issue of the certificate. The Employer will accordingly be in mora from the expiry of the 56 day period for payment.
The contract provides, clause 14.8, for compensation for delayed payments with an entitlement for the Contractor to receive “financing charges compounded monthly”, on the outstanding amount. Financing charges are defined as being paid at a rate of 3% above the discount rate of the Central Bank in the country of the currency of payment. Contractors who have specified portions of their contract to be paid in dollars and or euros will accordingly be subject to the very low rates of interest applicable to these currencies as set by the Federal Reserve Bank in the USA and the Central Bank of the European Union. Typically these interest rates are below 1%.
In contrast to the other forms of contract, clause 16.1 entitles the Contractor to suspend work where the Engineer fails to certify an interim certificate alternatively the Employer fails to provide financial information under clause 2.4 or the Employer fails to make payment. Under any of these circumstances and following due and proper notice the Contractor may suspend work and claim the additional time and cost together with reasonable profit and may thereafter terminate the contract if the default persists. It should be noted that this is the only standard form of contract which allows a Contractor to suspend work. Suspension under any of the other forms of contract would constitute a repudiation of contract.

JBCC form of Contract

The series 2000 edition of this frequently revised set of contract conditions provides for interim payment in clause 31 and obliges the Principal Agent to issue a certificate monthly. The Employer is obliged to pay the Contractor the amount certified within 7 calendar days (clause 31.9) of the date for issue of the payment certificate.
Interest is payable in accordance with clause 31.10 and 31.11 which distinguish between interest payable after the date of practical completion (clause 31.10) and interest payable before practical completion. Interest is compounded monthly and is based upon the interest rate specified by reference to the contract data in respect of the interest set by the Central Reserve Bank of the country named in such data multiplied by a stated factor. Interest under this form of contract also provides a mechanism to compensate the Employer in respect of interest where the Contractor is indebted to the Employer.

Rights to terminate are governed by clause 38 which entitles the Contractor, following failure to pay the amount certified alternatively failing to issue a payment certificate, and after giving the Employer 10 working days notice, to terminate the contract.

Once again this form of contract does not provide rights to suspend under these circumstances.

Various attempts have been made in different forms of contract to try and give Contractors a greater degree of security of payment. Notably the provision of a payment guarantee under clause 3.1 of the JBCC form of contract and the entitlement to access the Employer’s financial arrangements though notice under clause 2.4 of the FIDIC Suite of contracts. Nothing of course prevents Employers from deleting these provisions and until such time as a robust construction act is promulgated in South Africa to provide a greater degree of certainty that Contractors will be paid, these types of provisions are of little real value.

A right to suspend during the currency of the contract, that is before completion, is a powerful right which will impose a substantial amount of pressure on an Employer to make payment. It is surprising that only the FIDIC Suite of contracts provides such a right. Contractors operating under any of the other forms of contract would be well advised to try and include, by way of a special condition of contract, a similar right to suspend. Until such rights are entrenched through appropriate legislation and security for the payment of amounts certified becomes mandatory, Contractors will continue to be at risk and must ensure that they comply strictly with the provisions of the contract rather than taking the law into their own hands and creating a repudiatory breach which could then expose them to significant damages.
C D BINNINGTON
MANAGING DIRECTOR
BINNINGTON COPELAND AND ASSOCIATES (PTY) LTD