Payment Mechanisms and Legal Remedies in construction Contracts in Construction
Fundamental Principles of Payment in Construction Contracts
Payment is fundamentally characterized as the lifeblood of any construction or engineering project. Engineering and construction works contracts specifically make provision for interim payments, which are commonly executed on a monthly basis, to compensate for works performed in terms of the set contract. Each form of contract contains unique and specific provisions regarding the procedures associated with the initiation and processing of these payments. It is critical to note that interest is payable on overdue accounts to compensate for the delayed transfer of funds. While standard provisions exist in contract forms endorsed by the Construction Industry Development Board (CIDB), the specific "contract data" associated with a particular project may amend these standard provisions.
The Common Law Position on Construction Contracts
Under South African law, building and civil engineering contracts are classified as a species of the genus locatio conductio operis, which translates to the letting and hiring of work. This is defined as a mutual agreement between the employer (one party) and the contractor (the other party). In this arrangement, the contractor undertakes to make their services available regarding a physical material matter to an employer in exchange for remuneration. A core condition of this relationship is that the contractor builds while the client pays.
A contractor who accepts work under such a contract is under an obligation to build or repair as required without working under the direct supervision of the employer. The contractor is bound to perform the work within the time fixed by the contract, or within a reasonable time where no timeframe is explicitly specified. The distinction between a building contract and a civil engineering contract rests on the nature of the work: an agreement for the erection of a building is a building contract, while a project with a significant civil engineering component is referred to as a civil engineering contract. Because the general principles of South African law apply, courts will consider previous decisions and judgements where contracts with identical or similar wording have been interpreted.
Requirements for Contractors to Claim Payment
To successfully claim payment for work done under locatio conductio operis, a contractor must allege and prove several key elements. First, they must prove the specific terms of the contract relied upon. Second, they must prove the work that had to be performed. In this regard, it is usually an implied term that the contractor will use materials suitable for the purpose of the works and perform the work in a workmanlike fashion. The expected level of skill and diligence is defined as that possessed and exercised by other members of the trade to which the contractor belongs.
Third, the contractor must prove the applicable remuneration. This involves proving that remuneration was payable under the contract and the exact amount due. If a contract is silent regarding remuneration, the law dictates that a fair and reasonable amount, known as quantum meruit, will be payable. Fourth, the contractor must prove performance, demonstrating that they have done everything required to be done in terms of the contract.
Statutory Position and Public Finance Management
South Africa lacks construction-specific legislation dedicated to addressing the need for prompt payment of building and civil engineering contractors or consultants. However, the Public Finance Management Act (PFMA) of carries significant weight for public sector projects. Section , read with Part , Regulation , determines that all contractual obligations and accounts must be settled within days from receipt of an invoice. These provisions are mandatory. Any accounting officer or official who fails to comply may be found guilty of an offence under the PFMA.
Furthermore, the CIDB Act of established the Construction Industry Development Board (CIDB) to implement an integrated strategy for the growth and development of the industry. The CIDB has endorsed four standard building and construction contracts (GCC, JBCC, NEC, and FIDIC) which contain specific remedies to enforce payment, as detailed in CIDB Inform Practice Note # (June ).
Right to Interim and Final Payment Certificates
Under common law, a contractor's obligation to complete work is generally considered indivisible. Completing a specific subdivision of work does not automatically entitle the contractor to payment. In the absence of specific contractual provisions allowing interim payments, a claim for partially completed work could be legally met with the exceptio non adimpleti contractus, meaning the employer can refuse payment until work is whole. However, because most contractors do not have the resources to finish a project before receiving any payment, most contracts provide for interim payment certificates.
An interim payment certificate is a document where the employer’s representative records a reasonable, though approximate, assessment of the total work executed and materials supplied up to a specific date. This certificate entitles the contractor to payment of the certified amount within a set number of days. If payment fails, the contractor may sue the employer based on the strength of the certificate alone. This is an express contractual claim rather than an enrichment claim, even if the value is a "reasonable estimate."
General observations regarding CIDB-endorsed contracts include:
Payment certificates are certified by independent persons.
The frequency of interim certificates is defined in the contract.
The timing for the issuance and payment of both interim and final certificates is explicitly clear.
Payment for materials on site is generally included, though GCC does not expressly allow for payment of materials stored off-site.
Interest and Payment Guarantees
If an employer fails to pay money due, the contractor has the right to charge interest. Recovery is simplest when the contract includes express provisions for interest at a quantified rate. All CIDB-endorsed contracts provide for default interest, often termed "finance charges." These contracts define the specific circumstances under which interest may be charged, the time from which it begins to accrue, and the applicable interest rate.
In the South African construction industry, a payment guarantee is a contractual undertaking by a third party (the guarantor) to the contractor. The guarantor agrees to pay the contractor for work done, up to a guaranteed amount, should the employer default. Among the four CIDB-endorsed forms, only the FIDIC Red Book and the JBCC PBA (Clause ) expressly provide for the use of payment guarantees, providing pro forma forms for this purpose.
The Right to Suspend or Terminate for Non-Payment
A critical legal principle is that a contractor cannot simply abandon a site if an employer fails to pay for partially completed work, as this would be a material breach of the obligation to deliver the completed work. If a contractor terminates without a specific contractual right, it may be seen as a "repudiation" of the contract. Repudiation allows the employer to either accept the repudiation (ending the contract) or refuse it (keeping the contract alive), while in both cases claiming damages against the contractor.
However, all four CIDB-endorsed contracts contain provisions allowing for the suspension of work and/or cancellation of the contract if the employer fails to pay interim certificates. When enforcing a termination clause, conditions must be strictly followed. Any notice of intention to terminate must be an express, extra-judicial announcement; it cannot be implied. In the absence of a specific termination clause, the contractor has no common law right to terminate for non-payment of an interim certificate because the job is not yet finished.
Additional Remedies to Enforce Payment
Beyond termination, several other legal and contractual remedies exist:
Evidence of Financial Arrangements: Under the FIDIC Red Book, the employer must submit reasonable evidence within days of a request from the contractor that financial arrangements have been made to pay the contract price. The employer must also notify the contractor of any material changes to these arrangements. This is a risk-identification mechanism rather than a direct enforcement tool. Similar provisions are not found in JBCC, NEC, or GCC .
Contractor’s Lien (jus retentionis): This is the legal right to retain possession of the construction site until the employer pays the money lawfully due. It serves as a "course of resistance" against repossession. Liens are categorized as enrichment liens or debtor/creditor liens. Notably, a lien does not cover a retention fund.
Provisional Sentence: Under Rule of the High Court Rules, this is a speedy procedure for creditors with "liquid" documentary proof (like a signed payment certificate). it provides a provisional judgement without the delay of a full trial.
Summary Judgement: This allows a plaintiff with an "unanswerable case" to obtain swift enforcement against a defendant who has no real defense. It effectively closes the doors of the court to the defendant because the claim is so clear.
Order of Court: Arbitration awards can be made an order of a court. Once this occurs, the award can be enforced like any judgement, allowing for a writ of execution and attachment of the employer's assets (to be sold by the sheriff) or an order of contempt of court.
Comparative Payment Cycles and Procedures
Specific contracts follow distinct timelines for processing payments:
GCC (General Conditions of Contract): The contractor delivers a monthly statement. The Engineer issues a signed certificate within days. The employer must pay within days of receiving that certificate. If unpaid, the contractor can suspend works after days' notice. If unpaid for days, it may be treated as repudiation.
JBCC Principal Agreement: The Principal Agent issues an interim certificate by a stated day each month (based on a valuation not more than days prior). Payment is due within calendar days after the certificate is issued to the contractor and employer.
NEC Engineering and Construction Contract: The Project Manager assesses the amount due at each assessment date and certifies payment within one week. Payment is due within weeks of the assessment date. Importantly, if the contractor has not submitted a first program for acceptance, of payment can be withheld.
FIDIC Red/Yellow Books: the contractor application occurs at the end of each month. The Engineer certifies within days. The employer must pay within days of the Engineer receiving the application. Contractors can suspend or reduce the rate of progress after a -day notice if payment or certification is delayed. Termination is possible after a further -day notice.
David Allen Coe is quoted as saying: "It is not the beauty of a building you should look at, it’s the construction of the foundation that will stand the test of time."