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Clause 36
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Termination by Employer – Contractor’s Default

Question 1

The employer terminates the agreement in terms of 36.0. There is defective work that has to be attended to and the employer is suffering damages such as loss of rental due to late completion, interest etc. Is the employer entitled to claim damages as well as the penalty related to the termination or only the penalty?

Ref: P36.001

Answer

The basic contractual principle is that the employer can apply penalties and claim damages but not for the same event. Therefore:

1. Should the contractor be liable for penalties and subsequently achieves practical completion the application of penalties will cease. Should the contractor then fail to bring the works to final completion the employer can claim damages related to this later default. The employer will then have been entitled to both penalties and damages as they are separate defaults.

2. Should the contractor be liable for penalties and the employer invokes his right to terminate the agreement due to the non-performance of the contractor to achieve practical completion the penalties will cease when the termination is put into effect and no damages can be claimed in relation to the termination or later events as the contract has ceased to exist.

Question 2

The Employer seeks to terminate a contract – but after giving notice allows the contractor a reprieve – but then chooses to terminate – as the intention was issued – is this with immediate effect?

Ref: P36.002

Answer

In law the aggrieved party must give notice to the defaulting party before termination by either party can take place.
The 1st notice has expired – assuming the criteria for the employer to terminate the contract apply (Clause 36.1.1-2) (waiver of lien, if applicable; non provision of security; provision of a priced document; not commencing the works after site handover; non compliance with a contract instruction) [36.2]Where the employer considers termination, the principal agent shall to put the contractor on notice of the default.
[36.3] The employer shall give notice of termination should the contractor remain in default for 10 working days
[36.5] Termination procedure is described in {36.5]
Obviously, the employer can not terminate the contract if he is in default!

Question 3

The employer is unhappy with the workmanship of the contractor and is holding back payment of an interim certificate – but has paid the money into an attorney’s trust account – is this in compliance with JBCC?

Ref: P36.003

Answer

The JBCC contract suite does not cater for the storage of money in a neutral account. The provisions of the contract should be followed to get the work done correctly. Where the contractor was the defaulting party in the contract, the employer has now become the defaulting party.

Question 4

The contractor is likely to go insolvent – how should the employer proceed?

Ref: P36.004

Answer

Be aware that liquidation is a highly complex legal field! Clause 15.3 requires the contractor to ‘proceed continuously, industriously, and with due skill and diligence’ … to bring the works to completion. Failure to do so in terms of a contract instruction will allow the employer to terminate the agreement in terms of the provision of clause 36.
The contractor should have provided a construction guarantee (as the employer provided a payment guarantee) – the employer can call on the guarantor to recover some of the financial loss.

Question 5

When do penalties apply – and when damages?

Ref: P36.005

Answer

Penalty is a monetary value per calendar day specified in the contract data; Clause 30.1 describes the contractor’s default conditions … not bring the works to practical completion by the intended / extended date when specified penalties will apply The calculation of penalties is shown on the recovery statement and itemized on the payment certificate as a cost to the contractor.

                       

The employer can not claim penalties and damages for the same event, in the case of termination, the employer shall be entitled to apply the penalty up to the date of termination – and thereafter may recover damages form the contractor for additional costs incurred to complete the project.

Question 6

Do penalties have to be applied?

Ref: P36.006

Answer

The employer advises the principal agent at the start of a project at what monetary value penalties must be specified, and this value is recorded in the contract data (and may be negotiated with the contractor). If / when the contract performance is not as expected, it remains the employer’s choice to apply penalties and to what extent - … by waiving or limiting penalties the employer may encourage performance under certain circumstances.

Question 7

What is repudiation?

Ref: P36.007

Answer

Repudiation is the act of a party, who by his action, indicates that he is no longer interested in the project. The contract does not automatically come to an end. The choice to terminate the contract lies with the injured party – who may accept repudiation, advise the other party, is entitled to damages – and bring the contract to an end. If repudiation is not accepted, the contract remains alive whist the aggrieved party seeks to recover damages before terminating the agreement.