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Clause 38
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Termination by Contractor – Employer’s default (Ref 38.096 / 38.095 / 38.092/ 38.089 / 38.083 / 38.081 / 39.080 / 38.031 )

Question 1

On termination by the contractor 38.5.8 provides for the expiry of the security in terms of 14.0 and the return thereof to the contractor. The contractor opted for the withholding of payment in terms of 14.7.1. Does this imply that the current retention must be released or is it held and dealt with in the final account?

Ref: P38.001

Answer

Security as defined does not include "retention" which is an alternative thereto in terms of 14.7.1. 38.5.8 requires the security guarantee to be returned but as there isn't one the clause does not apply. However 38.5.7 clearly requires the continuing monthly certification of payment and in this case the retention must be reduced to zero and not held back as the contractor is not the defaulter. Note further that a payment certificate must be issued every month of the contract [31.1, 38.5.7] as well as in terms of the VAT and the Financial Management Acts.

Question 2

The principal agent has not issued a final account within the period stipulated but has issued certificates of practical and works completion… how can the contractor get the final account finalized?

Ref: P38.002

Answer

Per clause 38 ‘the principal agent shall issue the final account to the contract within 90 working days of the date of practical completion’. The contractor shall accept or object within 45 working days…
The principal agent shall issue monthly interim certificates until the final certificate – even if the value is zero …
Interest is due, compounded at the default interest rate …
The contractor may terminate the contract 38.1.6 and or 38.1.8 and the employer shall be liable for damages to the contractor 38.5.6…
Obviously the contractor may not be in default!
And – the defects liability period shall end 38.5.9

Question 3

An unhappy employer instructs the principal agent to deduct penalties / not to adjudicate claims / call in specialist party …. Resulting in an unhappy contractor and an aggrieved principal agent.

Ref: P38.003

Answer

The employer [clause 5.1, 6] warrants that the principal agent has full authority to act - shall not interfere with the principal agent

The contractor has every right to cancel [clause 38.1.7,8] and to claim damages [38.5.6] loss of security [38.5.8] and the latent defects period shall end [38.5.9]
Has the employer solved the problem? Unlikely – at great expense.

Question 4

The employer has ‘run out of money’ …and needs to terminate the contract.

Ref: P38.004

Answer

Assuming there is mutual agreement between the parties agree:
Record the state of completion on the project programme and on drawings, but particularly with a digital camera using the date function, numbering the pictures and print as an album of a legible size. Have this document certified by commissioner of oaths – SA Police, etc.

Instruct any works that has to be made safe, waterproof.

Prepare an (interim) valuation with a recovery statement, possibly the final account) and issue a (Final)payment certificate – that may not be paid (in full) The employer defaults [31.9] the contractor gives notice [31.16] and terminates [38.1.6]. The parties may agree to shorten notice periods.

Assuming both parties agree to terminate – it may be useful to appoint an arbitrator as a neutral party to oversee the process and verify that a fair solution has been achieved for both parties – probably the quickest solution – avoid involving the legal profession acting for each party = additional cost + time!

Question 5

Both parties have agreed to extend the payment period by the employer to suit the financing arrangements of the employer. Payments still occur late by a couple of days. What can the contractor do?

Ref: P38.005

Answer

The contractor is entitled to damages in the form of interest [31.12.2 or 34.12.2]
Late payment is not a reason to terminate the contract.

Question 6

The contractor has moved off site due to non/late payment by the employer – in spite of notices to the employer. How can the contractor recover the retention money held back?

Ref: P38.006

Answer

By vacating the site instead of exercising his lien the contractor has surrendered his rights.

Question 7

The employer’s payment guarantee has lapsed and not been renewed. Can the contractor terminate the contract?

Ref: P38.007

Answer

The contractor must ensure that he is not in default with regard to the contract as a whole. The contractor may give notice that the employer is in default – and he can exercise his lien.

Question 8

How to “give notice”?

Ref: P38.008

Answer

Address the defaulting party correctly – stating the project name, location etc. Simply refer to the applicable clause - and state that you give notice of “?” with the applicable time period. Do not include other information in the notice – this could be used against you – but all applicable date must be meticulously documented to defend your action at a later dispute resolution hearing.

Question 9

The contract has been terminated … the employer refuses to pay the retention amount to the contractor.

Ref: P38.009

Answer

Whilst ‘retention’ is included in the definition of ’security’. The VAT act and the Financial Management act require that a monthly certificate be issued until the Final account and final payment certificate. As the contract has been terminated, retention would be reduced to zero. This must be reflected on the recovery statement and the payment certificate … that is a liquid document and entitles the contractor to obtain a court order for the payment.