PROFESSIONAL PRACTICE EXAMINATION SEPTEMBER 2012

PAPER 2: Contract Law and Building ContractsThe Resolution of Building Disputes

OPEN BOOK EXAMINATION 100 marks

Question 1 (20 marks)

Describe briefly the differences between the following:

1.1 Penalties and damages 5 marks1.2 Interim certificate and a practical completion certificate 5 marks1.3 Domestic subcontractor and Direct contractor 5 marks1.4 Principal Building Agreement and Minor Works Agreement 5 marks

Answers1.1

Penalty DamagesPredetermined amount per day after the practical completion day

Calculated based on the loss suffered as a result of the delay

The suffering party does not have to prove that he has suffered damages

The suffering party must prove that he suffered damage as a result of the delay

The courts are reluctant to interfere with the penalty provisions in a contract although they may reduce them if they feel that they are excessive

May be applicable in the PBA in case penalties were not elected at the signing of the contract

The amount of the penalty and the manner in which it is calculated must be shown in a recovery statementWhere the contract stipulated sectional completion; separate penalty provision may be applicable for each section,Does not apply in an N/S Agreement

1.2 An interim statement is issued is issued at various stages in the contract on progress of the work. On large contracts it is often issued on a monthly basis to compensate the contractor on the work that he has done at that stage. Several interim certificates may be issued in a project.

Page 1 of 10

A practical completion certificate is issued when the project has reached a completion stage where the employer may make use of the building satisfactory. All the major works must be completed. Only one practical completion certificate is issued in a project unless sectional completions have been agree on.

1.3 A domestic subcontract is a subcontract which the contractor has decided to award to a subcontractor of his own choice; the employer has no right to approve or disapprove of such subcontract or the subcontractor concerned. The contractor is wholly at risk for any default of the subcontractor.

A direct contractor is an independent contractor engaged by the employer to carry out certain work on the site of a contract between the employer and a building contractor while the building contractor is still in possession of the site. The building contractor is not responsible in any way for the due performance by the direct contractor of his contract with the employer, and any delay that the direct contractor may cause the building contractor in the completion of his works shall entitle the building contractor to an extension of time. Any additional cost incurred in the completion of the works that are the subject of the direct contract that arises from the default of the direct contractor or his replacement is the liability of the employer

1.4

PBA MWAProvision for a principal agent and other agents

One Agent only

Provision for nominated and selected subcontractors

Provisions for domestic or direct subcontractors only

Contractor liable for risk of third party claims Employer liable for risk of third party claims

Contract may be based on bills of quantities No provision for bills of quantities

Contractor to provide construction guarantee Provision of retention fund as alternative to construction guarantee

Question 2 (20 marks)A refurbishment project of a 35 bed day hospital, which includes achieving compliance in terms of the SANS 10400 Part T regulation, has recently achieved Practical Completion in terms of the JBCC PBA Edition 5 which was used. Under the scope of

Page 2 of 10

the works, a new fire detection system and new fire control panel has been installed, connected and tested.

During this refurbishment project but prior to having achieved Practical Completion, the Electrical Consultant advised that she noticed that the existing building’s lightning protection system, is defective and that it might not provide adequate protection against lightning. Rectifying this was however not part of the original scope of works and was therefore not tendered for. The Principal Agent had duly advised the Employer in writing of this defect, at the time. The Employer responded by requesting 3 quotations to have the lightning protection system repaired, which the Electrical Consultant obtained and furnished to the Employer, however the Employer never requested for this work to be carried out.

During a severe storm, shortly after having achieved Practical Completion but prior to achieving Works Completion, the building is struck by lightning and the newly installed fire control panel is damaged and needs to be replaced in order to achieve Works Completion and ultimately Final Completion.

The Principal Agent informs the Employer in writing that the fire panel needs to be replaced, stating that Final Completion can ultimately not be achieved without a properly functioning fire panel. The Principal Agent subsequently requests the Principal Contractor to supply and install another new fire panel, which the Principal Contractor does at an additional cost of R12,843.21c to the contract value and eventually Final Completion is achieved.

Upon certification of the final payment, the Principal Agent includes this amount for payment, however the Employer effects payment, less the R 12,843.21c, citing that he had never agreed to this additional expense and never granted approval for the replacement of the fire panel and that the Principal Agent is liable for this cost, as the Principal Agent had instructed the Principal Contractor to proceed with replacing the damaged fire panel.

2.1How does the fact that this damage occurred after Practical Completion, affects the terms of the building agreement in terms of instructions, insurances etc. Discuss.

7 marks

2.2What were the Principal Agent’s and the Employer’s obligations respectively in this instance and did they both act accordingly? 7 marks

2.3What could or should the Principal Contractor do to recover this expense, bearing in mind that the Employer had reneged on this payment at the Final Payment Certificate stage?Refer to the relevant PBA clauses. 6 marks

Answer :

Page 3 of 10

2.1.1 At Practical Completion, the responsibility for the works shall pass to the Employer [8.1]1

however, the Principal Contractor (PC) still has the obligation to make good physical loss and to repair damage to the works up until the date of Final Completion [8.2] 2.

2.1.2 The PC is not liable for the cost of this repair [8.5] 3 and the physical loss shall be measured, valued and added to the contract value [8.6] 4

2.1.3 The PA has full authority AND obligation to act in terms of the agreement [5.1] 5 and;2.1.4 The Employer shall not interfere with or prevent the PA from exercising his independent

judgement when performing his obligations in terms of the agreement [5.6] 6;2.1.5 Two of the primary obligations of the PA i.t.o. the agreement, is to a. achieve fire

compliance7 and b. to achieve Final Completion8, both of which would be impossible without such an important component as the fire panel, having a direct bearing on the scope and intent of the design of the works9;

2.1.6 Thus, in view of the above authority and obligations, the PA had the responsibility to ensure a fully functional installation of the works10 and;

2.1.7 Was duly authorised to bind the Employer [5.3.1]11 in his request12 to replace the damaged fire panel;

2.1.8 After Practical Completion, the PC is no longer obliged to carry out any contract instructions for additional work [24.6]13, therefore the PA cannot issue the PC with an instruction, but the PA can instruct the PC to repair this damage [8.2]14.

2.1.9 Since full responsibility had already passed to the Employer at PC [8.1] 15, and since this damage was caused as a direct result of the Employer’s failure to provide a fully functional lightning protection for the existing building [8.5.7] 16, and since the PC had incurred expenses due to no fault of the PC [32.5] 17 then the contract value shall be adjusted and the Employer is obliged to pay for this repair18.

2.1.10 The fact that the Employer has reneged on the payment for this additional work at the stage of the Final Payment Certificate, means that there can no longer be a Recovery of Expense and Loss i.t.o. [33] 19. Since the provisions for dispute resolution survives all the provisions of the agreement, the PC can still declare this a dispute, however there will be little use for either Mediation or Adjudication, since the contract period has already expired. The PC will have to rely on either Arbitration or Litigation to recover this expense20.

Question 3 (20 marks)In which of the following instances, will the Principal Contractor be entitled to a revision of the date for practical completion and if so, will he also be entitled to an adjustment of the contract sum? Assume that the Principal Building Agreement is in use and that the contractor has fully complied with the requirements for submitting his claim. Give full reasons for your answers:

a) The erecting of steel roof trusses, where welding is required, has been stopped from the Thursday morning to the following Monday afternoon, due to unusually and un-seasonally heavy rains. The rain occurred in what is usually considered a dry season of the year, for the environment in which the site is located. 5 Marks

Page 4 of 10

b) Work on the critical path of the programme is delayed because the contractor did not receive the electrical layout from the Electrical Engineer when they were required. The engineer's response was that the Principal Agent did not provide him with a copy of programme for the supply of information, previously submitted to the Principal Agent. 5 Marks

c) A nominated subcontractor delays the progress of the works because the specialized sanitary fittings, which he collected from a supplier, were stolen together with his truck during a hi-jacking, while transporting the sanitary ware en route to the site, on the day it was required for delivery to site and now has to be re-manufactured. 5 Marks

d) The installation of façade cladding by a Selected Subcontractor, whom also designed the façade cladding and submitted shop drawings timeously to the Principal Agent for approval, is being delayed citing shop drawings have not yet been approved by the Principal Agent. Assume that the Principal Contractor and the Selected subcontractor have done everything necessary to ensure timeous submission of all shop drawings for approval. 5 Marks

Answersa) The contractor is entitled to a revision of the date of practical completion without

adjustment of the contract value [29.1.1]. The fact that the rain is considered “unusual” for that specific time of the year is irrelevant; the contractor is entitled to delays caused by any inclement weather, not just inclement weather during anticipated periods of the year.

b) The contractor will be entitled to a revision of the date for practical completion as well as an adjustment to the contract value for a delay caused by “failure to issue construction information timeously” [29.2.4] The programme for the supply of information, furnished to the Principal Agent, would be considered to be a request for information. The fact that this program was not issued to the Electrical Engineer by the PA, is not due to any fault on the part of the Contractor.

c) The delay was caused, not by any default of the subcontractor, but by an event beyond his control. [29.1.2] he would be entitled to a revision of the date for practical completion without an adjustment of the contract value.

d) The Contractor will be entitled to both a revision to the date of Practical Completion, as well as an adjustment to the contract value due to the late acceptance by the Principal Agent of a design undertaken by a Selected subcontractor [29.2.5] where such design shop drawings have been submitted timeously to the Principal Agent for approval [4.3].

Page 5 of 10

Question 4 (20 marks)

ScenarioYou are the Project Architect and Principal Agent on the following contract. You may select any name you wish for your own practice.

The JBCC PBA is in use and the following contract data is available. All amounts exclude VAT:

Employer >Eduright Private Schooling Group Ltd.

Principal Contractor >PLD Construction cc

Works identification >New 2 storey private school, consisting of lecture rooms, an auditorium, boys and girls dormitories with ablutions, a kitchen and canteen and a media centre, constructed of structural steel framework, infill brick work, external façade cladding, curtain walling, internal suspended ceilings, drywall partitioning, floor finishes as selected, sanitary ware and all related services and external works.

Type of Contract>With Bills of Quantities

Site description >Erf 3592, Beacon Bay, East London, Eastern Cape

Contract Sum >R 58,065,896.38c excl VAT

Preliminaries Amount >R 4,354,942.23c, however, to date, the PC has failed to furnish the Preliminaries break down into categories, as required

Site Possession date >01 March 2011

Intended Practical Completion date >31 May 2012

Contract Period >458 calendar days and 327 working days

Security selected >Variable Construction Guarantee

CPAP adjustment was not required. The date on which Payment Certificates must be issued, is the 30 th of each

month.

On Friday morning 20 May 2011, you are notified by the Principal Contractor, via an email, that he cannot place the order for the steel roof trusses for the kitchen and canteen roof, on that same day, in order to ensure delivery to site by Tuesday 26 July 2011 in accordance with his program, as he still has not received the detailed structural drawings, requested 1 week ago.

Page 6 of 10

You send an urgent request for this info to the structural engineer and on Monday 30 May 2011, you receive the required drawings from the structural engineer and after checking the drawings, you issue these to the Principal Contractor on Wednesday 01 June 2011.

The Principal Contractor eventually places the order for the steel roof trusses on Wednesday 08 June 2011and the trusses are delivered on Thursday 18 Aug 2011.

On Friday 19 August 2011, the Principal Contractor submits his claim to the project QS, which includes for the trusses as M.O.S. as well as an additional amount of R 179,791.20c Excl VAT, payable towards his preliminaries and which simply states that the contract period has been extended by 18 days, citing a delay of 18 calendar days, caused by the above.

For reference purposes, the following calendar may be handed to candidates.

Questions:4.1Verify :a. Whether the Principal Contractor has followed the correct procedures in

requesting a revision to the date of Practical Completion; and 2 marksb. whether the Principal Contractor is indeed entitled to additional preliminaries

payment and an extension of time; and if so 2 marksc. whether the quantity of days claimed is correct; and 2 marksd. whether the amount that is being claimed for this delay is correct. 1 mark

Page 7 of 10

4.2If not, then state the quantity of days that he is in fact entitled to and calculate the correct amount of additional Preliminaries due to the Principal Contractor, if any.

13 marks

Answer 4.1a. It is not the Principal Contractor’s (PC) duty to inform the Principal Agent that the

contract period has been extended. It is in fact the PA’s duty to inform the PC of this [29.7]1, subject to the PA’s evaluation of the PC’s request for an extension, submitted to the Pain in accordance with procedures provided [29.6] 2

b. An adjustment to the contract sum will be due3 and an extension must be granted4, however;

c. only in respect of a 9-working day5 extension of time in respect of delays caused by late information [29.2.4] 6, therefore the dates of delay are 20, 23-27, 30-31 May and 01 June. The fact that he placed the order 5 working days after receiving the information and that the supplier then took 52 days (4 days longer than the allotted 48 days delivery time in accordance with the program) is not for the Employer’s cost and;

d. the amount claimed by the PC is incorrect7, as it is in excess of 9 working days.

Answer 4.2Where the contractor fails to provide a breakdown into categories of the preliminaries8, then preliminaries shall be deemed varied in proportion to the construction period as compared with the initial construction period9 i.e. 75% of the contract sum (JBCC / ASAQS Preliminaries clause 10.3.110)

Thus preliminaries is R4,354,942.23c11

Of this, 75%12 will be varied in proportion to the construction period as compared with the initial construction period13 i.e. 75% of R4,354,942.23c = R3,266,206.67c14

The initial construction period was 32715 working days. Therefore the amount of preliminaries per day = R3,266,206.67c / 327days16 = R9,988.40c per day.17

The 9 working day extension of time therefore entitles the contractor to additional preliminaries of R9,988.40c18 x 919 = R89,895.60c Excl VAT 20

Question 5 (20 marks)

5.1List 5 (five) characteristics (positive or negative) of each of the following means of dispute resolution types.

Page 8 of 10

5.1.1 Litigation 5 marks5.1.2 Arbitration 5 marks5.1.3 Adjudication 5 marks5.1.4 Mediation 5 marks

Each correct characteristic will render 1 mark:

LitigationA judicial process governed by a statute where an officer of the court, a magistrate or a judge, presides and gives a judgement. The judge / officer is seldom an expert in building agreement disputesUnlike in Arbitration, the parties do not get to elect the presiding judge.Judge will have to be led by arguments and facts presented by the parties’ attorneys. This is usually a lengthy process as a judgement may only be made after all facts have been heard and substantiated.Court dates are subject to an overloaded judicial system and are often long into the future and thus time consumingAttorneys and advocates are costlyCourt cases are open to public scrutinyThe parties may seek leave to appeal to a higher court

ArbitrationThe parties freely and voluntarily agree to submit any dispute that may occur to the impartial judgement of a third party. This is done at the point of concluding the contract. The parties may not always agree with the choice of the arbitrator depending on the wording of the contractThe arbitrators judgement is final and the courts can enforce the award by means of a court orderParties may be represented by Legal Advisors and/or Counsel The arbitrator does not have to be an officer of the lawAn arbitrator is usually an expert in the fieldAn arbitrator has judicial immunityArbitration is a private matter and is therefore seldom subjected to the press.Arbitration is recognised as a legitimate alternative means of resolving disputesIt is governed by the Arbitration Act 42 of 1965Arbitration may be concluded in a shorter time than litigation.There are procedural rules that govern the conducting of arbitration.The cost of arbitration is borne largely by the unsuccessful party however the arbitrator may apportion the costs between the parties.

AdjudicationThe parties freely and voluntarily agree to submit any dispute that may occur to the impartial judgement of a third party of their choice.An adjudicator may be appointed when a dispute arisesThe courts cannot enforce the award of the adjudicatorThe adjudicator does not have to be an officer of the lawAn adjudicator is usually an expert in the field and is required to perform his duty with proper skill, diligence and care

Page 9 of 10

An adjudicator does not have any judicial immunity and thus is liable to the parties for any lack of skill, diligence or care in carrying out his duties.Adjudication is a private matterIt is not governed by any legislation The JBCC Rules on adjudication requires that the adjudicator must conclude within 20 working days.There is no set procedure however the JBCC publishes Adjudication Rules which may be used.

MediationThe parties freely and voluntarily agree to submit any dispute that may occur to the impartial judgement of a third party of their choiceThe mediators opinion is not final and bindingNo legal representation is permittedMediation has the potential to preserve goodwill as both parties often make concessions and agree to accept less.A mediator is usually a person that is respected in the field and that the parties feel will give an unbiased opinion.Mediation is a private matterThe court may overturn the opinion given by the mediatorThere is no legislation governing this method of dispute resolution.The idea of going for mediation is to save time and resources. It should be concluded in a short period of time.The procedure of mediation is determined by the the mediator in consultation with the parties.The costs of the mediator are borne equally between the two parties.

Note to markers: Any of the above or additionally as listed under the relevant topic in the SAIA Professional Practice Study Aid.

Page 10 of 10