South Africa: Construction (2nd edition)

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This country-specific Q&A provides an overview to construction laws and regulations that may occur in South Africa.

This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/construction-2nd-edition/

  1. Is your jurisdiction a common law or civil law jurisdiction?

    Whilst South Africa is generally considered to be a common law jurisdiction, it is more accurately described as a hybrid system, consisting of English common law, Roman-Dutch civil law and South African customary law.

    As a general rule, contract law and the law of delict (tort) are governed by Roman-Dutch common law. Civil procedure, company law, the law of evidence, damages and constitutional law are governed by English common law.

  2. What are the key statutory obligations relevant to construction and engineering projects?

    South Africa does not have a centralised body of legislation which governs construction and engineering projects. Instead, a number of statutes, regulations and guidelines collectively govern, inter alia, procurement, health and safety, the environment, planning, engineering and building on projects.

    Key statutes which set out specific obligations include:

    (i) The Construction Industry Development Board (“CIDB”) Act 38 of 2000, which provides that contractors may not undertake any construction works for public sector entities unless they are registered with the CIDB and hold a valid CIDB registration certificate;

    (ii) The Housing Consumers Protection Measures Act 95 of 1998, which prescribes that no home builder shall construct a residential property unless they are registered with the National Home Builders Registration Council (“NHBRC”);

    (iii) The Occupational Health and Safety Act 85 of 1993 (“OH&S Act”), and the Construction Regulations promulgated in 2014 under the OH&S Act (“Construction Regulations”), both of which obligate employers and contractors to take measures to ensure the health and safety of all persons on site;

    (iv) The Public Finance Management Act 1 of 1999 (“PFMA”) and the Municipal Finance Management Act 56 of 2003 (“MFMA”), which regulate public sector procurement at both provincial and local level.

  3. Are there any specific requirements that parties should be aware of in relation to: (a) health and safety; (b) environmental issues; (c) planning; (d) employment; and (e) anti-corruption and bribery.

    (a) health and safety;

    As set out above, employers, designers and contractors attract extensive health and safety obligations in line with international standards that are regulated by the OH&S Act and the Construction Regulations. Specifically, the Construction Regulations provide for, inter alia:

    (i) the health and safety specifications for the intended construction work.
    (ii) the development of a health and safety plan by the contractor, setting out minimum safety requirements and measures to be put in place to ensure implementation; and
    (iii) periodic health and safety audits.

    (b) environmental issues;

    There are a number of statutes that govern environmental issues related to construction and engineering projects. In particular, parties should be aware of:

    (i) The National Environmental Management: Air Quality Act 39 of 2004, which regulates national norms and standards for air quality monitoring, management and control, including the regulation of dust emissions on construction projects;
    (ii) The National Water Act 36 of 1998, which provides strict liability provisions in the event of water contamination on-site or off-site, and requires a contractor to take positive steps to prevent water pollution;
    (iii) The Environment Conservation Act 73 of 1989, which regulates waste management and the issuing of permits for the establishment or operation of waste disposal sites; and
    (iv) The National Environmental Management Act 107 of 1998, which provides a list of activities that cannot be carried out without an environmental authorisation, including ground clearing activities.

    (c) planning;

    The National Building Regulations and Building Standards Act 103 of 1977 (“NBRBAS”) provides that all building plans must be approved by the local authority.

    (d) employment; and

    While there is no specific legislation applicable to employees in the construction sector, South Africa has a comprehensive legislative framework which governs employment more generally. This legislation includes:

    (i) the Basic Condition of Employment Act 75 of 1997, which sets out basic conditions of employment to be provided by employers;
    (ii) the Labour Relations Act 66 of 1995, which, inter alia, governs collective bargaining and sectoral minimum wage agreements in addition to prohibiting employees from being unfairly dismissed and subjected to unfair labour practices by employers; and
    (iii) the Immigration Act 13 of 2002, which regulates the employ of foreign nationals in South Africa.

    (e) anti-corruption and bribery

    The Prevention and Combating of Corrupt Activities Act 12 of 2004 (“Corrupt Activities Act”), prohibits various corrupt actions and practices across all industries, including the construction industry. More specifically, the Corrupt Activities Act sets out offences for corrupt practices involving public officials, tenders and contracts.

    In addition, the CIDB has published a code of conduct for all parties engaged in construction procurement (“CIDB Code”). The CIDB Code provides a set of standards against which a party’s actions in a procurement process may be assessed. In an effort to curb and prevent corrupt practices, the CIDB Code provides that an agent, contractor, employer, employee, or subcontractor, may not accept gifts, favours or anything of any nature that is of more than token value, from another party involved in that procurement process. Additionally, the CIDB code provides that parties may not engage in unfair or unethical practices.

  4. What permits, licences and/or other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?

    Before:

    Again, in terms of the CIDB Act, all contractors who wish to tender for construction works for a public sector entity must:

    (i) hold a valid CIDB registration certificate, and
    (ii) be registered with the NHBRC should they wish to construct residential property.

    As set out in question 3, the NBRBAS Act provides that all building plans must be approved by the relevant local authority [Section 4(1) of the NBRBAS Act]. In addition, the National Building Regulations promulgated under the NBRBAS Act set out the documentation that must be submitted to the local authority before commencement of a construction project. By way of example, the following documents are required:

    (i) a site plan;
    (ii) layout drawings;
    (iii) a fire installation drawing;
    (iv) drainage installation drawings;
    (v) particulars of any existing building or structure that is going to be demolished and the necessary approval for the demolition work from the local authority; and
    (vi) any other plans and particulars that the local authority requires.

    Any person found in contravention of the NBRBAS Act may be found guilty of an offence and shall be liable to pay a fine.

    Additionally, permits are required for the transportation of abnormal loads on public roads in terms of the regulations promulgated under the National Road Traffic Act 93 of 1996.

    During:

    In addition to the above certificates and permits, the OH&S Act provides that inspections are required to be carried out and certificates issued during a construction project.

    Completion:

    The NBRBAS Act prescribes that after a contractor has erected a building it must obtain a certificate of occupancy from the local authority with jurisdiction which indicates that:

    (i) a building has been erected in accordance with the approved building plans; and
    (ii) that such building is in compliance with the related health and safety requirements [Section 14(1) of the NBRBAS Act].

    Any contractor that does not obtain a certificate of occupancy in terms of the NBRBAS Act may be found guilty of an offence and face imprisonment or payment of a fine.

    In addition, the Electrical Installation Regulations promulgated under the OH&S Act require contractors to obtain a certificate of competency for the electrical installations performed in construction projects which must be accompanied by a test report in the format approved by the chief inspector [Regulation 7(1) of the Electrical Installation Regulations].

  5. Is tort law or a law of extra-contractual obligations recognised in your jurisdiction?

    Yes, the law of tort (known as the law of delict) is recognised in South Africa.

  6. Who are the typical parties involved in a construction and engineering project?

    The typical parties are:

    (i) the employer (sometimes referred to as the client or owner);
    (ii) the employer’s representative – who may be referred to as the engineer, project manager and/or principal agent depending on the type of agreement concluded between the parties;
    (iii) the contractor.

    Typically, a large-scale construction and engineering project will also involve a number of sub-contractors with specialised skills necessary for the project.

  7. What are the most popular methods of procurement?

    The most popular methods of procurement are:

    (i) Traditional procurement – where the design and construction of the project are separate. Under this method of procurement, the employer will appoint a professional consultant or team of consultants (typically an architect or engineeer dependent on the nature of the intended works), who will be responsible for the design of the project and will separately appoint the building contractor on the employer’s behalf, who will construct the project. This procurement method is most commonly used for road and other civil construction works and commercial or residential building works.

    (ii) Design and build procurement – where the contractor is responsible for both the design and construction of the project.

    Other procurement methods such as:

    (A) engineering, procurement and construction (“EPC”),
    (B) multi-contracting procurement;
    (C) engineering, procurement, construction and management (“EPCM”)

    are also available for both international and local contractors. Public Private Partnerships (“PPP’s”) are also commonly used by the government as a tool for developing, operating and maintaining infrastructure in South Africa.

  8. What are the most popular standard forms of contract? Do parties commonly amend these standard forms?

    The most popular standard form contracts used in South Africa for large construction and engineering projects are as follows:

    (i) The Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) Conditions of Contract published by the International Federation for Consulting Engineers.
    (ii) The New Engineering Contract (“NEC”) April 2013 edition (“NEC 3”), published by the Institution of Civil Engineers through its NEC Panel.
    (iii) The Joint Building Contracts Committee (“JBCC”) 2000 suite of contracts produced by the JBCC, mainly used for commercial building projects.
    (iv) The General Conditions of Contract for Construction Works 2004 (“GCC”) produced by the South African Institute for Civil Engineering.

    These standard form contracts are commonly amended by way of particular conditions agreed between the parties to suit the respective project’s needs. The CIDB Regulations require that public sector construction procurement be undertaken on the above standard form contracts.

  9. Are there any restrictions or legislative regimes affecting procurement?

    There are no restrictions or legislative regimes affecting procurement in the private sector.

    As mentioned above, in terms of public sector procurement, the PFMA regulates the process to be followed when managing government finances at both a national and provincial level. Regulations promulgated under the PFMA, provide specific guidelines to be followed when dealing with public procurement. The MFMA provides similar guidelines for the management of public finances in respect of municipal authorities.

    Some sectors have adopted a sector code in terms of the Broad-Based Black Economic Empowerment Act No 53 of 2003 (“BBBEE Act”). These sector codes aim to increase participation by historically disadvantaged persons in that particular sector.

  10. Do parties typically engage consultants? What forms are used?

    Consultancy agreements are common in South Africa across the planning, design and construction phases of a project, depending on the size and complexity of the project. The FIDIC Client/Consultant Model Services Contract (“White Book”), NEC3: Professional Services Contract (“PSC”) and the Professional Consultants Services Agreement (“PROCSA”) are often used contracts to appoint professional consultants while the professional bodies for architects, engineers and quantity surveyors generally put forward and support standard engagement terms for their members.

  11. Is subcontracting permitted?

    Subcontracting is permitted in South Africa. In the private sector, the employer and contractor usually negotiate and agree the contract amount or the type of works that can be subcontracted.

    The PFMA 2017 Regulations regulate subcontracting in the public sector. The PFMA Regulations provide that a bidder cannot subcontract more than 25% of the contract value to another party if that party does not have at least the same or better transformation accreditation, known as a 'BBBEE' score or grading. [Section 6(5) of the PFMA Regulations]

  12. How are projects typically financed?

    Private sector projects are usually financed by debt and equity. Public sector projects are a) self-funded through the treasury, or b) financed by bond issues, commercial and/or development bank loans, or c) are procured through PPP structures.

    Commercial and/or residential projects are generally financed by commercial lenders through development loans and are typically secured through mortgage bonds registered over the property and improvements.

  13. What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?

    The following types of security are available for employers which can either be provided for by banks or companies specialising in security:

    (a) Performance Bonds – Both on-demand and default bonds (bonds which do not require the employer to establish the contractor’s breach of contract first). These bonds usually expire at practical completion;

    (b) Parent company guarantee – these are preferred as an alternative to performance bonds;

    (c) Advance payment bonds – these are usually drafted on an on-demand basis; and

    (d) Retention Bonds.

    Although not commonly used, direct agreements, which enable lenders to step into the shoes of the project company (the borrower) and take over the project and/or find a substitute entity to continue the project, are also available in South Africa.

  14. Is there any specific legislation relating to payment in the industry?

    Unlike the United Kingdom, South Africa has no specific legislation regulating payments in the construction sector. The CIDB has published draft regulations under the CIDB Act (“the Proposed Amendments”) which are currently under review. When enacted, it is envisaged that the Proposed Amendments will regulate “Prompt Payment” to contractors on construction projects (and introduce an adjudication regime). At present, the parties’ arrangements as to payment are regulated contractually only.

  15. Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?

    “Pay-when-paid” clauses are currently permitted and are commonly used. Again, however, the Proposed Amendments aim to introduce requirements in relation to, amongst other things, stage payments by ensuring proper cash flow for contractors by prohibiting “pay-when-paid” clauses.

  16. Do your contracts contain retention provisions and, if so, how do they operate?

    Yes. Construction contracts commonly provide for a proportion of the contract sum (usually 5% to 10%) to be withheld by a respective employer to correct defective works. Typically, on practical completion, half of the retention is paid to the contractor, with the remaining half released once the final completion certificate has been issued, at the end of the defect rectification period.

    As an alternative to retention of cash by the employer, a contractor may provide a fixed or variable (step down) retention guarantee. This is often attractive as it provides comfort to an employer who will retain security for the full value of retention against defective work until final completion. Where cash flow is a consideration, however, an employer may prefer, and insist on, cash retention.

  17. Do contracts commonly contain liquidated delay damages provisions and are these upheld by the courts?

    Yes. Construction contracts commonly provide for delay liquidated damages and prescribe a rate for such damages. These clauses tend to be upheld by the courts, adjudicators and arbitrators, as applicable, provided that they are not contrary to public policy.

    Delay liquidated damages constitute a penalty under South African law i.e. there is no distinction between delay liquidated damages and penalties. Accordingly, delay liquidated damages are governed by the Conventional Penalties Act, 15 of 1962 (“the Conventional Penalties Act”). The purpose of the Conventional Penalties Act is, as a matter of policy, to give legitimacy to penalties as a function of the parties’ freedom of contract. South African law therefore takes the view that penalties are prima-facie enforceable.

    Under the Conventional Penalties Act, a party may apply to court to have an “excessive penalty” reduced if the amount of the penalty is out of proportion to the prejudice suffered by the creditor. The court may, in its discretion, reduce the penalty as it considers fair. The onus lies on the claimant to establish that the penalty is disproportionate to the loss suffered by the Employer, which from an evidentiary perspective can be very onerous for a contractor.

  18. Are the parties able to exclude or limit liability?

    Yes. Parties are able to limit or exclude liability, except for losses or damages resulting from intentional conduct. Contractors’ liability is commonly limited in one of two ways:

    (a) The parties may agree to limit or exclude liability for consequential and indirect loss.
    (b) The parties may agree to cap or exclude liability for certain categories of non-performance or negligence, apart from introducing overall liability caps.

  19. Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?

    Parties may terminate contracts by mutual agreement. Cancellation provisions are usually included in the contract and typically set out:

    (a) the circumstances in which the parties may terminate the contract, and
    (b) a mechanism which provides the steps to be followed to give effect to a cancellation clause.

    Force majeure clauses are usually included in construction contracts and govern an event or occurrence which makes contractual performance impossible. South Africa’s common law recognises the principal of supervening impossibility. An event or occurrence which makes contractual performance impossible, but is not necessarily contracted for, is categorised under the common law principle of supervening impossibility. There are particular conditions which must be satisfied for the event to qualify as a supervening impossibility. These include that:

    (a) performance must be objectively impossible;
    (b) the impossibility must be unavoidable by a reasonable person; and
    (c) the event must not have been caused by either party.

    Extreme difficulty, inconvenience and / or economic hardship do not constitute impossibility.

    In addition, there is a common law right to terminate a contract if the other party commits a repudiatory breach. Most commonly under a construction contract, this would be an act or omission by one of the parties which demonstrates an intention of that party to no longer be bound by the terms of the contract.

  20. What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?

    South African contract law emphasises privity of contract and will not infer or recognise third party rights under a contract unless such rights are clearly stipulated and accepted by the third party as would make it privy to the contract. As a result purchasers, funders and tenants typically require performance guarantees and/or enter into separate direct contracts with contractors or employers where necessary, which provide for appropriate recourse by way of covenants, indemnities, warranties and/or step in rights to protect their interests in a construction contract.

  21. Do contracts typically contain strict provisions governing notification of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?

    Yes. Construction contracts typically provide that the contractor must notify the employer of an event potentially giving rise to a claim for extension of time or additional costs within a stipulated period calculated from the when the contractor first became aware, or should reasonably have become aware, of the claim. Such notice is usually considered a condition precedent to bringing a claim and a party will be precluded from advancing a claim where: i) it fails to notify a claim timeously, or at all, and ii) the clause includes a sanction against advancing a claim where that party has failed to abide by the time constraints set out in that clause.

    Courts, adjudicators and/or arbitrators will enforce a time-bar i) where the relevant provision is clearly expressed and ii) on the basis that the parties knowingly agreed to contract on such terms.

    Contractual provisions requiring delivery of regular progress reports, maintenance of site diaries etc. often practically assist the contractor to notify a claim timeously.

  22. What insurances are the parties required to hold? And how long for?

    There is no industry specific insurance which is required by law however, contractors and employers will typically agree to procure the following types of insurance, dependant on their risk profile under the relevant contract and the agreement reached by the parties in relation to specific cover required:

    (a) All-risk insurance covering damage to the works, premises and site materials;
    (b) Public liability insurance;
    (c) Professional indemnity insurance (this is particularly important for design, engineer and build projects); and
    (d) Special-risk insurance through SASRIA SOC Ltd (“SASRIA”). SASRIA is a state-owned company which provides special risk cover to businesses in South Africa (and government entities) against civil commotion, public disorder, strikes, riots and terrorism. SASRIA is mandated by legislation to offer such insurance but does not oblige companies to procure such insurance.
    In addition, where contractors act as employers, they are required to:

    (a) register with the Compensation Fund for the Compensation for Occupational Injuries and Diseases Act, 1993, or with a licensed insurer.
    (b) under the Construction Regulations prescribed in terms of OH&S Act, ensure that “Principal Contractors” are registered and are in good standing with the compensation fund or a licensed insurer.
    (c) Register with the Unemployment Insurance Fund under the Unemployment Insurance Act, 63 of 2001.

  23. How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?

    While most construction contracts will provide for some form of alternative dispute resolution (typically adjudication and/or arbitration) the default forum for resolving construction disputes is through the civil courts.

    An arbitration clause or agreement is typically included in construction contracts to regulate the arbitration proceedings. This clause will usually stipulate (i) a set of institutional rules to be applied, (ii) the method of selecting an arbitrator; and (iii) the seat and the governing law of the arbitration.

    In public sector projects, litigation is often enforced as a matter of policy on the part of public sector employers.

    Mediation and expert determination are also available and used with increasing frequency in South Africa. These processes are regulated by terms of reference and rules agreed between the parties. These processes are generally voluntary and are not mandated by law as a pre-requisite to litigation proceedings. Mediation continues to be treated with scepticism and is often viewed as nothing but a precursor to arbitration or litigation.

    The South African Department of Justice and Constitutional Development is taking steps to encourage court-annexed mediation projects. The purpose of this is to assist Case-Flow Management in order to reduce the number of disputes before the Courts and to promote access to quick and affordable justice.

  24. How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?

    Historically, the post-1994 democratic government has been sceptical of arbitration. It has traditionally been seen as a privatisation of the dispute resolution process and an attempt to circumvent the racial transformation objectives of the judiciary. It has only recently been reprioritised with the introduction of a new act applicable to international arbitration specifically, namely the International Arbitration Act of 2017.

    Domestic arbitration proceedings are discretely regulated, by an Arbitration Act which dates back to 1965 and which has been criticised as facilitating judicial interference in the arbitral process. Nontheless, the South African courts are deferent to, and strongly supportive of arbitration in relation to both process and enforcement, which makes South Africa an attractive and cost effective seat for African arbitration.

    Local courts are willing to give effect to domestic arbitration awards, provided that the respective arbitration agreement is valid and not against public policy. The courts are empowered to set aside arbitration awards but will only do so in limited circumstances; for example, if the arbitrator committed a gross irregularity in the conduct of the arbitration or has exceeded his/her powers. The enforcement of arbitration awards is subject to the Arbitration Act of 1965.

    Enforcement of foreign arbitration awards is subject to the International Arbitration Act which is based on the UNCITRAL model law. This Act provides for the recognition of foreign arbitral awards in South Africa, as required by the New York Convention. Foreign arbitral awards, once made an order of the court, are enforced as any judgment or order of the court.

  25. Are there any limitation periods for commencing disputes in your jurisdiction?

    Yes, the prescription period is relatively short by international standards. The Prescription Act 68 of 1969 (“the Prescription Act”), provides that contractual and delictual debts are extinguished after three years from the date when they became payable (due). “Debt” under the Prescription Act is broadly defined to encompass both contractual and delictual claims. Prescription starts to run as soon as the debt is due or cause of action arises. A debt is due once the creditor can identify the debtor and the facts from which the debt arose. Prescription is interrupted, inter alia, by the launch of legal proceedings.

    The position on prescription of construction claims in a tiered dispute resolution context is not clear. The position is arguably that prescription commences on finalisation of a third party assessment or adjudication process, if one is provided for, at which stage a party is free to pursue its claims at arbitration or litigation, being its chosen forum for the final resolution of the dispute.

  26. How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?

    Multi-party disputes are uncommon in a construction arbitration context mindful that there is no basis to consolidate arbitral proceedings outside of the parties' express agreement. They are more common in a litigation setting. The courts have confirmed that there is no apportionment of damages in a contractual context. A ‘net contribution clause’ is enforceable and may be used to avoid damages not fairly or reasonably attributable to a defaulting party. These clauses have become common in consultancy agreements on construction projects.

  27. What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?

    The recent industry-specific recession has resulted in a number of large listed construction companies – particularly contractors - offshoring their businesses, going into business rescue and filing for bankruptcy. This is symptomatic of a number of challenges which the industry has faced over the past few years, including; failed state-owned entities, a decline in investment around infrastructure and mining, and an unstable workforce, amongst other things.

    The industry continues to face a number of major risks, including a dip in national spend around national elections, an overall cut in infrastructure spend in the 2019 Budget, investor caution and restrictive legislative conditions.

    Fitch Ratings Inc. has indicated, nonetheless, that in 2019, growth will be at about 2.4%, bringing the industry out of this recession. The recent decline of majore domestic construction firms has also made space for development of smaller, local players in the industry, as well as global construction companies looking to invest in South Africa. In addition, the government sanctioned Independent Power Procurement (IPP) Programme seeks to unlock and develop inter alia renewable sources of energy as well as to expand and develop existing power capabilities including gas, coal and nuclear power stations.

  28. What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?

    As set out in question 27 above, the most prevalent projects attracting attention are power projects, bulk water infrastructure, roads and commercial property development in South Africa. In particular, the IPP Programme continues to be a source of considerable investment in the country.

  29. How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?

    Presently, the South African construction industry lacks the investment necessary to fund broad-scale technological development across the sector.

    There is, however, some progress in this space. South Africa is using Building Information Modelling (BIM) to improve quality and productivity of the built environments. Although at this stage, there are only pockets of excellence and players in the industry lack a coordinated approach and sufficient standards against which to measure the quality of the information being produced.

    Despite this, BIM-related conferences and workshops are becoming increasingly popular and there is an increased interest in BIM across employers, contractors, designers and builders alike. In addition, a non-profit company called the BIM Institute has opened, with the objective of improving construction quality and productivity through the leadership of information and education.