SUBCONTRACTORS – SECURING PAYMENT
 Subcontractors frequently face the age old problem of main contractors failing to make payment on time or at all. All Association members are expected to conduct their affairs ethically, but you may end up working for a main contractor who is not a member and who does not play the game fairly.
Here are some suggestions which it is hoped will help alleviate future problems of this nature.
Avoid going the retention route
The JBCC N/S Subcontract Agreement provides that the subcontractor may chose to provide a variable or fixed performance guarantee. This involves obtaining a facility from a recognised financial institution. Before guaranteeing a builder's performance obligations, financial institutions will secure their own risk usually by means of a pledge of assets such as Rand for Rand arrangements or mortgage bonds.
Requirements such as these lead may to a subcontractor's working capital being tied up with the result that they often opt for the retention arrangement. Main contractors may readily agree to this arrangement in order to improve their cash flow. To make matters worse some main contractors deliberately frustrate the final payment of retention monies in the full knowledge that the subcontractor may not have the resources or the will to enforce their rights.
Suggestion
It is recommended that subcontractors plan well ahead and obtain construction guarantee facilities well in advance of their next tender. This will enable the subcontractor to provide the necessary guarantees without any last minute “run around”. It is obviously preferable to have one's resources pledged to a recognised financial institution than be left to the mercy of a potentially unscrupulous main contractor.
A subcontractor can also specify that it requires a payment guarantee from the main contractor. There are bound to be less payment problems where the main contractor has issued a payment guarantee, but in practice these are not often issued.
The KwaZulu-Natal MBA offers a guarantee service and our Financial Services manager, Clive Hill (clive@masterbuilders.co.za) should be contacted for further information.
Beware! “Pay-if-paid” or “pay-when-paid” clauses
Main contractors frequently amend or delete the standard JBCC clauses and insert new ones into subcontract agreements to provide that payment will only be made when or if payment is received from the employer. Typically these clauses read something like this:
“No part of the price / contract sum shall be paid to the subcontractor until the expiry 7 days after payment is received from the employer”
or
“The Contractor shall pay the Subcontractor each progress payment within 7 days of after receipt of payment from the employer”
Subcontractors should pay careful attention to any amendments to the standard form of agreement, particularly clause 31.
Don't fall for this! Don't allow the main contractor to shift the burden of non-payment to you. Remember that the main contractor has all the machinery at his disposal at the time of entering into the Principal Building Agreement to secure payment from the Employer. Why then should subcontractors be held hostage to the state of the relationship between the employer and the main contractor?
A Point of Law
English law does not like pay-when-paid provisions and there is case authority that they will only be enforced when the wording is clear and ambiguous. In Australia and New Zealand legislation has been passed which specifically provides that pay-when-paid and pay-if-paid clauses have no force or effect. Certain jurisdictions in the USA, notably California, regard such clauses as invalid as they are contrary to public policy. In South Africa, however, the question is not altogether certain and should the issue come under judicial spotlight it is likely that your courts will look to the decisions taken by foreign courts for guidance. South African law does however recognise that no person may take advantage of his own default to the detriment of another. Thus a main contractor will not be able to rely on such clauses should the reason for non-payment be due to its defective performance.
Many of the abovementioned problems are also applicable to main contractors who experience difficulties with payment from clients. The solution largely lies in the insistence on your rights. This is not always easy to do, but the more often it is done, the greater the chance of the culture changing – ultimately for the benefit of all parties.
Bruce Lyle & Brandon Abdinor |
