The High Court of South Africa considered a dispute on the interpretation of retention clauses in two subcontracts. The court provided much needed guidance on the approach to be taken where subcontracts do not contain time periods for compliance.
The employer concluded a building agreement (the main contract) with the contractor for the construction of various houses. Subsequently, the contractor concluded two subcontracts with a subcontractor for the construction.
Although the terms of the main contract were incorporated into both subcontracts, each subcontract was independent.
Clause 16 of the main contract provided that:
- if the contractor was awarded 500 housing units, a 5 percent retention would be levied against the contractor prior to practical completion as security for completion of the building project;
- 2.5 percent of the retention would be released upon achievement of practical completion; and
- the final 2.5 percent would be released “6 months” from the date of achievement of final completion.
Similarly, clause 17 of both subcontracts provided that:
- a 10 percent retention would be levied against the subcontractor;
- the retention would be held until the retention period had lapsed or until all the work had been completed to the engineer’s satisfaction.
Clause 17 in one of the subcontracts, however, specified that 5 percent of the retention would be released upon practical completion; and that the remaining 5 percent of the retention would be released upon final completion.
Although clause 17 made mention of a “retention period”, the term was not defined.
A dispute arose when the subcontractor sought payment of its retention monies from the contractor for the work it completed in respect of the building projects. Central to this dispute was the weight given to the engineer’s report. The engineer confirmed in its report that the works were complete, to its satisfaction, and recommended payment of the retention money.
The contractor argued that the meaning of the “retention period” could only be explained with reference to the retention period in the main contract where 2.5 percent withheld by the employer is only paid out six months from the date of achievement of final completion.
The contractor argued that the retention period must be extended to six months after the date of achievement of final completion in the subcontract. Accordingly, the subcontractor should have waited for the six-month period after completion of the main contract to expire before declaring a dispute. Notwithstanding the issuing of the engineer’s reports, “there was still outstanding retention work” and the subcontractor was therefore not entitled to any payment of retention money.
The subcontractor argued that for court to interpret clause 17 within the context or background of the defects liability period, the defects liability period was to be understood as the period between practical and final completion in which the subcontractor would complete all outstanding work and correct all defective work.
The subcontractor relied heavily on the engineer’s reports which certified the fact that the main contract works were complete and that the final 2.5% should be released.
The court considered the wording of both subcontracts and the context within which these words appeared. The court held that the “retention period” could “only be interpreted to be a period ending at the date of final completion of the [sub]contract”. This is why the engineer’s reports were issued at that particular date.
It was clear from the engineer’s report that the engineer was satisfied that all work was complete. The retention provided for in the subcontract should have lapsed upon issuing of the engineer’s reports. This became a central feature of this dispute.
The fact that the main contract provided for a payment of an outstanding 2.5 percent retention some six months after date of final completion could not be ascribed to a further defects liability period in the already “completed” subcontract.
It was accordingly decided that the subcontractor was entitled to receive payment of the retention money from the contractor.
This case serves as a useful warning to engineers who prematurely confirm the works as complete. As echoed by the court, at the date of issuing the engineer’s report, “the retention work was not done properly”. The engineer must therefore “be blamed for certifying their satisfaction of the retention work done”.
Parties must also take care in drafting back-to-back subcontracts. Time, payment, risk and dispute related clauses require particular consideration when drafting any agreement. Parties are encouraged to provide clear definitions and clauses which are consistent in all agreements. This requires collaborative efforts by incorporating clauses by reference.
To avoid similar disputes, draft your back-to-back subcontract with care. Precision is key and all time periods must be properly defined. Also, appoint your engineers carefully as obligations carried out have ramifications by which both parties are bound by.