Where a construction contract creates reciprocal obligations, own performance or tender of own performance is a requirement for the enforceability of a claim for counter-performance. This is known as the principle of reciprocity and is an accepted principle under South African law. The principle dictates that a party is not entitled to demand performance unless it has itself performed, or is prepared to perform.
Whether the principle applies is a question of interpretation. This exercise is assisted by a presumption that in any bilateral contract (i.e. one in which each party undertakes obligations towards the other) the common intention is that neither should be entitled to enforce the contract unless that party has performed or is ready to perform its own obligations.
Obligations may be reciprocal when performance, or tender of performance, by both parties are “concurrent conditions” i.e. each is conditional upon the other. Alternatively, the reciprocity may be one-sided in that the complete performance of a contractual obligation by one party may be a “condition precedent” to the performance of a reciprocal obligation by the other party (for example, where a contractor is obliged to carry out the work which he is engaged to do before the full contract price can be claimed). In such a case, the obligation to pay is conditional on the pre-performance of the obligation to carry out the work (ESE Financial Services (Pty) Limited v. Cramer 1973 (2) SA 805 (C) 808H-809A).
But what happens when performance is due by one party in instalments? If cancellation ensues before the completion of the works, what happens to the right to payment instalments which accrued prior to that cancellation?
The South African Provisional Division (more than 30 years ago) in Thomas Construction (Pty) (in Liquidation) v. Grafton Furniture Manufacturers (Pty) Limited 1986 (4) SA 510 (N) (later confirmed by the Appellate Division in 1988 (2) SA 863 (A)) provided guidance to this conundrum, which remains a useful warning to contractors today.
In this case, Thomas Construction was engaged by Grafton to perform certain construction works pursuant to two separate but similar written building contracts.
Salient clauses in the contracts provided for:
- interim certificates to be issued periodically on the basis of which Grafton was obliged to pay Thomas Construction the amounts certified within 14 days of being issued;
- termination of the contracts within 14 days of a failure to comply with a written notice being given to Thomas Construction calling upon it to proceed with the works;
- termination of the contracts in the event of Thomas Construction being liquidated;
- Grafton to make no payment for work done by Thomas Construction if the contracts were being terminated as provided for above until the works had been completed.
During the performance of the works, Thomas Construction was liquidated, the contract terminated and the works were completed by a third party. However, just before the liquidation of Thomas Construction, two interim payment certificates were issued, the payment dates had matured and payment was therefore overdue. Upon liquidation, the contract was validly cancelled.
Thomas Construction claimed payments for the amounts reflected in the interim certificates. The Provincial Division, as it was then known, dismissed the claims. On appeal, having decided that the contract was validly cancelled, the main issue was whether Thomas Construction was entitled to enforce payment in terms of the interim certificates despite Grafton having cancelled the contracts.
The Appellate Division confirmed the findings of the Provincial Division. The Court accepted the test set out in Crest Enterprises (Pty) Ltd v. Rycklof Beleggings (Edms) Bpk 1972 (2) SA 863 (A) that a claim ex contractu can survive the subsequent cancellation of the contract if it is a right which is “accrued, due and enforceable” as a cause of action “independent of any executory part of the contract”.
The Court found that:
- the interim certificates were not insensitive to the fate of the remainder of the contract simply because they “functioned on their own”. The certificates were “not immune against attack or defence” – all defences remained open to a claim based on an interim certificate, including set-off or a counterclaim for damages for breach of the very contract which spawned the certificate;
- a progress payment was essentially a prepayment of the eventual contract sum – if payment of the contract sum could no longer be enforced, neither could the prepayment. An undertaking to make the prepayment should therefore no longer have to be honoured;
- the function of an interim certificate was to quantify the prepayment and to record the employer’s undertaking to pay it, and any defence capable of defeating a claim for the eventual contract sum ought therefore to be valid against a claim founded on an interim certificate;
- the claim on the interim certificates remained in essence a claim on the contract. As the claim was not independent of the executory part of the contract, the cancellation of the contract, which struck at the very foundation of the claim, debarred such claim. A contractor would have to look to remedies other than the interim certificate to exact compensation for work done by him (i.e. unjustified enrichment).
Consequently, the two interim certificates did not survive the cancellation of the contracts.
This serves as a valuable lesson for contractors seeking the independent enforceability of their rights to interim payment notwithstanding breach of contract. South African courts will conduct a ”quid pro quo” enquiry which will prevent an unreciprocated payment.