APPLICATION OF THE “ROOT CAUSE” PRINCIPLE IN CONSTRUCTION CLAIMS

By Tumisang Mongae Friday, January 10, 2014
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Such cause of action does not “arise” or “accrue” until the occurrence of the last of such facts and consequently the last of such facts is sometimes loosely spoken of as the cause of action.”

A defect may occur at a particular point but have its effect manifesting only at a later stage. The question is does a debt arise when the first or last of such facts occurs? A further issue is what is a creditor required to do in order to be seen to have exercised reasonable care in order to ascertain the identity of a debtor and the facts from which a debt arises? The Court in African Products (Pty) Limited v Venter NO (in her capacity as the Liquidator of John Thomson Africa (Pty) Limited) & Others was presented with these issues.

During January 1996, African Products (Pty) Limited (AP) concluded an oral agreement with John Thompson Africa (Pty) Limited (JTA) in terms of which JTA would manufacture and supply a tube bundle to AP in the gluten drier at AP’s Germiston mill. On 16 August 1998, six months after the tube bundle was installed and commissioned, a crack emitting steam was identified in the pressure vessel of AP’s new germ drier. None of the parties on site knew what the root cause of the crack was. It accordingly became apparent that the root cause of the crack would require a detailed investigation

On 17 September 1998, a meeting was held between the parties and TJA agreed to undertake an investigation into the root cause of the mechanical defect in the tube bundle. Prior to any report on the investigation on the first crack, a second crack manifested on 26 October 1998. An expert was immediately commissioned to investigate the root cause of the further tube bundle failure. A week thereafter, the expert advised AP orally that the likely cause of both cracks was a substantial misalignment at the joint between the dished end and the shaft and further that indications were that TJA was liable for the defect. This finding was repeated in the expert’s written report of 14 November 1998, as well as his final report of July 1999.

On 21 September 2001, AP issued summons against inter alia TJA (which was subsequently placed under liquidation) for damages suffered due to TJA’s breach of its contractual obligations. The defendants raised a special plea that AP’s claim had become prescribed in accordance with the Act as a period of three years had already elapsed since the claim became due. The parties agreed to separate the issue of prescription as raised by the defendants. The Court a quo dismissed the action and found that the defendants had succeeded in proving that AP’s claim had become prescribed.

On appeal, the Court observed that the crisp issue was whether AP had knowledge of the facts from which the debt arose on 16 August 1998 or, if not, whether AP should have acquired such knowledge by exercise of reasonable care before 21 September 1998 (that is, three years before the summons was issued). The Court further noted that what appears to have been accepted by the parties was that as at 16 August 1998, none of the parties present on site had knowledge of the root cause of the mechanical failure of the tube bundle. It was further accepted that it was not until the expert had informed representatives of AP, almost a week after the second crack had manifested, of the root cause of the bundle failure, that such knowledge was acquired.

The Court inter alia considered the concept of “facts from which the debt arises” as envisaged in section 12 (3) of the Act. The Court held that AP had knowledge for the first time of the facts from which the debt arose a week after the second crack had manifested on 26 October 1998. In arriving at this finding, the Court stated the following:

The concept refers to knowledge on the part of the creditor of the material facts constituting its cause of action, the factual ingredients thereof and not merely a legal conclusion drawn from the facts.

Where a creditor’s claim for damages is based on defective workmanship, all that is required is knowledge, not only of the defect and the resultant damage, but also the root cause of the defect and the resultant damage.

On 16 August 1998, all that AP knew was that there had been a failure of the tube bundle. What was not established was the root cause of the crack.  Furthermore, there was consensus amongst those on site that the actual cause of the crack warranted further investigation.

It was not until the expert had carried out his investigation, about a week after the second crack had manifested (2 November 1998), that the appellant came to know of the root cause of the crack.

After the aforesaid finding, the next issue considered by the Court was whether AP could have acquired knowledge of the root cause of the crack prior to 21 September 1998 had it exercised reasonable care as envisaged in section 12 (3) of the Act. In this regard, the question was whether AP had acted unreasonably by not conducting its own investigation, leaving it rather to TJA to investigate the root cause of the tube bundle failure.

The Court held that it was unable to find that AP conducted itself unreasonably in allowing TJA to undertake the required investigations, and that there was no justification for a finding which attributed knowledge of the root cause of the bundle failure to AP before 21 September 1998. In arriving at this finding, the Court stated the following:

The requirement of exercising reasonable care required diligence not only in ascertaining the facts underlying the debt, but also in relation to the evaluation of those facts.

Section 12 (3) required the creditor to do no more than what could reasonably be expected in circumstances.

Factors to be taken into account in determining whether AP’s conduct was unreasonable were the relationship which existed at the time between AP and TJA (that of a manufacturer / supplier and a customer /end-user), that TJA did not object to AP’s expectation that TJA would conduct a full assessment of the probable cause of the crack and make the findings available to AP, that at the meeting of 17 September 1998 JTA undertook to conduct an investigation and to report to AP, and that TJA had the necessary expertise to deal with the defect under the circumstances.

There is no basis to suggest that AP should not have believed the bona fides of TJA’s undertaking to investigate the root cause, more so that TJA was both the manufacturer and supplier.

We hold the view that, particularly in construction claims, it is often necessary to conduct a detailed investigation into the root cause of a defect for the following reasons:

Inherently, a construction project entails various components which eventually form one functional unit. After the amalgamation of the various components, a defect in one of them may not be readily identifiable.

It is not uncommon for the employer to deploy multiple contractors on site at the same time. A defect in one area may very well manifest in other areas which are defect-free (for example, water seepage which manifests on a wall could be traced back to a leaking geyser).

The employer may procure a design and material and thereafter appoint a contractor (other than the designer or the supplier of material) to implement the design using the material acquired. In the event of a defect in the completed works, it would be essential for the employer to ascertain whether such defect emanates from the design (in which event the employer may look to the designer for recourse), or from the material (in which event the employer may look to the supplier of material for recourse) or from the contractor’s workmanship (in which event the employer may look to the contractor for recourse).

Equally important, in addition to identifying the root cause of a defect, the employer’s investigation would enable it to ascertain the identity of the debtor.
An employer who is aware of a defect but unaware of the root cause or the identity of the debtor is required in terms of section 12 (3) of the Act to exercise reasonable care in order to gain knowledge of the identity of the debtor and the facts from which the debt arises.

As a precautionary measure, in the event that the process of determining the root cause and quantifying damages could extend beyond the three-year prescriptive period, consideration could be given to launching an application for a declaration of rights under section 15 (1) of the Act, thereby effectively interrupting prescription in terms of the Act.

Lastly, one should not lose sight of the effect of the Act on construction claims which are pursued under the dispute resolution mechanisms provided for in construction contracts. As the Courts have held, the referral of a dispute under a prescribed dispute resolution mechanism delays the completion of the running of prescription under section 13 (1) (f) of the Act.