UNFINISHED BUSINESS: WHAT TO DO WHEN CONSTRUCTION HALTS DUE TO A CONTRACTOR’S LIQUIDATION
The past year has been challenging for South Africa’s construction industry, with some of the country’s best-known construction companies facing business rescue or liquidation. The unfinished business left behind when this occurs can be problematic for project employers in the private and public sectors alike. Although their options are limited, the financial exposure for employers can be mitigated through immediate action, says Diana Burger, senior associate in Bowmans’ Construction Dispute Resolution Department. Here are the crucial steps to take.
Step one - Await the liquidator’s decision: As a general rule, liquidation does not suspend or put an end to a contract. Once a final liquidation order has been made, the appointed liquidator steps into the shoes of the liquidated contractor and must either abide by or repudiate any pending contracts. More than likely, a partly finished construction contract will be repudiated by the liquidator (due to factors such as a lack of expertise) and consequently terminated by the employer unless there is an extremely good prospect that the project can be viably completed by the liquidator in terms of its obligations under the contract. The liquidator must make such decisions within a ‘reasonable’ period, which is determined by the specific facts of each contract and the provisions of the contract.
Step two – Principal agent to prepare the final account: If the liquidator repudiates the contract, the employer will be entitled to terminate the contract. In this event, the principal agent or engineer generally needs to prepare a final account, to determine whether the employer owes monies to the liquidated contractor or vice versa. The starting point is for the independent principal agent or engineer to conduct a detailed valuation of the works and prepare a final account in respect of the works executed by the liquidated contractor.
Step three – The valuation: the principal agent or engineer must inspect the works on site to quantify the work that has been completed, the outstanding work and any damages for purposes of preparing a final account. Damages could include penalties associated with any delays in completion of the works, defective work (work not done according to specifications) and outstanding work, among other things. Quantification is necessary for any claim that the employer intends to lodge against the liquidated contractor’s estate or that the liquidated estate may pursue against the employer.
Step four – Start appointing a new contractor: The employer needs to appoint a new construction contractor to complete the construction project and should therefore call for quotes or put out a competitive tender, depending on the procurement process required. The contractors taking part in the bidding process will generally visit the site themselves to do their own assessments and quantifications of the work to be executed and submit their quotes or bids.
Employers should be aware that if there is scope creep (in addition to the original scope of work), the additional work required can be included in the bid documents for pricing by the new contractors but the price accepted for the additional work cannot be part of any claim against the liquidated contractor.
A contractor’s quote or bid accepted by the employer for completion of the liquidated contractor’s outstanding work could be useful in accurately quantifying the additional costs the employer may incur in relation to the outstanding works, for inclusion in a potential claim against the liquidated contractor’s estate.
Step five – Claim against liquidated estate: In the event of an uncompleted project, the bulk of the claim amount that the employer may have against the liquidated estate relates to the additional costs that the employer will incur for the appointment of a new contractor. It is invariably more expensive to appoint a new contractor to pick up from where a previous contractor left off, as the site has to be established all over again and the cost of materials will almost certainly have increased in the interim. However, employers should not pin their hopes on receiving a full claim payout.
For one, the liquidated entity probably has very limited means to repay creditors. For another, the employer whose construction project has ground to a halt is probably one of many creditors hoping to be paid. Under liquidation law, employers will be on an equal footing with other concurrent creditors and will not receive any preferential treatment, regardless of what the terms of the construction contract provide.
While it will be cold comfort for employers who have already seen their contractors go out of business, the best advice for any employer contemplating a construction project is to do proper due diligence before the appointment of a contractor and commencement of the project. Financial difficulties on the part of a contractor seldom begin overnight and employers who properly assess the financial situation of prospective contractors are less likely to find themselves contending with a half-finished building and mounting construction costs.