TOOLS OF THE TRADE – Mr Tom McDonald’s ‘Timing of lex commissoria’ – December 2022

TOOLS OF THE TRADE – DECEMBER 2022

TIMING – LEX COMMISSORIA CANCELLATION

SUMMARY

This article considers the timing of a cancellation invoked in terms of a lex commissoria clause and the affect which the issue of an intervening negative payment certificate (i.e., money certified as being due to employer) has on a vested right to cancel.

LEX COMMISSORIA

A lex commissoria clause removes the need to prove that the breach was material or sufficiently serious to justify cancellation.  In the matter of Oatorian Properties (Pty) Ltd v Maroun[1] Potgieter JA stated that if there is such a clause, the Court will not investigate the materiality of the breach. 

CONSTRUCTION CONTRACTS

Most construction contracts contain a lex commissoria clause which entitles the contractor to cancel should the employer fail to honour a payment certificate.  Some construction contracts have introduced an intermediate step allowing the contractor to suspend the works prior to cancellation. Usually notice needs be given to the employer to remedy or purge the breach within a particular period, usually between 7 and 14 days, failing which the contractor becomes entitled to cancel. 

TOO SOON

In the construction matter of Hodgkinson v K2011104122 (Pty) Ltd and Another[2] the lex commissoria clause stipulated a 14 days’ notice period.  The contractor invoked the cancellation after 7 days’ notice instead of the contractually stipulated 14 days.  The Court found that the cancellation was invalid.  On appeal the contractor argued that even if the cancellation was initially defective, the employer had still not remedied the breach after 14 days and therefore the cancellation became effective.  The Court disagreed, finding that a defective notice does not become effective simply by a passage of time. 

TOO LATE 

In the matter of Mahabeer v Sharma NO and Another[3] the Court found that there is no principle in South African law that a vested right to cancel may be lost through a mere delay in enforcing it.  An unreasonable delay or other conduct indicating the intention to abide by the contract may, however, justify an inference that the non-breaching party has tacitly condoned the breach and has elected not to cancel.[4]  

INTERVENING INTERIM PAYMENT CERTIFICATE 

In the construction matter of Buildcure CC v Brews and Another[5] the Court dismissed an appeal for the review of the arbitrator’s award.  In this matter, the lex commissoria clause stipulated 7 days’ notice.  The contractor gave the lex commissoria notice in relation to payment certificate no 5, suspended the works after 8 days and cancelled 22 days later.  However, 14 days prior to cancellation, payment certificate no 6 was issued in a negative amount (i.e., money certified as being due to employer).  The arbitrator found that the contractor became entitled to cancel 7 days after the notice was given and – should the contractor have cancelled prior to the issue of certificate no 6 – the termination would have been lawful.  The arbitrator further found that following the issue of payment certificate no 6 when there was no amount due to the contractor, the contractor had lost its right to cancel and therefore the cancellation of the contract subsequent to the issue of payment certificate 6 was unlawful.

THE BUILDCURE MATTER

The first half of the judgment (up to paragraph 29) comprises a thoroughly researched conclusion that an award does not need to be published strictly in accordance with section 25 of the Arbitration Act 65 of 1942 (the Act).  The second half of the judgment (paragraphs 30 to 45) deals with the issue of gross irregularity by the arbitrator, namely that he did not apply the audi alteram partem principle in coming to his finding that the contractor had lost the right to cancel.  

This article deals only with the second half of the judgment.   

To fully understand the judgment, it is necessary to synoptically recount the background facts.

Synopsis of background facts 

The following are the relevant facts in relation to the project:

  1. The parties concluded a written Master Builders South Africa (MBSA) Housebuilding and Small Contracts Agreement (with amendments) (the contract).  
  2. The contract stipulated that the contractor had to submit monthly draws to an appointed Quantity Surveyor (QS) ,who then had to determine the sum of the monthly payments that fell due.
  3. Despite the fact that there was no reference in the contract to payment certificates, the QS issued interim payment certificates.
  4. The contract contained a lex commissoria clause (Clauses 12.2.2 & 12.3), which provided for both suspension (3 days’ notice) and cancellation (7 days’ notice) where the employer failed to honour a payment. 
  5. In terms of the contract the employer was entitled to withhold 10% retention from the final balance due.
  6. The contractual practical completion date was 15 November 2008 linked to a penalty for late completion, initially R5 000 per day increasing to R20 000 per day. 
  7. On 17 September 2008 the QS issued payment certificate no 5.  Retention of R125 000.00 was withheld and the sum of R201 360.91 was certified as being due to the contractor. 
  8. On 29 September 2008 the employer made a payment of R163 034.55, making a short payment of R38 326.36 according to payment certificate no 5. 
  9. On 15 October 2008 the contractor issued a notice which complied with the requirements of the lex commissoria clause, demanding payment of the unlawful deduction of retention, as well as the short payment in relation to certificate no 5. 
  10. On 21 October 2008 the contractor submitted an interim draw no 6 in the sum of R813 924.65 to the QS. 
  11. On 23 October 2008 the contractor suspended work.
  12. On 30 October 2008 the QS issued interim payment certificate no 6.  Retention of R153 309.42 was withheld and a negative sum of -R1 915.75 was certified as being due to the employer. 
  13. On 14 November 2008 the contractor cancelled the contract.  As at this date, the employer had not paid the amounts demanded in terms of the 15 October 2008 notice. 

Arbitration Proceedings 

In the arbitral proceedings that ensued further relevant facts emerged.  The contractor was ‘the claimant’ and the employer was ‘the defendant’ in these proceedings:

  1. The contractor claimed payment of R905 990.17, calculated on the value of work executed at the time of cancellation minus previous payments received.
  2. The employer’s defence was that the amount paid, i.e., R163 034.55 on 29 September 2008 in terms of certificate no 5, was the only amount due to the contractor.  The employer pleaded that the QS confirmed in an email dated 21 October 2008 that no monies were due to the contractor as at the end of September 2008. 
  3. The only reference made in the defendant’s plea to certificate no 6 was an admission that the QS issued payment certificate no 6 on 30 October 2008 in the negative amount of (-R1 915.750. 
  4. The employer alleged the cancellation was unlawful and counter-claimed for damages of R1 254 998.35 to repair the works and penalties of R6 825 000.00 for late completion, calculated from 15 November 2008 to 30 October 2009, when the employer completed the works.
  5. After the close of pleadings, the arbitrator compiled an agreed list of issues to be determined. The list identified fifty-seven (57) issues in dispute.  The list made reference to certificates no 4 and no 5.  It made no reference to certificate no 6. 
  6. At the commencement of the oral hearing, it was agreed that the hearing would proceed on the basis of a separated hearing, dealing at first only with whether or not the contractor’s cancellation of the contract was lawful.  Quantum was to be dealt with as a second exercise. 
  7. The day after the conclusion of the oral hearing, the arbitrator issued a letter dated 11 July 2014 confirming that the interim award needed to be issued on the question ‘Has the claimant (contractor) lawfully cancel the contract?’.  In addition, the arbitrator proposed that certain ancillary issues on the agreed list also needed to be addressed and listed eleven (11) such issues.  These ancillary issues referred to both certificates no 4 and no 5, but again no reference was made to certificate no 6 nor was any reference made as to whether the contractor had lost the right to cancel. 
  8. The arbitrator’s letter of 11 July 2014 further confirmed that once the interim award on the cancellation question had been published, he would make a determination on the quantum. 
  9. During the hearing, the employer discovered a revised payment certificate no 5 issued in the sum of R163 034.55.
  10. The arbitrator made, among others, the following findings (relevant for the purpose of this article) in his interim award on the question of cancellation:

    1. The QS was not entitled to withhold retention on interim payment certificates and should not have done so. 
    2. The QS conceded that he never issued the revised payment certificate no 5 and also conceded that his email dated 21 October 2008 did not constitute a payment certificate. 
    3. With regard to payment certificate no 5, the employer was not entitled to revise the payment certificate and he should have paid the amount as certified by the QS. 
    4. The short payment of certificate no 5 provided valid grounds for termination. 
    5. In terms of clause 12.2.2 of the contract (i.e., the lex commissoria clause), the contractor became entitled to terminate the contract as from 23 October 2008. 
    6. Had the contractor cancelled the contract after 23 October 2008 and prior to the issue of payment certificate no 6, the termination would probably be legitimate. 
    7. However, the contractor issued its notice of termination two weeks after it has received payment certificate no 6. 
    8. The contractor was entitled to suspend the works from 3 days after the notice until the issue of payment certificate no 6 on 30 October 2008, which effectively remedied the breach which the contractor to suspend. 
    9. The employer breached the contract by not paying in full the amount certified by the QS in payment certificate no 5.  The breach entitled the contractor to terminate the contract under clause 12.2.2 of the contract.  However, the breach was in effect remedied upon the issue of payment certificate no 6 on 30 October 2008. 
    10. The contractor was entitled to cancel the contract from 23 October 2008 until 30 October 2008.  The contractor did not cancel the contract in this period and lost its right to cancel the contract upon the issue of payment certificate no 6. 
    11. The interim award was thus that the contractor’s cancellation of the contract was unlawful.  Costs were awarded in favour of the employer. 

Review Application to Court

The contractor launched a review application arguing that the ultimate finding, namely that it had lost the right to cancel, was neither pleaded nor raised in argument; and that the parties were not forewarned by the arbitrator that such legal principle was being considered.  The application was thus that the arbitrator had not complied with the audi alteram partem requirement. 

The contractor emphasised that it was not complaining about the incorrect interpretation or application of the law – it was complaining that it was denied an opportunity to bring the fallacy of the finding underpinning the award, to the attention of the arbitrator. 

The review was heard by Masipa J. She found as follows: 

‘Nowhere in his interim award does the arbitrator refer to a principle.  What the arbitrator did was to come to a conclusion and then give his reasons for that conclusion.  The arbitrator’s approach may have been unconventional but it certainly does not mean that there was any misconduct on the part of the arbitrator’.

Appeal

The contractor lodged an appeal which was dismissed by Sutherland J (with whom Moshidi and Nicholls JJ concurred). 

With regard to the pleadings submitted in the arbitration, the Court found:

‘In paragraph 56 of the claim it had been alleged that notice of breach was given, the demand made to remedy the breach, as contemplated in the agreement, based on the non-payment of monies due in terms of certificate No 5. The respondent pleaded that no monies were due and payable as at 21 October 2008, a date of significance as it was after the date of the demand and before the purported cancellation.’[6]

Although the date of 21 October 2008 was after the date of the demand, it was also prior to the issue of certificate no 6 (30 October 2008), which made the plea irrelevant in relation to certificate no 6. 

The Court also found, without reference to any specific pleading or any other document, that:

‘First, the misconception derives from the belief that an extraneous “issue” has been  intruded into the case in the shape of a supposedly ‘’lost right to cancel”. … Second, the very point that a valid cancellation cannot be effected at the time when no money is due and payable, and by inference, any breach that might have existed no longer exists, is encapsulated in the pleadings. The point was always apparent and it ought not to have been any surprise as to the attentive reader of the pleadings’.[7]

and 

‘Once it is appreciated that the lapsing of the right to elect to cancel is not an “issue” or “disputed matter”, properly understood, the complaint about not being heard on extraneous issues simply cannot arise. There cannot be any doubt that the parties were heard on the issue of the purported cancellation.’[8]

It is evident from the judgment, that no pleading or any other document (save for the interim award) contained an allegation that the consequence of certificate no 6 was that the vested right of cancellation, resulting from the breach of certificate no 5, could no longer be effected.  There was also no allegation in any pleading or any other document that the contractor’s right to cancel had been lost or that the contractor’s right to elect to cancel had lapsed.

The second half of the judgment in Buildcure opens with reference to Telcordia[9] which states that an incorrect finding by an arbitrator appointed under the Act does not amount to a gross irregularity.[10]  In Buildcure the Court did not explicitly identify in what respect the arbitrator’s finding was incorrect. 

What the arbitrator and the Court were in agreement on, was that the contractor was no longer entitled to cancel after the issue of payment certificate no 6.  What the arbitrator and Court differed on, was the reason for this.  The arbitrator found that the contractor had lost its right to cancel.  The Court found that the loss of right was not an issue since the contractor’s right to elect to cancel had lapsed. 

The Court did not make a finding as to whether or not the parties had been heard on the issue that the contractor’s right of election had lapsed.  The Court seems to have found that as it was so apparent that it was encapsulated in the pleadings (seemingly that it was therefore not necessary to be expressly pleaded) and ought not to have been any surprise to the attentive reader of the pleadings.

CASE LAW 

The case law on cancellation where a creditor relies on a lex commissoria clause, deals primarily with agreements making provision for instalment payments, such as sale and loan agreements. 

In Moodley v Reddy[11] the cancellation of an agreement of sale of land was considered by Thirion J.  He found that upon fulfilment of the condition which brings the lex commissoria into operation, there accrues to the seller a right to cancel the contract, which cannot be defeated by an offer made before the contract has actually been cancelled by the seller, or performance by the purchaser, and the offer of performance by the purchaser then become subordinate to the choice of the seller to cancel.

In Boland Bank Ltd v Pienaar[12] the cancellation of loan agreement was considered by Nestadt JA.  He found that the principle as was set out in Schuurman v Davey 1908 TS 664 was well-established: ‘The principle underlying the argument is a well-established one.  It has been applied to the case of creditor seeking to cancel the contract of sale on the basis of a lex commissoria.  His accrued right to do so is not defeated by a belated tender of payment of the arrears before he exercises election to cancel’. [13]

See also in Boland Bank, where the court (per Nestadt JA, with whom Jansen JA, Smalberger JA, Vivier JA and Viljoen AJA concurred) stated:

‘Tender of the price after the due date could not cure the buyer’s default, and therefore, could not affect the seller’s position.’ [14]

In Boland Bank the court also referred to the following additional old authority in support of Thirion J’s views in Moodley, namely Voet’s Commentary on the Pandects 22.1.31 ‘…. there is no room for purgation, since a right which has accrued to anyone cannot be taken from him except by his own act’.[15]

It proceeded as follows: 

‘I can see no difference in principle between a lex commissoria in a contract of sale and foreclosure of a bond. Both usually (i) involve periodic payments by the debtor (ii) which, if not made timeously, afford the creditor an election of remedies (iii) which election, however, must be made within a reasonable time and (iv) may be waived (v) but, having been made, binds him and (vi) result in the termination of the sale or bond.’ [16]

In the matter of De Bruin v First Rand Bank[17] relating to an instalment sale agreement for the purchase of a vehicle, Barrie AJ found that where the lex commissoria clause in the agreement requires actual payment, a tender for payment would not suffice.

Furthermore, Christie[18] supports this view, citing the Boland Bank judgement as authority.

Most construction contracts are similar in structure as described above in relation to sale and bond agreements.  There is an obligation on a debtor (employer in construction contracts) to make periodic payments and if not done timeously, the creditor (contractor in construction contracts) has a remedy of cancellation.  Is there case law in this regard concerning construction contracts?  Writer could not discover any other case law dealing with the consequences of an intervening payment certificate issued under similar circumstances as described in the Buildcure matter. 

CONCLUSION

The judgment in the Buildcure matter could be perceived to be an over-zealous attempt by the Court to uphold an arbitrator’s award.   

It could also be perceived as authority for the view that where a contractor in a construction contract has obtained a vested right to cancel in terms of a lex commissoria but has not yet elected to exercise such right, the right of election will lapse upon the issue of a payment certificate which certifies monies due to the employer, in which event the cancellation will be too late. This appears to be out of step with the authorities cited above. Why should construction contracts be so drastically different?

Tom Mc Donald Pr. Eng.

Attorney, Conveyancer, Notary

October 2022

[1]    Oatorian Properties (Pty) Ltd v Maroun 1973 (3) SA 779 (A).
[2]    Hodgkinson v K2011104122 (Pty) Ltd and Another [2019] 2 All SA 754 (WCC).
[3]    Mahabeer v Sharma NO and Another 1985(3) SA 729 (A).
[4]    D Hutchinson & Others, The Law of Contract in South Africa, 3rd Edition, pp. 338 and 339.
[5]    Buildcure CC v Brews and Another 2017(6) SA 562 (GJ).
[6]    Buildcure, para 41.
[7]    Buildcure, para 44.
[8]    Buildcure, para 45.
[9]    Telcordia Technologies Inc v Telkom SA Ltd2007 (3) SA 266 (SCA) at paras 85 and 86.
[10]   Buildcure, para 31.
[11]   Moodley v Reddy 1985 (1) SA 76 (D).
[12]   Boland Bank Ltd v Pienaar 1988 (3) SA 618 (A).
[13]   Boland Bank p. 621 G-H.
[14]   Boland Bank p. 622 A-B.
[15]   Boland Bank p. 622 G-H.
[16]   Boland Bank p. 623 D-F.
[17]   De Bruin v First Rand Bank ZAGP JHC 132 (5 May 2017), at paras 40 and 41.
[18]   GB Bradfield, Christie’s Law of Contracts in South Africa (7th Edition), at page 638.

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