About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
1994
>>
[1994] ZASCA 190
|
|
Shelagatha Property Investments CC v Kellywood Homes (Pty) Limited, Shelfaerie Property Holdings CC v Midrand Shopping Centre (Pty) Ltd (542/93, 558/93) [1994] ZASCA 190; [1995] 2 All SA 135 (A) (1 December 1994)
IN THE SUPREME COURT OF SOUTH AFRICA (APPELLATE DIVISION)
In the matter between
Case No 542/93
SHELAGATHA PROPERTY INVESTMENTS CC APPELLANT
and
KELLYWOOD HOMES (PTY) LIMITED RESPONDENT
Case No 558/93
SHELFAERIE PROPERTY HOLDINGS CC APPELLANT
and
MIDRAND SHOPPING CENTRE (PTY) LTD RESPONDENT
CORAM: JOUBERT, E M GROSSKOPF, VIVIER, EKSTEEN
et HARMS JJA.
HEARD: 18 November 1994.
DELIVERED: 1 December 1994.
JUDGMENT
2
VIVIER JA:
The appeals in these two cases were heard together since the
facts are broadly similar and the same issue arose for decision in i
both cases.
The issue was whether a contractor under a building contract was entitled to
enforce payment in terms of an architect's
interim certificate, issued while the
contract was still in force, after the contractor had cancelled the contract due
to the employer's
breach of contract. The appellants, Shelagatha Property
Investments CC ("Shelagatha") and Shelfaerie Property Housing CC ("Shelfaerie")
were respective sureties for the due performance by Shelstaton Two (Pty) Ltd
("Shelstaton") of its obligations under two building
contracts it had concluded
with Imprefed (Pty) Ltd ("Imprefed") and Group Five Contractors (Pty) Ltd
("Group Five").
3
The suretyships were secured by mortgage bonds. The respondents, Kellywood
Homes (Pty) Ltd ("Kellywood") and Midrand Shopping Centre
(Pty) Ltd ("Midrand")
were the respective cessionaries of Imprefed and Group Five. In an application
brought on notice of motion
in the Witwatersrand Local Division Kellywood sought
judgment against Shelagatha for payment of a total amount of Rl 800 000,00,
for
an order declaring the mortgaged property executable, interest and costs.
Kellywood's claim was founded on the amounts certified
as due in terms of two
interim certificates issued by the architect under the building contract between
Shelstaton and Imprefed.
In a separate application before the same Court Midrand
applied for judgment against Shelfaerie for payment of a total amount of
4
R5 117 582,00, an order declaring the mortgaged property executable, interest
and costs. Midrand's claim was similarly based on two
interim certificates
issued by the architect under the contract between Shelstaton and Group Five.
The two cases were heard together
by Leveson J who gave judgment for Kellywood
and Midrand and granted the orders sought. Following petitions to the Chief
Justice
leave was given to the appellants to appeal to this Court against the
judgments and orders of the Court a quo.
The two building contracts were the following: On 12 October 1990 a written
contract was concluded between Shelstaton, as employer,
and Imprefed, as
contractor, which provided for the construction of the socalled Industrial Park
Development at Midrand for a contract
sum of R36 983 000,00.
5
The contract was the standard form of contract approved by the Institute of
South African Architects and others (1981-1988 edition).
On 8 May 1991
Shelstaton, as employer, and Group Five, as contractor, concluded a written
building contract for the erection of a
shopping centre at Midrand for a
contract sum of R57 100 000,00. The conditions of contract governing the legal
relationship between
the parties to this contract can be taken to be identical
to those in the first building contract. I shall refer to the two contracts
as
the Industrial Park Development and the Shopping Centre contract
respectively.
In respect of each building contract Shelstaton was in default with the
payment of interim certificates issued by the architect in
terms of clause 25.1
of the contract. In the case of the Industrial
6
Park Development contract interim certificates no 9, issued on
5 July 1991
for the sum of R2 897 300,28 and no 10, issued
on 2 August 1991 for the sum
of R2 142 797,22, remained i
unpaid after the time-limit provided in the
contract for payment had
expired. In the case of the Shopping Centre contract interim
certificates no 6, issued on 20 June 1991 for the amount of
R2 985 226,00, and no 7, issued on 22 July 1991 for the amount
of R4 026 680,00, remained unpaid after due date. On 19 July
1991 Shelstaton drew two cheques, one for the amount of
R2 897 300,28 in discharge of its indebtedness reflected in
certificate no 9 issued under the Industrial Park Development
contract, and the other for the amount of R2 985 226,00 in
respect of its indebtedness reflected in certificate no 6 issued under
7
the Shopping Centre contract. Both cheques were stopped by Shelstaton before
they were honoured. As will be seen later, the defences
raised in the Court a
quo that Imprefed had repudiated the Industrial Park Development contract and
Group Five the Shopping Centre
contract entitling Shelstaton to stop payment of
the two cheques, were not persisted in on appeal.
Two surety mortgage bonds were thereafter registered to secure Shelstaton's
indebtedness under the two building contracts. On 8 August
1991 Shelagatha
caused a surety mortgage bond to be registered over certain immovable property
in favour of Imprefed, in terms whereof
Shelagatha acknowledged itself to be
bound to Imprefed in the sum of Rl 500 000,00 as a continuing covering security
"for and in
respect of every indebtedness or
8
obligation of whatsoever cause and nature" which Shelstaton might from time
to time incur to Imprefed, and a further sum of R300 000,00
as security for
contingent payments, costs or outlays. Under "any indebtedness or obligation"
were specifically included "negotiable
instruments made, drawn, accepted,
endorsed or otherwise executed" by Shelstaton. On 13 August 1991 Shelfaerie
caused a surety mortgage
bond to be registered over certain immovable property
in favour of Group Five in terms whereof Shelfaerie acknowledged itself to
be
bound to Group Five in the sums of R4 500 000,00 and R900 000,00 in identical
terms to those to which Shelagatha had bound itself
to Imprefed.
On 19 August 1991 Shelstaton caused a letter to be addressed to the firm of
attorneys acting for both Imprefed and
9
Group Five in which Shelstaton purported to cancel both
building
contracts. Imprefed and Group Five reacted by letter from
their
attorney dated 26 August 1991 in which it was alleged that
Shelstaton had abandoned both building contracts before completion
and had generally conducted itself in a way which showed a clear
intention not to be bound to either contract and to repudiate its
obligations thereunder. This repudiation was accepted and the
contracts cancelled. The letter further stated that both building
contracts were cancelled on the ground also of Shelstaton's breach
in failing to pay the amounts due in terms of the interim certificates
for more than seven days despite written notice to do so.
On 3 September 1991 Imprefed ceded its rights to its claims against
Shelstaton to Kellywood Homes and on 19 September 1991
10
Group Five ceded its rights to its claims against Shelstaton
to
Midrand. The litigation to which I have already referred was
then
initiated. '
Mr Serrurier, who appeared on behalf of both Shelagatha and Shelfaerie at the
hearing of the appeals, conceded for the purposes of
the appeals that Shelstaton
had no right to cancel either building contract and he further conceded the
validity of the cancellation
by Imprefed and Group Five on both grounds stated
in their said letter of cancellation of 26 August 1991. It was further common
cause
that the interim certificates in question are true payment certificates
and were not intended merely to evaluate work and material
on hand. (Cf Simmons
NO v Bantoesake Administrasieraad (Vaaldriehoekgebied) 1979(1) SA 940 (T) at
946F.)
11
It is convenient to deal with Mr Serrurier's argument only with reference to
the Industrial Park Development contract. What is said
in regard thereto applies
equally to the Shopping Centre contract. For ease of reference I shall use the
expressions "the employer"
and "the contractor" when referring to Shelstaton and
Imprefed respectively.
Mr Serrurier submitted that the contractor was not entitled to enforce
payment under the interim certificates after it had cancelled
the contract. He
relied for this submission on the provisions of clause 23 of the conditions of
contract and on the case of Thomas
Construction (Pty) Ltd (in liquidation) v
Grafton Furniture Manufacturers (Pty) Ltd 1986(4) SA 510 (N) which was upheld on
appeal.
The judgment of this Court is reported in 1988(2) SA
12
546(A).
Clause 23 provides for cancellation by the contractor and
its
consequences in the following terms.
"23.
Determination by Contractor
.
If the Employer does not
pay the Contractor within the period stated in clause 25, and thereafter for
seven days after written and
registered notice from the Contractor fails to pay
the amount due on any certificate of the Architect, or if the Employer
interferes
with or obstructs the issue of any such certificate, or if his estate
is sequestrated as insolvent or, in the case of a company,
it is placed under
voluntary or compulsory liquidation, or if the whole or substantially the whole
of the Works, other than Works
in respect of defects under clause 13, is delayed
under the provisions of clause 20, excepting local combination of workmen,
strike
or lock-out, for three months, the Contractor may by written and
registered notice to the Employer or Architect determine the employment
of the
Contractor under this
13
contract, and thereupon, without prejudice to
the accrued rights of either party, their
respective rights and liabilities shall be as
follows:
23.1
23.2 the Contractor shall be paid by the Employer:
23.2.1 the contract value of the Works completed at the date of such
determination as aforesaid, subject to clause 10;
23.2.2 the value of work commenced and executed, but not completed at the date
of such determination, the value being ascertained
mutatis mutandis in
accordance with the provisions of clause 10;
23.2.3 the cost of materials or goods properly ordered and delivered for the
Works actually paid for by the Contractor, or of which
he is legally bound to
accept delivery, and on such costs being paid by the Employer the same shall
become his sole property;
23.2.4 the reasonable cost of removal under clause 23.1;
23.2.5 any loss or damage caused to the Contractor owing to such determination
as aforesaid;
14
Provided that, in addition to all other remedies,
the Contractor upon the
said determination, may
take possession of and shall have a lien upon
all
unfixed materials and/or goods intended for the
Works, which may have
become the property of
the Employer under this contract, until payment
of
all monies due to the Contractor from
the
Employer "
It is convenient at
this stage also to quote the relevant provisions of clause 25 of the conditions
of contract, in terms of which
the architect's interim certificates were
issued.
"25.
Certificates and Payments.
25.1 The contractor shall
be entitled to receive from the Architect interim certificates at intervals not
greater than one calendar
month, a penultimate certificate and a final
certificate (as more fully set out hereunder), stating the amount due to him and
to
payment of such amount by the Employer within the period set out in the
attached schedule. The Architect shall notify the Employer
of the
15
date and amount stipulated in each certificate at the time of issue thereof. If,
after the expiry of the aforementioned period, the
amount so certified has not
been paid to the Contractor, the Employer shall be liable, without prejudice to
any right the Contractor
may have to determine his employment under this
contract, to pay the Contractor interest on the amount so due,
calculated
25.2.1 The amount so due as aforesaid shall, in respect of each monthly
certificate, be a reasonable estimate:
25.2.1.1 of the total value of the work duly executed: and;
25.2.1.2 of the materials and goods delivered upon the site for use in the
Works;
assessed up to and including a date not more than seven days prior to the date
of the said certificate, less the amount to be retained
by the Employer, as
hereinafter provided, and less any amounts previously certified under this
clause: Provided that such certificate
shall, subject to the provisions of
clause 25.2.2 only include the value of the said materials and goods as
and
16
from such time as they are reasonably, properly not prematurely brought upon the
site, and then only if adequately stored and/or
protected against weather and
other casualties.
25.4
25.5 Upon the issue of the certificate of completion of the Works in terms of
clause 13.4 and provided that the Architect has timeously
received the documents
referred to in clause 10.2 the Architect shall issue a final certificate of the
value of the Works executed
by the Contractor
...
25.6
25.7 A final certificate ... shall be conclusive evidence as to the sufficiency
of the said Works and materials, and of the value
thereof.
25.8
25.9 Save as aforesaid, no certificate of the Architect shall of itself be
conclusive evidence that any Works or materials to which
it relates are in
accordance with this Contract."
17
Before dealing with the employer's defence based on clause 23 of the contract
it is convenient to deal first with the legal nature
of the instant interim
certificates and with the defence based on the decisions in the Thomas
Construction case.
It is clear from the provisions of clause 25 that an interim certificate,
issued during the progress of an ongoing building contract,
cannot be regarded
as conclusive evidence of the sufficiency of the work and materials or of the
correctness of their value as reflected
therein. (Mouton v Smith 1977(3) SA 1(A)
at 5 C-D.) It was common cause, nevertheless, that an interim certificate, duly
issued in
terms of the contract which is not paid by the employer within the
stated time-limit, creates a debt due and as such affords the
contractor a
distinct cause of action in respect of which he could sue immediately without
going beyond the certificate. See Mouton
v Smith, supra, at 5 D-E and the
18
judgment of this Court in the Thomas Construction case, supra, at 562 E-F.
The contractor's right which is embodied in the interim
certificate clearly
constitutes an accrued right. See the judgment of Nienaber J in the Court a quo
at 515 D-F in the Thomas Construction
case, supra.
In the Thomas Construction case an interim certificate was issued by the
architect to the contractor under clause 25.1 of a building
contract which was
identically worded to clause 25.1 of the present contract. A few days later
written notice was given to the contractor
under clause 22 of the contract
(which was the same as clause 22 of the present contract) to proceed with the
works with reasonable
diligence. Under that clause the contractor was required
to comply with the notice within 14 days, failing which the employer was
entitled to terminate the contractor's employment under the contract. A few days
after the written notice was given
19
the contractor was provisionally liquidated. After the 14-day period had
expired the employer cancelled the contract on the ground
of the contractor's
failure to remedy its breach in terms of clause 22. The employer's letter of
cancellation stated that another
contractor had been appointed to complete the
works and that, in terms of clause 22.3.4, no payment would be made under the
interim
certificate until the work under contract had been completed. The
contractor's provisional liquidators elected not to proceed with
the performance
of the contract but persisted in the claim for payment under the interim
certificate, contending that the interim
certificate provided the contractor
with a self-sufficient cause of action, without the need to go beyond the
certificate or to rely
on the contract. The claim failed both in the Court a quo
and on appeal.
In the Court a quo Nienaber J commenced his judgment by
20
applying the principle affirmed by this Court in Crest Enterprises (Pty)Ltd v
Rycklof Beleggings (Edms) Bpk 1972(2) SA863(A) at 870
G-H to the facts of that
case. That principle is to the effect that a claim ex contractu may survive
cancellation of the contract
if, prior to the cancellation, it was accrued, due
and enforceable as a cause of action independent of any executory part of the
contract. The learned judge held that the contractor's claim was not so
independent of the executory part of the contract. His reasoning
in arriving at
this conclusion was as follows. He pointed out (at 517 A-B) that the interim
certificate was not intended as compensation
for a completed segment of the
work. It was a medium for making progress payments which payments represented
only an approximate
and proportional value of the work done and material on site
at a specified date. The purpose of a progress payment was to supply
the
contractor with working capital
21
as an advance on the contract sum and it was dependent upon the ultimate
completion of the work (at 516 G-J). Payment on an interim
certicate was thus
not only made in respect of work done by the contractor but conditionally upon
the contractor's willingness and
ability to complete the rest of the work. In
this way payment on an interim certicate was linked to what was at that stage
the executory
part of the contract. The right which had accrued was therefore
not independent of the executory part of the contract (at 517 E-I).
Nienaber J
next dealt with clause 22.3.4 of the contract which provided that if the
contract was cancelled by the employer on account
of the contractor's breach of
contract or liquidation, the employer would, inter alia, be entitled to employ
another contractor to
complete the works and until completion of the work no
payment would be made to the contractor under the contract. The learned judge
held (at 519 E-J) that those provisions were in
22
line with what he considered in any event to be the true
position
according to the law of contract.
On appeal the judgment in the Court a quo was upheld.
With
reference to the provisions of clause 22.3.4 it was held that
payment under an interim certificate was necessarily a payment
under the contract and accordingly fell within the purview of that
clause which constituted a valid defence in favour of the employer
against the contractor's claim based on the interim certificate (at 562
D-E). With regard to the nature of an interim certificate and the
effect of a payment made in terms of it Botha JA, in delivering
the judgment of this Court, said (at 563 E-H) -
".... it was contended that payments under interim certificates were not to
be regarded as advances on account of the ultimate contract
price; that the sum
certified was indeed to be regarded as compensation for a completed segment of
the work; and that the sum certified
was not to be treated as provisional and
subject to adjustment and re-adjustment in later certificates. I have no
hesitation in rejecting
this entire
23
line of argument, coupled with all the submissions made in support of it. Not
only does it do violence to the fundamental nature
of a building contract and
the reciprocal obligations of the parties to such a contract; it flies in the
face of the clear authorities
cited and discussed by Nienaber J in the reported
judgment at 516F-517D and 519D."
Botha JA further held that the
principle enunciated in the Crest Enterprises case, which applied to all forms
of breach of contract
culminating in cancellation, afforded the contractor no
avenue of escape from the fact that the contract had been cancelled or from
the
consequences of such cancellation, which included the coming into operation of
the provisions of clause 22.3.4 of the contract
(at 566 E-F). In so holding
Botha JA rejected an argument by counsel for the contractor that the words
"prior to" in the expression
"prior to the cancellation of the contract" in the
Crest Enterprises principle, meant that the ascertainment of the existence of
an
accrued and enforceable cause of action could be isolated
24
entirely from both the fact and the consequences of the cancellation of the
contract. Dealing with this argument Botha JA also
warned against, what he
called, the dangerous process of applying
a dictum in a judgment in another
factual context not contemplated by the dictum (at 565 A-B).
In the present case Mr Serrurier has attempted to elevate to a general rule
what was said about the nature of an interim certificate
and the effect of a
payment made in terms thereof in the Thomas Construction case. In so doing he
has, in my view, done exactly what
Botha JA warned against in the passage just
referred to. The general rule contended for is that after cancellation of a
building
contract, regardless of the terms of the contract and who the
defaulting party is, interim certificates previously issued in terms
of the
contract can no longer be enforced. In my view neither judgment in the Thomas
Construction case
25
provides authority for such a general rule. What was said in that case
related to a claim on a prior interim certificate by a contractor
whose breach
had caused the cancellation of the contract and who was unable to complete the
work so that another contractor had to
be engaged to do so. An innocent
contractor suing on a prior interim certificate after he has cancelled the
contract due to the employer's
breach, is in an entirely different position. In
the former case the contractor's right to remuneration is uncertain and can only
be determined after completion of the work by another. He may eventually be
found to be entitled to very little or nothing at all.
In the latter case the
innocent contractor is, upon cancellation, released from his obligation to
finish the work and the employer
has no further claim against him in this
regard. The innocent contractor's right to remuneration is not conditional upon
further
performance under the contract and, while subject to final
26
adjustment, is not uncertain. The mere fact that it is subject
to
final adjustment does not, in my view, make the right dependent
on any
executory part of the contract. And I do not read either
of the judgments in
the Thomas Construction case as having
decided that it does.
I come now to deal with the defence based on the provisions of clause 23,
which provide for cancellation by the contractor in the
event of the employer's
breach of contract. The clause was clearly inserted for the benefit of the
contractor. It facilitates both
the cancellation of the contract and the
contractor's claims for damages for breach of contract. Specific provision is
made for the
contractor's claims for damages under various heads (sub-clauses
2.1 to 2.5). As far as payment for the work done is concerned, provision
is made
for a final accounting. In terms of sub-clauses 2.1 and 2.2 the contractor is
entitled to be paid the contract value
27
of the work completed at the date of termination as well as the value of work
commenced and executed but not completed at the date
of termination as actually
measured and valued by a quantity surveyor in accordance with clause 10 of the
contract. " Accrued rights"
are specifically preserved. As I have said earlier,
a contractor's rights which are embodied in interim certificates clearly
constitute
"accrued rights". The accrued rights must, of course, still be
independent of the executory part of the contract in order to satisfy
the Crest
Enterprises principle, as Mr Gauntlett, for Kellywood, readily conceded. It is,
however, significant to contrast the preservation
of accrued rights in the event
of cancellation by an innocent contractor, with the provisions of clause 22,
which deal with cancellation
by the employer due to the contractor's breach. Not
only is there no corresponding preservation of accrued rights in clause 22, but
clause 22.3.4
28
(which is identical to clause 22.3.4 of the contract in the Thomas
Construction case) expressly provides that upon cancellation due
to the
contractor's breach he is not entitled to any payment until completion by
another contractor.
Mr Serrurier contended that clause 23 substitutes a different formula for
payment in lieu of the prior interim certificates. He submitted
that clause 23
is a comprehensive provision as to the entitlement of the contractor after
termination, ie to be paid the actual value
of the work at the date of
termination and that there is no provision that, in addition thereto, the
contractor is still entitled
to be paid amounts certified in interim
certificates but not yet paid. He submitted that after cancellation the
contractor has to
bring all claims under clause 23 so that it cannot be said
that his claims under any prior interim certificates are independent of
the
executory part of the contract.
29
I cannot agree with Mr Serrurier's submissions. I have already indicated that
in the event of a contract being cancelled due
to the employer's breach there
is, in general, no reason to
reconsider a prior interim certificate, except
for adjustments. The final accounting provided for in clause 23 means no more,
in my
view, than that prior interim certificates are subject to adjustment, in
the same way as if the contract had not been cancelled and
the work completed in
terms thereof. I can find no indication in clause 23 or in the rest of the
contract to the effect that the
innocent contractor's right under a prior
interim certificate is made dependent upon the executory part of the contract in
clause
23. Indeed, the provision in clause 25.1 that interest is payable by the
employer on an interim certificate even after cancellation
by the contractor,
would indicate the contrary.
In the event of an overpayment to the innocent contractor on
30
the interim certificates, the employer will obviously be entitled to reclaim
such overpayment from the contractor. I can see no inequity
in that (cf the
judgment of Nienaber J in the Thomas Construction case at 520 A-C). There is no
defence in the present case that
payment on the interim certificates will result
in an overpayment. In my view it could never have been the intention that the
innocent
contractor should, after cancellation, lose his accrued rights embodied
in prior interim certificates and that he should be limited
to an eventual claim
for damages, with all the uncertainty and delay involved in such a claim.
For the reasons stated I accordingly hold that according to general
principles and in terms of the specific provisions of the contract,
the
contractor's right to payment under the interim certificates was independent of
the executory part of the contract, and that
it accordingly survived the
cancellation of the contract.
31
It follows that both appeals must be dismissed with costs, such costs to
include the costs of two counsel. In the Shelagatha appeal,
Shelagatha is
further ordered to pay the costs of the application to the Court a quo for leave
to appeal, such costs to include the
costs of two counsel, as well as the costs
of opposition to the petition for leave to appeal. In the Shelfaerie appeal a
similar
order is made against Shelfaerie regarding the costs of the application
to the Court a quo for leave to appeal and the opposition
to the petition for
leave to appeal.
W. VIVIER JA.
Joubert JA)
E M Grosskopf JA)
Eksteen JA)
Harms JA) Concur.