Construction and projects in South Africa: overview
A Q&A guide to construction and projects law in South Africa.
The Q&A gives a high level overview of the main trends and significant deals; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; employment laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; and proposals for reform.
To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.
This Q&A is part of the global guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-guide.
Overview of the construction and projects sector
South Africa continues to see a high level of public sector infrastructure upgrading and private sector capacity expansion, with a particular focus on increased electricity generating and distributing capacity, natural resource processing capacity (chemicals, metals and oil) and rail, port, water and sanitisation and related infrastructure upgrades.
The most significant transactions over the last 12 months relate to a wide variety of energy projects, including:
Ethanol plant projects.
Power projects, including:
thermal power (gas, coal, biomass);
solar power (photovoltaic power (PV) and concentrated solar power (CSP)); and
In addition, procurement and execution related to the Eskom Medupi and Kusile Power Stations (each station comprising six generating units of approximately 600 megawatts each) continues.
Procurement activities related to rail infrastructure (including rolling stock) is also expected to further increase in the coming year.
The main parties in a construction and engineering project are the:
Contractor or contractors.
The construction and engineering environment is sophisticated (both from a legal and market perspective), and therefore procurement arrangements vary. An open or limited tender process is typically used (and generally required for public sector procurement), although negotiated procurement is not uncommon in the private sector.
The most common procurement arrangement for road works, or commercial or residential building works is for an appointed single main contractor to carry out the works. The contractor assumes full responsibility for all construction activities and the supply of all labour and materials (whether supplied by the contractor or by subcontractors). The contractor carries out the works according to the employer's design, under the direction of the employer's agent. The employer appoints the design team.
For other projects, procurement arrangements vary from turnkey (that is, handing over the project in a ready to use condition), engineering procurement and construction (EPC) contracts, to multiple contractor arrangements (with or without the employer appointing an engineering, procurement and construction management (EPCM) contractor or one or more external professional consultants as the employer's agent).
Multiple contractor arrangements typically include mixed design-build and construct-only or erect-only contracting arrangements.
These arrangements apply equally whether the parties are international or local contractors or consultants.
Generally, internationally recognised transactional structures are used for local projects. Depending on the nature of the procurement and works, these structures include special purpose vehicles, joint ventures and consortiums.
The structures used in local projects (see above, Local projects) are also used when the main parties are international contractors. However, international contractors often include onshore and offshore components in their joint venture and consortium structures (particularly when partnering with a South African entity). In these circumstances, employers typically:
Seek to maximise single party liability.
Require the assurance of joint and several liability from consortium and joint venture members.
Commercial and/or residential construction projects are generally bank-financed by development loans and secured through first mortgage bonds. There is no typical finance approach for other construction or engineering projects.
Private sector procurement is usually financed by debt and equity. Public sector procurement is generally self-funded or financed by bond issues, commercial and/or development bank or foreign export credit agency loans, or is procured through private public partnership (PPP) structures.
Security and contractual protections
The security and contractual protections vary depending on whether the project is financed:
With recourse to the employer's balance sheet.
With limited recourse to the employer's balance sheet (a project finance transaction).
By way of a public private partnership (PPP).
In the case of projects where investors have limited recourse to the employer's balance sheet, funders typically require:
Security over all the project company's available assets, including:
mortgages over fixed property;
notarial bonds over movable assets;
pledges and cessions over all the project company's rights against third parties;
security over all the project company's bank accounts; and
a pledge of all shares in the project company.
A range of step-in rights, which are generally exercised through security granted over the shares in the project company (the funders must first be entitled to exercise those rights under the security documents before they can step in).
In the case of PPP projects, investors typically require security over the:
Project company's various rights (particularly claims the project company has against the government under the PPP agreement).
Shares in the project company. Generally, funders cannot obtain security over the project's fixed assets, as these are usually the government's property.
In the case of projects where investors have limited recourse to the employer's balance sheet, funders typically require a comprehensive set of financing documents, including a fully termed common terms agreement that contains, among other things; all appropriate representations, warranties, positive and negative covenants and events of default.
In the case of PPP projects, investors will typically require fully termed finance documents (see Question 29).
Standard forms of contracts
The most common standard forms of contracts used for large construction and engineering projects are:
The Fédération Internationale des Ingénieurs-Conseils (FIDIC) Conditions of Contract (produced by the International Federation for Consulting Engineers):
Plant and Design-Build, First Edition, 1999 (Yellow Book);
Construction, First Edition, 1999 (Red Book);
EPC/Turnkey Projects, First Edition, 1999 (Silver Book); and
Short Form of Contract, First Edition, 1999 (Green Book).
The New Engineering Contract (NEC) Engineering and Construction Contract (NEC3) produced by the Institution of Civil Engineers through its NEC Panel.
The Joint Building Contracts Committee (JBCC) 2014 suite of contracts, produced by the JBCC.
The General Conditions of Contract for Construction Works (GCC), Third Edition (2015), produced by the South African Institute for Civil Engineering.
Public sector construction procurement must be undertaken on the above standard form contracts, and certain other standard form contracts approved or prepared by the Construction Industry Development Board (CIDB) (CIDB Act 38 of 2000 (CIDB Act) Regulations (CIDB Regulations)). The CIDB encourages using these standard form contracts for private sector construction procurement to promote efficiency.
Construction contracts do not differ for international projects (see above, Local projects).
Risk allocation typically follows international trends and is largely determined by the nature of the works and the procurement methodology. Generally, the FIDIC or NEC risk allocation regimes are used in the construction market.
Fixed and firm price contracts (particularly where the contract period is more than 12 months) are the exception rather than the rule. This is largely because of South Africa's relatively high interest rates and the fact that commodity prices and inflation rates remain relatively unpredictable and are influenced by foreign exchange rates. Construction and engineering contracts typically include change-in-cost provisions linked to acceptable indices. Contractors are not usually required to assume the risk for changes in the cost of labour, materials or other inputs except for a pre-determined fixed portion (usually between 5% and 15%). Employers similarly avoid unnecessary price premiums, which are otherwise associated with a fixed and firm price, and retain the benefit of downward price movements for these input costs.
Procurement arrangements and risk allocation are influenced by the volatility of the South African rand (ZAR) and by the Exchange Control Regulations. The Exchange Control Regulations both:
Prohibit payments in foreign currency by South African persons and entities, except with the prior approval of the Exchange Control Department of the South African Reserve Bank (exchange control approval).
Regulate the receipt of foreign currency payments by South African persons and entities.
Typically, as a result:
Foreign or multiple currency contracts are only appropriate where the contractor is a foreign entity or comprises a joint venture or consortium with one or more foreign entity members (in which case the employer can, subject to prior exchange control approval, make foreign currency payments to these foreign entities). The employer then assumes the risk of currency fluctuation and obtains forward cover (that is, secures foreign currency at a pre-determined rate, in advance) to mitigate this risk.
Contracts with local contractors or between local entities are denominated and paid in ZAR. The contractor assumes the risk of foreign currency-related input cost changes (and usually obtains forward cover to mitigate this risk).
Caps on liability
Contracts typically exclude liability for consequential and indirect loss (see Question 8), and cap the contractor's liability for direct damages. The cap is usually determined as a percentage of the contract price and is subject to negotiation. The cap often depends on the nature of the works. Civil engineering contracts typically have a lower cap than design-build contracts.
Generally, the following are not taken into account to determine limitation of liability:
Proceeds from principal-controlled insurances (that is, where the building contract parties are automatically covered under a blanket insurance policy, for all approved works).
Liability from the annulment of principal-controlled insurance policies.
Low performance damages.
However, this is subject to negotiation and depends on the level of the cap.
Force majeure exclusions are available and enforceable.
Common law recognises force majeure exclusions. Construction and engineering contracts typically expressly regulate the parties' rights and obligations in the case of force majeure events. For the common law exclusion to be effective and to discharge the contract, the "supervening impossibility" must be absolute (as opposed to probable and relative) and must not be the fault of or under the control of either party. The courts do not recognise commercial impracticability as a supervening impossibility.
Liquidated damages for delay and the employer's right to terminate are typically negotiated to cover delay attributable to the contractor.
The following are typically negotiated to cover delays which are not attributable to the contractor:
Contractual time extension and additional cost entitlements (typically subject to time barring).
The right to terminate for prolonged suspension (and consequently the right to receive payment for expenses incurred and work done).
Limitations on the ultimate duration of defect or warranty periods.
Early warning provisions and comprehensive progress reporting requirements are often included to manage the risk of delays.
Employers (through the employer's agent) can typically instruct the contractor to carry out a variation, subject to the contractor's entitlement to claim an extension of time and additional costs. This entitlement is usually subject to time barring. However, the right to instruct a variation in design-build contracts is usually subject to the contractor's right to resist it if the resulting change affects the suitability (unless the employer accepts the risk) or safety of the works.
At common law (unless specifically provided for in the agreement or otherwise agreed, and depending on the circumstances), an employer cannot omit part of the works with the intention of giving it to another contractor to complete. The extent of the works that can otherwise be omitted is arguably limited.
Other negotiated provisions
Additional matters that are often heavily negotiated by the parties include both the:
Contractor's liability for latent defects in the works.
Governing law and dispute resolution provisions, where one of the parties is foreign. South Africa is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention). Public sector construction contracts are typically regulated by South African law, with South Africa as the dispute resolution forum.
Architects, engineers and construction professionals
Construction professionals are typically appointed using industry standard agreements, although bespoke agreements are also widely used. Standard form contracts include:
The NEC Professional Services Contract.
The FIDIC Client/Consultant Model Services Agreement.
Various standard forms, prepared and distributed by various professional organisations and associations (for example, standard appointment contracts for architects, engineers, quantity surveyors and project managers).
Bespoke agreements are usually used for more complicated EPCM-type arrangements.
However, the Construction Industry Development Board Regulations (CIDB Regulations) require public sector procurement for construction-related professional services to be undertaken using the NEC Professional Services Contract or the CIDB Standard Professional Services Contract.
Professional liability is subject to negotiation, but is usually capped and limited to damages arising from negligence. However, liability to re-perform defective services is not usually limited. Specific performance is available as a legal remedy under common law.
Limitation of liability is usually determined with reference to the value of the fee to be charged (not the value of the resulting works) and available professional indemnity insurance. Professional indemnity insurance is often limited to insurance arranged through the relevant professional association (although larger consulting companies usually have self-standing professional indemnity insurance).
For professional consultants, one of the more difficult provisions to agree on is the level of liability that the consultant will accept for the services he provides. Consultants generally do not accept an absolute "fit for purpose" obligation for their services, as it is likely that they will not be able to procure professional indemnity insurance to cover such risk. For this reason, consultants typically seek to limit their obligations to a standard of "reasonable care and skill".
While clients typically accept that consultants will not undertake an overall "fit for purpose" obligation, they will often require these obligations to be bolstered to at least accord with recognised good practice and/or the level of skill and care ordinarily expected or required by the profession to which the consultant belongs.
As in most jurisdictions, limitation of liability clauses are heavily negotiated with consultants typically seeking to limit liability to a percentage of their fees without regard to the associated value of their deliverables.
Payment structures are also often heavily negotiated, with clients often requiring a fixed or ceiling price for services, while consultants prefer a fully man-hour reimbursable arrangement with no payment ceiling.
Payment for construction work
Methods of payment
Payment methods are negotiated and usually arranged to keep the contractor cash flow positive or, at least, neutral. Payments are typically structured as progress payments, as certified by the employer's agent, according to the value of work completed or agreed milestones, and are typically subject to limited retention. Contracts often allow for an advance payment as an interest free loan, which is paid and secured against an on-demand bond. The advance payment is amortised and repaid against future payments.
Common law allows a contractor, unless otherwise agreed, to obtain a lien (right of retention) over the works, to secure payment of a claim relating to works' expenditure. However, it is typical for an employer/funder to require a contractor to waive this lien. In building contracts, contractors usually only waive their lien where alternative security for payment is provided.
The risk of non-payment is mitigated by:
Contractual rights of suspension and termination.
An obligation to pay interest (at sometimes punitive, but lawful rates).
Security in the form of a letter of credit.
Other payment guarantee.
Between the employer and the contractor, the contractor generally assumes full responsibility for the performance of all subcontractors. However, this position can be modified contractually, so that the employer assumes certain risks (or so that the contractor's responsibility is otherwise limited). For example, the standard form JBCC building contract provides that the responsibility for design undertaken by a nominated (selected) subcontractor does not fall on the contractor. Instead, the contract allows the subcontractor's design liability to flow through to the employer.
The relationship between the contractor and a subcontractor is subject to negotiation and is usually managed on a "back-to-back" basis with the main contract. For example, a contractor is free to request an indemnity from the subcontractor, which will typically be on the same or similar terms as that provided by the contractor to the employer. In addition, the back-to-back arrangement often extends to the subcontractor's right to receive payment which, unlike the situation in, for example England and Wales, is permitted in South Africa.
The Construction Industry Development Board (CIDB) Regulations provide for the establishment of a register of contractors, and require that any enterprise tendering or entering a construction works contract with the public sector must be registered in the appropriate grading and designation. Contractors tendering or entering a construction works contract with the private sector are not restricted in this way. In addition, all home builders must be registered with the National Home Builders Registration Council (NHBRC). Contractors registered with the NHBRC do not also have to register with the CIDB if the public sector procurement relates to the construction of a home.
Apart from these registration requirements, there are no specific licences required by contractors for construction work. However, there are various works specific approvals, notifications or consents, required under applicable legislation (including environmental, and health and safety legislation and regulations), and relevant municipal or other building regulations.
All land in South Africa falls within the jurisdiction of a municipality. Each municipality has its own requirements related to the approval of building plans for land within its area of jurisdiction. Building plans must be approved by the relevant municipality before construction begins (National Building Regulations and Building Standards Act No. 103 of 1977 (NBRBSA)). In most cases, approval for a building plan is only required for land that falls within a township development plan. However, as a general rule, all land that is zoned residential, business or industrial will fall within a township development plan of a municipality. Therefore, building plans for a project in these types of zones must be approved by the applicable municipality before construction can commence.
Various statutes and authoritative standards:
Provide for the right of authorities to carry out inspections.
Require inspections to be carried out and/or certificates to be issued in respect of construction works.
These inspections and certificates apply mainly in relation to health and safety requirements and civil engineering construction works. These are generally administrative rather than specific licences or consents. However, it should be noted that under applicable road traffic legislation, specific permits are required for the conveyance of abnormal loads on public roads.
Apart from specific works which require a licence, there are generally no specific licences or other consents required on completion of the project. However, no building or structure can be occupied by any person until the relevant municipality issues a certificate of occupancy (NBRBSA). This statement essentially certifies that the building has been constructed and completed:
In accordance with the approved building plans.
In compliance with the related health and safety requirements (for example, the design complies with the necessary fire safety requirements).
There is no specific construction-related insurance that must be maintained by law. Construction contractors, as with all employers (in the context of an employer/employee relationship) must register with the Compensation Fund for the Compensation for Occupational Injuries and Diseases Act 130 of 1993, or with a licensed compensation insurer. Under the Construction Regulations 2014 (Construction Regulations), issued under the Occupational Health and Safety Act 85 of 1993 (OH&S Act), employers must ensure that principal contractors (appointed under the Construction Regulations) are registered and in good standing with the compensation fund or a licensed compensation insurer, before construction work starts.
Contract works insurance, public liability insurance and marine insurance (as applicable) are typically procured by the employer or the contractor, and the contract typically regulates the obligation to procure and maintain insurance.
Insurance for physical loss or damage arising from strike, riot, civil unrest and/or terrorism is provided by the South African Special Risks Insurance Association (SASRIA). A SASRIA coupon is typically procured together with (and linked to) contract works insurance.
See above, Compulsory insurance.
There are no specific requirements related to the hire of construction sector employees. The Basic Conditions of Employment Act 1997 (BCEA) prohibits employment of any child under 15 years of age or under the minimum school leaving age.
Foreign nationals, who have not been granted permanent resident status in South Africa, must obtain work permits under the Immigration Act 13 of 2002. It is an offence to employ a foreign person in violation of the Immigration Act.
Sectoral Determination 2: Civil Engineering Sector, South Africa (Sectoral Determination) applies to all civil engineering sector employers and employees, and regulates wages. The provisions of the Sectoral Determination regulating the following do not apply to employees whose earnings exceed an amount determined by the Minister of Labour under the Basic Conditions of Employment Act 1997 (BCEA) (the current earnings threshold being ZAR205,433.30):
Ordinary hours of work.
Payment for overtime.
Employers outside the civil engineering sector, whose activities fall within the metal and engineering industries are subject to the Main Agreement concluded at the Metal and Engineering Industries Bargaining Council. The Main Agreement is binding on employers and employees within its scope and is valid for a fixed period, after which it is renegotiated.
The BCEA, which sets basic conditions of employment and the Labour Relations Act 66 of 1995 (LRA) also apply. The LRA, among other things, provides that every employee has the right not to be unfairly dismissed or subjected to unfair labour practices.
On major construction projects, where different sectors are usually involved, employer organisations increasingly negotiate with trade unions to sign a project labour agreement (PLA) to ensure labour management consistency on-site. A PLA can:
Include a productivity bonus.
Regulate matters not covered under any industry level sectoral determination or collective agreement.
Provide for expedited dispute resolution procedures.
An employee employed on an indefinite basis by a contractor can be redeployed to another construction project by the employer without his employment terminating at the end of a construction project. Given that the employment is not terminated, the employee is not entitled to any statutory or redundancy payments.
Employees can be employed under a fixed-term contract for the duration of a particular project or for the duration of certain work on the project. At the end of the fixed-term contract, the employment terminates automatically, and this is not considered a dismissal. Therefore, employees are not entitled to any statutory payments.
For employees employed on an indefinite basis and who are not redeployed to another project site, their services can be terminated because of the employer's operational requirements. Operational requirements are requirements based on the economic, technological, structural or similar needs of the employer (Labour Relations Act 66 of 1995 (LRA)). The LRA provides a specific procedure that must be followed for a dismissal for operational reasons. An employer must consult with employees or their representatives on issues specified in the LRA. Failure to do so can result in the dismissal being found to be unfair. Under the Basic Conditions of Employment Act 1997 (BCEA), on termination of employment for operational requirements, an employer must pay an employee severance pay equal to at least one week's remuneration for each completed year of continuous service with the employer.
In addition, on termination of employment, an employer must give the employee notice. The employer can require the employee to work the notice period or pay the employee in lieu of notice. On termination of employment, an employee must also be paid for all accrued annual leave.
Health and safety
The Occupational Health and Safety Act 85 of 1993 (OH&S Act) and the Construction Regulations (as well as various other regulations promulgated under the OH&S Act) regulate the health and safety of all persons (subject to certain minor exceptions) involved in construction work, other than construction work that is regulated under the Mine Health and Safety Act 29 of 1996.
The Construction Regulations impose obligations on employers (owners), contractors and designers. The obligations relate principally to the management of health and safety by the employer and designer through the design and procurement phase of the project, and by all parties on the construction site itself. The management of health and safety on the construction site must be undertaken under pre-formulated and agreed health and safety plans, setting out specific minimum safety requirements for various construction activities (Construction Regulations). These include minimum requirements for:
Work at elevated positions.
Formwork and support work.
The use of cranes and mobile plants.
Transport of construction personnel.
The National Environmental Management: Air Quality Act 39 of 2004 (AQA) provides measures for the prevention of pollution and ecological degradation, particularly for the control of emissions. The AQA does the following:
Sets out national norms and standards regulating air quality monitoring, management and control.
Provides the basis for control of dust emissions, including construction dust.
Lists activities that cannot be carried out with an atmospheric emissions licence.
Although the AQA is relatively new, similar restrictions have been in place in South Africa since the 1960s.
For emissions, minimum standards are specified for each listed activity (that is, an activity that requires an atmospheric emission licence), as well as the requirements for monitoring and reporting on them.
It is an offence to carry out a listed activity without an atmospheric emission licence, punishable by either or both:
A maximum fine of ZAR5 million.
A maximum prison sentence of five years on conviction of a first offence.
In the case of a second or subsequent conviction, a maximum fine of ZAR10 million and/or a maximum prison sentence of ten years may be imposed.
There are a wide range of listed activities that require an atmospheric emission licence.
The National Water Act 36 of 1998 (Water Act) provides that the state is the custodian of all water in South Africa. As a result, all water uses are subject to an administrative licensing process. Water use includes (Water Act):
Activities that have an impact on the beds or banks of water courses (including drainage lines) or wetlands.
Activities that could pollute a water resource.
The above uses (which includes for the purpose of construction) require a licence, a general authorisation or other form of statutory authorisation.
The Water Act contains stringent polluter-pays provisions in the event of on- and off-site water contamination. People involved or in control of the construction projects must take all reasonable measures to prevent water pollution if their activities may pollute water. Failure to take these reasonable measures exposes the contractor to criminal liability and liability for pollution clean-up costs.
The National Environmental Management Act, Waste Act 59 of 2008 (Waste Act) requires holders of waste to both:
Ensure that the waste is treated and disposed of in an environmentally sound manner.
Prevent any employee or any person under his or her supervision from contravening the Waste Act.
The Waste Act prohibits unauthorised disposal of waste and littering. The Act also provides for the licensing of the waste management services. Builders' rubble is generally included in the definition of "waste" and must be disposed of at an appropriately authorised facility.
A list of waste management activities that have or are likely to have detrimental effect on the environment was published on 3 July 2009. The list prohibits any person from commencing, undertaking or conducting a waste management activity listed unless a licence is issued for that activity. There are two categories of listed activities:
Category A. These are activities that require a basic assessment process.
Category B. These are activities that require a full environmental impact assessment (EIA) process prior to commencement of the activity.
Category C. These are activities that require compliance with certain standards relating to the storage, recycling or recovery of waste.
Failure to obtain a required waste management licence is an offence, punishable by:
A maximum fine of ZAR10 million.
A maximum prison sentence of ten years.
Most municipalities in South Africa have separate bye-laws that deal with the management and disposal of construction-related waste. A breach of bye-laws may lead to similar penalties or fines to those above.
Environmental impact assessments (EIAs)
The National Environmental Management Act 107 of 1998 (NEMA) lists activities that cannot commence without an environmental authorisation. Commencement includes any activity on site (including ground clearing activities).
The lists of activities presently in force came into operation on 2 August 2010, and replaced the previous EIA Regulations. These lists are:
Listing Notice 1. This contains activities that require the carrying out of a basic assessment before being authorised.
Listing Notice 2. This lists activities requiring scoping and an EIA to be undertaken before being authorised.
Listing Notice 3. This identifies protected geographical areas in each municipality, such as:
important areas for biodiversity conservation;
sites or areas identified in an international convention (for example, for the purpose of protecting endangered species).
Commencing specified developments in these areas also requires environmental authorisation. It is an offence to conduct a listed activity without such authorisation, which can be punishable by:
A maximum fine of ZAR10 million.
A maximum prison sentence of ten years.
There are no overriding regulatory requirements to use sustainable construction practices.
South Africa is a party to the United Nations Framework Convention on Climate Change and the Kyoto Protocol. South Africa is classed as a developing country under the Kyoto Protocol and therefore does not have specified commitments to reduce and/or cap carbon emissions.
However, under the Copenhagen Accord, South Africa undertook to reduce greenhouse gas emissions by 34% by 2020 and by 42% by 2025.
In November 2011, amendments were made to the regulations published under the National Building Regulations and Building Standards Act No. 103 of 1977 (NBRBSA). These amendments introduced new requirements for energy usage in buildings. The basic requirement is that affected buildings must be designed so they either:
Are capable of using energy efficiently while fulfilling user needs in relation to vertical transport (if any), thermal comfort, lighting and hot water.
Have a building envelope and services that facilitate the efficient use of energy appropriate to their function and use, internal environment and geographical location.
A set of regulations providing minimum standards for environmental sustainability in buildings in South Africa (SANS 10400 part XA) was developed by the South African Bureau of Standards (SABS). The new regulations require the design and construction of new affected buildings and extensions to existing buildings to use energy efficiently. The regulations are far-reaching. For example, under the regulations, 50% of all water heating requirements for new affected buildings must be obtained from renewable energy sources.
The SABS has also published a guideline (SANS240) that sets higher standards of energy efficiency in buildings for the purpose of reducing greenhouse gases. However, these higher standards remain voluntary at this point.
Prohibiting corrupt practices
The Code of Conduct for all Parties Engaged in Construction Procurement published under the Construction Industry Development Board Act (Code of Conduct) provides a framework under which an action or default by any party to the procurement process may be assessed. An agent, contractor, employer/employee or subcontractor must not accept gifts, favours, or anything of more than token value from another party to the procurement process, and must not engage in unfair or unethical practices (Code of Conduct).
The CIDB can convene and conduct an inquiry into breaches of the Code and can issue fines or warnings for breaches, referring the matter to the relevant authority in the circumstances, or de-registering contractors for a period of time.
The Prevention and Combating of Corrupt Activities Act 12 of 2004 (Corrupt Activities Act) identifies various specific corrupt actions and corrupt practices. It is an offence for any person who corruptly gives or agrees to give any person any undue gratification as an inducement or reward to do or not to do anything, in carrying out or performing his duties or functions (section 3, Corrupt Activities Act). Specific offences apply to specific circumstances, including matters involving public officials, tenders and contracts.
A person who is convicted of any of the above offences may be liable to imprisonment or fines, with a maximum penalty of life imprisonment (section 26, Corrupt Activities Act). In addition to any fine, a court can impose a fine equal to five times the value of the gratification involved in the offence (section 26(3), Corrupt Activities Act).
A court can order the particulars of a conviction and sentence of any person convicted of an offence to be endorsed on a register (section 28, Corrupt Activities Act). If the party convicted is an enterprise, the particulars of that enterprise, as well as the particulars of any partner, manager, director or other person who wholly or partly exercises control and was involved in or knew about the commission of the offence, can be recorded with the conviction and sentence. Endorsement on the register allows the National Treasury to terminate any agreement with the person or entity convicted, subject to certain restrictions. The register is open to the public (section 32, Corrupt Activities Act).
Insolvency is regulated by the Insolvency Act 22 of 1936 (Insolvency Act) and, to some extent, the old Companies Act 61 of 1973 (Companies Act). The new Companies Act does not affect issues in a liquidation (although it has introduced a new form of bankruptcy (see below, Business rescue)).
The insolvency of the contractor affects all executory (partly performed) contracts the contractor is party to at the time. However, the contractor's insolvency does not give the employer an option to terminate the contract.
Generally (subject to specific exclusions in the Insolvency Act), insolvency neither suspends nor terminates a contract. Instead, the trustee or liquidator, being bound to do whatever is in the best interests of the group of creditors (concursus creditorum), can generally choose whether to abide by the agreement or repudiate it.
Repudiation by the contractor can usually be countered with an order for specific performance. However, this option is unavailable to an aggrieved employer (no matter how fully it has fulfilled its obligations) when the trustee of an insolvent estate repudiates. If the contractor's liquidator repudiates further performance under the contract, the employer is left with an unsecured concurrent claim for damages (for example, for the additional costs of getting a new contractor to complete the works at a higher cost than the original contract).
Alternatively, the trustee can elect to complete the contract and step into the shoes of the insolvent contractor (thereby becoming entitled to any performance owed by the employer and being bound to carry out the insolvent contractor's obligations).
The effect is that a clause designed to protect the employer's interests if the contractor becomes insolvent (for example, by conferring a preference or modifying the legal consequences of the concursus creditorum), is void against the trustee. A clause that allows termination on the basis of the insolvency of a party is also unenforceable, since this denies the trustee the right to elect to continue with the contract, if the creditors' interests demand it. However, where a right to cancel accrues for reasons other than insolvency (for example, non-performance) before insolvency, but insolvency occurs before the employer can cancel the contract, the employer can exercise its right to cancel the contract.
The new Companies Act 71 of 2008 introduced a new form of bankruptcy called business rescue. Business rescue permits the debtor company to put itself into business rescue by means of a simple directors' resolution with no notice to creditors. An aggrieved creditor can apply to court to set aside the business rescue.
A practitioner is appointed to supervise the board. A moratorium is imposed immediately. A practitioner can "suspend, entirely, partially or conditionally, any obligation under an agreement to which the company is a party at the commencement of the business rescue period". If the practitioner wishes to cancel any obligation, he can only do so with court approval. If an obligation is suspended or cancelled, the other party is left only with a claim for damages. Therefore, if a construction contract is not terminated on the onset of business rescue in relation to a contractor, the practitioner can suspend (or with court approval, cancel) certain obligations of the contractor, such as delay penalties and so on.
PPPs are becoming increasingly common. The government issued a policy confirming that PPPs are one of their instruments of choice for, among other things, developing infrastructure in the country. PPPs have been used in the following sectors:
Government (for example, for administration buildings).
Healthcare, including hospitals.
Road infrastructure, such as toll roads.
High-speed rail links (such as the Gautrain project).
Correctional services, consisting of buildings and prisons.
Education, including schools and other facilities.
The Public Finance Management Act 1 of 1999 (PFMA) and the Municipal Finance Management Act 56 of 2003 are the two most noteworthy pieces of legislation that deal with PPPs in South Africa. Regulation 16 under Treasury Regulations of the PFMA sets out the requirements and processes required by National Treasury for PPP arrangements.
The Public Finance Management Act 1 of 1999 (PFMA) and the Municipal Finance Management Act 56 of 2003 (MFMA) are the two most noteworthy pieces of legislation that deal with PPPs in South Africa. Regulation 16 under Treasury Regulations of the PFMA sets out the requirements and processes required by National Treasury for PPP arrangements.
On a local government level, the MFMA and the Municipal Public-Private Partnership Regulations apply.
The government issues a request for qualification (RFQ) to potential tenderers who must respond to the RFQ to qualify for participation in the subsequent stages of the tender.
The government then issues a fully termed request for proposal (RFP), requesting all qualified tenderers to submit a bid for the proposed project. The base agreement for the RFP is the PPP agreement itself, which is gradually becoming more standardised.
Occasionally, the government runs a best and final offer (BAFO) process after the RFP closes. This process stage is likely to become more infrequent as the process of concluding PPPs and standardised terms becomes more settled and common practice.
After the RFP and BAFO processes (if relevant), the government announces a preferred bidder and a reserve bidder, and then conducts the negotiations to financial close with the preferred bidder. If negotiations with the preferred bidder fail, the government can revert to the reserve bidder and negotiate with them. The standardised terms for PPPs are issued by the PPP Unit of National Treasury.
A recent development implemented by the National Treasury for some PPPs is that of conducting a debt funding competition immediately before or after the PPP agreement is signed. Various models for this have been proposed, and this process still has some way to go before it becomes standardised.
Formal dispute resolution methods
Unless otherwise provided for in a construction contract or subsequently agreed to between litigants, the default position is that disputes are dealt with either in the high court or magistrates' court. Jurisdiction depends on the monetary value of the claim. The parties generally contractually agree for disputes to be referred to adjudication followed by private arbitration. The conduct of a private arbitration is regulated by terms of reference and rules agreed to by the parties, either in the contract or subsequently under a separate arbitration agreement, subject to the provisions of the Arbitration Act 42 of 1965, which provides a statutory framework for arbitrations.
The International Arbitration Bill was published for comment on 28 April 2016. The Bill is expected to significantly modernise South Africa's arbitration laws and harmonise them with those of leading arbitration hubs. Under the Bill, South Africa will adopt the UNCITRAL model law on international commercial arbitration.
Courts and arbitration organisations
There are no specific construction courts. The relevant high court or magistrates' court with jurisdiction, depending on the monetary value of the claim, deals with construction-related disputes.
The following national and/or international arbitration organisations are used to arbitrate construction disputes:
The Association of Arbitrators (Southern Africa) (www.arbitrators.co.za).
Tokiso Dispute Settlement (Pty) Limited (www.tokiso.com).
The Arbitration Foundation of South Africa (AFSA) (www.arbitration.co.za).
United Nations Commission on International Trade Law (UNCITRAL) (www.uncitral.org).
International Chamber of Commerce (ICC) (www.iccwbo.org).
The London Court of International Arbitration (LCIA) (www.lcia.org).
The China-Africa Joint Arbitration Centre (http://arbitration.co.za/pages/CAJAC.aspx).
Adjudication (whether by a single adjudicator, through dispute review or adjudication boards) is commonly used as a first step dispute resolution mechanism for construction disputes. Mediation is also a common form of ADR. Both adjudication and mediation are non-legislated voluntary processes that are regulated by terms of reference and rules agreed to by the parties, either in the construction contract, or subsequently under a separate agreement.
Construction contracts are not subject to any stamp duty, withholding tax or other specific construction contract or construction activity-based tax. South Africa applies transfer pricing rules similar to the Organisation for Economic Co-operation and Development (OECD) transfer pricing rules.
VAT is payable (generally at 14%) on:
The supply of goods and/or rendering of services by a registered VAT vendor in the course or furtherance of any enterprise carried on by him.
The importation of goods or on the supply of any imported services by any person.
Any person who carries on an enterprise in South Africa (or partly in South Africa) on a continuous or regular basis, and whose taxable supplies exceed the annual threshold of ZAR1 million must register as a VAT vendor.
Income tax and capital gains tax (CGT)
South Africa applies a residence basis of taxation. This means that:
Residents are subject to income tax and CGT on their worldwide income and capital gains.
Non-residents are subject to income tax only on their income from South African sources and to CGT only in relation to capital gains arising from the disposal of either:
immovable property in South Africa or an interest in immovable property; or
an asset that is attributable to a permanent establishment (PE) of that non-resident in South Africa.
Non-residents conducting business in South Africa are therefore subject to income tax only to the extent they derive income from a South African source, subject to any tax relief that may be available under a double tax agreement (DTA), if applicable. In most DTAs, South Africa can only tax business profits of a non-resident enterprise to the extent these profits are attributable to a PE of the non-resident in South Africa. Customs duties (at varying rates) are payable with respect to imported goods, in addition to the import VAT referred to above.
Dividends tax at a rate of 15% must be withheld from dividends declared by either:
South African companies.
Non-resident companies, in relation to South African-listed shares.
There is no tax on the distribution of profits by a branch of a non-resident company.
A 15% withholding tax on interest paid to or for the benefit of a non-resident came into effect on 1 January 2015. In addition to transfer pricing rules regarding the deductibility of interest (thin capitalisation), a new section (section 23M) that limits the deduction of interest payments to persons who are not subject to income tax (for example, non-resident creditors) came into effect on 1 January 2015.
The previous 12% withholding tax on royalties has been increased to 15% from the same date. It was proposed that a 15% withholding tax on service fees in respect of non-residents would be introduced, but this proposal has since been abolished.
All of these withholding tax rates may be reduced under a DTA, if applicable.
Resident and non-resident companies are now both subject to income tax at a rate of 28%. In addition, the effective CGT rate for companies has increased to 22.4% in respect of capital gains occurring during the years commencing on or after 1 March 2016.
Non-resident individuals will similarly be subject to income tax only to the extent that they derive income from a South African source. It is generally accepted that the source of income from employment is the place where the services were rendered, irrespective of where the contract of employment was entered into or where payment was received. Accordingly, to the extent that non-resident employees render services in South Africa, their remuneration will be from a South African source and they will, in principle, be subject to South African income tax in respect of such portion of their remuneration.
However, if any employees are resident in a jurisdiction that has entered into a DTA with South Africa, they may be able to qualify for tax relief under the relevant articles of such DTA. These articles are usually called "dependent personal services" or "income from employment".
The terms of each DTA must be considered to determine whether an individual can qualify for DTA relief, but as a general rule, an individual will not qualify if either:
He is present for 183 or more days during a fiscal year or 12-month period (depending on the wording of the DTA).
He is employed and remunerated by a resident employer.
A non-resident contractor who is tax resident in a country that has a double tax agreement (DTA) with South Africa may qualify for tax relief under the DTA (see Question 34).
A tax incentive is provided in the form of an accelerated depreciation allowance to the owner of property in an urban development zone, for the erection or improvement of property. The depreciation period is shorter for improvement of existing buildings than for the erection of new buildings.
Other requirements for international contractors
The Construction Industry Development Board (CIDB) Regulations require that any enterprise (including foreign contractors) that tenders or enters into a contract for construction works with the public sector, must be registered with the CIDB (see Question 18). A foreign contractor can apply for registration with the CIDB. The process can take several months and the cost depends on the specific grade of registration required.
For example, the cost of a grade nine application (for contracts with a value greater than ZAR130 million) is about ZAR55,000. For registration in the required grade to be granted, a contractor must prove its record of experience in contracts with a similar nature and value. Further visa and permit requirements apply to foreign nationals working in South Africa (see Question 21, Foreign workers).
The government has also implemented certain policies and legislation regarding economic transformation, local content, skills development and sustainable growth in South Africa, namely the:
National Industrial Participation Programme (NIPP).
South African Government's Accelerated and Shared Growth Initiative (ASGISA).
Broad Based Black Economic Empowerment Act (Act No. 53 of 2003) (B-BBEE Act).
The NIPP and ASGISA are aimed at developing sustainable industry and growth in South Africa and apply only to state-owned entities and those parties contracting with state-owned entities.
Black Economic Empowerment (BEE) is a central part of the South African Government's economic transformation strategy. The BEE Act is the key legislation through which the BEE process is managed. It does not set out offences or penalties relating to BEE performance but rather seeks, through economic measures, to facilitate a uniform approach to BEE in the South African economy.
Other than in state licensing, permitting and authorisation processes, there is no "hard law" requiring that any entity in South Africa must meet specific B-BBEE targets or must implement a B-BBEE policy within the entity. However, from a practical perspective, any company (including a foreign contractor) wishing to do business in South Africa must consider and develop its B-BBEE position as, in addition to the pressures from government, an entity that does not have a good B-BBEE rating, or does not strive to improve its B-BBEE rating, is obstructed in the conduct of day-to-day business with the government, organs of state and private sector customers. For these reasons, a contracting party in South Africa may require a foreign contractor to have a certain B-BBEE rating. Further, a new regulation (Regulation 3(l)) was recently promulgated. Regulation 3(1) provides that the registration of contractors must, in relation to each contractor registered under these Regulations, reflect the broad-based economic empowerment recognition level of a contractor prescribed under the Codes of Good Practice issued under the B-BBEE Act from time to time.
In relation to exchange control restrictions, the following are relevant:
Exchange controls have limited application to non-residents (although some rules do apply).
A non-resident can operate a non-resident bank account with a South African bank, which allows it to freely receive foreign currency and convert South African rand (ZAR) amounts received into foreign currency.
The limited exchange control rules that apply to expatriate individuals do not generally result in significant restrictions, provided they confirm their status as temporary workers with an authorised dealer, such as any of the commercial banks.
In practice, there are no legal obstacles to a foreign company opening bank accounts, renting office space or hiring local services or other local supports for its daily operations in South Africa.
A new 15% withholding tax on service fees for non-residents was proposed to come into effect on 1 January 2016, but this proposal has been rejected (see Question 34, Income tax and capital gains tax (CGT)).
The Construction Industry Development Board (CIDB) Regulations were recently amended. For example, section 33 of the CIDB Act was amended to give smaller contractors the opportunity to become registered with the CIDB. This has led to various amendments, including (among others):
The lowering of the threshold values for registration.
The lowering of the thresholds attached to the grading designations.
The Waste Act contains onerous provisions regarding contaminated land.
These provisions will, among other things, apply to land that is already contaminated. If the contamination is discovered during a construction project, this must be reported in the required manner. Under the Waste Act, the land owner may be required to:
Arrange for a site assessment to be conducted by an independent person at its own cost.
Submit the site assessment report to the relevant authorities.
In terms of Regulation 76 of the Treasury Regulations, the National Treasury published Treasury Instruction No. 4 of 2015/2016 (Instruction) and a Standard for Infrastructure Procurement and Delivery Management (Standard). The Instruction came into effect on 1 July 2016 and applies to all departments, constitutional institutions and public entities listed in Schedules 2 and 3 to the Public Finance Management Act 1 of 1999, and any organ of state which implements infrastructure projects on behalf of any of these institutions.
The purpose of the Instruction, through the Standard, is to establish a control framework for:
The planning, design and execution of infrastructure projects, the tracking of such projects and the monitoring of performance.
Infrastructure procurement, including requirements for infrastructure procurement and delivery management, and minimum standards for infrastructure procurement.
During the planning, design, procurement or execution of infrastructure projects, the Instruction requires accounting officers and accounting authorities to implement the Standard and develop a suitable supply chain management policy for infrastructure procurement and delivery management.
*The authors would like to thank the following for their contributions to this chapter: Anton Barnes-Webb, John Brand, Claire van Zuylen, Robin Carr, Khomotso Makapane, Aneria Bouwer and Bavesh Pillay.
Association of Arbitrators (Southern Africa)
Description. Official website of the Association of Arbitrators (Southern Africa).
Department of Trade and Industry
Description. Official website of the Department of Trade and Industry.
Tokiso Dispute Settlement (Pty) Limited
Description. Official website of Tokiso Dispute Settlement (Pty) Limited.
Arbitration Foundation of South Africa (AFSA)
Description. Official website of the AFSA.
United Nations Commission on International Trade Law (UNCITRAL)
Description. Official website of the UNCITRAL.
International Chamber of Commerce (ICC)
Description. Official website of the ICC.
London Court of International Arbitration (LCIA)
Description. Official website of the LCIA.
Construction Industry Development Board (CIDB)
Description. Official website of the CIDB.
Council for the Built Environment (CBE)
Description. Official website of the CBE.
South Africa Federation of Civil Engineering Contractors (SAFCEC)
Description. Official website of SAFCEC.
Main construction organisations
Construction Industry Development Board (CIDB)
Main activities. The CIDB is tasked, among other things, with:
Establishing a national register of contractors and construction projects to regulate, monitor and promote the performance of the construction industry for sustainable growth, delivery and empowerment.
Promoting improved delivery management capacity, and the uniform application of procurement policy throughout all spheres of government.
Promoting improved performance and best practice of public and private sector clients.
Council for the Built Environment (CBE)
Main activities. The CBE is a statutory body established under the CBE Act. Under the CBE Act, the CBE is, among other things, responsible for transforming the professions, acting as a conduit between the South African Government and the built environment professions, fostering growth of the professions, and contributing to the creation of a dynamic built environment.
The South Africa Federation of Civil Engineering Contractors (SAFCEC)
Main activities. SAFCEC was formed to advance the interests of civil engineering contractors in South Africa.
Claire Tucker, Head of Public Law and Regulatory
Tumisang Mongae, Partner
Professional qualifications. Admitted to practice in South Africa
Areas of practice. Construction and engineering law; administrative law; corporate litigation; dispute resolution.
Non-professional qualifications. LLM, University of Pretoria; LLB, University of Pretoria
Advising a roads agency on the enforcement of performance bonds.
Advising an employer on various claims by a contractor before a tribunal based on the New Engineering Contract 3 (NEC3) relating to the construction of a hydro pumped-storage scheme.
Advising an employer on various claims by a contractor before an adjudicator based on the NEC 3 (TSC) relating to the maintenance of rail infrastructure.
Advising an employer on various claims before an arbitrator based on a bespoke contract relating to the construction of a sub-station.
Publications. "Application of the “root cause” principle in construction claims".