Penalties under the JBCC Principal Building Agreement refer to predetermined and agreed compensation payable by a contractor to an employer consequent upon the contractor breaching the contract when failing to achieve the contractually agreed date for practical completion or the revised date for practical completion.
In terms of the JBCC, a ‘penalty’ is an amount stipulated in the contract data and calculated per calendar day, that is payable by the contractor to the employer where the contractual or revised practical completion date has not been met for reasons attributable to the contractor.
The penalty amount must be reasonable and agreed upon at contract conclusion. Penalties are therefore pre-agreed compensation for the employer’s estimated losses incurred due to a delay attributable to the contractor.
The specific provisions regarding penalties are outlined in the JBCC contract document, including the circumstances under which they become payable, the rate, the process for calculation, and the levying thereof.
The employer’s entitlement:
An employer who suffers financial loss as a consequence of late completion of the works is entitled to such recompense from the contractor as would put him in the position in which he would have been had the works been timeously completed.
The challenge is determining the extent of loss incurred by the employer in instances where the completion of a building project is delayed. To address this issue, the parties generally include a penalty clause that requires the contractor to pay a specified penalty to the employer instead of damages for late completion, for example, clause 24 in the JBCC (2014 and 2018 editions of the JBCC).
While such penalties are legally enforceable under the Conventional Penalties Act 15 of 1962, the employer is restricted from claiming both damages and penalties, or damages instead of penalties, unless explicitly provided for in the contract.
Clause 24 serves as the sole mechanism for an employer to levy penalties against a contractor in this regard. In the situation where the contractor fails to bring the works to practical completion by the contractually agreed date or the revised date, the contractor will be liable to the employer for a penalty (clause 24.1).
The employer has the option to levy the penalty and must notify the contractor of its decision through the principal agent. The principal agent will then be responsible for determining the amount of the penalty.
The penalty will be calculated at the agreed rate from the later of the contractually agreed date for practical completion or the revised date for practical completion until the earlier of the actual or deemed date of practical completion of the works, or the date of termination (clause 24.2). The principal agent will include the penalty in monthly interim payment certificates starting from the date when the employer becomes entitled to the penalty (clause 24.3). To ensure clarity, the recovery statement must specify the magnitude and method of calculation for any penalties levied (clause 27.1.1).
Actual damages?
It is crucial for parties to understand that penalties do not have to be an accurate pre-assessment of the actual damages suffered by the employer, nor are they limited to covering only the employer’s potential financial loss.
The penalties can encompass a wide range of harms, including financial loss, harm to the employer’s property, reputation, or well-being, and therefore they are not limited to a consideration of the financial loss likely to be sustained by the employer. The employer does not have to prove that the late completion caused any actual damage to claim the penalty, as the right to the penalty is not only a direct and automatic result of the contractor’s delay but also agreed upon at contract conclusion.
The courts have the discretion, in terms of the Conventional Penalties Act, to reduce the amount of the penalty if it appears that it is out of proportion to the prejudice suffered by the employer.
Penalties not payable:
A penalty provision presupposes a breach by the contractor. Clause 24 is therefore not applicable if the contractor is granted an extension of time in terms of clause 23 of the JBCC (2014 and 2018 editions). This is because an extension of time grants a revision to the date for practical completion or the revised date for practical completion and absolves the contractor from any liability for penalties for the period of the extension.
The application of a penalty for not achieving the contractually agreed date for practical completion or the revised date for practical completion is dependent on the determination of the contractor’s entitlement to an extension of time under clause 23. If the delay constitutes a relevant event that consequently affects the date for practical completion, the contractor is entitled to claim an extension of time, and clause 24 does not apply in circumstances where such an extension of time is granted.
South African law recognises and respects penalty stipulations such as clause 24 of the JBCC. It serves as an effective motivator for defaulting contractors to perform both timeously and expeditiously. Such stipulations in construction contracts make it easy for an innocent employer to levy penalties on their contractors and critical for contractors to diligently enforce their rights through the extension of time mechanisms provided for in the contract. In addition, the high threshold provided by the Conventional Penalties Act guards against excessive penalties being levied against contractors, allowing for a reduction in the amount of the penalty, which makes it a compelling tool for ensuring that a penalty amount is not out of proportion to the prejudice suffered by the employer.
It is important for contractors to have a clear understanding in their respective contracts of the penalty provisions, the compulsory time periods allowed for notifying and claiming extensions of time, the relevant time bars and to be properly advised of what the differences are between penalties and damages as contract law differs in circumstances where the employer elects to levy the penalty from the contractor and when the contractor, for example elects to claim damages from the subcontractor in the JBCC Nominated/Selected Subcontract.
By Gerard van Beek | Associate