Can a Contractor deduct penalties from a Subcontractor under the JBCC N/S Sub Agreement?
This is what construction contractors and subcontractors lose a lot of sleep on – penalties for late completion. Yes, the dreaded penalty clause. A stick for some, but mostly misunderstood and erroneously applied on many projects as proven by the sheer number of disputes we regularly deal with involving penalties or damages.
It would appear as if many industry role players are quite unaware, or perhaps ill-informed when it comes to drawing a distinction between penalties (liquidated damages or LD’s) and damages within the ambit of the JBCC agreement.
Penalties within the JBCC N/S Subcontract Agreement, can it be levied?
Within the “contract data” section of the JBCC N/S Subcontract Agreement, you will notice a space is provided for penalties. Main Contractors often populate this space with a false sense of security thinking that those penalty amounts represent an amount to be paid to the Main Contractor, by the Subcontractor in the event of late completion.
This is not quite the case. Contractors cannot apply that penalty amount as a penalty to a Subcontractor under the standard JBCC N/S Sub agreement.
What is that I hear? Shock and horror for the Main Contractors? Subcontractors pulling out the site-braai equipment for a celebration? Not so fast…
Are you sure about this, if not penalties, what then?
Even though the word “ penalties” or “ penalty” is used in the contract data of the N/S Subcontract Agreement, on closer inspection of the 5.0 version, the wording states that the penalties are merely used for information purposes, as they denote the penalties payable in the main contract.
In the latest 6.2 version, it states “Penalty applicable to the contractor [24.1]”, in other words not applicable to the Subcontractor. This is to inform the Subcontractor of the amount of penalties that could be levied by the Employer against the Main Contractor, in the event of late completion.
Furthermore, the most important section in JBCC which is often overlooked but where 90% of disputes are resolved is the Definitions and Interpretation section. Have a look at the definition of a penalty in the N/S Sub Agreement. “PENALTY: The stipulated amount per calendar day [PBA-CD] payable by the contractor to the employer where the date or the revised date for practical completion, whichever is later, has not been met.”
Wherever the word penalty is used, even in the contract data, it is a term in bold which refers to the aforementioned definition. A penalty in the subcontract agreement is therefore indicative of the amount of penalties applicable in the Principal Building Agreement (PBA) between Contractor and Employer.
Lastly and most conclusively, there is no clause or mechanism in the N/S Subcontract Agreement that can trigger the application of a penalty on the Subcontractor by the Contractor. Clause 24, which is the penalty clause in the PBA is replaced with a “damages” clause in the N/S Sub Agreement. It states that a Subcontractor shall be liable for damages to the contractor in the event of late completion.
The difference between penalties and damages
A penalty provision within a contract stipulates that one party shall pay a specified penalty to the other when that party fails to perform on an agreed obligation within the contract. In this instance, the other party does not need to prove that they suffered any damages in order to levy such an agreed penalty.
Damages on the other hand is different. When one party fails to perform on an agreed obligation stipulated within a contract, the other party can claim the damages they suffered as a direct result of such failure. Very important is that damages must be proven in terms of liability and quantum. What it means is this: If a Contractor wants to recoup damages from a Subcontractor, the Contractor must (a) prove and clearly demonstrate how and why the Subcontractor is liable in terms of the contract and (b) prove the actual amount of loss or expense they incurred as a result of such liability.
Just because a Subcontractor is liable for damages does not mean such damages can be levied against them. If a Subcontractor is late on a project and demonstrably liable in terms of the contract, but the Contractor suffered no provable loss as a result of it, then there can be no damage claim against the Subcontractor.
This distinction between penalties and damages is imperative to understand and interpret the parties’ intention pursuant to a JBCC contract.
Why is this difference important?
Many Subcontractors would be in dire trouble if they did indeed have a penalty provision with a Main Contractor. Very few Subcontractors manage their programme and extension of time claims properly. So, in the event of delays beyond their interim completion date, a Contractor would be able to apply penalties even if the Contractor suffered no loss at all in terms of their contract with the Employer. Penalty clauses therefore bring about an automatic, agreed, contractual mechanism that triggers the penalty to be levied when the default is present, irrespective of actual losses suffered by the other party.
With damages, if a Subcontractor in this instance, manages his programme poorly and finishes his work far beyond his contractual interim completion date, the Main Contractor can only claim damages, when he suffers provable loss. Mostly, Main Contractors do the hard yards in terms of their extension of time claims. When a Subcontractor completes his section late and no penalties are levied against the Main Contractor due to approved extensions of time claimed by him, there are no provable time-related damages or losses suffered and the Main Contractor cannot claim damages as a result of the late completion.
Subcontractors are not off the hook!
Subcontractors on the other hand need to take note that if a Main Contractor can prove that they (the Subcontractor) are the sole cause of a late completion, they can deduct damages for the total amount of penalties levied against them by the Employer as well as any other provable costs like time-related P&G etc.
This is the intention of showing the PBA penalty in the N/S Subcontract’s contract data. The purpose is to make the Subcontractor aware of the potential amount of damages it could suffer should it be liable for causing a project delay.
Subcontractors therefore need to manage their programmes and delays constantly and proactively and keep up to date with their notifications under the required clauses of the N/S Agreement. For those interested, see our information video on how to compile a construction schedule in MS Project, specifically for subcontractors.
Note: Where reference is made to any clauses or definitions, it denotes the latest version of the JBCC contracts, which is Edition 6.2 May 2018 unless otherwise stated. Kindly note that our posts on social media and our website do not constitute professional or legal advice.. see below.
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This post was compiled by Kobus le Roux for Le Roux Consulting, all rights reserved. Please contact us for your professional outsourced project scheduling, claims or adjudication assistance services or construction training courses in the heavy civil and building industry.
Kindly note that our posts on our website and social media do not constitute professional or legal advice and the comments, opinions and conclusions drawn from this post must be evaluated and implemented with discretion by our readers at their own risk.