With South Africa’s recent repo-rate increase and subsequent grey listing, it is no surprise that many companies are under financial distress. Construction companies are not an exception to the economic downturn with the construction industry currently inundated with matters involving business rescue practitioners aiming to rehabilitate companies. In these matters, it is widely accepted for the employer to invoke the cancellation clause of the contract on the basis that the contractor is undergoing business rescue, however, this seems to contradict the powers of the business rescue practitioner provided for in the Companies Act 71 of 2008 (the Act). This raises the question whether the employer may rightfully cancel in terms of the construction contract notwithstanding the fact that the business rescue practitioner (the BRP) has taken over the execution of the rights and obligations of the company in terms of the Act.
Section 128(1)(b) of the of the Act provides that business rescue proceedings create a moratorium on the rights of claimants in relation to entities undergoing business rescue. This means that the exercise and/or enforcement of rights by claimants such as an employer should be suspended until the business rescue proceedings are finalised.
It is widely accepted that the powers of the BRP are often regarded as being “wide”. This is so because, the BRP is tasked with “breathing life” into a distressed company. However, it is our considered view that the cancellation clauses found in most construction contracts rightfully narrow these wide powers.
The employer’s right to terminate the contract, is often triggered by the appointment of the BRP or the commencement of the business rescue proceedings. Practically the BRP is not a skilled construction contractor but rather an administrator of a construction contract. This exposes the employer and the project to significant risks, which must be mitigated and often termination may be the best option.
A few considerations
In deciding whether to exercise its right to terminate the contract, in cases where the contractor is undergoing business rescue, we believe the employer should consider, among others, the following questions:
- The percentage of progress achieved and the balance to be completed by the contractor (including defects);
- The costs of appointing a replacement contractor;
- The value of the construction guarantee in favour of the employer;
- The contractor’s other obligations on other projects, if any; and
- The extent of delay damages that have been levied against the contractor, if any.
The appointment of the BRP is essential in rescuing companies in distress. However, as an employer, the importance of the project being completed on time and within budget cannot be superseded by the need to breathe life into a company that may or may not survive the business rescue process. This remains a critical balance that must be struck and the employer should not lose sight of what is important in such cases.