MDA Law
The Carbon Tax and Construction
The President has signed into law the Carbon Tax Act No 15 of 2019, which came into effect from 1 June 2019.
The objectives of the levying of carbon tax are to force companies involved and/or operating carbon-intensive processes to make more environmentally responsible choices. The Act applies a base tax rate per ton of the CO2 equivalent of the greenhouse gas emitted. The Tax will have a financial impact on these companies, and/or third parties procuring manufactured goods and/or materials from such companies.
Our clients that are contractors in the construction industry have been receiving price increase notification letters from suppliers (particularly in the cement and steel industries) and have been left in the dark about how to deal with these price increase notifications.
We at MDA shall be putting together a series of articles that set out the relevant clauses under the standard form construction contracts whereby a contractor may be able to claim additional compensation as a result of price increases from suppliers, consequent upon the Carbon Tax Act.
The first contract form in our series is the FIDIC Red Book (1999 Edition).
Clause 14.1(b) of the FIDIC Red Book provides that “the Contractor shall pay all taxes, duties and fees required to be paid by him under the Contract, and the Contract Price shall not be adjusted for any of these costs except as stated in sub-Clause 13.7 [Adjustment for Changes in Legislation]”
Clause 13.7 of the FIDIC Red Book provides that:
“The contract Price shall be adjusted to take account of any increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) or in the judicial or official governmental interpretation of such Laws, made after the Base Date, which affect the Contractor in the performance of his obligations under the contract.
If the Contractor suffers (or will suffer) delay and / or incurs (or will incur) additional Cost as a result of these changes in the Laws or in such interpretations, made after the Base Date, the Contractor shall give notice to the Engineer and shall be entitled subject to sub-clause 20.1 [Contractor’s claims] to:
- An extension of time for any such delay, if completion is or will be delayed under sub-Clause 8.4 [Extension of time for Completion]; and
- Payment of any such Cost which shall be included in the Contract Price.
Although Clause 14.1(b) holds the Contractor responsible for the payment of all taxes, it is recognised that a change in legislation that affects the price of the Works shall not be a Contractor risk. In this regard, an exclusion from the requirement that the Contractor pay all taxes is found in Clause 13.7.
As is evident from Clause 13.7 however, the ability of the Contractor to claim additional payment due to a change in the Laws is subject to the following:
- Firstly, a claim submission that complies with the provision of Clause 20.1; and
- The amount of compensation available to the Contractor is limited to the Cost thereof.
It is further noted that for Clause 13.7 to operate, the change in Laws needs to be a change in Law of the Country – ie. the country where the Site is located / the Permanent Works are being executed. Entitlement to claim additional compensation may therefore be limited to projects being executed in South Africa.
A claim submission that complies with the provisions of Clause 20.1
Clause 20.1 provides:
“If the Contractor considers himself to be entitled to any extension of the time for Completion and/or additional payment, under any clause of these Conditions or otherwise in connection with the Contract, the contractor shall give notice to the Engineer describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware of the event or circumstance.
If the Contractor fails to give notice of a claim within such period of 28 days, the time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the employer shall be discharged from all liability in connection with the claim…” [our emphasis]
Hence, a defence available to an employer to avoid making additional payment to a contractor would be that a contractor “should have become aware” of the circumstances surrounding the levying of carbon tax on construction materials as soon as the Carbon Tax Act was promulgated. A contractor would naturally only become aware of the additional expense upon receipt by it of price increase letters from suppliers.
The amount of compensation available to the Contractor is limited to the Cost thereof.
The definition of Cost as per the FIDIC Red Book is “all expenditure reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overhead and similar charges, but does not include profit.”
In this regard, the Contractor’s entitlement to additional compensation shall be limited to such Cost. A difficulty may arise in calculating the exact Cost involved, particularly in contracts where there are contract price adjustment provisions.
Summary
The Carbon Tax Act may have an affect on prices of building materials (particularly cement and steel). The promulgation of new laws may entitle the Contractor to additional compensation under its contract with the employer if the provisions of Clause 13.7 are satisfied (more particularly that the change in the Law is a change in the Law in the country where the Site is located). Once this condition is satisfied, the Contractor is required to comply with the provisions of clause 20.1 in order to secure its entitlement.
Author: Natalie Reyneke, Senior Associate.
