COLUMN EQUIPMENT
PERFORMANCE AND PAYMENT SECURITY IN THE MINING INDUSTRY AN ALTERNATIVE APPROACH
© ISTOCK – poco_bw
WEBBER WENTZEL COVER STORY
12
SA MINING
MAY / JUNE 2022
www.samining.co.za
The views expressed are the author’s own and do not necessarily reflect SA Mining’s editorial policy.
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of self-insurance. They could set here are various aside a separate fund in the event options open to of default, which could be called mining companies on in the worst-case scenario, but seeking protection if not called upon could be rolled against nonover and used for other projects. performance by a contractor, and contractors seeking PAYMENT SECURITY protection against nonPayment security is often a risk for payment by a client. contract miners engaged by junior In the mining and miners that do not have access to construction industries, capital or a large balance sheet, the non-performance of a particularly when they are in startcontractor or non-payment up phase and before they have by a client to a contractor are achieved steady state mining and potential risks that both parties By Tyron Theessen and Megan Jarvis payment via offtake agreements. need to consider in the early Partners at Webber Wentzel Often the contract miner will stages of their relationship, seek security for payments to be made to it by the client. Performance using performance bonds, insurance and various forms of payment security in the way of a bond is often not feasible as the required capital security. is simply not available. Various forms of security are available to a contractor wishing to PERFORMANCE BONDS minimise its exposure. A combination of various forms of security is Performance bonds, which are issued by a contractor to its contracting often necessary. Contractually, the contractor ought to include a right client, are commonly used in capital projects. However, they can place of suspension where payment is not made timeously. Although this is a a significant financial burden on the contractor, especially smaller good stick to have, a contractor is often reluctant to suspend the contract emerging construction firms, and their call-up by the client can lead to as this may harm the relationship and put the project at risk. costly and lengthy legal disputes. Also, the contractor must be mindful of the fact that its exposure can This can be especially problematic for smaller businesses, without be for a three-month period (or longer, depending on the contractual access to substantial litigation budgets, and it is impossible to know payment terms) if it begins work in month one, then renders an invoice how many smaller operations have quietly collapsed as a result of at the end of month one which is payable at the end of month two. If frequently overly conservative drawdowns on performance bonds. payment is not made, the contractor may need to give 30 days to remedy It is questionable whether performance bonds, which add to the breach. Usually, it is only then that the contractor would be able to the costs of projects for the client (because the contractor will suspend performance. factor the costs into the tender), are the best way for clients to The contractor should also include as security for the client’s secure performance. The mining industry, which is required to performance the right to a lien over the site where it conducts assist emerging black entrepreneurs, may find that the costs of a operations. A right to use the client’s property onsite in the event of an performance bond render new entrants less competitive in tendering. exercise of the lien may be specified. This may allow the contractor to A performance bond or guarantee may require the contractor to set exercise its security and continue rendering its services, should it choose aside cash equivalent to 10% to 20% of the value of the contract, pay to do so. high premiums – in instances where cash security is not available – As lien holder, the contractor would need to remain in continuous and expose their assets as further security. possession of the site and exercise effective control over it. The lien is a As an aside, where the mine has secured traditional bank funding, useful tool and, if it is exercised, has the effect of making the contractor the rights of the contractor are secured by way of a bank guarantee, as a secured creditor. Ultimately, if the client goes into business rescue or part of the funding package made available to the mine. In return for liquidation, being ranked as a secured creditor is preferable to being a this “bank guarantee”, all rights to security would be ceded in favour contingent creditor. of the bank. In South Africa, we have seen contractors taking out insurance to One possible solution is contractor default insurance, which is cover payment they are due by the client in terms of the contract. Care relatively common in the United Kingdom, Europe and other mature must be taken to ensure that the insurance is properly crafted. Often markets – but not yet in South Africa. this is crafted as trade debt insurance, which is not the most appropriate Contractor default insurance covers the contracting company in instrument. Contractor default insurance is required. the event that the contractor defaults, for any reason. It is a threeIt is important to ensure that the insurers are wholly apprised of the way contract between the insurance company, the client and the nature of the contract and the risks associated with it. This is particularly contractor. The cost is borne by the contracting party, rather than the relevant when this type of insurance is not commonplace in the market contractor, but the advantage of this is that the cost of the protection and the insurers may not be well-versed in the mining industry. is not a hidden cost in the project and becomes one that the client has In the end, a combination of one or more of these forms of security more control over. is suitable for helping to minimise the contractor’s exposure to nonAn alternative approach, which may be more appropriate for payment by the client. ■ large mining companies with strong balance sheets, could be a form
