Esor Sues Kopano Ke Matla Lesotho: M165M Claim Over Polihali Tunnel Subcontract

• Esor Construction (Pty) Ltd, which has been under receivership since March 2019, is suing the Kopano Ke Matla joint venture for over M165 million in a high court case in Lesotho.
• The dispute centers on whether a letter of acceptance for a M365 million subcontract created a binding agreement for work on the Polihali Transfer Tunnel.
• Esor claims it began preparations and incurred costs after the letter, but Kopano Ke Matla failed to provide access or finalize a detailed subcontract.
• Kopano Ke Matla denies a valid contract, citing the absence of a signed detailed agreement and Esor's failure to provide required guarantees.
• Esor terminated the subcontract in February 2024 after its M78.9 million payment claim was rejected, alleging a contract breach.

The dispute over binding subcontract validity highlights the risks associated with commencing work or incurring substantial costs based on preliminary agreements like letters of acceptance, especially when a more detailed, formal contract is anticipated.

A significant legal dispute has emerged in Lesotho, where South African firm Esor Construction (Pty) Ltd, which has been under receivership since March 2019, has initiated a high court case against the Kopano Ke Matla joint venture, seeking over M165 million (approximately R165 million) for work related to the Polihali Transfer Tunnel. The Esor Construction lawsuit centers on whether a letter of acceptance issued by Kopano Ke Matla constituted a binding subcontract for M365 million, a claim the joint venture vehemently denies, asserting no valid agreement was ever reached between the parties.

The Kopano Ke Matla joint venture, comprising China's Yellow River Company, Sinohydro Bureau 3, and South Africa's Unik Civil Engineering, was awarded the primary M9.2 billion contract for the Polihali Transfer Tunnel construction by the Lesotho Highlands Development Authority in November 2022. Esor's claim against the joint venture and its three partners alleges that their tender for a subcontract was formally accepted, leading to the expectation of work commencement on this critical infrastructure project.

The core of the Polihali Transfer Tunnel dispute revolves around the validity of a subcontract agreement. According to an affidavit by Esor Regional Director Len Nel, Esor and Kopano Ke Matla engaged in tender exchanges and revised submissions starting in August 2022. Esor submitted its final revised tender on or about January 20, 2023, which was followed by a letter of acceptance issued by Kopano Ke Matla on January 27, 2023. This letter, signed by Zeng Yingfeng on behalf of Kopano Ke Matla, explicitly stated that its issuance confirmed a "binding contract" between the contractor and subcontractor.

Len Nel signed the acceptance on behalf of Esor on January 30, 2023. The accepted subcontract amount was approximately M365 million. Following this exchange, Esor reportedly began preparations for the work, including providing required guarantees, deploying engineers to establish the site, and ordering necessary machinery. However, the subcontract also stipulated that a detailed subcontract agreement was to be executed within 28 days, which Esor alleges Kopano Ke Matla failed and refused to finalize.

Despite Esor's readiness to perform, as stated by Nel, Kopano Ke Matla allegedly failed to provide access to work areas, approve key technical submissions, issue necessary instructions and designs, or certify and pay Esor's claims. Esor submitted a payment claim for M78.9 million on October 5, 2023, covering fixed and time-related preliminary and general costs. However, Kopano Ke Matla rejected this claim on October 19, 2023, citing the absence of a signed subcontract agreement and Esor's failure to submit an advance payment guarantee and a performance guarantee.

Esor contends that Kopano Ke Matla's rejection constituted a material breach of the agreement, arguing that the payment application was submitted in accordance with the contract and that Kopano Ke Matla's repeated failures prevented Esor from carrying out the subcontract works. After attempts to resolve the matter through correspondence, Esor ultimately terminated the subcontract on February 9, 2024, and subsequently vacated the site, leading to the current Kopano Ke Matla contract breach litigation.

This Lesotho Highlands Water Project litigation underscores the critical importance of formal contract execution in large-scale infrastructure developments. The Polihali Transfer Tunnel is a vital component of phase two of the Lesotho Highlands Water Project, designed to transfer water from the under-construction Polihali Dam to the existing Katse Dam, ultimately channeling water to South Africa. The project is projected to significantly increase annual water transfers from 780 million to more than 1.27 billion cubic metres.

The dispute over binding subcontract validity highlights the risks associated with commencing work or incurring substantial costs based on preliminary agreements like letters of acceptance, especially when a more detailed, formal contract is anticipated. The outcome of this case could set a precedent for how preliminary contractual documents are interpreted in major construction projects within the region, emphasizing the need for clear, fully executed agreements to prevent similar payment claims and contractual disagreements.

This case highlights the critical importance of formal contract execution over preliminary agreements like letters of acceptance, especially in large infrastructure projects. Lawyers should advise clients on the risks of commencing work or incurring costs without a fully signed, detailed contract to avoid similar disputes over contract validity and payment claims.

Source: Original reporting via The Mail & Guardian