Construction guarantee call

The applicant, NAD Property Income Fund (Pty) Ltd (“NAD”), by way of application proceedings, sought to enforce payment of a construction guarantee by the first respondent, Guardrisk Insurance Company Limited (“Guardrisk”).[1]

Background

NAD and the third respondent, Belo and Kies Construction (Pty) Ltd (“BK”) concluded a construction contract (in the form of a Joint Building Construction Contract).

Pursuant to such construction contract, BK had a guarantee issued by the second respondent, Performance and Custom Bond Services (Pty) Ltd (“PCBS”), on behalf of Guardrisk (NAD being the beneficiary thereof).

Clause 5 of the guarantee provided as follows:

“Subject to the Guarantor’s maximum liability …, the Guarantor hereby undertakes to pay the Employer the guaranteed Sum or the full outstanding balance upon receipt of a first written demand from the Employer to the Guarantor at the Guarantor’s Physical address calling up this Construction Guarantee stating that:

5.1????????….

5.2????????A provisional sequestration or liquidation order has been granted against the Contractor and the Construction Guarantee is called up in terms of 5.0. The demand shall enclose a copy of the court order.”

Disputes and interim arbitration award

Disputes arose between NAD and BK (which were referred to arbitration). By agreement between NAD and BK, an interim award was published which, in so far as is relevant, read as follows:

“The respondent [NAD] shall not call on the guarantee, issued in terms of the Acornhoek contract concluded between the claimant [BK] and the respondent, until the final determination of all the disputes between … BK and the respondent in respect of the Dwarsloop and Acornhoek projects which are and/or may be placed before Mr Mahon in the pending arbitration (or any other arbitrator, including any appeal proceedings.)”

BK liquidation

On 29 June 2022 BK was liquidated. The third to fifth respondents cited in the application proceedings were its liquidators (who also opposed NAD’s application).

On 4 July 2022 NAD called up the guarantee (relying on clauses 5 and 5.2 of the guarantee above).

Parties’ submissions

NAD submitted that it had met the terms of the guarantee and nothing further needed to be proved. It stated that BK’s final liquidation was a new and self-standing trigger which entitled it to payment from Guardrisk.

Guardrisk’s response was that NAD’s call was in bad faith and opportunistic (as the disputes between BK and NAD were not finally determined). It and PCBS submitted that on a proper interpretation of the interim award, taking into account context and commercial purpose, NAD’s application should be dismissed (as the interim award precluded a call for whatever reasons, including the liquidation of BK, pending the final determination of the arbitration). Accordingly, they submitted that BK’s liquidation was of no consequence.

BK’s liquidators, without referring the court to any authority on this point, contended further that the interim award effectively amended NAD’s rights to call up the guarantee.

The defences raised were as follows:

• ????????By agreeing to the clear and unambiguous award, BK and NAD agreed that their disputes will be determined first (before NAD may call on the guarantee);

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• Such ‘settlement’ was concluded in contemplation of the possible liquidation of BK and this should be taken into account;

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• ???????BK’s liquidation may have interrupted the pending arbitration but did not end the disputes;

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• ????????BK’s liquidation did not mean that it was indebted to NAD;

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• ????????NAD must be held to its agreement with BK; and

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• ????????it is absurd for NAD to call for payment under the guarantee as though the award did not exist.

Legal principles

The High Court reiterated the following principles:

• ????????the terms of a guarantee, which creates an independent obligation (not an accessory obligation) to pay upon the happening of an event, should be looked at to determine the rights and obligations of the guarantor and the beneficiary of the guarantee;[2]

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• ????????a demand for payment is made in terms of the guarantee terms of the guarantee concerned (an obligation to pay arises from the guarantee and not from the underlying construction contract, to which the guarantor was not party). The terms of the guarantee gave rise to an entirely separate cause of action (as the contractor was not party to the guarantee and the guarantee terms did not incorporate any provision of the construction contract or like provision);[3]

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• ????????the purpose of a construction guarantee is to enable a person relying thereon to readily obtain payment by production of the required documents (a guarantee of the type under consideration was enforceable according to its terms). Save for very limited exceptions like fraud, extraneous issues are precluded as defences;[4]

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• ????????that financial institutions should honour guarantees and letters of credit with little judicial interference as such instruments are the lifeblood of commerce (the mercantile practice is to treat rights thereunder as the equivalent of cash in hand).[5]

High Court decision

The High Court rejected the defences raised for the following reasons:

• ????????disputes between BK and NAD are entirely irrelevant to the calling up of the guarantee;

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• ????????an extraneous agreement is not a defence to NAD’s call;

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• ????????it is no defence to say the interim award was made in contemplation of BK’s possible liquidation;

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• ????????the guarantee terms could not be amended without Guardrisk’s involvement;

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• ????????Guardrisk was not a party to the agreement between NAD and BK (which turned into an interim award);

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• ????????the Australian decision sought to be relied upon by the respondents was misplaced (that case was concerned with Australian law and the Australian court expressly stated that the position in Australia was not the same as in South Africa);

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• ????????the guarantee is payable on its terms - which establish a separate cause of action (being BK’s liquidation). The terms of the guarantee did not admit extraneous defences.

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It therefore held there was no defence to NAD’s call and ordered Guardrisk to pay R15?179?698,26, and interest from date of NAD’s demand to date of payment.

The respondents were also ordered to pay NAD’s legal costs (jointly and severally).

[1] 029956/2022 Pretoria, High Court (Judgment handed down by Bam J on 5 July 2023)

[2] Citing Lombard Insurance Company Ltd v Landmark Holding (Pty) Ltd and Others 2010 (2) SA 86 (SCA)

[3] Citing Eskom Holdings v Hitachi Power Africa

[4] Citing Coface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven

[5] Citing Loomcraft Fabrics CC v Nedbank Ltd & Another