Interdicting the call up of a performance guarantee

The Supreme Court of Appeal (“SCA”), in Exxaro Coal Mpumalanga (Pty) Ltd v TDS Projects Construction and Newrak Mining JV (Pty) Ltd and Another[1], had to determine whether a contractor could interdict the calling up of a performance guarantee.

Background

On 12 July 2018 Exxaro Coal Mpumalanga (Pty) Ltd (“Exxaro”) and TDS Projects Construction and Newrak Mining JV (Pty) Ltd (“TDS”) entered into a written agreement for the construction of mechanical and electrical plant, and civil, building and engineering works (relating to Exxaro’s Matla Coal Mine North West Access Project).

As required by the contract TDS procured a performance guarantee, from Absa Bank Limited (“ABSA”), for the due fulfilment of its obligations. The guarantee was in an amount of ZAR?32?082?012,90.

The material terms of such performance guarantee were as follows:

·??????ABSA would pay the guaranteed amount to Exxaro on receipt of a written demand stating that such amount was due and payable;

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·??????written demand would be signed by a person warranting that he/she was duly authorised to do so;

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·??????ABSA would have to receive any claim and statement before the guarantee expiry date (see below); and

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·??????the guarantee would expire and lapse on 19 June 2020 and any claim and statement received thereafter would be ineffective.

On 9 June 2020 Exxaro terminated the contract on the basis that TDS breached it and failed to remedy same. TDS denied having breached the contract.

On 10 June 2020 Exxaro sent a written demand (“first demand”) to ABSA claiming that the guaranteed amount had become payable (as a result of TDS’ failure to perform in terms of the contract). In response, ABSA advised Exxaro that the demand was ‘deemed unfit for processing’ on various bases (that were not necessary to deal with). Exxaro then suspended the first demand and, on 19 June 2020, retracted the suspension and claimed a lesser amount of ZAR 22?165?055.66 on identical terms as the first demand (save for the lower amount claimed).

On 25 June 2020 TDS applied to the High Court for an interim order interdicting Exxaro from demanding, and ABSA from paying, any amount under the guarantee (pending an order that the demands made by Exxaro for payment of the guarantee were invalid and a final interdict preventing ABSA from making payment of any amount under the guarantee).

Exxaro opposed the application and lodged a counterapplication to compel TDS to provide a new or revised guarantee (on the basis of an agreement TDS had allegedly reneged upon).

TDS’ grounds for a final interdict were as follows:

·??????the first and second demands were fraudulently made;

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·??????TDS had a clear right to prevent Exxaro from unlawfully benefiting under the guarantee;

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·??????the demands did not comply with the terms of the guarantee because they:

o??were not signed by persons who warranted that they had authority to do so;

o??failed to state that the amount claimed was due and payable;

o??they did not indicate the respects in which TDS had breached the contract;

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·??????TDS, having been subjected to a fraudulent call, would suffer severe financial prejudice in relation to the trigger of counter guarantees and immediate liability (under circumstances where there would otherwise be none). This would also trigger events of default in respect of TDS’ various facilities and/or contracts (resulting in the cancellation of contracts and/or immediate calling up of facilities when there would otherwise not have been an immediate liability);

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·??????TDS had no other satisfactory remedy because its damages were impossible to quantify (or extremely difficult to quantify). TDS further alleged that damages would be recovered in the distant future whilst its business would be crippled or destroyed in the interim.

High Court

The high court held that TDS was entitled to raise the issue of Exxaro’s non-compliance with the guarantee on the basis of a contract of mandate (banker-client relationship). Consequently, the high court granted an order declaring the demands to be invalid and of no force or effect.

The high court dismissed Exxaro’s counter application because of disputes of facts on the papers and because of an arbitration clause in the contract that dealt with the subject matter of the counter application disputes.

SCA

The SCA noted that it was common cause that the guarantee in question was a demand guarantee.

The SCA, therefore, highlighted the Loomcraft[2] principles as follows:

·??????a demand guarantee is akin to an irrevocable letter of credit;

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·??????a demand guarantee establishes a contractual obligation on the part of the bank to pay the beneficiary on the occurrence of a specified event;

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·??????a demand guarantee is wholly independent of the underlying contract;

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·??????a bank will escape liability upon proof of fraud on the part of the beneficiary;

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·??????the importance of allowing banks to honour their obligations without judicial interference; and

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·??????an interdict to restrain a bank from paying would not be granted save in the most exceptional circumstances.

The SCA also restated the trite requirements for a final interdict, being as follows:

·??????a clear right on the part of the applicant;

·??????an injury actually committed or reasonably apprehended; and

·??????the absence of another adequate remedy.

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Counsel for TDS conceded that no case of fraud was made out in TDS’ founding affidavit. The focal point of TDS’ case was therefore Exxaro’s non-compliance with the terms of the guarantee.

Regarding whether final interdict requirements were met, the SCA held as follows:

·??????TDS’ assertions regarding the harm or injury that it would suffer (if the interdict was not granted) were not based on evidence of the consequences that ABSA’s honouring of the demand would have on it. TDS failed to establish something actually done which was prejudicial to or interfered with its rights i.e., TDS did not plead the terms of the banker customer relationship between TDS and ABSA, the content of the counter-guarantees that would allegedly have resulted in immediate liability to TDS, and details of TDS’ defaults of facilities’ terms;

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·??????if ABSA were to honour the guarantee when its terms were not complied with, TDS would have a complete defence against a claim by ABSA. The only basis on which TDS would be liable, to ABSA or any other party, would be if ABSA was lawfully obliged to honour the guarantee. As TDS argued that Exxaro’s demand of ABSA was not lawful, because it did not comply with the terms of the guarantee, such demand could not amount to a violation of a right of TDS (and in such circumstances neither would payment). TDS could therefore not demonstrate that it would sustain any injury if ABSA honoured the guarantee when not obliged to do so; and

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·??????TDS, like any contractor in its position, would have its ordinary contractual remedy against the guarantor (being a complete defence to any claim founded on the honouring of the guarantee that ABSA was not obliged to honour).

The SCA, therefore, upheld Exxaro’s appeal and set aside the high court’s order and dismissed TDS’ application with costs.

The takeaway from this case is summed up by the SCA’s quoting of State Bank of India and Another v Denel SOC Limited and Others[3] as follows:

“South African courts, like their international counterparts, should jealously guard the international practice that banks honour the obligations they have assumed in terms of guarantees issued by them save in exceptional cases where fraud is involved.”

[1] Case no: 169/2021

[2] 1996 (1) SA 812 A at 815G-J (and numerous cases that followed it)

[3] 2014 ZASCA 212