Article

Factual Summary: The facts of the case were fairly straightforward. At the end of January 2007 the Western Cape Department of Transport and Public Works, South Africa ("the Department") concluded two construction contracts with Zanbuild Construction (Pty) Ltd ("Zanbuild") for the building of two pathology laboratories at two different hospitals, one in Worcester and the other in Paarl. The material terms of the two construction contracts were the same and both incorporated the standard terms proposed by the Joint Building Contracts Committee ("JBCC"). Both construction contracts called for construction guarantees. Absa Bank Ltd ("Absa Bank") issued the two construction guarantees - one for ZAR1 181 104, 80 and the other for ZAR1 106 500 (each was for 10% of the contract price). The material terms of the construction guarantees were identical. Both these construction guarantees differed considerably from the form of the guarantee envisaged in the JBCC, and from the standard guarantee form called for by the Department in its letter accepting Zanbuild's tenders. Nonetheless, these guarantees were issued with the consent of Zanbuild and were accepted by the Department. Both construction guarantees contained the following relevant term:

"The bank reserves the right to withdraw the guarantee after the employer has given 30 (thirty) days written notice of its intention to do so, provided the employer shall have the right to recover from the bank the amount owing and due to the employer by the contractor on the date the notice period expires."

Relying on this term of the guarantees (ie, the right to withdraw from the guarantees after 30 days' notice) Absa Bank informed the Department on 28 August 2008 that it intended to withdraw from the guarantees and that they would be cancelled on 28 September 2008 after which no claims or payments would be considered. Then two days before the expiry date (ie, 26 September 2008), the Department responded to this notice and demanded immediate payment of the full amount of both guarantees, alleging default on the part of Zanbuild in accordance with an annexure to the letter of demand. The annexure was a letter dated 4 August 2008 by the principal agent, an architect, for the Department regarding the construction contracts and it informed Zanbuild that:

(1) Both the Department and the principal agent were of the opinion that Zanbuild was in breach of the construction contracts, in that it had failed to execute the work with "due skill, diligence, regularity and expiation"; and

(2) Zanbuild was afforded a period of 10 days to remedy its breach failing which the Department could give notice of cancellation.

On 9 October 2008 the Department purported to cancel the construction contracts. Zanbuild disputed that the Department was entitled to do so, but in turn chose to accept the purported cancellations as repudiations by the Department. Accordingly, the construction contracts were terminated before either of the building projects could be completed.

As a result, Zanbuild then applied to the Western Cape High Court, Cape Town ("the court a quo") for an interdict (injunction) preventing the Department to draw on the construction guarantees and Absa Bank from making a payment in terms of the guarantees. As the Department did not allege that it had any identifiable monetary claim against Zanbuild under the construction contracts, Zanbuild argued that no claim arose under the guarantees. Their argument was founded on the interpretation of the guarantees as accessory guarantees akin to suretyships. Zanbuild essentially argued that as the guarantees were so inextricably linked to the underlying contracts akin to suretyship agreements, Absa Bank's liability under the guarantees was limited to the extent that the Department could prove a monetary claim against Zanbuild under the underlying contracts (ie, construction contracts). This contention found favour with the court a quo. In contrast, the Department contended that the guarantees were independent of the underlying contracts and were thus comparable to the independence of a letter of credit in an international sale transaction. Therefore, the guarantees could be called up without any allegation or evidence of any claim against Zanbuild under the underlying contracts. All that the Department had to do to procure payment of the full amounts guaranteed was to submit a statement to Absa Bank that Zanbuild was in default in terms of the underlying contracts. The court a quo rejected the Department's arguments and granted the interdicts applied for. The Department then appealed to the Supreme Court of Appeal, South Africa against the court a quo's order. Absa Bank was joined as a party in both matters, and in both matters the Bank decided to simply abide by the decisions of the courts.

Legal Analysis:

Relevant to the outcome of the appeal was the correct interpretation of the two construction guarantees that were identical in their material terms.

Brand JA (Nugent JA, Lewis JA, Maya JA and Bosielo JA concurring) confirmed that both the English law as well as the South African law is familiar with the distinction between guarantees that are accessory in nature such as suretyships and those that are independent in nature such as demand guarantees and letters of credit. He referred particularly to Dormell Properties 282 CC v Renasa Insurance Co Ltd and Others NNO 2011 (1) SA 70 (SCA) (see the abstract of this case at **) and Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd (2010 (2) SA 86 (SCA) (see the abstract of this case in the 2010 Annual Review of International Banking Law and Practice at **) where the construction guarantees concerned were interpreted as being independent guarantees or demand guarantees. He also referred to Basil Read (Pty) Ltd v Beta Hotels (Pty) Ltd and Others 2001 (2) SA 760 (C) where the construction guarantee in that case was interpreted as creating a conditional undertaking similar to that of a surety. He also pointed out that in South African law, just like in English law, it is accepted that the question whether the guarantee concerned constitutes the one or the other is dependent on the interpretation of the terms of that guarantee. Brand JA also stressed that the remarks made regarding independent guarantees in the Lombard and Dormell cases could not merely be transferred to the matter before him, as they needed to be interpreted against the background of the specific terms of the guarantees in those cases which were in the form of the standard guarantees that had been requested by the Department in its acceptance letter to Zanbuild. The construction guarantees the Department ended up accepting in the matter before the Court, however, was not in that form at all and they were significantly different.

Of particular importance were the following terms of the guarantees that were issued by Absa Bank:

". . . whereas it is stipulated in the [construction] contract that the contractor [ie, Zanbuild] shall provide the employer [ie, the Department] with a bank guarantee of 10% of the contract value . . . as security for the compliance of the contractor's performance of obligations in accordance with the contract , and whereas the bank [ie, Absa Bank] is willing to agree to guarantee an amount . . . which is equal to 10% of the contract value under certain conditions stipulated hereafter . . .

Now therefore we the undersigned . . . in our capacities as [employees of] the bank do hereby guarantee and bind the bank as guarantor for the due and faithful performance by the contractor of all its obligations in terms of the said contract subject to the following conditions . . .

With each payment under this guarantee the bank's obligation shall be reduced pro rata." [Emphasis added.]

Brand JA was of the opinion that the aforementioned terms quoted above (particularly the underlined portions of thereof) was in line with the language associated with suretyships and not independent demand guarantees. If one construed each of the guarantees as a whole, it appeared that it gave rise to liability on the part of the bank similar to a suretyship. Brand JA thus agreed with the view of the High Court (and the interpretation contended for by Zanbuild) in this regard (in par 19).

The construction guarantees also contained the following important term:

"Each claim by the employer must be made in writing accompanied by a signed statement that the contractor has failed to fulfil his obligations in terms of the contract and shall be sent to the bank's domicilium address as indicated below . . ." [my emphasis]

The Department argued that the aforementioned term quoted above, particularly the underlined portion thereof, meant that in order for the Department to obtain payment of the guarantees in full, it simply had to submit two documents to the bank: (1) a claim in writing; and (2) a signed statement that the contractor was in default under the construction contract. The effect of this thus was that the guarantees were payable on demand whenever the contractor was in default, irrespective of the liability on the part of the contractor (in par 20). Brand JA did not agree with this argument and highlighted that the Department's interpretation was not in line with the fact that this term of the guarantees they relied upon envisaged more than one claim under them linked to a pro rata reduction of Absa Bank's exposure. The term "[w]ith each payment under this guarantee the bank's obligation shall be reduced pro rata" clearly made provision for more than one claim. The Department's interpretation made no provision for multiple claims and in terms of their interpretation any breach of the construction contract (underlying contract) would render the full amount of the guarantee payable on demand (in par 21).

In addition, Brand JA was also of the opinion that the term in the guarantees reserving the right of Absa Bank to withdraw from the guarantees after 30 days' notice, (which the Bank did invoke in this case (see the term quoted above)) particularly limited the liability of the Bank to the amount owing by the contractor under the underling contracts (ie, construction contracts). This was obviously an indication of a liability similar to that of a surety - a fact the Department conceded to (in par 22). Despite accepting this fact, the Department, however, argued in this regard that the limitation of the liability of Absa Bank under this particular term only applied after expiry of the 30 days' notice period. Therefore, the Department argued that as it had demanded payment before expiry of the 30 days' notice period, this limitation did not apply to it. Brand JA did not agree with this contention and said (in par 24):

"It would mean that the 30 days' notice changes the whole nature of the guarantee. Prior to the expiry of the period, the guarantee is the equivalent of a letter of credit. After expiry it retrospectively converts into a suretyship. I can simply find no basis for this interpretation in the wording of the guarantee."

Brand JA also pointed out that the 30 days' notice provision was one which was typically found in a suretyship for an indefinite period. It affords the right to the surety to terminate the suretyship by not less than a stated period of notice to the creditor. It has the effect that the surety is not liable for amounts that become due by the principal debtor after expiry of the notice period. While the surety's liability for amounts owing by the principal debtor before the expiry date, remains unaffected (in par 24).

In the end the Court found that since the Department had not established any amount owed to it by Zanbuild during the currency of the guarantees, it was not entitled to demand payment under the guarantees from Absa Bank. Accordingly the appeal was dismissed with costs.

Comments:

The decision by the Supreme Court of Appeal cannot be faulted. It is clear that the guarantees in this matter were not independent guarantees, but rather accessory obligations similar to suretyships.

* Prof M. Kelly-Louw, Professor of Law, Department of Mercantile Law, School of Law, University of South Africa

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