Summarized by Prof. M Kelly-Louw*

Topics: Interpretation; Interdict (Injunction); Demand (Performance) Guarantees; Independence

(Autonomy) Principle; Classification

Note: Eskom Holdings Soc Limited concluded a construction contract during October 2007 with Hitachi Power Africa (Pty) Ltd and Hitachi Power Europe GMBH (hereinafter "Hitachi"), for the construction of certain Works at the Medupi Power Station (Medupi). Medupi is a massive new electrical power generating station that is being constructed in South Africa. It was agreed between the parties that the first of its six power generating plants had to be online in 2013 and the last of them by July 2015. The construction called for six demand (performance) guarantees to be issued in favour of Eskom (beneficiary) that would secure performance by Hitachi (principal) of their obligations under the construction contract. The guarantees, subject to the law of South Africa and silent as to any governing ICC rules, were issued by Mizhuo Corporate Bank Limited of Japan (the Bank) at the instance of Hitachi (principal).

During 2012, a number of disputes had arisen between the parties concerning the performance by Hitachi (principal) of its obligations under the construction contract. Eskom (beneficiary) inter alia alleged that Hitachi (principal) had been guilty of material and ongoing breaches of the construction contract. Eskom also claimed that in view of the said material breaches, it was entitled to demand payment under three of the six demand guarantees totalling over ZAR 600 million. On 12 February 2013, Eskom presented these three guarantees to the Bank (guarantor) for payment.

The disputes that ensued culminated in Eskom (beneficiary) eventually addressing a letter to Hitachi (principal) on 1 February 2013, accusing them of a failure to effect certain corrections to the construction work. In trying to resolve the disputes, Eskom indicated inter alia that it was prepared to postpone its decision to demand payment of the three guarantees up to and until 28 February 2013, on condition that in the meantime Hitachi (principal) remedied the breaches.

On 8 February, Hitachi (principal) responded to this letter and stated that it disputed Eskom's entitlement to demand payment of the guarantees and also disputed the allegations made concerning its alleged breaches. This letter, however, was silent on Hitachi (principal)'s attitude to the grace period extended by Eskom not to present demand guarantees up to and until 28 February 2013.

On 13 February 2013 at 23h00, Hitachi (principal) launched an urgent application in the South Gauteng High Court, Johannesburg (court of first instance), seeking a final order:

- interdicting Eskom (beneficiary) until 28 February 2013 from demanding payment of the guarantees; and

- to the extent that the guarantees may have been paid, directing Eskom to revoke the said demand and instructing the Bank accordingly and ancillary relief.

The application for an interdict (injunction) was based on the following grounds:

- first, a failure on the part of Eskom (beneficiary) to comply with sub-clause 2.5 of the construction contract requiring that Eskom (beneficiary) first give written notice to Hitachi (principal) before making a demand on the guarantees; and

- second, a breach of promise made by Eskom (beneficiary) in its letter dated 1 February, namely that it would not present the guarantees prior to 28 February 2013.

Sub-clause 2.5 of the construction contract read as follow:

"If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract, the Employer or the Engineer shall give notice and particulars to the Contractor. However, notice is not required for payments due under Sub-Clause 4.19 [Electricity, Water and Gas], under Sub-Clause 4.20 [Employer's Equipment and Free-Issue Material], or for other services requested by the Contractor.

The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount to which the Employer considers himself to be entitled in connection with the Contract.

The Employer may set off such amounts against moneys due to the Contractor (or to become due) but only to the extent that such amounts are liquid and payable to the Employer by the Contractor under any Clause of these Conditions or otherwise in connection with the Contract. This amount may, without limiting the Employer's other rights to recover amounts due to him from the Contractor (including by having recourse to the Performance Security and Retention Money or Retention Money guarantee provided for in Sub-Clause 14.9 [Payment of Retention Money]), be included as a deduction in the Contract Price and Payment Certificates. Without limiting or derogating from the Contractor's other rights under the Contract, if the Employer sets off any amounts due to the Contractor which are not due and/or payable the Employer shall be liable to the Contractor for the interest thereon, calculated at the Stipulated Interest Rate."

Hitachi (principal)'s contention in respect of the first of these two causes of action found favour with the court of first instance, and the application for the final interdict was granted in its favour. The finding was based on the court of first instance's reading of clause 2.5 as requiring the beneficiary to give Hitachi (principal) notice of its intention to demand payment of the guarantees. The court of first instance was of the view that when the negotiations had broken down or any indulgence granted was withdrawn, Hitachi (principal) should have been given proper and timely notice of the beneficiary's intention to proceed with the presentation of the guarantees for payment. It rejected the beneficiary's contention that it was not required to give notice before calling up the demand guarantees.

As to Hitachi (principal)'s second cause of action - the beneficiary's undertaking not to call up the demand guarantees up to and until 28 February 2013 - the court of first instance rejected the argument advanced by the beneficiary that its concession to postpone a call on the guarantees until 28 February 2013 was merely a proposal to which Hitachi (principal) had to respond. The court favoured Hitachi (principal)'s argument that the concession had meant that the beneficiary was prepared to hold "its horses up to and until 28 February 2013".

Eskom (beneficiary) appealed to the South African Supreme Court of Appeal. Hitachi (principal) elected not to oppose the appeal and to abide by the decision of the Supreme Court of Appeal.

The outcome of this appeal turned on the interpretation of the demand (performance) guarantees as "on demand guarantees" or "conditional (accessory) guarantees".

The Supreme Court of Appeal looked at the nature and various clauses of the guarantees involved in the case before it and concluded that they had all the characteristics of an "on demand" or "call guarantee", which was independent of the construction contract. Therefore, Eskom (beneficiary) was not required to give notice to Hitachi (principal) nor was the Bank (guarantor) required to investigate whether notice was given and whether the beneficiary had complied with the construction contract. The Bank's obligation to pay arose from the terms of the guarantee and not from the conditions of the construction contract to which the bank was not a party. Furthermore, the provisions of the guarantees, which gave rise to an entirely separate cause of action to which Hitachi (principal) was not a party, did not incorporate, by reference or at all, clause 2.5 of the construction contract nor any like provision. The beneficiary's entitlement to make a call upon a guarantee did not have to be proven at the time the demand was made. The Supreme Court of Appeal held that the court of first instance had misread the demand guarantee and imposed the requirement of notice which was not provided for in its terms.

Concerning the reliance by Hitachi (principal) on the undertaking given by the beneficiary not to call up the demand guarantees up to and until 28 February 2013, the Supreme Court of Appeal stated that it could not be said that the beneficiary had waived its rights to claim on demand guarantees up to and until 28 February 2013. It also added (para 21):

"Instead of indicating that it was accepting Eskom's extension of time until 28 February 2013, Hitachi elected to unleash on Eskom a litany of issues, comprising of denials and claims. Hitachi never addressed itself to the question whether it was prepared to rectify matters raised by Eskom before the cut-off date of 28 February 2013. I [We] do not think that it lies in the mouth of Hitachi to now rely on the indulgence given by Eskom in order to avoid the consequences of the call up of a demand guarantee. It follows that Hitachi must also fail on this cause of action."

As the Supreme Court of Appeal heard the matter on 15 August 2013 and only delivered its judgment on 12 September 2013, the issue of mootness regarding the matter arose. To this, the Supreme Court of Appeal had the following to say (para 22):

"The cut-off date (28 February 2013) by which the call up of the guarantee had to be made has come and gone. It may be said that the matter has therefore become moot and that any judgment or order that this court might make will have no practical effect. In terms of s 21A(1) of the Supreme Court Act 59 of 1959, this court is empowered in those circumstances to dismiss an appeal on that ground alone. There can be no question however that it is in the public interest for this court to pronounce on the question of guarantees in this matter. Eskom is a public body, dealing with a matter which is of great public interest in this country - the supply of electricity - and is currently involved in a number of similar contracts. It is important for this court to offer guidance on the interpretation and application of similar demand guarantees Eskom has concluded with other contractors. [D]espite the suggestion that this matter might be moot, there is a practical need for this court to express a view on the interpretation of the demand guarantees in question in this appeal on a matter of wide public interest."

Finally the Supreme Court of Appeal also mentioned that Hitachi (principal) had failed to satisfy the requirements for the granting of a final interdict. It was of the view that the application for a final interdict had to be dismissed on that ground as well. It said (para 23):

"The most obvious missing elements in Hitachi's case were its failure to establish that it had suffered 'irreparable harm' and 'the absence of any other remedy or relief', leaving aside the question of a 'clear right' . . . . The high-water mark of Hitachi's case on the requirement of irreparable harm was that they would have had to pay interest on the guarantees. This part of Hitachi's case, however, flounders in the face of that portion of clause 4.2 which allowed Hitachi to recover not only the capital amount paid out under the guarantees, but additionally interest paid at the stipulated rate. The contract also made provision for dispute resolution mechanisms and there can therefore be no question of Hitachi having met the requirements of absence of any other remedy or relief for them to claim entitlement to a final interdict. . . . Hitachi should have failed on all fronts in the high court."

The appeal was upheld and the order of the court of first instance was set aside.

Text of Performance Bond:

"3. A demand for payment under this guarantee shall be made in writing at the Bank's address and shall:

3.1 be signed on behalf of Eskom by the managing director of an Eskom division (including, for the avoidance of doubt, the managing director of Eskom's Enterprises Division or his successor in title or the managing director of Generation Division or his successor in title) or by any board director of Eskom;

3.2 state the amount claimed ("the Demand Amount");

3.3 state that the Demand Amount is payable to Eskom in the circumstances contemplated in sub-clause (a), (b), (c) or (d), as applicable of clause 4.2 of the Contract."



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.