Legal Case Summaries

Article

Note: The Department of Public Transport, Roads and Works of the Gauteng provincial government (Department) concluded a contract with a joint venture consisting of 4 different companies (JV) for the construction of a hospital in Soweto in July 2006. Black Economic Empowerment (BEE) played an important role in the awarding of the contract to the JV. Ilima was the leading construction company in the JV, and the successful completion of this project would have facilitated its quest for a higher grading in the civil engineering profession. The construction contract required JV to procure an independent demand construction guarantee.

Group Five (Applicant), in order to improve its own BEE profile, had concluded an enterprise development agreement with Ilima sometime earlier in terms of which, inter alia, it agreed to facilitate the acquisition of guarantees for Ilima by backing them, i.e.by agreeing to reimburse a guarantor that had issued such a guarantee, should the guarantee be called up.

A guarantee backed in this manner by Applicant was issued for this construction project in October 2006 by Lombard Insurance Co. Ltd. (Guarantor). In the guarantee, Guarantor undertook to pay Department/Beneficiary on receipt of a written demand stating that the contract had been cancelled due to the default of the contractor and annexing the notice of cancellation.

The construction project was a fiasco from its inception. There was much internal strife between the JV partners including allegations of corruption. This led to all the partners of the JV, barring Ilima, repudiating the contract over a period of two years and walking away from it. Department, in a quest to protect and nurture Ilima, deliberately decided not to cancel the contract in the wake of the aforementioned repudiations and the patent default in performance of the contract. Instead it eventually (in August 2008) simply concluded a new construction contract (at a significantly higher price) with Ilima as sole contractor against the background of express contentions that the first contract had “expired” (whatever that may have meant). A new guarantee was issued in accordance with this second construction contract by a New Guarantor. This guarantee was not backed by Applicant. One month into this second contract (in September 2008), Department rescinded it on the basis of an alleged misrepresentation by Ilima of its tax affairs.

Department called on Guarantor’s guarantee (provided in terms of the first construction contract) in December 2008, alleging cancellation due to default, and annexing to the demand the letter cancelling the second construction contract (an entirely different contract). Guarantor, quite properly, rejected the demand as being non-conforming after which Department withdrew the demand. For several months thereafter nothing further happened. Eventually Applicant sought assurance from Department that Guarantor’s guarantee (which would only expire on the date of practical completion of the construction) would not be called on again and that the original guarantee would be returned to Guarantor. The assurance was not forthcoming. Instead Department made a second demand in September 2009. This demand alleged cancellation due to the contractor’s default and stated that the notice of cancellation was to be found in a summons commencing legal proceedings against JV (which was not annexed to the demand but which was provided to Guarantor a couple of weeks later). The summons relied alternatively on a misrepresentation of its tax affairs by the contractor and on a tacit acceptance by Department of a repudiation by the contractor of its obligations under the first construction contract.

Applicant applied for a court order declaring that the guarantee was of no force and effect and that the second demand was non-conforming and/or fraudulent, and that payment thereof could accordingly not be enforced against Guarantor (who was joined in the proceedings by Department). Guarantor also contended that it was not liable since the demand was non-conforming. The High Court of South Africa, Guateng Local Division, Johannesburg, Satchwell, J. granted the application.

Regarding the non-conformity Satchwell, J. expressed her doubts as to whether the defective demand could have been cured by the delivery of the summons a couple of weeks later. “The [Department] takes the view that this delivery rendered the demand complete and that the demand now complied with the requirements ... because [Guarantor] was now in receipt of the summons containing or consisting of the notice of cancellation or confirmation thereof. I have my doubts whether or not a demand composed of dribs and drabs, ebbing and flowing like the tides could possibly meet the requirements for compliance. After all, when would either the Employer or the Guarantor be permitted to conclude that the demand was now complete and compliant.” (Par 27 & 28.) However, she stated expressly that it was not necessary for her to decide this point.

The conformity question was, instead, decided on the basis that the summons did not constitute a clear an unambiguous cancellation of the contract. (“I note the extent of time and energy spent at the hearing of this application debating the content and meaning of this summons and particulars of claim.  If the cancellation was easily apparent therefrom, this would not have been necessary. The particulars of claim hardly furnish a clear and unequivocal notice of cancellation.” (Par 30.)) The Judge further pointed out that the Department, in its summons, relied upon an argument that it had tacitly accepted the repudiation of the JV when it concluded the second construction contract in August 2008. A tacit acceptance of a repudiation cannot, of course, be annexed to a demand. The Department therefore contended that the summons itself constituted the required notice. The Judge rejected this argument since the summons was issued several months after conclusion of the second construction contract. (“One of the difficulties with this argument is that the repudiation is claimed to have been tacitly accepted on 4th August 2008 when the second contract was concluded.   The first contract therefore terminated on that date.  The summons was issued out of court on the 3rd November 2008 and cannot therefore cancel an agreement which ceased to exist some months prior thereto. (Par 34.))”

Regarding the fraud argument Satchwell, J. accepted Applicant’s argument to the effect that Department’s demand was fraudulent “on the basis that the [Department] presented a demand in full knowledge that the contract had not been [cancelled] due to the default of the JV contractor” – a fact supported by “[m]ore  or less contemporaneous documents explicitly disavow[ing] any intention to cancel or actual cancellation of the first JV contract which is the subject matter of the guarantee” (par 40 & 41). She referred to the fact that several of these contemporaneous documents describe the first contract as having “expired”. In this regard she stated as follows: “The first JV contract was not cancelled. What is meant by writing that this first JV contract ‘expired’ is not exactly known.  It may be arrival of a practical completion date, death by inactivity, reaching a date specified in the original building contract or general exhaustion. It does not matter. We cannot speculate thereon. However, the documents contrapose cancellation as against expiry. The two are not viewed as the same. There was no cancellation. There was no cancellation due to default.” (Par 44 & 45.) Hence the demand was held to be fraudulent. It is especially noteworthy that the court was willing to make a finding of fraud on the papers without having heard oral evidence – something which does not happen lightly.

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