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Note: Quits Aviation Services Ltd (Contractor/Beneficiary) contracted with World of Windows (Subcontractor/Applicant) to install aluminum windows and curtain walling on a construction project. As agreed, Contractor/Beneficiary advanced payment to Subcontractor/Applicant, which assured its performance by causing Hollard Insurance Co. (Issuer/Guarantor) to issue a “recoupment of the Guarantee Advance Payment Sum ”for ZAR 6,032,297.24 in favor of Contractor/Beneficiary. Various entities acted as sureties under a Deed of Indemnity. An additional advance payment of ZAR 2,112,371.82, not covered by the Guarantee, was also sent to Subcontractor/Applicant.

Claiming a default by Subcontractor/Applicant, Phenix Construction Technologies Ltd. (Contractor’s Agent) gave a default notice to Subcontractor/Applicant. When the default was not cured, Contractor’s Agent canceled the contract and made a demand on Guarantor/Issuer for ZAR 6,032,297.24.

When the Issuer/Guarantor failed to pay, Contractor’s Agent acting on behalf of Contractor sued Issuer/Guarantor, which joined Subcontractor/Applicant and the sureties. The High Court of South Africa, Opperman, J., granted judgment in favor of Issuer/Guarantor.

The Judge noted that ZAR 3.4 million had already been recouped by Contractor’s Agent from the total advance payments of ZAR 8,144,669.06 pursuant to Payment Advice No. 7. Under it, Subcontractor/Applicant had paid ZAR 3.4 million. This sum included all advance payments not covered by the Guarantee and a sum of ZAR 1,287,628.18, which was covered by the Guarantee. The opinion contains the following excerpts from the advance payment guarantee:

Clause 1.0 of the Guarantee provided:

“The particulars of the recoupment of the Guarantee Advance Payment Sum are set out in the following schedule:

Recoupment Period (no. of months) 4

Recoupment period commencement (start month) October 2014

Monthly recoupment (amount) [ZAR]1,508,074-31

Note: Where the recoupment amounts and/or periods are irregular a schedule of recoupment amounts and dates is to be attached”

Clause 4.0 provided:

“4.0 Subject to the Guarantor’s maximum liability referred to in 1.0 the Guarantor undertakes to pay the Employer the Guaranteed Advance Payment Sum or the full outstanding balance upon receipt of a first written demand from the Employer to the Guarantor and the Guarantor’s physical address calling up this Advance Payment Guarantee stating that:

4.1 The Agreement has been cancelled due to the Recipient’s default and that the Advance payment Guarantee is called up in terms of 4.0. The demand shall enclose a copy of the notice of cancellation”.

Notwithstanding the payment of part of the amount covered by the Guarantee, Subcontractor/Applicant drew the full amount. The Judge found the full drawing to be fraudulent and excused Issuer/Guarantor from paying any amount covered by the Guarantee.

The Judge cited Theron, JA., in Guardrisk Insurance Company Ltd v. Kentz (Pty) Ltd, [2013] ZASCA 182 (21 Nov. 2013), for the proposition that“[i]t is trite that where a beneficiary who makes a call on a guarantee does so with knowledge that it is not entitled to payment, our courts will step in to protect the bank and decline enforcement of the guarantee in question. This fraud exception falls within a narrow compass and applies where: ‘…the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his (the seller’s) knowledge are untrue.’”

The Judge also considered that the witness offered by Contractor’s Agent lacked credibility and authority, and dismissed any alternative interpretations of the construction of the guarantee in favor of Contractor’s Agent as contrary to the evidence presented. The Judge concluded, “[Contractor’s Agent] have failed to tip the probabilities in their favour and the ineluctable conclusion to be drawn is that the demand… was fraudulent.”

Comment:

  1. It is unclear how Contractor’s Agent can act for Contractor/Beneficiary here.
  2. One wonders whether the Beneficiary, which is owed ZAR 4,744,699.06, would be entitled to recover that amount? The opinion stated “the demand made by [Contractor/Beneficiary and Contractor’s Agent] was fraudulent and [Issuer/Guarantor] is excused from paying any amount under the guarantee.”

[JFS]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.