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Note: Fast Track Contracting (Pty) Ltd. (Applicant), as subcontractor, concluded a construction contract (underlying contract) with Group Five Coastal (Pty) Ltd (Third Respondent), acting as agents for Group Five Construction (Pty) Ltd (Second Respondent), the contractor. The construction contract was governed by, inter alia, the terms of the Joint Building Contracts Committee (JBCC) N/S Subcontract Agreement, July 2007, Edition 5.0. The construction contract called for a construction guarantee to be issued. Constantia Insurance Company Limited (First Respondent and Guarantor) issued the required construction guarantee in favour of Group Five Coastal (Pty) Limited, acting as agents for Group Five Construction (Pty) Ltd (Beneficiary).

The construction guarantee contained the following important clause (clause 3.1):

[a]ny reference in this Guarantee to the Agreement is made for the purpose of convenience and shall not be construed as any intention whatsoever to create an accessory obligation or any intention whatsoever to create a suretyship.

Clause 4 of the construction guarantee provided that the Guarantor would incur liability to the Beneficiary (Group Five Construction) if the sum certified in a payment advice had not been paid. The clause provided:

4. Subject to the Guarantor’s maximum liability referred to in clause 1 above, the Guarantor hereby undertakes to pay the Contractor the sum certified upon receipt of the documents identified in clause 4.1 to 4.3 below:

4.1 A copy of the first written demand issued by the Contractor to the Subcontractor stating that payment of a sum certified by the Contractor in a payment advice has not been made in terms of the Agreement and failing such payment within seven (7) calendar days, the Contractor intends to call upon the Guarantor to make payment in terms of clause 4.2.

4.2 A first written demand issued by the Contractor to the Guarantor’s domicilium citandi et executandi with a copy to the Subcontractor stating that a period of seven (7) calendar days has elapsed since the first written demand in terms of clause 4.1 and the sum certified has still not been paid: therefore the Contractor calls up this N/S Construction Guarantee and demands payment of the sum certified from the Guarantor.

4.3 A copy of the payment advice which entitles the Contractor to receive payment in terms of the Agreement of the sum certified in clause 4. (Emphasis added)

On 25 April 2018, Group Five Coastal sent an e-mail to Applicant. Attached to the e-mail was a payment advice (certificate) which showed an amount due to “Group Five KZN (Pty) Ltd” (Group Five KZN). The payment advice was signed by Mr. Melvin Murugan, the quantity surveyor of Group Five Coastal under the heading ‘APPROVED FOR PAYMENT’. Applicant was given 21 days to make the payment. Applicant failed to make payment of the certified amount. On 18 May 2018, Group Five Coastal issued a first written demand to Applicant demanding payment to be made within seven days. Attached to this first written demand was the request for payment of 25 April 2018 and the payment advice. Applicant did not make the payment of the certified amount (para 8).

On 28 May 2018, Group Five Coastal made a demand in terms of the construction guarantee for the sum of ZAR 2,199,817.25 (approximately USD 164,387.92 as of 4 February 2019). Group Five Coastal attached the following to its written demand: its first written demand sent to Applicant on 18 May 2018; the request for payment dated 25 April 2018 with the payment advice attached thereto; a letter from the relevant bank confirming the bank details of Group Five Construction and a cancelled cheque of Group Five Construction (para 9). Guarantor indicated that it would honour the guarantee.

Applicant disputed the entitlement of Group Five Coastal to call up the guarantee, and applied to court for an injunction (an interdict under South African law) to prevent payment from being made.

Applicant argued before the court that a non-compliant demand had been made and therefore an injunction should be issued to prevent payment from taking place. In Applicant’s view, Group Five Coastal had failed to comply with clause 4 of the guarantee (quoted above). It contended that no binding payment advice was issued in favour of the contractor, Group Five Construction, since the one on which reliance was placed was issued to “Group Five KZN (Pty) Ltd” (Group Five KZN) and not to Group Five Construction. Therefore, the payment advice, according to Applicant, did not entitle Beneficiary to payment under the guarantee. Beneficiary, in contrast, argued that there was proper compliance with clause 4 of the guarantee (para 6). The High Court of South Africa, Meyer, J., dismissed Applicant’s application for an injunction.

The Judge correctly confirmed the independent nature of the construction guarantee in this case while relying on relevant South African case law. It stressed that the guarantee in this case, entailed that it had to be paid according to its terms, and liability under it was “not affected by the relationship between other parties to the transactions that gave rise to its issue, particularly not with the question whether the subcontractor performed in terms of his contract with the contractor” (para 2). The Judge found that the words used in the guarantee made it evident that it was not a suretyship but an independent, and not accessory, agreement that had to be performed according to its terms (para 2).

The Judge not only upheld the independence principle of the construction guarantee, but also confirmed that under South African law, only in a case where fraud committed by Beneficiary was clearly established would it be valid for the Guarantor to deny its liability to pay in terms of the guarantee (para 4). It also confirmed that injunctions would be issued only in “exceptional cases” (see para 4 and reliance on R D Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., [1977] 2 All ER 862 (QB) at 870b–d).

The Judge also upheld the documentary nature of the construction guarantee and confirmed that once a compliant demand was made and no fraud was proved, a guarantor would be obliged to pay in terms of the guarantee (paras 5 and 7). It found that in the case before it, there was no allegation of fraud on the part of Beneficiary. The issue was rather whether or not a compliant demand was made (para 6).

The Judge noted that in the construction contract as well as in the construction guarantee the contractor was described as Group Five Coastal acting as agents for Group Five Construction. At some point Group Five Coastal changed its name to Group Five KZN. The court found that a company could legally change its name in terms of the South African Companies Act 71 of 2008. It stressed that a company is assigned a unique registration number and is a juristic person from the date and time that the incorporation of a company is registered in terms of the Companies Act. A company thus exists continuously until its name is removed from the Companies Register in accordance with the Companies Act. Therefore, Group Five KZN, was for all purposes Group Five Coastal (para 11).

According to the court there was a clear certification of a sum in a payment advice that had not been made (para 8). The court concluded that the demand on the construction guarantee was proper and compliant with the requirements of clause 4 of the guarantee. A sum was certified as due and owing to Group Five Construction, a payment advice that entitled Group Five Construction to payment had been issued to Applicant and all the documents required in clause 4 of the guarantee were received by Guarantor (para 11). Accordingly, the application was dismissed with costs, including those of senior counsel (para 12).

Comments:

It is accepted in South Africa that the doctrine of strict compliance applies to documents that are required to be submitted in terms of a letters of credit in order to obtain payment. Although it is generally also accepted that the same standard applies to demand guarantees, it has been argued in some cases that a less strict standard of compliance applies to demand guarantees, but the matter has not been authoritatively settled (for detailed discussions and the case law, see M Kelly-Louw “The doctrine of strict compliance in the context of demand guarantees” (2016) 49 The Comparative and International Law Journal of Southern Africa 85–129; and M Kelly-Louw “Must all the required documents for a demand guarantee be presented at the same time?” (2017) 80 Journal of Contemporary Roman-Dutch Law148–164).

In Fast Track, the court had to answer the question of whether or not there was compliance with the terms of the construction guarantee. It is a matter of construing (interpreting) exactly what is called for in the guarantee and then applying that construction (interpretation) to what was actually submitted to determine whether or not a compliant demand was made. It is often a difficult task to decide how strictly the compliance must be. Clause 4 of the guarantee called for, inter alia, a “copy of the payment advice which entitles the Contractor to receive payment in terms of the Agreement of the sum certified” to be attached to the demand. The clause did not specifically state what exactly needed to be reflected in the payment advice itself and what would constitute a compliant demand in that regard. The requirement was two-fold: firstly, a copy of the payment advice had to be attached to the demand; and secondly, the advice just had to show that the Contractor was entitled to receive payment in terms of the construction contract of the sum that was certified in the advice. It is settled that a copy of the payment advice was attached to the demand. Therefore, the only question that needed to be answered was whether or not, based on the facts presented to court, the payment advice complied with the second requirement. The court in Fast Track found that there was compliance, but did not specifically state whether there was strict compliance.

The court correctly upheld the independence principle of the construction guarantee, by holding that only fraud would constitute a valid exception to the independence principle. This is in line with current South African case law.

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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.