In the case of Joint Venture between Aveng (Africa Pty) Ltd and Strabag international GmbH m(“the applicant”) versus Sanral and Lombard insurance Co Ltd Case no 8331/19, the applicant approached the Pretoria High Court on an urgent basis seeking, inter alia, an interdict restraining Sanral from making a claim in terms of two performance guarantees that the applicant was required to provide to Sanral, pending the outcome of dispute resolution procedures instituted by the applicant which were agreed to by the parties in terms of the Fidic Red book 1999.
As a general rule, in South African law, in the absence of allegations of fraud, a contractor is not entitled to challenge payment of construction guarantees even though there may be contractual dispute in terms of the building contract itself.
The applicant contended that it had validly cancelled the building contract due to a state of force majeure (act of God/unforeseeable event) that had persisted for 84 days. In addition it contended that in terms of the contract there are prescribed steps that Sanral was required to follow before it could present the guarantees to Lombard for payment. In addition it was further argued that Sanral was required to follow certain procedures provided for in terms of the building contract before it could present the guarantee for payment and that Sanral would be in breach of contract if it presented the guarantees to Lombard.
Sanral contended that the underlying contract dispute is not part of South African law and therefore it was not prohibited from presenting the guarantees for payment whilst the parties are resolving the contractual dispute between them. Furthermore Sanral contended that the applicant’s purported termination of the contract was invalid because there was no state of force majeure. Sanral did not accept the applicant’s termination of the contract.
The court noted that the underlying contractual dispute argument is not part of our law, but it is part of Australian law. This was considered by Cloete JA in the matter of Kwikspace Modular Buildings Ltd v Sabodala Mining Co SARL and another 2010 (6) SA 477 (SCA). Cloete JA expressly refrained from considering whether the Australian law, namely that a building contractor may “without alleging fraud, restrain the person with whom he had, covenanted for the performance of the work from presenting to the issuer a performance guarantee unconditional and its terms and issued pursuant to the building contractor, if the contractor can show that the other party to the building contract would breach a term of the building contract by doing so; but the terms of the building contract should not readily be interpreted as conferring such a right”
The applicant argued that if the underlying contract makes provision for restraining the presentation of a performance guarantee, then the void left by Cloete JA had been filled, and it was possible to interdict an employer from presenting a performance guarantee in circumstances where fraud was not relied upon. It was argued that the presentation of a performance guarantee in circumstances where there was an underlying dispute, would constitute a breach of contract. Thus the principle of independence of guarantee would be retained.
The court agreed with the applicant’s submission that South African courts are not oblivious to the underlying contract and the effect of claims arising from contract may have on performance guarantees.
The court decided that this was not an issue it would pronounce upon but said in passing the following. First the mere fact that the contractor is not a party to guarantee between the employer and the insurance company is not an obstacle to instituting legal action, because the contractor has a material interest in the manner in which and reasons for which a guarantee is presented. The court added that this is in line with the settled principles of natural justice.
The court however made no pronouncement on the lacuna (gap) because the facts of the matter did not require such a pronouncement, however the court did say that if this was the only issue for decision it would make a finding that the applicant has leg stand it interfere with the right of the first respondent to present the guarantees for payment. Furthermore and based upon clause 4.2 of the contract, the first respondent would have to meet the jurisdictional facts there before presenting the guarantees for payment.
Clause 4.2 regulates performance security. In particular it provides that the employer shall not make a claim under the performance security except for amounts to which the employer is entitled in the contract in the event of:-
- failure of the contractor to extend the validity of the performance security is regulated by clause 4.2.
- failure by the contractor to pay the employer and amount due as either agreed by the contractor or determined under sub clause 2.5 [employer’s claims] or clause 20 [claims, disputes and arbitration], within 42 days after this agreement or determination.
- failure by the contractor to remedy a default within 42 days after receiving the employers notice requiring the default to be remedied or circumstances which would entitle the employer to terminate on the sub- clause 15.2.
Whilst the comments by the court are obiter, it does seem that if there is a contractual basis to lay the platform, the Australian principle, that is the “underlying contractual dispute” argument may well find acceptance in South African courts.
NB: Please note that this article is for informational purposes only and not for the purpose of providing legal advice. Should you require more information on this topic or any issue arising out of this please contact Allardyce & Partners on 011-234 2125 or firstname.lastname@example.org