CASE IN POINT – AUGUST 2021
JOINT VENTURE BETWEEN AVENT (AFRICA) (PTY) LTD AND STRABAG INTERNATIONAL GMBH V SOUTH AFRICAN NATIONAL ROADS AGENCY SOC LTD AND ANOTHER
2021 (2) SA 137 (SCA) (AVEN-STRABAG-SCA)
INTRODUCTION AND BACKGROUND
This judgment by the Supreme Court of Appeal (SCA) is the sequel to the Aveng-Strabag judgment[1] discussed in the June 2021 e-periodical issue 9 of Arbitrarily Speaking!
Our readers are still likely to recall the essential background facts. However, they conveniently can be summarised as follows:
| (a) | Aveng (Africa) (Pty) Ltd (Aveng), a South African registered company, and Strabag International GmbH (Strabag), a company with limited liability registered in Germany, formed an unincorporated joint venture (AS-JV), which had successfully tendered and been a contract for the construction of the Mtentu River Bridge on the N2 Wild Coast Toll Road (the project) by the South African National Roads Agency (SANRAL). |
| (b) | AS-JV, as the contractor, and SANRAL, as the employer, entered into a standard form construction contract known as the FIDIC Red Book (1999 Edition) (the underlying contract). |
| (c) | The second respondent, Lombard Insurance Company Limited (Lombard), issued two guarantees, including a performance guarantee, in favour of SANRAL, as the intended beneficiary thereof. |
| (d) | The works on the project were intermittently suspended due to violent disruptions by outside parties. Eventually, AS-JV delivered a notice of termination on 30 January 2019 stating that it had been prevented from executing the works for a continuous period of eighty-four (84) days by reason of, what it categorised as, force majeure. SANRAL disputed that the disruptions constituted a force majeure in this dispute was referred to arbitration. |
| (e) | Pending such arbitration proceedings, AS-JV sought an undertaking from SANRAL that it would not make a demand on the performance guarantee. SANRAL declined to do so, which prompted AS-JV to seek interdictory relief in the court a quo restraining SANRAL from calling up the performance guarantee pending the finalisation of the pending arbitral proceedings. |
| (f) | AS-JV’s contentions in support of the interdictory relief were essentially that SANRAL had not complied with the terms of the underlying contract, which qualified and restricted any rights it had to demand payment under the performance guarantee. |
| (g) | The court a quo dismissed AS-JV’s application on basis that the AS-JV had failed to show that the disruptions and unrest, objectively assessed, constituted a force majeure in terms of the underlying contract’s provisions; and that SANRAL was justified to regard the AS-JV’s actions as a repudiation of the contract, which, in turn, also entitled SANRAL to terminate the contract and permitted it to present the guarantees for payment. |
THE SCA’s JUDGMENT
After obtaining leave to appeal form the court a quo, the AS-JV pursued its appeal in and to the SCA.
Before dealing with the AS-JV’s submissions, the SCA (per Makgoka JA, with whom Navsa JA, Saldulker JA, Goosen AJA and Unterhalter AJA concurred) restated our law on the topic.[2] This restatement was informed by the following considerations and principles that were pertinently emphasised in the judgment:
| (a) | First, that our law is well settled, and firmly recognises the autonomy principle, i.e. the autonomy of the performance guarantee from the underlying contract,[3] which principle is best expressed in the oft-quoted passage from Lord Denning in Edward Owen Engineering Ltd v Barclays Bank International Ltd (Edward Owen):[4] |
| (b) | Second, that as far back as the decision in Loomcraft Fabrics CC v Nedbank Ltd and Another (Loomcraft),[5] the erstwhile Appellate Division (per Scott AJA) – with reference to Edward Owen and other decisions – explained that:
‘The unique value of a documentary credit, therefore, is that whatever disputes may subsequently arise between the issuing bank’s customer (the buyer) and the beneficiary under the credit (the seller) in relation to the performance or, for that matter, even the existence of the underlying contract, by issuing or confirming the credit, the bank undertakes to pay the beneficiary provided only that the conditions specified in the credit are met. The liability of the bank to the beneficiary to honour the credit arises upon presentment to the bank of the documents specified in the credit, including typically a set of bills of lading, which on their face conform strictly to the requirements of the credit. In the event of the documents specified in the credit being so presented, the bank will escape liability only upon proof of fraud on the part of the beneficiary.’[6] (Own emphasis). |
| (c) | Third, that since the judgment in Loomcraft it has been followed in a long line of decisions, which have consistently recognised the autonomy principle,[7] including, among other judgements, the following:[8] Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd and Others2010 (2) SA 86 (SCA) ([2009] ZASCA 71) at paras [20] – [21]; Minister of Transport and Public Works, Western Cape and Another v Zanbuild Construction (Pty) Ltd and Another 2011 (5) SA 528 (SCA) ([2011] ZASCA 10); Compass Insurance Co Ltd v Hospitality Hotel Developments (Pty) Ltd 2012 (2) SA 537 (SCA) ([2011] ZASCA 149) at para [15]; Guardrisk Insurance Co Ltd and Others v Kentz (Pty) Ltd [2014] 1 All SA 307 (SCA) ([2013] ZASCA 182) at para [14]; FirstRand Bank Ltd v Brera Investments CC 2013 (5) SA 556 (SCA) ([2013] ZASCA 25) at para [2]; Coface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association 2014 (2) SA 382 (SCA) ([2013] ZASCA 202) at paras [12] – [13] and [25], which overturned the majority decision of Bertelsmann AJA in Dormell Properties 282 CC v Renasa Insurance Co Ltd and Others NNO 2011 (1) SA 70 (SCA) ([2011] 1 All SA 557; [2010] ZASCA 137) at paras [40] – [41], and approved the view of the minority (per Cloete JA) at paras [64] – [65], who had followed the decisions referred to above; |
After this restatement of our jurisprudence on this topic, Makgoka JA turned to AS-JV’s submissions and proceeded by stating that while the AS-JV recognised the autonomy principle referred to, it sought to convince the SCA that the law should be developed to recognise a so-called ‘underlying contract exception’.[9] What this exception would entail is that where the underlying contract restricts or qualifies an employer’s (qua beneficiary’s) right to call up the guarantee, a contractor in the AS-JV’s position would be able to interdict it from doing until such restrictive or qualified conditions in the underlying contract have been met.[10]
The SCA next referred to the fact that the underlying contract exception the AS-JV sought to rely on had received some judicial attention in our courts on three previous occasions, viz:
| (a) | In Union Carriage and Wagon Co Ltd v Nedcor Bank,[11] where the full court made an obiter remark to the effect that where it had been agreed between a beneficiary and a contractor in the underlying contract not to draw on the letter of credit before a specific event, and the beneficiary nevertheless sought to exact payment, it could be guilty of fraud. Since no allegation of such an agreement was made in that case, the question in issue did not pertinently arise;[12] |
| (b) | In Sulzer Pumps (South Africa) (Pty) Limited v Covec-MC Joint Venture (Sulzer Pumps),[13] the Northern Gauteng Division of the High Court (per Jansen J) found that the prohibition on the beneficiary from making a call on the guarantee arose from the terms of the guarantee itself[14] – and not from the underlying contract. In other words, the issue did not arise directly in this case;[15] and |
| (c) | In Granbuild (Pty) Ltd v Minister of Transport and Public Works, Western Cape and Another (Granbuild),[16] Western Cape Division of the High Court also found that the prohibition on the beneficiaries resided in the guarantee,[17] which again meant that the issue did not arise directly. |
The judgment of the SCA in Kwikspace Modular Buildings Ltd v Sabodala Mining Co SARL and another[18] (Kwikspace) was next referred to. Makgoka JA pointed out that the court was enjoined, by the contract between the parties, to apply Australian law, and that it (per Cloete JA) concluded that, after an examination of Australian law on the topic, in that country a contractor could restrain a beneficiary from making demand on a performance guarantee in circumstances where such a contractor is able to prove that the beneficiary would breach a term of the building contract by making such a demand.[19] The court then quoted[20] paragraph 11 of Kwikspace where Cloete JA had stated the following:[21]
‘It therefore seems to me that it can be said with sufficient certainty that Australian law is to the following effect: 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 in its terms and issued pursuant to the building contract, 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.’ (Own emphasis).
After referring to fact the Australian courts[22] since have maintained the direction of this development, Makgoka JA specifically drew attention to the interpretative importance laid on:[23]
‘… identifying the commercial purposes for which a guarantee was furnished when interpreting its provisions, namely to provide security and, perhaps in addition [*referring here to Callaway JA’s observations in Fletcher Construction at 826-827[24]], to allocate the risk as to who, between the employer and the contractor, shall be out of pocket pending resolution of a dispute.
[13] In para 25 the court – [*i.e., the Victoria Court of Appeal in Sugar Australia[25]] – remarked:
“The fact that a performance bond is intended to operate as a risk allocation device is not, of course, necessarily determinative of the right of a party to have recourse to it. It may be subject to a contractual qualification or limitation upon the circumstances in which recourse may be had.”
(*Own insertions).
The learned judge then observed that a similar trend had developed in English law[26] and then expressed the following viewpoint:[27]
‘[17] For present purposes, I am willing to assume that there is room in South African law to follow the same path as that taken in Australian and English law, with the clear caveat expressed at the end of para 11 in Kwikspace. The caveat will often provide the basis to resolve the inherent tension between a performance guarantee, framed without conditionality, and usually required in circumstances such as these, and an underlying contract that contains some asserted restriction. Furthermore, given the significance of performance guarantees and letters of credit in international trade and commerce, such claims as are made by the Joint Venture in relation to the underlying contract, should be approached with caution.’ (Own emphasis)
Makgoka JA next considered the provisions of the performance guarantee issued by Lombard,[28] as well as the relevant provisions of the underlying contract,[29] and then embarked on an analysis of AS-JV’s submissions which he dealt with as follows:
| (a) | First, he disagreed with the AS-JV’s submission to the effect that, if it were to succeed in the pending arbitration in establishing force majeure, SANRAL would be precluded from relying on subclause 4.2 (d) of the underlying contract (i.e., ‘circumstances which entitle the employer to termination under sub-clause 15.2 [termination by employer], irrespective of whether notice of termination has been given’), since that would have meant that no circumstances could ever have existed that would have entitled SANRAL to terminate the contract.[30] In this regard, the learned judge emphasised that the latter’s entitlement to rely on the indemnity provided for under subclause 4.2 was not limited by anything contained in the contract’s dispute resolution provisions and that the AS-JV’s prospects of success in the pending arbitration were irrelevant;[31] |
| (b) |
Second, in dealing with the AS-JV’s contentions that SANRAL first had to establish a factual basis for its entitlement to make a demand under the performance guarantee, before it would be entitled to make any such demand,[32] the learned judge pointed out that:
|
‘The catch-all provision, viz., ‘any reason’ is important. The Joint Venture’s failure to complete the project, be it due to force majeure or otherwise, falls into this category. In other words, the reason for such failure is irrelevant. That the Joint Venture considered itself to have been prevented by force majeure is immaterial as far as this provision is concerned.’
| (c) | Third, he rejected the AS-JV’s endeavour to distinguish the SCA’s earlier judgement in Eskom Holdings Soc Ltd v Hitachi Power Africa (Pty) Ltd and Another (Eskom),[38] where the Court had overturned the judgement of the court a quo, which had granted an interdict similar to the one sought by the AS-JV restraining the employer from making[39] a demand under a performance guarantee. In this regard, Makgoka JA found that although there were minor differences between the performance guarantee in the present case and the one in issue in Eskom such differences were not material and that the case was not distinguishable. |
In the result, the SCA dismissed the AS-JV’s appeal with costs, including those of two counsel.
August 2021
[1] Joint Venture between Aveng (Africa) (Pty) Ltd and Strabag International GmbH v South African National Roads Agency SOC Ltd and another [2019] 3 All SA 186 (GP).
[2] Aveng-Strabag-SCA: paras [7] to [11], pp. 142 – 144.
[3] Id., para [7], p. 142.
[4] [1978] 1 All ER 976 (CA) ((1977) 3 WLR 764) at 983b – d, where the Master of the Rolls said: ‘A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions. The only exception is where there is a clear fraud of which the bank has notice.’ (Own emphasis).
[5] 1996 (1) SA 812 (A) at 815G – J.
[6] Aveng-Strabag-SCA: para [8], pp. 142 – 143.
[7] Id., para [9], p. 143.
[8] Id., footnote 11.
[9] Id.
[10] Id.
[11] 1996 CLR 724 (W).
[12] Id., para [10], p. 143.
[13] [2014] ZAGPPHC 695.
[14] Sulzer, at, especially, paras [99] – [100], as well as paras [114] – [116].
[15] Aveng-Strabag-SCA: para [10], p. 143.
[16] [2015] ZAWCHC 83.
[17] Granbuild, at paras [42] – [56], especially at paras [49], [54] and [55].
[18] 2010 (6) SA 477 (SCA).
[19] Aveng-Strabag-SCA: para [11], pp. 143 – 144.
[20] Id.
[21] Kwikspace, para [11], p. 486 B – C.
[22] Aveng-Strabag-SCA: paras [12] to [14], pp. 144 – 145, with reference to the Australian case of Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98 (Sugar Australia) at paras 19-24, in which reference was made to Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 (Fletcher Construction), Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [No 3] (2008) 249 ALR 458, Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283; as well as to the case of Uber Builders and Developers Pty Ltd v MIFA Pty Ltd [2020] VSC 596, where Nichols J restated the position as follows at para 26: ‘Where the contract does impose a condition on the right to access the security, the party seeking to restrain recourse must establish the existence of a serious question to be tried as to whether the beneficiary has in fact met the contractual requirements’ (Own emphasis).
[23] Id., para [12], p. 144.
[24] The second case in footnote 22 above, in which Callaway JA observed:
‘There are broadly two reasons why the beneficiary may have stipulated for a guarantee. One is to provide security. If it has a valid claim and there are difficulties about recovering from the party in default, it has recourse against the bank. The second reason, which is additional to the first, is to allocate the risk as to who shall be out of pocket pending resolution of a dispute. The beneficiary is then able to call upon the guarantee even if it turns out, in the end, that the other party was not in default. It is a question of construction of the underlying contract whether the guarantee is provided solely by way of security or also as a risk allocation device. Remembering that we are speaking of guarantees in the sense of standby letters of credit, performance bonds, guarantees in lieu of retention moneys and the like, the latter purpose is often present and commercial practice plays a large part in construing the contract.’ (Own emphasis).
[25] The first case in footnote 22 above.
[26] Aveng-Strabag-SCA: paras [15] and [16], p. 145, with reference to the English cases of Potton Homes Ltd v Coleman Contractors Ltd (1984) 28 BLR 19 CA at 28; and Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC), in which Akenhead J (the head of the Technology and Construction Court) at para 33 summarised the relevant principles to be drawn from the authorities as follows:
‘(a) Unless material fraud is established at a final trial or there is clear evidence of fraud at the without notice or interim injunction stage, the Court will not act to prevent a bank from paying out on an on demand bond provided that the conditions of the bond itself have been complied with (such as formal notice in writing). However, fraud is not the only ground upon which a call on the bond can be restrained by injunction.
(b) The same applies in relation to a beneficiary seeking payment under the bond.
(c) There is no legal authority which permits the beneficiary to make a call on the bond when it is expressly disentitled from doing so;
(d) In principle, if the underlying contract, in relation to which the bond has been provided by way of security, clearly and expressly prevents the beneficiary party to the contract from making a demand under the bond, it can be restrained by the Court from making a demand under the bond.
(e) The Court when considering the case at a final trial will be able to determine finally what the underlying contract provides by way of restriction on the beneficiary party in calling on the bond. The position is necessarily different at the without notice or interim injunction stage because the Court can only very rarely form a final view as to what the contract means. However, given the importance of bonds and letters of credit in the commercial world, it would be necessary at this early stage for the Court to be satisfied on the arguments and evidence put before it that the party seeking an injunction against the beneficiary had a strong case. It cannot be expected that the court at that stage will make in effect what is a final ruling.’ (Own emphasis)
[27] Id., paras [15] and [16], p. 145.
[28] Id., para [18], p. 146. The relevant parts of which read as follows:
| ‘3. | The Guarantor [Lombard] undertakes and agrees to pay SANRAL the … amount of R 245 120 849.40 … including VAT, or such portion as may be demanded on receipt of a written demand from SANRAL, which demand may be made by SANRAL if (in your opinion and at your sole discretion) the said contractor [the Joint Venture] fails and/or neglects to commence the work as prescribed in the contract or if he fails and/or neglects to proceed therewith or if, for any reason, he fails and/or neglects to complete the services in accordance with the conditions of the contract, or if he fails or neglects to refund to SANRAL any amount found to be due and payable to SANRAL, or if his estate is sequestrated or if he surrenders his estate in terms of the Insolvency Law in force within the Republic of South Africa. |
-
-
- Subject to the above and without in any way detracting from your rights to adopt any of the procedures set out in the contract, the said demand can be made by you at any stage.
- The said amount … including VAT, or such portion as may be demanded may be retained by SANRAL on condition that after completion of the service, as stipulated in the contract, SANRAL shall account to the guarantor showing how this amount has been utilised and refund to the guarantor any balance due.
- This guarantee is neither negotiable nor transferable and
-
(a) must be surrendered to the guarantor at the time when SANRAL accounts to the guarantor in terms of clause 5 above;
(b) shall lapse upon the issue of the Taking Over Certificate in terms of sub-clause 10.1 of the Conditions of Contract; and
(c) shall not be interpreted as extending the guarantor’s liability to anything more than payment of the amount guaranteed.’
[29] Id., para [19], pp. 146 – 147, where the clause relied upon by the AS-JV (i.e., clause4.2) thereof was quoted. The relevant portion thereof reads as follows:
‘The employer [SANRAL] shall not make a claim under the performance security, except for an amount to which the employer is entitled under the contract in the event of:
(a) failure by the contractor [the Joint Venture] to extend the validity of performance security as described in the preceding paragraph, in which event the employer may claim the full amount of the performance security;
(b) failure by the contractor to pay the employer an 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;
(c) failure by the contractor to remedy a default within 42 days after receiving the employer’s notice requiring the default to be remedied; or
(d) circumstances which entitle the employer to termination under sub-clause 15.2 [termination by employer], irrespective of whether notice of termination has been given.
The employer shall indemnify and hold the contractor harmless against and from all damages, losses and expenses (including legal fees and expenses) resulting from a claim under the performance security to the extent to which the employer was not entitled to make the claim.’ (Own emphasis).
[30] Id., paras [20] to [23], p. 147.
[31] Id.
[32] Id., paras [24] and [25], pp. 148 and 149.
[33] Id., para [26], p. 149.
[34] Id., para [27], p. 149.
[35] Id.
[36] Id., para [28], p. 149.
[37] Id.
[38] [2013] ZASCA 101; 2013 JDR 2011 (SCA), p. 1.
[39] Id., paras [29] to [31], pp. 149 and 150.