CASE IN POINT – JUNE 2021
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) (AVENG-STRABAG)
INTRODUCTION AND FACTUAL BACKGROUND
The parties
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 awarded the 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).[1]
The contract
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 contract).[2]
The guarantees
In terms of the contract AS-JV, was required to procure two payment guarantees in favour of SANRAL. The first guarantee was for fifteen percent (15%) of the contract value[3] to serve as security for the proper performance by AS-JV of the works (performance guarantee), while the second guarantee for ten percent (10%) of such value was to provide SANRAL with security against AS-JV’s (possible) failure to rectify defects after practical completion of the works (retention guarantee).
These two guarantees[4] were obtained by AS-JV from Lombard Insurance Company Limited (Lombard), which issued them in favour of SANRAL, as the intended beneficiary thereof, on 8 June 2018.
The relief sought
AS-JV, as applicant, instituted urgent motion proceedings against SANRAL, as first respondent, and Lombard, as second respondent, in order to, among other things:[5]
| (a) | interdict and restrain SANRAL from making any claim under the performance guarantee and the retention guarantee, pending the outcome of dispute resolution proceedings to be instituted under the provisions of the contract, viz., the FIDIC Red Book (1999 Edition), within ten (10) days of the grant of the order; |
| (b) | obtain a declaratory order to the effect that any demand made by SANRAL on Lombard for payment under such guarantees shall be ‘of no force and effect’ pending the outcome of the aforementioned dispute resolution proceedings. |
SANRAL opposed AS-JV’s application.[6] Lombard, elected not to oppose the application, but it filed an affidavit to explain the nature and categorisation of the two guarantees.[7]
A synopsis of the facts and the parties’ broad contentions
AS-JV alleged that:
| (a) | it had cancelled the contract on the basis of a state of force majeure that supposedly had endured for some eighty-four (84) days;[8] |
| (b) | in terms of the contract, certain prescribed steps had to be followed before SANRAL could lawfully present the guarantees to Lombard for payment;[9] and |
| (c) | SANRAL would be committing a breach of the contract if it were allowed to present the guarantees for payment without following the contractually prescribed procedure arising from the termination of the contract as a result of a state of force majeure.[10] |
SANRAL, on the other hand, contended that:
| (a) | AS-JV’s purported termination of the contract is invalid because there was no state of force majeure and that it did not accept such termination;[11] |
| (b) | it had, through the Engineer, issued an instruction to the AS-JV to withdraw the termination and return to the site, failing which it indicated that it intended to cancel the contract on the basis of the AS-JV’s repudiation thereof;[12] |
| (c) | the underlying dispute between the parties about the contractual terms did not prohibit it from presenting the two guarantees for payment even while they (i.e., the parties themselves) were engaged in trying to resolve whatever contractual disputes existed between them;[13] and |
| (d) | AS-JV refused to withdraw its termination of the contract and, instead, indicated that it intended to approach the court to assert its rights.[14] |
The disputed termination of the contract originated from and related to events that were referred to and addressed comprehensively in various written communications exchanged between the parties in the period between 24 October 2018 and 4 February 2019.[15]
A brief analysis of the parties’ respective written communications
The court’s analysis of these written communications exchanged between the parties, reveal that a group – calling itself ‘Practical Radical Economic Transformation’[16] – initially[17] stormed the project’s site, or a portion thereof, and demanded to address management and the workforce directly, and not through the usual channel of communication through the AS-JV’s public liaison officer.
According to AS-JV’s statements in its written communications to SANRAL this type of disruption continued for a substantial period and, eventually, it prompted AS -JV to deliver 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.[18]
In a further letter, also dated 30 January 2019, written subsequently to its aforementioned termination notice, AS-JV requested SANRAL to give it an undertaking not to make a demand on the two guarantees without first giving AS-JV a fourteen (14) days’ written notice of its intention to do so. The request was based on its stance that SANRAL was, in its view, not entitled to make the demand.[19] This request was rejected by SANRAL on 4 February 2019.[20]
In a further letter on 31 January 2019, AS-JV set out the grounds upon which it contended SANRAL was prohibited from making a claim against the two guarantees. The grounds listed by AS-JV included these, namely, that: (1) the retention guarantee was intended to serve as security for defects in the works actually carried out; and (2) SANRAL’s right to call up the performance guarantee is regulated by subclause 4.2 of the contract and is limited to the following circumstances: (i) AS-JV (qua contractor) failing to extend the validity of the performance guarantee; (ii) AS-JV failing to pay SANRAL (qua employer) an amount due, as agreed or determined; (iii) AS-JV failing to remedy a default within forty-two (42) days after receiving the SANRAL’s notice in that regard; and (iv) circumstances entitling termination by SANRAL in terms of subclause 15.2 of the contract.[21] Other grounds contractual grounds were also relied on by AS-JV, but, for present purposes, it is unnecessary to refer to them.[22]
On 4 February 2019, SANRAL addressed a letter to the AS-JV in which it disputed the latter’s rights and basis to terminate the contract in terms of subclause 19.6 of the contract. The letter detailed the sequence of events from the beginning of the unrests and protests, the community meetings and correspondence between the parties. SANRAL reiterated its position that the events did not constitute force majeure. As mentioned earlier, it further provided the AS-JV with an opportunity to withdraw the notice of termination and return to site as directed by the Engineer, failing which SANRAL reserved its rights to terminate the contract in terms of clause 15.2(b).[23]
In its further letter, dated 4 February 2019, that was addressed to AS-JV, SANRAL also set out, in paragraph 8 thereof, what the court (per Makhuvele J) considered to be, ‘the gist of the dispute and issues for determination in this matter’. The germane portions of the said paragraph read as follows:
| ‘8.1 | The contractor is not a party to the contracts concluded between LICL *[i.e. Lombard] and the Employer, pursuant to which the Performance and Retention Money Guarantees, were issued; |
| 8.2 | To the extent that any dispute may exist in relation to the underlying Construction Works Agreement, more particularly with regard to the validity or lack thereof, of the Contractor’s potential termination based on what the contractor considered to be an ongoing event of force majeure, is irrelevant in so far as the employer may make any demand for payment, in respect of either the performance Guarantee, or the Retention Money Guarantee; |
| 8.3 | To that end, the employer disputes that it may not make any lawful demand, in respect of either the Performance Guarantee and/or the Retention Money Guarantee in that the provisions of the underlying Construction Works Agreement are irrelevant to any such demand; |
| 8.4 | The terms of the respective Guarantees do not make provision for a limitation of any such demand, should same be made by the Employer, until such time that the amount has been finally determined, in accordance with the provisions of the underlying Construction Works Agreement.’ |
(Emphasis and *[insertion] added)
THE RELEVANT LEGAL PRINCIPLES
In essence AS-JV was seeking to interdict payment on the basis that SANRAL first had to comply with the above-referenced terms of the contract before it could present the guarantees to Lombard for payment.
It is generally accepted in South Africa that, in the absence of proven allegations of fraud, a contractor is not entitled to challenge or restrain the payment of construction guarantees, even though disputes exist in connection with the terms of the underlying contract. The court referred to this as the ‘underlying contractual dispute’ argument, which, it added, is not according to the South African courts part of our law.[24] It then proceeded to quote an extensive portion from the judgment of the Supreme Court of Appeal (SCA) in Kwikspace Modular Buildings Ltd v Sabodala Mining Co SARL and another 2010 (6) SA 477 (SCA) (Kwikspace) to reaffirm the above legal position. The quoted portion from the Kwikspace judgment (per Cloete JA)[25] reads as follows (footnotes omitted):[26]
‘[11] 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.
[12] I expressly refrain from considering whether, in view of the decision of this court in Loomcraft Fabrics CC v Nedbank Ltd and Another (which dealt with a letter of credit) and the English decisions referred to therein, in particular, the decision of the English Court of Appeal in Edward Owen Engineering Ltd v Barclays Bank International Ltd (where Lord Denning MR and Browne LJ both said that a performance guarantee is akin to a letter of credit), there is any room for a contention that the position in South Africa should be the same as in Australia. So far as Australian law is concerned, English authority to the contrary notwithstanding, the Federal Court of Australia held as recently as 2008, in Clough Engineering *[(2008) 249 ALR 458)]:
“[81] In determining whether the underlying contract confers an unfettered right to call upon the performance guarantee, the importance of such instruments in the construction industry, both nationally and internationally, is a factor which bears upon the question of construction of the Contract. A number of authorities support this proposition:
| (1) | In Wood Hall at CLR 457 – 458; ALR 396 – 397, Stephen J referred to English authority which described the performance guarantee as standing on a similar footing to a letter of credit. |
| (2) | In the passage from the judgment of Callaway JA in Fletcher Construction at 827 quoted above, his Honour emphasised the importance of commercial practice in construing the contract. The reference in the judgment of Charles JA at 822 to the passage from Hudson’s Building and Engineering Contracts, is to similar effect. |
| (3) | In Bachmann, Brooking JA referred at [51] to the practice in the United States. He said that the generally accepted view in that country is that standby letters of credit (and hence, performance guarantees) are intended by the parties to the underlying contract to require the supplier or contractor to: ‘[51] … stand out of the amount of the credit in favour of the buyer pending resolution of the underlying dispute.’ |
| (4) | This approach is supported by the observations of Hobhouse LJ in Toomey v Eagle Star Insurance Co Ltd [1994] 1 Lloyd’s Law Rep 516 at 520, that parties to a commercial contract are to be taken to have contracted against a background which includes the earlier authorities on the construction of similar contracts. |
[82] Notwithstanding the importance of commercial practice, the statements in these authorities do not suggest that the Court should depart from the task of construing the terms of the contract in each case. What the authorities emphasise is that the commercial background informs the construction of the contract.”
[22] To sum up: as a matter of law in Australia, a building contract can contain provisions enforceable at the suit of the contractor, which amount to preconditions to, and therefore limit, the right of the beneficiary of an unqualified performance guarantee to present it to the issuer. But even assuming in favour of the contractor in this case, that GC 5.5 requires the principal to have an enforceable right under the contract before it is entitled to present the guarantees issued by Nedbank, it had such a right which it was entitled to assert; and no tacit term is to be incorporated into GC 5.5 obliging the principal, in its notice to the contractor required by that clause, to set out the grounds on which the demand will be made.’
(Emphasis and *[insertion] added)
The court stated that the issues before it related to the question whether the lacuna left unanswered in Kwikspace, had been answered in the ensuing period since that judgment was given in 2010; and whether the position with regard to independence of construction guarantees had changed.[27]
After referring to all the relevant clauses in the contract that informed the underlying contractual dispute,[28] the court then referred to the arguments presented by the parties’ respective counsel,[29] the essence of which it had summarised earlier in the judgment as follows (my paraphrasing thereof):
| (a) | In respect of AS-JV:[30] Counsel contended that the void left unanswered in Kwikspace has been filled since then. In support of this submission he referred to the judgment of the Queen’s Bench in the matter of Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC) at para 33, where it was held that the beneficiary of a contract security bond can in principle be restrained from making a demand under the bond if the underlying contract makes express provision for that. Counsel also referred to the work writing of Charl Hugo; ‘Construction Guarantees and the Supreme Court of Appeal (2010 – 2013)’, in Visser C and Pretorius JT Essays in honour of Frans Malan, LexisNexis, Durban, p. 159 at pp. 168 to 170, to support the proposition that a contractor can obtain an interdict against an employer to prevent demand for payment of a bond of security, if doing so would breach a term of a building contract. This, according to AS-JV’s argument and the authorities relied on in support thereof, would not offend the independence principle of the guarantee; |
| (b) | In respect of SANRAL:[31] Counsel for SANRAL maintained that this is not part of our law and that the legal precedents have not developed beyond the lacuna that was left by the judgment in Kwikspace. In particular, SANRAL’s counsel referred to the case of Eskom Holdings Soc Ltd v Hitachi Power Africa (Pty) Ltd and Another,[32] which the court said is of no assistance to it because the clauses in the latter case were not identical to those in the contract it was dealing with.[33] |
The court did not deal directly with either of these arguments. It held that it was unnecessary to do so,[34] as the case should be resolved on a different basis. Nonetheless, before briefly discussing the basis on which the case was eventually disposed of, the court made certain obiter remarks concerning AS-JV’s argument. Its obiter remarks were the following:
| (a) | The authorities it had referred to during its own research suggest that the lacuna left by Cloete JA’s judgment in Kwikspace ‘… may no longer pose a difficulty that we should be afraid to confront, and close, should the relevant facts provide such a platform.’[35] (Emphasis added); |
| (b) | ‘… a lot has happened since 2010 when the Kwikspace judgment was issued, and as expected, parties in construction contracts, would want to utilise the modern principles to argue for a view that the contractor is entitled to interdict the employer from presenting contract guarantees for payment on the basis of a clause in the construction agreement.’[36] (Emphasis added); |
| (c) | ‘It may be an issue of how the legal question was initially formulated and understood in 2010, but indeed, there is authority that suggest [sic] that our courts have ventured to answered [sic] the lacuna left *[in Kwikspace], without necessarily saying so.’[37] |
In support of the approach foreshadowed in these remarks, the court referred to two cases, namely: Granbuild (Pty) Ltd v Minister of Transport and Public Works, Western Cape[38] and Sulzer Pumps (South Africa) (Proprietary) Limited v Covec-MC Joint Venture.[39] In this regard, the court stated that, should it have been required to adjudicate on the issue it then would have held that:
| (a) | AS-JV had the requisite locus standi to interfere with SANRAL’s right to present the two guarantees for payment;[40] |
| (b) | SANRAL would have had to meet the jurisdictional factors contained in clause 4.2 of the contract before it would have been entitled to present the guarantees for payment to Lombard;[41] and |
| (c) | In the result, it would have found that AS-JV was entitled to interdictory relief as prayed for.[42] |
However, the case was not disposed of on the hypothetical basis referred to above, but rather on the question of whether or not a state of force majeure had actually existed that entitled AS-JV to cancel the contract.[43] In this regard, the court found that that the events giving rise to the unrest, referred to earlier, could not, objectively assessed, be deemed to be, or regarded as constituting, an event of force majeure in terms of the contract’s provisions.[44]
Consequently, it held that SANRAL was justified to regard the AS-JV’s actions as a repudiation of the contract, which, in turn, entitled SANRAL to terminate the contract and permitted it to present the guarantees for payment. AS-JV’s application was therefore dismissed.[45]
Eric Dunn SC
18 May 2021
| BRIEF DISCUSSION |
|
In Aveng-Strabag, at para [119], p. 206, it was suggested by the court (per Makhuvele J) that there is a need for the higher courts – meaning, in context, the Supreme Court of Appeal (SCA) and the Constitutional Court – to pronounce on the lacuna left in the SCA’s judgment (per Cloete JA) in Kwikspace Modular Buildings Ltd v Sabodala Mining Co SARL and another 2010 (6) SA 477 (SCA). It was also suggested by Makhuvele J that two of the fundamental objections (legal standing of the contractor and the autonomy principle) to a court interfering with calls on guarantees no longer appear to be relevant (Id.). This latter suggestion, particularly the suggestion that the autonomy principle – usually termed the independence principle – no longer appears to be relevant, is certainly incorrect, and it cannot be accepted without qualification. Whether the principle will be sustained or disregarded will depend on the facts of the particular case. In exceptional circumstances it may be disregarded should public policy considerations demand the recognition of an exception to it (Cf. C Lupton ‘A Comparative Legal Perspective on the Impact of Good or Bad Faith on the Independence of Documentary Credits and Demand Guarantees’ (LL.M. Dissertation, University of Johannesburg (November 2018), at e.g. §3.2.6, p. 35. Much also depends on the nature of the guarantee itself and whether it, properly interpreted and categorised, is an on-demand (unconditional) guarantee or a conditional one (Cf. Minister of Transport and Public Works, Provincial Government of the Western Cape and another v Zanbuild Construction (Pty) Ltd and another 2011 (5) SA 528) (SCA) at paras [13] to [15], p. 532 A -533 A; and Guardrisk Insurance Company Ltd and others v Kentz (Pty) Ltd [2014] 1 All SA 307 (SCA) at para [14], p. 312). It is clear that Makhuvele J considered the guarantees in issue in Aveng-Strabag as conditional ones, which probably prompted him to make this latter suggestion. The two cases referred to by him prior to making this suggestion, viz., Granbuild (Pty) Ltd v Minister of Transport and Public Works, Western Cape (5021/2015) [2015] ZAWCHC 83 (5 June 2015), and Sulzer Pumps (South Africa) (Proprietary) Limited v Covec-MC Joint Venture (1672/2013) [2014] ZAGPPHC 695 (2 September 2014), both involved ‘conditional’ guarantees which seemingly aligned with his thought processes, but the ratio in both these case does not support the suggestion that independence principle has been rendered irrelevant. One last thought: Aveng-Strabag appears not to have considered – understandably so too, given the basis upon which Makhuvele J ultimately decided the case – developments in Singaporean law that would allow a further exception to the independence principle. In this regard, our readers are invited to consider Ms Adine Abro’s article in this issue of Arbitrarily Speaking! in which she cogently argues for the recognition of an unconscionability exception based on cases decided in Singapore; and in which she argues that recent developments locally have paved the constitutional path for recognition for such an exception. Upton, op. cit., §3.2.4, pp. 29 to 31, specifically at p. 31, states that there is: ‘… uncertainty as to whether the doctrine of unconscionability remains an independent exception to the independence principle in Singapore, *[and that it] … requires clarification by the Singaporean judiciary’. *(insertion added). However, Abro’s article refers to two recent judgments by the High Court in Singapore in 2020, which show – or at least tend to show – that the unconscionability exception is alive and well in that country. Editor. |
[1] Aveng-Strabag, at para [14], p. 190.
[2] Ibid., at para [15], p. 190.
[3] Approximately R1.635 billion – ibid., at para [17], p. 190.
[4] Ibid., at para [19], p. 190. The performance guarantee was for R245 120 849.40 and the retention guarantee for R81 769 49.80.
[5] Ibid., at para [1], p. 187, read with paras 2 and 3 of AS-JV’s notice of motion quoted therein.
[6] Ibid., at para [4], p. 187.
[7] Id.
[8] Ibid., at para [21], p. 190.
[9] Id., as well as paras [81] and [82], pp. 197 and 198.
[10] Ibid., at para [22], p. 190.
[11] Ibid., at paras [24] and [25], p. 191.
[12] Ibid., at para [25], p. 191; and para [84], p. 198.
[13] Ibid., at para [23], p. 190.
[14] Ibid., at para [25], p. 191.
[15] Ibid., at para [27], p. 191, to [87], p. 199.
[16] No doubt attributable to the so-called ‘Construction Mafia’ that caused (and may still be causing) havoc on construction sites throughout this period (2018 and even beyond) and which the SAPS, quite scandalously, remained reluctant to do anything about. See Adv Wayne Pocock, ‘Construction mafia: the legal remedy’ (11 September 2018) at https://www.moneyweb.co.za/moneyweb-opinion/soapbox/construction-mafia-the-legal-remedy/
[17] On 22 October 2018 – ibid., at para [29], p. 191, to [32], p. 192.
[18] Ibid., at para [77], p. 196, to [79], p. 197.
[19] Ibid., at para [80], p. 197.
[20] Ibid., at para [84], p. 198.
[21] Ibid., at para [81], pp. 197 and 198.
[22] Ibid., at para [82], p. 198.
[23] Ibid., at para [83], p. 198.
[24] Ibid., at para [7], pp. 188 and 189.
[25] Kwikspace at paras [11] and [12], p. 486 B – F, as well as para [22], p.
[26] Ibid., at para [7], pp. 188 and 189.
[27] Ibid., at para [9], p. 189.
[28] Ibid., at para [88], p. 199, to [93], p. 203.
[29] At paras [95] to [97], pp. 203 and 204 in respect of AS-JV’s counsel; and at paras [99] to [106], p. 204, in respect of SANRAL’s counsel.
[30] Ibid., at para [10], p. 189, read with paras [95] to [97], pp. 203 and 204.
[31] Ibid., at para [11], p. 189, read with paras [99] to [106], p. 204.
[32] (139/2013) [2013] ZASCA 101 (12 September 2013). The Eskom Holdings case was concerned with the question whether the guarantee it had to interpret, was a true on-demand guarantee (i.e. an ‘unconditional’ one), or whether it was a ‘conditional’ one. Ultimately the SCA (per Mthiyane AP, with whom Brand JA, Shongwe JA, Majiedt JA and Petse JA concurred) held that it was an on-demand guarantee, to which the principles enunciated in Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd & others 2010 (2) SA 86 (SCA) at para [20] applied. (Cf. Eskom Holdings at paras [12] to [15], as well as paras [20] and [21]).
[33] Aveng-Strabag, at para [106], p. 204.
[34] Ibid., at para [111], p. 205.
[35] Id.
[36] Ibid., at para [112], p. 205.
[37] Ibid., at para [113], p. 205.
[38] (5021/2015) [2015] ZAWCHC 83 (5 June 2015). In this case the guarantee was interpreted as, and found to be, a conditional one (Cf. para [49], p. 19).
[39] (1672/2013) [2014] ZAGPPHC 695 (2 September 2014). The guarantee in this case, also a conditional one on the court’s interpretation thereof, had been extended from time to time; the court found that it could not be called up before certain arbitral proceedings pertaining to the underlying contractual disputes between the parties had been resolved, i.e., unless there had been a refusal to extend the guarantee any further (which apparently never happened) before the completion and resolution of such arbitral proceedings (Cf. para [78], as well as paras [87] to [90]).
[40] Ibid., at para [120], p. 206.
[41] Id.
[42] Id.
[43] Ibid., at para [121], pp. 206 and 207.
[44] Ibid., at para [127], p. 208.
[45] Ibid., at paras [130] to [133], p. 208.