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[2016] ZASCA 87
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Mutual and Federal Insurance Company Limited and Another v KNS Construction (Pty) Limited and Another (208/2015) [2016] ZASCA 87 (31 May 2016)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Not
reportable
Case
No: 208/2015
In
the matter between:
MUTUAL
& FEDERAL INSURANCE COMPANY
FIRST
APPELLANT
LIMITED
AQUA
TRANSPORT & PLANT HIRE (PTY)
SECOND APPELLANT
LIMITED
and
KNS
CONSTRUCTION (PTY) LIMITED
FIRST RESPONDENT
(In
liquidation)
K2012020306
(SOUTH AFRICA) (PTY) LIMITED
SECOND RESPONDENT
Neutral
citation:
Mutual
& Federal v KNS Construction
(208/15)
[2016] ZASCA 87
(31 May 2016)
Coram:
Lewis, Tshiqi and
Willis JJA, Fourie and Tsoka AJJA
Heard:
13 May 2016
Delivered:
31 May 2016
Summary
:
Building contract: performance guarantee found to be conditional
guarantee akin to suretyship.
ORDER
On
appeal from
:
Gauteng Local Division of the High Court, Johannesburg (Twala AJ
sitting as court of first instance).
1
The appeals of the first and second appellants are upheld.
2
The respondents are declared liable, jointly and severally, for the
costs of the appeal,
including the costs of two counsel where so
employed.
3
The cross appeal of the first respondent is dismissed with costs,
including the costs
of two counsel where so employed.
4
The order of the court a quo is set aside and replaced with the
following:
‘
(a)
The application is dismissed.
(b)
The first and second applicants are ordered to pay the respondents’
costs, jointly and severally, including
the costs of two counsel.’
JUDGMENT
Tsoka
AJA (Lewis, Tshiqi and Willis JJA and Fourie AJA concurring)
[1]
This appeal concerns
the interpretation of a construction guarantee. In 2011, South
African National Roads Agency Limited (SANRAL)
awarded to the first
respondent, KNS Construction (Pty) Limited (KNS Construction), a
contract for the construction of road works
at Ballito interchange,
National Route 2, KwaZulu-Natal (the main contract). In turn, on 22
March 2011, KNS Construction appointed
Aqua Transport & Plant
Hire (Pty) Ltd (Aqua), as a sub-contractor. In terms of the
sub-contract, Aqua was required to provide
a performance guarantee
(the guarantee) to the value of 15 per cent of the main contract: the
guarantee was not to have an expiry
date. The first appellant, Mutual
and Federal Insurance Company Limited (Mutual & Federal), as
guarantor, issued the guarantee
on behalf of Aqua for the due
fulfilment of its obligation to KNS Construction pursuant to the
sub-contract entered into between
Aqua and KNS Construction.
[2]
On 5 April 2011, Mutual
& Federal issued the guarantee, the relevant terms of which are:
‘
1.
. . Mutual & Federal Insurance Company Limited (Reg. No:
1970/00619/06) (hereinafter referred to as “the Guarantor”)
do hereby hold at your disposal the amount of R3 423 850.49 (Three
million, four hundred and twenty three thousand, eight hundred
and
fifty rand and forty nine cents) for the due fulfilment by Aqua
Transport & Plant Hire (Pty) Ltd (Reg No. 2003/007768
(hereinafter referred to as “the sub-contractor”) of its
obligations to KNS Construction (Pty) Ltd Reg. No: 2004/013912/07
thereafter referred to as “KNS” [Construction] in terms
of the above stated contract between the Sub-Contractor and
KNS
[Construction].
2.
The Guarantor hereby renounces the benefits of the exceptions
non
numeratae pecuniae, non-causa debiti
, excussion and division, the
meaning and effect whereof we declare ourselves to be fully
conversant.
3.
The Guarantor undertakes to pay KNS the said amount of R3 423 850.49
(Three million, four hundred and twenty three thousand,
eight hundred
and fifty rand and forty nine cents) or such portion as may be
demanded on receipt of a written demand from KNS [Construction]
which
demand may be made by KNS [Construction] if, (in your opinion and at
your sole discretion), the said Contractor 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 contract, or if he fails or neglects
to refund to KNS
[Construction] any amount found to be due and payable to KNS
[Construction], 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’.
[3]
Pursuant to the issuing
of the guarantee, KNS Construction experienced financial problems
with the result that it was not able to
perform in terms of the main
contract. In September 2011, its diesel supplies ceased because of
its inability to pay the suppliers
and it was also unable to pay its
staff. As a result, it could not continue with its obligations which
it was required to perform
before Aqua could render its services in
terms of the sub-contract: the surfacing work consisting of applying
prime coat and the
asphalt base and surfacing. It also failed to pay
Aqua its first invoice for work already performed, promising to
settle the invoice
by 15 December 2011 by which date it had hoped to
have concluded an empowerment transaction. Its financial situation
did not improve
and it placed itself under voluntary winding-up in
terms of a special resolution registered by the Master of the High
Court on
13 December 2011. By 14 December 2011 the site was closed
resulting in no work being carried out. Its insurers, who had issued
a performance guarantee on its behalf to SANRAL, were informed of the
dire financial situation. This led to SANRAL cancelling the
main
contract and issuing a new tender for the completion of the remaining
earthworks.
[4]
O
n 24 January 2012, KNS
Construction was placed under provisional winding up at the instance
of one of its creditors. The provisional
order was made final on 5
March 2012 whereafter on 8 March 2012, provisional liquidators were
appointed. The appointment was made
final on 11 July 2012. Prior to
the two winding up applications, in 2010 one of its creditors had
instituted a winding up application
in the North Gauteng High Court,
Pretoria, which application was dismissed. The creditors in that
application, being dissatisfied
with the dismissal, lodged an appeal
to the full bench. On 19 September 2012, the full bench upheld the
appeal and placed KNS Construction
in final winding up retrospective
to 8 October 2010.
[5]
In spite of these
insurmountable difficulties, and the fact that the site was abandoned
with no work being carried on in terms of
the main contract, KNS
Construction, on 14 December 2011, a day after it had placed itself
under voluntary winding up, purported
to cancel the sub-contract with
Aqua, giving Aqua 14 days’ notice to rectify its performance,
failing which it intended calling
up the performance guarantee. The
threat to call up payment of the guarantee was followed up by the
liquidators on 10 May 2012
and 11 July 2012. The basis for the
calling up of payment of the guarantee was alleged to be the failure
to commence, proceed with
or complete the project.
[6]
On 28 May 2012, Aqua
launched an application in the South Gauteng High Court, Johannesburg
interdicting Mutual & Federal from
effecting payment in terms of
the guarantee. By agreement between the parties, Mutual & Federal
was interdicted from honouring
the guarantee pending resolution of
proceedings to be instituted within 30 days by KNS Construction. In
due course, KNS Construction
launched an application which came
before the court a quo demanding payment of the guarantee on the
basis that, as the guarantee
was a ‘call or on demand
guarantee’ it had become payable. Aqua on the other hand
contended that the guarantee was
a ‘conditional guarantee’,
inextricably linked to the sub-contract, and as Aqua was not in
breach of the sub-contract,
the guarantee was not due and payable.
[7]
The Gauteng Local
Division of the High Court, Johannesburg (Twala AJ) held that the
guarantee was a ‘call or on demand’
guarantee, and that
Mutual & Federal was, on demand by KNS Construction, obliged to
pay in terms thereof as long as the latter
complied with the terms of
the said guarantee. Mutual and Federal and Aqua now appeal with leave
of the court a quo, while KNS
Construction cross-appeals the order
with regard to the date when mora interest began to accrue.
[8]
The main issue raised
as a ground of appeal is that the guarantee is a ‘conditional
guarantee’ that is inextricably
linked to the underlying
contract, and therefore akin to suretyship and not an ‘on
demand’ or ‘call guarantee’
as found by the court a
quo. In the first alternative it is contended that even if this court
were to find that the court a quo
was correct in holding that the
guarantee was ‘a call guarantee’, the demand did not
comply with the terms of the guarantee.
In the second alternative it
is submitted that the demand was mala fide or tainted by fraud.
[9]
In
order to resolve the question whether the guarantee is ‘a call
guarantee’ or ‘a conditional guarantee’,
it is apt
to restate what this court said about interpreting documents. In
Novartis
SA v Maphil Trading
,
[1]
this court said:
‘
.
. . the interpretative process is one of ascertaining the intention
of the parties – what they meant to achieve. And in
doing that,
the court must consider all the circumstances surrounding the
contract to determine what their intention was in concluding
it. . .
and the court should always consider the factual matrix in which the
contract is concluded – the text to determine
the parties’
intention.’
[10]
In assessing whether the guarantee is a call or on demand guarantee
as opposed to a conditional guarantee, it is helpful to
refer to some
of the previous decisions of this court.
[11]
In
Lombard
Insurance Co Ltd v Landmark Holdings (Pty) Ltd & others
,
[2]
this court was required to interpret a guarantee in terms of which
Lombard bound itself as principal debtor. In terms of the guarantee
Lombard undertook to pay, on demand, the guaranteed sum or full
outstanding balance upon the happening of two eventualities.
Clause 3 of that guarantee provided:
‘
3.
The Guarantor hereby acknowledges that:
3.1
Any 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.
3.2
Its obligation under this Guarantee is restricted to the payment of
money.
3.3
Reference to a practical completion certificate or to a final
completion certificate shall mean such certificate as issued by
the
Principal Agent.
The
court in interpreting that guarantee stated:
‘
The
guarantee creates an obligation to pay upon the happening of an
event. The guarantee itself records that reference to the
construction
contract is solely for the purpose of convenience and
that there is no intention to create an accessory obligation or
suretyship.
Clause 14.5 of the construction contract merely records
that security exists in respect of the contractor’s
obligations.
The
guarantee by Lombard is not unlike irrevocable letters of credit
issued by banks and used in international trade, the essential
feature of which is the establishment of a contractual obligation on
the part of a bank to pay the beneficiary (seller). This obligation
is wholly independent of the underlying contract of sale and assures
the seller of payment of the purchase price before he or she
parts
with the goods being sold. Whatever disputes may subsequently arise
between buyer and seller is of no moment insofar as the
bank’s
obligation is concerned. The bank’s liability to the seller is
to honour the credit. The bank undertakes to
pay provided only that
the conditions specified in the credit are met. The only basis upon
which the bank can escape liability
is proof of fraud on the part of
the beneficiary. This exception falls within a narrow compass and
applies where the seller, for
the purpose of drawing on the credit,
fraudulently presents to the bank documents that to the seller’s
knowledge misrepresent
the material facts.’
[12]
In
Minister
of Transport and Public Works, Western Cape, & another v Zanbuild
Construction (Pty) Ltd & another
,
[3]
this court was also required to interpret the terms of a performance
guarantee. Unlike the one in
Lombard
the court stated that the guarantee gave rise to liability akin to
that of a surety and said:
‘
The
first indicator in that direction is the assertion at the outset that
the guarantee provide “security for the compliance
of the
contractor’s performance of obligations in accordance with the
contract”. And in the body of the document the
bank guarantees
“the due and faithful performance by the contractor”.
This accords with language associated with suretyships.’
[13]
In the present matter, the language used in the guarantee and its
purpose reveal the true intention of the parties. The language
used
is similar to that in
Zanbuild
.
Clause 1 states that it is issued for the ‘due fulfilment’
by Aqua of its obligations to KNS Construction in terms
of the
sub-contract. Clause 3 of the guarantee states that the
guarantee amount is payable ‘. . . on receipt of a written
demand from KNS [Construction], which demand may be made by KNS
[Construction] if (in your opinion and at your sole discretion)
the
said Contractor [Aqua] 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 contract. . .
[14]
Although the guarantee is payable in the discretion of KNS
Construction, and that payment in respect thereof may be demanded
‘at
any stage’, the true purpose was to guarantee the due
performance by Aqua. It was only payable if Aqua breached
the
sub-contract as expressly stated in the guarantee. I am
fortified in my reasoning by the fact that on completion of the
construction, it was to be returned to Mutual & Federal (as in
the case of suretyship) and once the principal debt was discharged,
the surety would be released from its obligations. The ineluctable
conclusion is that the present guarantee is not autonomous,
but
inextricably linked to the underlying contract.
[15]
The fact that the demand was at the discretion of KNS Construction
does not affect the nature of the guarantee. The discretion
vested in
KNS Construction was to be exercised ‘
arbitrio
bono viri
’,
[4]
the trigger event being Aqua’s failure to commence, proceed
with or complete the sub-contract. It is not clear from
the
letters of demand seeking to rely on the performance guarantee which
of the grounds it seeks to rely on. They do not specify
which breach
Aqua is alleged to have committed. It is thus not clear on what basis
KNS Construction alleged it was entitled to
payment. KNS
Construction did not and could not perform its own obligations in
terms of the sub-contract and therefore it
did not meet any of the
conditions imposed, before payment can be held to be due and payable.
[16]
The fact that the guarantee was not accompanied by any document
before payment was demanded, but depended on breach of the
sub-contract by Aqua in either failing to commence, proceed with or
complete the project, lends credence to the fact that the guarantee
is inextricably linked to the sub-contract and therefore akin to a
suretyship. The inescapable conclusion is therefore that the
guarantee is akin to suretyship (like that in
Zanbuild
),
and thus a conditional guarantee and not a call or demand guarantee.
Therefore the court a quo erred in holding that the guarantee
is a
demand and not a conditional guarantee.
[17]
The appellants contended, in the alternative, that in the event the
guarantee is found to be a call or demand guarantee, then
there was
fraud on the part of KNS Construction in seeking payment in terms of
the guarantee. However, having concluded that the
guarantee is a
conditional guarantee, it is unnecessary to pronounce on this issue
save to state that the demand by KNS Construction
and the
Liquidators, while KNS Construction was in dire financial
difficulties, after it had placed itself in voluntary liquidation
and
knowing that it would not be able to fulfil its own obligations in
terms of the sub-contract with Aqua, constituted misrepresentation.
The appeal must thus succeed. It follows that the cross appeal falls
to be dismissed.
[18]
The following order is made:
1
The appeals of the first and second appellants are upheld.
2
The respondents are declared liable, jointly and severally, for the
costs of the appeal,
including the costs of two counsel where so
employed.
3
The cross appeal of the first respondent is dismissed with costs,
including the costs
of two counsel where so employed.
4
The order of the court a quo is set aside and replaced with the
following:
‘
(a)
The application is dismissed.
(b)
The first and second applicants are ordered to pay the respondents’
costs, jointly and severally, including
the costs of two counsel.’
____________
M
Tsoka
Acting
Judge of Appeal
APPEARANCES:
For
First Appellant:
AO Cook SC (with
him JJ Meiring)
Instructed
by:
Hogan
Lovells (South Africa), Johannesburg
Symington
& De Kok, Bloemfontein
For
Second Appellant:
P Stais SC (with him JE Smit)
Instructed
by:
Cox
Yeats Attorneys, Johannesburg
Symington
& De Kok, Bloemfontein
For
Respondent:
M v R Potgieter SC
Instructed
by:
Senekal
Simmonds Inc, Johannesburg
Phatshoane
Henny, Bloemfontein
[1]
Novartis
SA v Maphil Trading
2016
(1) SA 518
(SCA) paras 27.
[2]
Lombard
Insurance Co Ltd v Landmark Holdings (Pty) Ltd & others
[2009] ZASCA 71
;
2010 (2) SA 86
(SCA) paras 19 and 20.
[3]
Minister
of Transport & Public Works, Western Cape, & another v
Zanbuild Construction
(Pty)
Ltd & another
[2011]
ZASCA 10
(SCA);
2011 (5) SA 528
para 19.
[4]
NBS
Boland Bank Ltd v One Berg River Drive CC & others
;
Deeb
& another v Absa Bank Ltd; Friedman v Standard Bank of SA
Ltd
(4) SA 928 (SCA) para 25.