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[2011] ZAGPJHC 18
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East London Own Haven t/a own Haven Housing Association v Coface South Africa Insurance Company Limited (09/12141) [2011] ZAGPJHC 18 (22 March 2011)
Links to summary
IN THE
SOUTH GAUTENG HIGH COURT, JOHANNESBURG
REPUBLIC
OF SOUTH AFRICA
CASE NO 09/12141
DATE:22/03/2011
In the
matter between:
EAST
LONDON OWN HAVEN t/a OWN HAVEN
HOUSING
ASSOCIATION
….............................................................................
Plaintiff
And
C
OFACE
SOUTH AFRICA INSURANCE COMPANY LIMITED
.................
Defendant
JUDGMENT
SATCHWELL
J:
INTRODUCTION
This exception requires interpretation of a guarantee issued by
defendant (‘the insurer’) which, when called upon
to
meet its obligations in terms of such guarantee, seeks to rely
upon the merits of an underlying agreement between plaintiff
(‘the
employer’) and a third party (“the contractor’).
In addition, the exception deals with an estoppel
pleading alleged
verbal representations or terms giving rise to the written
guarantee.
Plaintiff’s claim against defendant is founded upon a
construction guarantee in terms whereof defendant undertook to pay
a
guaranteed sum to plaintiff upon notice of cancellation of a
principal building agreement. In it’s amended plea
defendant disputes the lawfulness of the termination of the
principal building agreement. Plaintiff excepts to defendant’s
amended plea.
1
Defendant has also pleaded that certain oral representations
made by the contractor caused to the defendant to issue the
guarantee.
It is common cause that plaintiff entered into a principal
construction agreement with Construct Construction (Pty) Ltd (‘the
contractor’) in respect of construction to be undertaken at
Kenwick Close, East London. Pursuant thereto, defendant
executed
a construction guarantee
2
in favour of plaintiff in terms whereof defendant guaranteed
payment by it to plaintiff of a guaranteed sum or the balance
thereof on certain terms.
Clause 5.1 of the construction guarantee provides that the defendant
undertakes to make payment upon receipt of a first written
demand
from plaintiff
“calling up this construction guarantee
”
stating that:
“
The agreement has been cancelled due to the Contractor’s
default and that the Construction Guarantee is called up in terms
of
5.0 The demand shall enclose a copy of the notice of cancellation;”
On 22
nd
September 2008 the contractor was informed that
the construction agreement was cancelled with immediate effect.
3
That letter states
“due to the slow progress of
building works on site, we are obliged to place on record that you
again have failed to comply
with clause 15.3 of the contract between
yourselves and East London Own Haven in that you have failed to
proceed with the works
with due skill, diligence, regular expediency
to bring the works to practical completion as per the dates in …..”
4
On 29 January 2009 plaintiff delivered to defendants nominated
domicilium
a letter giving notice that
“the
contract was cancelled due to the contractor’s default”
and that
“the construction guarantee is hereby called up
in terms of clause 5.0 thereof and payment of the guaranteed sum of
R
1,172,583.80 is hereby called for…”
5
Defendant has not made such payment. In the mess of papers it
appears that there have been more than one plea and amendment
thereto. At issue in this exception is the undated plea in the
bundle indexed for the opposed roll of 1 February 2011.
6
EXCEPTION TO PARAGRAPH 5 OF AMENDED PLEA
It is to paragraph 5 of the amended plea that plaintiff takes
exception. That paragraph sets out:
. “
5.1 The works to be performed included inter alia a
design for the use of concrete and shuttering instead of
conventioinal brick
and mortar.
5.2 The principal building agreement concluded between the
plaintiff and the contractor provided for plaintiff to accept all
responsibility
for the design of the works.
5.3 The termination of the agreement between the plaintiff and
the contractor, Construct Construction (Pty) Ltd was as a result
of
the failure of the concrete and shuttering construction method.
5.4 By virtue of the aforegoing and the provisions of the
principal building agreement concluded between the plaintiff and
Construct
Construction (Pty) Ltd, the plaintiff remained responsible
for the consequences of such failure and such failure does not
constitute
any breach on the part of the contractor.
5.5 As a result, the alleged termination of the agreement between
plaintiff and Construct Construction (Pty) Ltd (if established)
was
not as a result of default on the part of Construct Construction
(Pty)Limited.
5.6 Accordingly, defendant is not liable in terms of the
construction guarantee, annexure ‘A’ to the particulars
of
plaintiff’s claim.
5.7 Defendant in any event pleads that what is stated in Annexure
B are not grounds for lawful termination of the principal building
agreement and accordingly that plaintiff is non-suited in seeking any
relief pursuant to such purported termination”.
Plaintiff has excepted to this defence, reliant upon the terms of
the principal building agreement, as being one which is pertinently
precluded by reason of the terms of the construction guarantee
7
and
accordingly bad in law and irrelevant to the issues between the
parties in respect of the obligations arising out of the terms
of
the construction guarantee.
Plaintiff argues that the only jurisdictional fact of relevance
to the calling up of the guarantee is the fact of the cancellation
of the principal building agreement. The validity of such
cancellation is of no relevance.
Defendant argues that one of the jurisdictional facts for invoking
the construction guarantee is the cancellation of the principal
building agreement due to “
the contractor’s
default
” and that there is therefore nothing to preclude
defendant from alleging facts indicating that the contractor was not
in
default and accordingly that the construction guarantee may not
be called up.
Reference to Principal Building Agreement
Both parties referred this court to a number of authorities
dealing variously with construction guarantees or letters of credit
and whether or not they should be read in conjunction with the
principal building contract or trading agreement.
In
Loomcraft Fabrics CC v Nedbank Ltd and another 1996(1) SA 812
AD, Lombard Insurance Company Ltd v Landmark Holdings (Pty)
Ltd
and Others
2010 (2) SA 86
(SCA
) and
Dormell Properties 282
CC v Renasia Insurance Company Limited & others 491/09 SCA
the insurer or bank had issued construction guarantees or letters
of credit on behalf of a contractor or buyer in favour of
the
employer or seller.
8
In each case there were difficulties in execution of obligations
by the contractor or buyer and cancellation was involved.
A number
of principles may be extracted from the relevant judgments
9
.
Firstly, the Supreme Court of Appeal has expressed itself clearly
as to the
purpose of the issue of such guarantees
: In
Lombard supra
the court stated that the guarantee “..w
as
to protect [the employer] in the event of default by [the
contractor].
In
Dormell supra
the majority judgment
repeatedly stated that
“ the guarantee was intended to
provide the employer with a ready cash fund for the completion of
the development project
in the event of the building contract having
to be cancelled by the employer prior to its finalization.
”
and
“ the issue of the guarantee was in order to enable
the employer to finalise the building project if the contract
between
it and the contractor were to be cancelled before the work
was completed”
and the guarantee was
“intended
to securer the employers position” and “the guarantee is
intended to enable the employer to complete
the contract in case of
default by the contractor
.”
Secondly, the Supreme Court of Appeal has consistently emphasized
the significance of
the event which triggers the claim
under the guarantee: In
Loomcraft supra
10
“The unique value of a documentary credit,
therefore ……….., by issuing and confirming the
credit, the
bank undertakes to pay the beneficiary provided only
that the conditions specified in the credit are me
t” and
“
The liability… arises upon presentment of the
documents specified in the credit…. Which on their face
conform strictly
to the requirements of the credit”
. In
Lombard supra
, the court found the guarantee issued by the
insurer “
creates an obligation to pay upon the happening of
an event”, “the bank undertakes to pay provided only
that the
conditions specified in the credit are met”
and
“ The trigger event of which it granted the guarantee had
occurred and demand was properly made.”
. Both judgments
in
Dormell supra
cited
Loomcraft supra
and
Lombard supra
with approval and the majority judgment went
on to say
“In principle therefore, the guarantee must be
honoured as soon as the employer makes a proper claim against it
upon the
happening of a specified event”
.
Thirdly, the Supreme Court of Appeal has been at pains to stress
that obligations under the guarantee are not reliant upon
nor
concerned with any
underlying disputes
in contractor-
employer or seller-buyer agreements: In
Loomcraft supra
the court commented on the
“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 and confirming the credit, the bank
undertakes to pay the beneficiary
provided only that the conditions
specified in the credit are me
t”. The court in
Loomcraft supra
approved the speech of Kerr J
in R D
Harbottle (Mercantile) Ltd and Another v National Westminster Bank
Ltd and Others [1977]2 All ER 862 (QB)
at 870b-d where was said
“
the machinery of irrevocable obligations assumed by
banks.. … are regarded as collateral to the underlying
rights and
obligations between the merchants at either end of the
banking chain. Except possibly in the clear cases of fraud…
the
courts will leave the merchants to settle their disputes under
the contracts by litigation or arbitration as available to them
or
stipulated in the contracts. The courts are not concerned with
their difficulties to t enforce such claims; these are risks
which
the merchants take. In this case the plaintiffs took the risk of
the unconditional wording of the guarantees”.
In
Lombard supra
, the court held that the guarantee
“is
not unlike irrevocable letters of credit issued by banks and used in
international trade. ….. This obligation
is wholly
independent of the underlying contract and assures the seller of
payment of the purchase price before he or she parts
with the good
being sold. Whatever disputes may subsequently arise between buyer
and seller is of no moment insofar as the banks
obligation is
concerned.”
.
The Construction Guarantee and its terms
The upshot of these extracts from three fairly recent decisions of
the Supreme Court of Appeal is that the plaintiff (as
employer)
is entitled to rely upon the guarantee of which it was the
beneficiary to provide it with necessary funds upon the
identified
event taking place.
That event is set out in clauses 5.0 and 5.1 of this construction
guarantee:
“
The guarantor undertakes to pay the employer the
guaranteed sum or the full outstanding balance upon receipt of a
first written
demand from the employer to the guarantor…
calling up this construction guarantee
stating that: the
agreement has been cancelled due to the contractors default…”
(my underlining)
It would seem that there are four jurisdictional requirements to
this demand – (1) a statement (2) that there has
been
cancellation (3) due to the (4) default of the contractor.
Plaintiff has argued that the only question is whether or not there
has been cancellation and then demand and submits that the
wording
of the guarantee requires no more than a statement as to
cancellation by reason of default and does not require proof
of such
default.
I am far more persuaded by the logic of defendants argument that
there would be no reason for clause 5.1 of the guarantee to
have
identified the reason for cancellation if that reason were
irrelevant to the guarantee.
If all that were required of the plaintiff was to ‘state’
that it had ‘ cancelled’ the principal construction
agreement, then I am sure that it what the parties would have
agreed. However, the construction guarantee goes further than
that. Firstly, Clause 5.1 requires a reason to be given. If
the underlying reason or the developments envisaged in
the
principal building agreement were irrelevant, then there would be no
purpose in having inserted the words “due to
the contractors
default”. Secondly, the employer is not at liberty to
call up the guarantee for any reason which
it may choose to
identify. It is limited to one reason only – “the
agreement has been cancelled due to the contractors
default”.
That is the only ground of cancellation permitted in this
guarantee. Thirdly, the cancellation of the principal
agreement
does not occur merely in conjunction with or associated with the
default of the contractor. A cause and effect
is required to be
stated ie alleged
viz
that the cancellation is “due to
the contractors default”.
The opportunity to call up the guarantee only in such specified
circumstances limits the ability of the employer to cancel
the
principal agreement for any reason or no reason whatsoever and
then rely upon the construction guarantee. The employer
is
constrained. As importantly, the liability of the insurer is
equally circumscribed. To my mind this approach is not
inconsistent with the provisions of clause 8 of the guarantee .
11
I have indicated that I understand the logic and the consistency of
the approach of the Supreme Court of Appeal in the cases
to which I
have been referred. I do not see my views as, in any way, failing
to follow the judgments to which I have referred
above.
The
Loomcraft supra
judgment is distinguishable in two
important respects from the facts in this case: firstly, that case
was concerned with a
letter of credit whereas the guarantee here is
not such a document; secondly that case concerned an irrevocable
letter where
here the guarantee is conditional upon the eventuating
of certain very narrowly defined events.
The
Lombard supra
judgment was concerned with a completely
different triggering event and surrounding circumstances. The
insurer had issued
a guarantee on behalf of the contractor in favour
of the employer for due fulfillment of the contractors liability.
The guarantee
fell due upon two events one of which was liquidation
and the other was “default resulting in cancellation”.
Upon
liquidation of the contractor, the insurer sued yet another
set of entities which had executed suretyships in favour of the
insurer in terms whereof they undertook to indemnify the insurer
from all claims “
of whatsoever nature”
and
“
whether or not the contractor on whose behalf [the
insurer] furnished the guarantee admitted the validity of the
claim
”. Those sureties refused to pay contending that
insurer had been induced to pay through the fraud of the principal
agent for the construction contract.
The differences between
Lombard supra
and the present case
are as follows. Firstly, the litigation was between the insurer
and the sureties. Secondly, the
sureties were liable for all
claims
“of whatsoever nature
” whereas this
insurer is not a surety and the liability is limited to
cancellation due to contractors default. Thirdly,
the liability
of the sureties existed
“whether or not the contractor on
whose behalf the guarantee was furnished admitted the validity of
the claim
” whereas there is no such open-ended liability
in the present case. Fourth, there was a fraud perpetrated by the
principal
agent for the construction project but investigation found
that the employer had not colluded therein. . That fraud was
relevant
insofar as it was suggested that the insurer should not
have paid the claim in
Lombard supra
and the finding that
“Lombard,
(the employer),
it is accepted, did not
collude in the fraud. There was no obligation on it to investigate
the propriety of the claim”.
There has been no averment of
fraud in the present case
Fifth, the triggering event in
Lombard supra
was the
liquidation of the employer. As to this event, the liquidation,
the court held that “there was no obligation
on the insurer to
investigate the propriety of the claim”. The construction
guarantee in the present matter also permits
the guarantee to be
called up on provisional sequestration or liquidation of the
contractor
12
.
The demand for the guaranteed sum from the insurer must be
accompanied by a copy of the court order. The fact of a court order
and the resulting liquidation is not a triggering event of the same
kind as in the present case. Here more is required than
merely a
piece of paper showing a court and date and result. There must be
a cancellation due to the contractors default which,
as I have
already discussed, has a cause and effect interdependency.
Sixth, since all that was required in
Lombard supra
was
the fact of a liquidation, it is appropriate that the court found
that guarantee to be “not unlike irrevocable letters
of
credit issued by banks and used in international trade”.
That analogy was apposite in the case of a liquidation
but in the
present case we are concerned with something rather more complex -
there must be (1) statement (2) that there
is a cancellation
(3) due to (3) the contractors default. This trigger event is
not like “irrevocable letters of
credit”. As I have
pointed out, the liability of the insurer is very limited.
The guidance given to this court by
Lombard supra
is that
one must be careful in scrutinizing the trigger event which may
permit a demand in terms of the guarantee. The
obligation to pay
arises “
provided only that the conditions specified in
the credit are met”
The trigger event in the present
case is very different to that in
Lombard supra.
The
wording of the guarantee is decisive and it is to that which one
must have regard. In Lombard supra the trigger event ,
the
liquidation, did not permit of any debate or doubt – it had
occurred. The principal building agreement was irrelevant.
As was said in
Lombard supra
, “
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.”.
I cannot see that the insurer, the
defendant in this case, is not entitled to enquire and question and
critique whether
or not the conditions specified in the present
guarantee have been met.
The guarantee may require no more of the employer in formulating its
demand to the insurer than to “state” the
fact of the
cancellation and the reason therefore. That does not preclude the
insurer from disputing such statement or defending
any claim by
challenging any one of the jurisdictional facts ie that there has
been a cancellation and whose fault that is.
The insurer cannot be
precluded from ensuring that “the conditions specified”
are met.
Absent the opportunity to plead any disputes concerning or the
merits of the cancellation of the principal agreement, it would
be
open to any employer to cancel the principal building agreement as
and when it chose, without justifiable or
bona fide
grounds,
where there may be no default or where default may exist but not
bring about or contribute to the cancellation and thereby
be
entitled to demand payment from the insurer and receive payment
within seven days thereof.
That question arose in
Dormell supra
where there was a
construction guarantee in identical terms to the one presently
before the court
13
.
There were delays in construction and the principal
construction agreement was cancelled. However, the matter went
to arbitration where it was found that the employer had not been
entitled to cancel the principal building agreement. The
majority
judgment referred to both
Lombard supra
and
Loomcraft
supra
and concluded that in principle, the guarantee must
be honoured as soon as the employer makes a proper claim against it
upon
the happening of a specified event. However, because the
arbitration resulted in finding that the employer was not entitled
to cancel the building contract, the majority of the court found
that “
Its [the employers] repudiation of the building
contract was held to have been unlawful. As a consequence, [ the
employer] has
lost the right to enforce the guarantee…..”
The majority of the court in
Dormell supra
certainly had
regard, explicitly, to the fate of the underlying building agreement
and the dispute which had given rise to the
cancellation. The
court did not adopt a purely formalistic approach and accept that
the employer, having sent a demand stating
it had cancelled due to
the contractors default, was therefore entitled to the guaranteed
amount. Notwithstanding, that which
was said in both
Loomcraft
supra
and
Lombard supra,
the majority of the court in
Dormell supra
found that the principled approach must
also be mindful of the factual situation.
In
Dormell supra
the majority of the court did not comment
that
Loomcraft supra
was concerned with irrevocable letters
of credit whilst
Lombard supra
was concerned with a
liquidation as a trigger event. Nevertheless, it would seem that
the approach in
Dormell supra
recognizes that the
principles enunciated in the other judgments should not be
slavishly followed irrespective of the relevant
facts. One should
be concerned to ensure that formalism in application of legal
principles does not lead to a result that
is either unfair or
unjust or ineffective or patently inequitable.
In the present case, the fact is that there is only one ground
permitted for cancellation which would render the insurer
liable.
That ground is the statement that cancellation is due to the
contractors default. All that is required is a statement.
But,
as has been exemplified in
Dormell supra
, that statement
can be successfully challenged and the employer may be denied its
claim to the guaranteed sum.
I am not persuaded that the defence set out in the defendant’s
plea, to which the plaintiff has excepted is a defence
which is
either precluded by the provisions of the guarantee or by our law
as set out in the judgments to which I have referred.
It may be that there is more to be argued on the interpretation of
the provisions of clauses 5 and 5.1 of the construction
guarantee.
It is understandable that the courts are generally reluctant to
decide questions of interpretation at the
time and in the course
of exception proceedings. In the present case, I believe that
to allow the defence to stand would
enable a proper airing of this
dispute. I cannot say that ‘unnecessary evidence”
would be led as a result. It
may well be essential evidence which
will dispose of the matter.
The plaintiff, as excipient, has pleaded that it will be
prejudiced if it has to plead to defendant’s plea as
currently
framed. Plaintiff submits that it will have to traverse
the terms of the principal building agreement and the conduct of the
parties, ie the contractor and the employer, relevant to the
termination in circumstances. Plaintiff maintains that such issues
are irrelevant to plaintiff’s claim and any defences
thereto. I am not so persuaded. The
Dormell
result is
an example that one must always allow for the unexpected.
ESTOPPEL
Paragraph 3 of the defendants plea was amended
14
reading as follows:
“
3.2 The defendant pleads, however, that, prior to the
issue of the demand guarantee, the plaintiff, with the intent to
persuade
the defendant to issue the said guarantee, represented to
the defendant that, in the event that the contract is cancelled with
the contractor, the plaintiff irrevocably and unconditionally
consented to Tusk Construction Support Services (Pty) Ltd and/or
National Urban Reconstruction and Housing Agency (Sect 21) and/or
Joint Equity Investments in Housing (Pty) Ltd assuming all or
any of
the contractors responsibilities arising from the building contract.
The
defendant, acting on the basis of the correctness of the aforesaid
representation, issued the said guarantee.
The
aforesaid representation was false, in that the plaintiff did not
intend to and in fact did not allow the aforesaid parties
to assume
the contractor’s responsibilities under the building
contract.
In
issuing the aforesaid guarantee pursuant to the aforesaid
misrepresentation, the defendant acted to its detriment by assuming
a risk it would otherwise not have assumed.
In
the premises the plaintiff is barred, alternatively estopped from
relying on the aforesaid guarantee.”
Plaintiff has excepted to the plea, firstly on the basis that
defendant cannot found an estoppel by representation by reference
to
intention or future intention and secondly, that these allegations
amount to an attempt to introduce a term into the construction
guarantee which is in conflict with the terms thereof.
I am in agreement that these purported representations are in
conflict with the written terms of the construction guarantee.
Should the defendant wish to rectify the guarantee then it must
take the appropriate steps. It cannot plead an estoppel
on these
allegations.
Accordingly, I do not need to decide on whether or not the plea as
set out in clause 3 deal with ‘present fact’
or
‘future intention’.
COSTS
Normally costs would follow the result. In this application both
parties have been substantially successful. The exception
taken
to paragraph 5 of the plea was the more complex and took both
longer to argue and to consider. In that respect, the
plaintiff
(as excipient) has perhaps been more successful. However, to
attempt to compute the matter by time would be clumsy.
I am mindful that this matter is coming to trial and then the
wisdom and correctness of the matters raised in paragraph 5 of
the
plea will be adjudicated upon. However, I do not think there
would be merit in reserving the costs of the exception for
that time
– what has been at issue now is not the merits of the dispute
but the raising thereof. In any event this possibility
was not
argued before me.
Accordingly, I shall make no order as to costs.
ORDER
The exception to paragraph 5 of the Defendants amended plea is
dismissed.
The exception to paragraph 3 of the Defendants amended plea is
upheld, paragraph 3.2 – 3.6 are struck out.
There is no order as to costs.
________________________
Satchwell J
Date of hearing: 1 February 2011
Date of Judgment: 22 March 2011
Plaintiffs Attorneys: Bax Kaplan Incorporated
Plaintiffs Counsel: E A S Ford SC
Defendants Attorneys: Larson Falconer Inc
Defendants Counsel: A J Troskie SC
1
The papers comprising the court file are a total mess. In the
morass of loose pleadings and documents I have been unable to
find,
for instance, the principal building agreement. By reason of the
workload of this division and my presiding without pause
in court
each day since the hearing of this matter, I have not spent time
tidying up the file or arranging for an attorney
so to do.
2
Annexure A to the Particulars of Claim.
3
Annexure B to Particulars of Claim.
4
It is possible that words are missing from the photocopied version
of Annexure B.
5
Annexure C to Particulars of Claim.
6
What is identified as the “Defendants amended Plea” in
the Index at pages 17 -22 has no court stamp, and the last
page is
simply dated “……..December 2009”.
7
This is apparently a reference to clause 3.1 of the guarantee
which provides that
“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
”.
8
In both Lombard supra and Dormell supra were found clauses, as in
the present case, that any reference to the principal construction
agreement in the guarantee was for convenience only and created no
accessory or suretyship obligations.
9
Reference to
Basil Read (Pty) Ltd v Beta
Hotels (Pty) Ltd and others 2001(2) SA 760 C
is of no assistance since the guarantee in that case quite
obviously did not have the same clause as in
Lombard
supra, Dormell supra
and the present
matter to the effect that any reference to the principal
construction agreement was for convenience only and
created no
accessory or suretyship obligations. In Basil Read supra , the
court found that “
the guarantee is in
the nature of a suretyship and any obligation of the insurer to
the employer was accessory to that
of the contractors”
with the result that the “insurer is liable to the employer
only if and to extent the contractor
is liable to the employer”.
10
In discussion of the system of irrevocable documentary credits.
11
Clause 8 provides that the plaintiff “
shall
have the absolute right to arrange his affairs with the contractor
in any manner which [the plaintiff] deems fit and [the
defendant]
shall not have the right to claim his release from this
construction guarantee on account of any conduct alleged
to be
prejudicial to [the defendant]”
.
12
Clause 5.2
13
Attached to and for use with the JBCC Principal Building
Agreement.
14
Again on an unknown date