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[2020] ZAGPJHC 403
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Buffalo City Metropolitan Municipality v Fusion Guarantees (Pty) Ltd (8731/2020) [2020] ZAGPJHC 403 (24 November 2020)
REPUBLIC
OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
LOCAL DIVISION, JOHANNESBURG
CASE
NO: 8731/2020
NOT
REPORTABLE
NOT
OF INTEREST TO OTHER JUDGES
REVISED
Date:
24/11/20
In
the matter between:
BUFFALO CITY
METROPOLITAN MUNICIPALITY
APPLICANT
And
FUSION GUARANTEES
(PTY) LTD
RESPONDENT
JUDGMENT
Delivered:
This judgment was
handed down electronically by circulation to the parties’ legal
representatives by e-mail. The date and
time for hand-down is deemed
to be 11h30 on the 24
th
November 2020.
TWALA
J
[1]
Before this Court, is an application launched by the applicant
wherein it sought an
order against the respondent for payment of the
sum of R1 518 273.70 and interest at the prescribed legal
rate a tempore
morae together with the costs of the action based on
the performance guarantee issued by the respondent on behalf of
Kubela-Meladi
Civil Construction currently known as Mmutla Civil and
Plant Hire cc (“the Contractor”) in favour of the
applicant.
The application is opposed by the respondent for the
reasons that will appear hereunder.
[2]
It is common cause that on the 20
th
of March 2015 the
applicant awarded the contractor the contract to carry out the works
on a sewer line extension between Berlin
and Lingilitsha in the
Eastern Cape for the project amount of R15 182 737 in 2015
(“the Building Contract”).
Furthermore, in terms of the
building contract the contractor was required to procure and obtain a
performance guarantee in favour
of the applicant. On the 5
th
of June 2015, the respondent issued the performance guarantee on
behalf of the contractor and in favour of the applicant. It is
further not in dispute that the contractor failed to complete its
scope of work and the completion certificate was not issued.
As
result on the 20
th
of August 2018 the applicant terminated
the building contract. On the 23
rd
of October 2015 the
applicant demanded payment of the guaranteed amount of R1 518 273.70
from the respondent based on
the performance guarantee.
[3]
It is apposite at this stage to mention that, after the respondent
had filed its answering
affidavit in these proceedings, the applicant
launched an application to strike out certain paragraphs of the
respondent’s
answering affidavit for being irrelevant or
tendering hearsay evidence. However, the applicant did not file an
affidavit in support
of the application stating exactly which
paragraphs of the answering affidavit were irrelevant and which
tendered hearsay evidence.
The application was to be heard together
with the main application.
[4]
At the hearing of this case, Advocate Mc Aslin SC, assisted by
Advocate Ntoane on
behalf of the applicant did not persist with the
application to strike out submitting that the issues in the main
application can
be determined by simply ignoring the irrelevant and
hearsay evidence as appears on the respondent’s answering
affidavit.
[5]
Advocate van Niekerk submitted on behalf of the respondent that the
application to
strike out was ill-conceived and premature since it
was filed without a founding affidavit to establish any prejudice
that the
paragraphs complained of in the answering affidavit are
causing the applicant. The paragraphs, so it was argued, are not even
mentioned
as to which are irrelevant and which are tendering hearsay
evidence. There is a live application before this Court which must be
determined and it cannot just be ignored. The application should be
dismissed with the applicant to pay the costs since it cannot
be
simply ignored.
[6]
It is trite law that an application in motion proceedings shall be
brought by way
of notice of motion supported by an affidavit stating
the facts upon which it is relied for the relief sought. Put
differently,
an applicant in motion proceedings must make out its
case in the founding affidavit which is attached to the notice of
motion in
support of the application.
[7]
The Uniform Rules of Court provide the following regarding
applications:
“
Rule
6 Applications
(1)
Save where
proceedings by way of petition are prescribed by law, every
application shall be brought on notice of motion supported
by an
affidavit as to the facts upon which the applicant relies for relief.
(2)
…………………………
..
[8]
I am unable to disagree with counsel for the respondent that the
application is defective
in its current form and does not comply with
the rules of Court. Furthermore, the application is live before the
Court and has
not been withdrawn by the applicant and therefore
should be determined not only to be gleaned over and be left at that.
I am therefore
inclined to dismiss the application to strike out with
costs for it does not comply with the rules of Court.
[9]
Advocate Mc Aslin SC submitted that there was no reason for the
applicant to join
the contractor in these proceeding for it has no
interest whatsoever. It was up to the respondent to join the
contractor if it
so wished. The applicant’s claim is based on
the performance guarantee which is completely independent of the
building contract.
The guarantee creates, so it was argued, a
principal obligation on the part of the respondent and is autonomous
and the only defence
available to the respondent is if the demand is
fraudulently made by the applicant. The guarantee is an instrument of
security
for the contractor’s performance and not a suretyship.
[10]
It was contended further that the applicant has met all the
requirements of the guarantee –
hence it was entitled to call
up the guarantee and to payment as demanded. The guarantee is
independent of the underlying contract
and the respondent cannot say
the demand is fraudulent based on the disputed facts of the
underlying contract. The applicant has
no discretion to make the
demand but is entitled only to make the demand once the trigger facts
come into existence. Fraud would
be if the applicant makes the demand
when there are no trigger facts in extant. The fact that the demand
is for the full amount
as per the guarantee does not mean that the
applicant is committing fraud if the amount finally proven in the end
is less that
the amount demanded. The demand would be fraudulent if
the applicant knowingly misrepresented the facts when the demand is
made.
[11]
Advocate Van Niekerk submitted for the respondent that
the termination of the building
contract is in dispute for the
applicant failed to pay the contractor causing its failure to perform
its obligations in terms of
the contract. The demand is fraudulent
because at the time the demand was made, the outstanding works were
worth about R100 000
whereas the demand is for the full
guaranteed amount. The demand was made long before the applicant
quantified the indebtedness
of the contractor to be R9.5 million.
Therefore, so it was argued, the applicant committed fraud when it
made the demand knowing
that it owes the respondent a sum of more
than R900 000 but claims the full amount of the performance
guarantee.
[12]
Before considering the submissions made in this case, it is necessary
to restate our jurisprudence
on the nature and effect of performance
guarantees. It is now settled that the performance guarantee is
autonomous from the underlying
contract. The performance guarantee is
a unique contract in that whatever disputes may subsequently arise
between the employer
and the employee or contractor, the guarantor
undertakes to pay the employer provided only that the condition
specified in the
guarantee are met.
[13]
To put matter in the proper context, it is essential for me to
restate the provisions of the
performance guarantee which are
relevant for the purposes of the determination of this case which
read as follows:
“
3.
The guarantor hereby acknowledges that:
3.1
Any reference in this Performance Guarantee to the Contract 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 Performance Guarantee is restricted to the
payment of money:
4.
Subject to the Guarantor’s maximum liability referred to in 1,
the Guarantor hereby undertakes to pay
the Employer the sum certified
upon receipt of the documents identified in 4.1 to 4.3
4.1
A copy of a first written demand issued by the Employer to the
Guarantor stating that payment
of a sum certified by the Engineer in
an Interim or Final Certificate has not been made in terms of eh
Contract and failing such
payment within seven (7) calendar day, the
Employer intends to call upon the Guarantor to make payment in terms
of 4.2
4.2
A first written demand issued by the Employer to the Guarantor at the
Guarantor’s
physical address with a copy to the Contractor
stating that a period of seven (7) calendar days has elapsed since
the first written
demand in terms of 4.1 and that the sum certified
has still not been paid;
4.3
A copy of the aforesaid payment certificate which entitles the
Employer to receive payment
in terms of the Contract of the sum
certified in 4
5.
Subject to the Guarantor’s maximum liability referred to in 1,
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
at the Guarantor’s
physical address calling up the performance Guarantee, such demand
stating that;
5.1
the contract has been terminated due to the Contractor’s
default and that this Performance
Guarantee is called up in terms of
5; or
5.2
…………………….
5.3
the aforesaid written demand is accompanied by a copy of the notice
of termination and or
the provisional/final sequestration and or the
provisional liquidation court order;
[14]
In
Lombard Insurance Company Ltd v Landmark Holdings (Pty) Ltd
2010 (2) SA 86
(SCA)
the Court stated the following
:
“
Para
20 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 the 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
t 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.”
[15]
In
Dormell Properties 282 CC v Renasa Insurance Co Ltd and Others
NNO 2011 (1) SA (SCA)
the Court stated the following:
“
Para
63 The appellant complied with the provisions of clause 5. It was not
necessary for the appellant to allege that it had validly
cancelled
the building contract due to the second respondent’s default.
Whatever disputes there were or might have been between
the appellant
and the second respondent were irrelevant to the first respondent’s
obligation to perform in terms of the construction
guarantee………………
“
Para
64 Once the appellant [the beneficiary] had complied with clause 5 of
the guarantee, the first respondent [the guarantor] had
no defence to
a claim under the guarantee. It still has no defence. The fact that
an arbitrator has determined that the appellant
was not entitled to
cancel the contract, binds the appellant – but only vis-à-vis
the second respondent [the employer].
It is res inter alios acta so
far as the first respondent is concerned. As the cases to which I
have referred above make abundantly
clear, the appellant did not have
to prove that it was entitled to cancel the building contract with
the second respondent, as
a precondition to enforcement of the
guarantee given to it by the first respondent. Nor does it have to do
so now.”
[16]
The autonomy principle of the guarantee was again emphasised in
Guardrisk Insurance Company Ltd v Kentz (Pty) Ltd (92/2013) [2013]
ZSCA 182
which judgment was in the same year quoted with approval
by the Supreme Court of Appeal in
Coface South Africa Insurance Co
Ltd v East London Own Haven t/a Own Haven Housing Associatin
(050/2013) [2013] ZSCA 202;
[2014] 1 All SA 536
(SCA);
2014 (2) SA
382
(SCA) (2 December 2013)
where the Court stated the following:
“
Para
13 The terms of the guarantees are clear. They create an obligation
on the part of the guarantor (Guardrisk) to pay Kentz (the
employer)
on the happening of a specified event. It was recorded in the
guarantees that notwithstanding the reference to the construction
contract, the liability of the bank as principal is absolute and
unconditional, and should not be construed to create an accessory
or
collateral obligation. The guarantees go further and specifically
state that the bank may not delay making payment in terms
of the
guarantees by reason of a dispute between the contractor and the
employer. The purpose of the guarantees was to protect
Kentz in the
event that Brokrew could not perform its obligation in terms of the
construction contract.”
[17]
Although the Court was dealing with a different issue arising out of
the performance guarantee
in
Joint Venture Between Aveng (Africa)
(Pty) Ltd and Strabag International GmbH v South African National
Roads Agency Soc Ltd and
Another (577/2019) [2020] ZSCA 146 (13
November 2020)
the Court stressed the autonomy principle with
regard to the performance guarantees as follows:
“
Para
7 Before I consider the Joint Venture’s submission before us,
it is necessary to restate our jurisprudence on the nature
and effect
of letters of credit (which applies equally to performance
guarantees). Our law is well settled, and firmly recognises
the
autonomy principle, ie the autonomy of the performance guarantee from
the underlying contract. The principle is best expressed
in the
oft-quoted passage from Lord Denning MR’s speech in Edward
Owen:
‘
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.’”
[18]
I understand the above authorities to be saying that the purpose of
the performance guarantee
is to provide security and to allocate the
risk as to who, between the employer and the contractor shall be out
of pocket pending
resolution of the dispute between them. The
guarantee creates an obligation on the part of the guarantor to pay
the employer, the
applicant in this case, a predetermined sum of
money on the happening of an event, once the conditions of the
performance guarantee
as stated therein have been complied with. The
guarantee is absolutely independent of the building contract between
the applicant
and the contractor and is payable on demand. Whatever
issues that may arise between the contractor and the applicant in
terms of
the underlying contract are of no moment with regard to the
guarantee.
[19]
I am unable to disagree with counsel for the applicant that there is
no merit in the respondent’s
contention that the contractor
should have been joined in these proceedings for there is a dispute
between the applicant and the
contractor with regard to payments and
outstanding amounts. The applicant is suing on the bases of the
provisions of the guarantee
and the issues arising from the
underlying contract between the applicant and the contractor are
irrelevant. Furthermore, I do
not understand the respondent to be
saying that the applicant has not complied with the conditions of the
performance guarantee
nor that the underlying contract provides for
the contractor to be joined in proceedings involving the performance
guarantee.
[20]
In the Joint Venture case quoted above, the Court referred to the
decision of the Victoria Court
of Appeal in
Uber Builder and
Developers v MIFA Pty Ltd
[2020] VSC 596
where Nichols J stated
the following:
“
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.”
[21]
It has been stated in the above authorities that the only defence
available to the guarantor
in cases involving the performance
guarantee is when the employer has committed fraud. In casu, I do not
agree with the respondent
that the applicant has committed fraud by
demanding payment of the full guaranteed amount when the outstanding
works were only
worth R100 000 and there was a judgment in
favour of the contractor in the amount of over R900 000. It is
my respectful
view that these issues are not relevant to the
determination of the issues regarding the performance guarantee. They
are issues
arising from the underlying contract and the liability
arising from the performance guarantee is absolute, unconditional and
independent
of the underlying contract. Whatever disputes existed
between the applicant and the contractor at the time the demand was
made
are irrelevant to the respondent’s obligation to perform
in terms of the performance guarantee.
[22]
In the case of Guardrisk quoted above the Supreme Court of Appeal
stated the following at paragraph
18:
“
Insofar
as the fraud exception is concerned, the party alleging nd relying on
such exception bears the onus of proving it. That
onus is an ordinary
civil one which has to be discharged on a balance of probabilities,
but will not lightly be inferred. In Loomcraft
Fabrics CC v Nedbank
Ltd and Another, it was pointed out that in order to succeed in
respect of the fraud exception, a party had
to prove that the
beneficiary presented the bills (documents) to the bank knowing that
they contained material misrepresentations
of fact upon which the
bank would rely and which they knew were untrue. Mere error,
misunderstanding or oversight, however unreasonable,
would not amount
to fraud. Nor was it enough to show that the beneficiary’s
contentions were incorrect. A party had to go
further and show that
the beneficiary knew it to be incorrect and that the contention was
advanced in bad faith.”
[23]
I hold the view that, for the respondent to succeed with its defence
that the applicant has committed
fraud when making the demand, it is
required to establish facts that the applicant knowingly
misrepresented material facts when
it made the demand. However, the
respondent has failed establish facts to prove that the applicant
misrepresented material facts
when it made the demand. Furthermore,
it does not mean that the applicant has committed fraud when it
demanded the full guaranteed
amount when the outstanding works was
only R100 000. The contractor still has recourse against the
applicant if it proves
its claim in future proceedings between itself
and the applicant. It follows ineluctably therefore that the
applicant is entitled
to call up the guarantee and has succeeded in
its claim against the respondent.
[24]
I am persuaded by the submissions of counsel for the applicant to
award a special costs order
against the respondent for devoting
almost ninety percent of its answering affidavit dealing with issues
that are irrelevant in
this case. At the hearing of this case counsel
for the respondent did not even spend any time in arguing about the
irrelevant issues
as to what happened between the applicant and the
contractor as contained in the answering affidavit. It is my
respectful view
that it was not necessary for the respondent to raise
all these issues but did that only, if I may borrow the phrase, to
muddy
the waters.
[25]
Furthermore, I do not agree with the respondent that the applicant is
not entitled to costs for
both counsel because, so it was argued, the
issues were crisp and uncomplicated. The Courts, including the
Supreme Court of Appeal,
are extremely busy dealing with matters
involving the performance guarantees in building contracts. In almost
every case new and
different issues are raised and our law is still
developing for it relies mostly on decision of foreign jurisdictions.
I am of
the view therefore that it was necessary for the applicant to
engage the services of two counsel.
[25]
In the circumstances, I make the following order:
1.
The respondent is to
pay the applicant the sum of R1 518 273.70
2.
The respondent is
to pay the applicant interest on the sum of R1 518 273.70
calculated at the rate of 10% per annum
from the 23
rd
of October 2018 to the date of final payment
3.
The respondent is to
pay the costs of suit on an attorney and client scale including costs
of senior counsel.
TWALA
M L
JUDGE
OF THE HIGH COURT OF SOUTH AFRICA
GAUTENG
LOCAL DIVISION
Date
of hearing:
16
th
November 2020
Date
of Judgment:
24
th
November 2020
For
the Applicant:
Adv. C J Mc Aslin SC
Adv.
T Ntoane
Instructed
by:
Joubert Galpin Searle Inc
wp@jgs.co.za
melissa@nortons.inc.com
For
Respondent:
Adv. D van Niekerk
Instructed
by:
Korsten and Beukes Attorneys
litigation@knblaw.co.za