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[2013] ZASCA 25
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First Rand Bank Ltd v Brera Investments CC (385/2012) [2013] ZASCA 25; 2013 (5) SA 556 (SCA) (25 March 2013)
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THE SUPREME COURT OF APPEAL OF
SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 385/2012
In
the matter between:
FIRST RAND BANK LIMITED
.........................................................................
Appellant
and
BRERA INVESTMENTS CC
.......................................................................
Respondent
Neutral
citation:
First Rand Bank v Brera
(385/2012)
[2013] ZASCA
25
(25 March 2013)
Coram:
Lewis, Ponnan, Malan and Theron JJA and
Plasket AJA
Heard:
4 March 2013
Delivered: 25 March 2013
Summary: Construction guarantee in favour of
sub-contractor – interpretation of – liability not
affected by events occurring
after due date
_________________________________________________________________________
ORDER
On appeal from:
the South Gauteng High Court,
Johannesburg (Nicholls J sitting as court of first instance):
The appeal is dismissed with costs.
___________________________________________________________________
JUDGMENT
Malan JA (Lewis, Ponnan and Theron JJA and Plasket AJA
concurring):
[1] This is an appeal against the judgment and order of
Nicholls J that the appellant (First Rand Bank Limited) pay a certain
amount
to the respondent, Brera Investments CC, in terms of a payment
guarantee issued to the latter. The respondent had on 1 November
2007
entered into a Joint Building Contracts Committee N/S Subcontract
Agreement with Spirit of Africa Developments (Pty) Ltd (the
‘contractor’) for the supply of materials and fittings
and the installation of the electrical reticulation of residential
units forming part of the Windmill Park Extension 12 development in
Boksburg.
[2] On 3 October 2007 First Rand issued a payment
guarantee to the respondent for the amount of R12 997 972,36
including
VAT. The guarantee recorded in clause 1.1 that any
reference to the agreement between the contractor and the respondent
was for
the purpose of convenience and –
‘
shall not be construed as any intention
whatsover to create an accessory obligation or any intention
whatsoever to create a suretyship.’
The guarantee is thus of the same nature as a
performance guarantee, performance bond or letter of credit and
consists of an undertaking
to make payment of an amount of money on
the happening of a specified event (see Cloete JA in
Dormell
Properties 282 CC v Renasa Insurance Co Ltd & others
[2011]
1 All SA 557
(SCA),
2011 (1) SA 70
para 61). A guarantee of this
nature must be paid according to its terms and liability under it is
not affected by the relationship
between other parties to the
transactions that gave rise to its issue, particularly not with the
question whether the sub-contractor
performed in terms of his
contract with the contractor (see
Lombard
Insurance Co Ltd v Landmark Holdings (Pty) Ltd & others
2010
(2) SA 86
(SCA) paras 19 and 20;
Loomcraft
Fabrics CC v Nedbank Ltd
2010 (2) SA 86
(SCA)
para 38 and
Minister of Transport and Public
Works, Western Cape & another v Zanbuild Construction (Pty) Ltd &
another
2011 (5) SA 528
(SCA) paras 11-15).
The words of the guarantee under consideration make it
clear that it is not a suretyship but an independent, and not
accessory,
agreement that must be performed according to its terms
(see also
Compass Insurance Co Ltd v
Hospitality Hotel Developments (Pty) Ltd
2012
(2) SA 537
(SCA) para 15).
[3] First Rand lent the necessary funds on mortgage bond
to Spirit of Africa for the development of the township. In terms of
this
loan the respondent was required to waive in favour of First
Rand any right of retention or lien that might arise from its
execution
of the works on the development. The guarantee under
consideration only became effective after waiver of the lien by the
respondent
(clause 1.2.2.1).
[4] The sub-contract between the respondent and the
developer provided for interim payments to the respondent on the
issue of payment
certificates by the principal agent (clause 31 of
the sub-contract). The principal agent was obliged to issue an
interim certificate
every month until the issue of the final
certificate (clause 31.1) and the contractor required to apply to the
principal agent
for payment to be made to a sub-contractor. The
latter had to co-operate with and assist the contractor in the
preparation of the
claim by providing all the relevant documents and
assessments of quantified amounts of works completed and materials
and goods
supplied (clause 31.2). The principal agent thereafter
furnished the interim certificates to the contractor (clause 31.3).
Within
seven days of the issue of an interim certificate the
contractor had to draw up a payment advice statement to be issued to
the
sub-contractor together with the amounts certified in the interim
certificate (clause 31.5). The employer was obliged to pay the
contractor the amount certified in an interim payment certificate
within seven days of its issue. Payment to the sub-contractor
became
due on the date of the issue of the interim certificate and payment
had to be made within seven days after the due date
for payment by
the employer to the contractor (clause 31.9).
[5] The payment guarantee in this matter envisaged two
situations where First Rand could incur liability to the respondent.
The
first is where the sum certified in a payment certificate was not
paid by the contractor within seven days. Clause 2 provided for
this
eventuality:
‘
2.0 Subject to the Guarantor’s
maximum liability in terms of the Guaranteed Sum, the Guarantor
hereby undertakes to pay the
Subcontractor the sum certified upon
receipt of the payment certificate which entitles the Subcontractor
to receive payment in
terms of the Agreement of the sum certified.
2.1 A copy of the first written demand issued by the Subcontractor to
the Contractor stating that payment of the sum certified
by the
Principal Agent has not been made in terms of the Agreement and
failing such payment within seven (7) calendar days, the
Subcontractor intends to call upon the Guarantor to make payment in
terms of 2.2.
2.2 A first written demand issued by the Subcontractor to the
Guarantor at the Guarantor’s
domicilium citandi et
executandi
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 2.1 and that the sum certified has still not been paid
therefore the Subcontractor calls up the Payment Guarantee and
demands
payment in the sum certified by the Guarantor.’
[6] The second situation arises where the contractor
fails to issue a payment certificate within seven days of a demand
for it.
This is the situation with which this appeal is concerned.
Clause 3 deals with it:
‘
3.0 Subject to the Guarantor’s
maximum liability in terms of the Guaranteed Sum, and limitations
recorded in 1.2 and 1.3,
the Guarantor hereby undertakes to pay the
Subcontractor the demanded sum upon receipt of the documents
identified in 3.1 and 3.2.
3.1 A copy of a first written demand issued by the Subcontractor to
the Contractor stating that the Subcontractor demands the issue
of a
payment certificate and failing such issue within 7 (seven) calendar
days, the Subcontractor intends to call upon the Guarantor
to make
payment in terms of 3.2 of the demanded sum as set out in the demand.
3.2 A first written demand issued by the Subcontractor to the
Guarantor at the Guarantor’s
domicilium citandi et
executandi
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 3.1 and that the payment certificate has still not been
issued therefore the Subcontractor calls up this Payment Guarantee
and
demands payment of the demanded sum from the Guarantor.’
[7] The written demand referred to in clause 3.1 for the
issue of a payment certificate for R1 065 864,29 was made
on
17 March 2011. The contractor was informed that should it fail to
issue the certificate within seven calendar days, the respondent
intended calling on First Rand to make payment in terms of clause
3.2. The payment certificate demanded was not issued within seven
days. On 15 April 2011 the respondent issued a first written demand
to First Rand in terms of clause 3.2 demanding payment of
R1 065 864,29 and stating that a payment certificate was
demanded from the contractor, that seven calendar days had elapsed
from the date of the demand and no payment certificate had been
issued. Despite these demands payment was not forthcoming and the
application in the high court was launched on 14 July 2011. On 25
August 2011, however, a payment certificate for R60 909,79
was
issued by a Mr R H Gardiner on behalf of the contractor. The
certificate stated that the other amounts claimed were disputed
and
were not certified.
[8] Nicholls J based her judgment on the unambiguous
words of clause 3 in terms of which First Rand undertook to pay ‘upon
receipt of the documents identified in 3.1 and 3.2’. As it was
common cause that the demands referred to in clauses 3.1 and
3.2 were
made and that at the time the payment guarantee was called up the
payment certificate had not been issued, she found that
the ‘trigger
event’ on which liability is based had occurred. In her
judgment in the application for leave to appeal
her reasons for
making the order sought were articulated more clearly: liability was
incurred because the payment certificate was
not furnished
timeously
.
I agree.
[9] On behalf of the appellant, however, it was
contended that it was entitled to rely upon events that occurred
after demand had
been made. In particular it was argued that the word
‘still’ in clause 3.2 had the effect that, if at any
stage after
the expiry of the seven day period referred to in clause
3.1 a payment certificate was issued, the respondent’s
entitlement
to demand payment would fall away and it would only be
entitled to the certified sum, if any. Liability is thus based, so
the argument
went, on the continued failure by the principal agent to
issue a payment certificate. To my mind, this construction is
artificial.
The event on which liability depends is set out in clause
3.0, that is ‘upon receipt of the documents identified in 3.1
and
3.2’. The obligation to pay arises the moment the
provisions of clause 3.0 are met, and not on the continued failure of
the
principal agent to issue the payment certificate. The words in
clause 3.2 ‘and that the payment certificate has still not
been
issued’ do not detract from this conclusion. The use of the
word ‘still’ in clause 3.2 simply means that
the payment
certificate was not issued within the seven day period referred to in
clause 3.1. The interpretation of First Rand,
that it means that
liability depended, not on the conditions set out in clause 3, but on
the continued failure to provide the payment
certificate at all is
strained. It would mean that the subsequent provision of a payment
certificate (that is, after the seven
day period set out in clause
3.1) would extinguish or exclude the guarantor’s liability or
limit it to the amount certified.
The express words used in the
clause exclude such a construction.
[10] It was submitted on behalf of First Rand that the
majority decision of this court in
Dormell
Properties
above established a party’s
right to rely on events that occurred after demand for payment was
made. In that case, Bertelsmann
AJA posed the question whether a
party was entitled to enforce a building guarantee notwithstanding
the fact that it was decided
in arbitration proceedings that it had
repudiated the underlying construction agreement which was lawfully
cancelled by the other
party. He held (para 41):
‘
The arbitration has established that
Dormell is in the wrong. Its repudiation of the building contract was
held to have been unlawful.
As a consequence, Dormell has lost the
right to enforce the guarantee. There remains no legitimate purpose
to which the guaranteed
sum could be applied.’
Because it was found that judgment in favour of the
party enforcing the guarantee (Dormell) would, in the circumstances
of that
case, have had no practical effect (since any amount paid
under the guarantee would have to be repaid) the appeal was
dismissed.
The facts of this matter are distinguishable and concern
an interim payment under an interim payment certificate. There was no
final arbitration award as in
Dormell
.
No question of mootness arises. In any event, I consider
that the better approach in that case is that of Cloete JA with whom
Mpati
P concurred:
‘
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’ (para 64).
For these reasons, it is not in my view bad faith for an employer,
who has made proper demand in terms of a construction guarantee,
to
continue to insist on payment of the proceeds of the guarantee, when
the basis upon which the guarantee was called up has subsequently
been found in arbitration proceedings between the building owner and
the contractor to have been unjustified. I would add that
the fact
that the arbitrator’s award is final as between the appellant
and the second respondent does not mean that it is
correct, or that
the appellant would have to set it aside before calling up the
guarantee, much less that the appellant is acting
in bad faith in
seeking to enforce payment under the guarantee against the first
respondent’ (para 65).
[11] The autonomy of letters of credit, demand
guarantees,
performance bonds and similar
documents is well recognised (see
Lombard
Insurance Co Ltd v Landmark Holdings (Pty) Ltd & others
2010
(2) SA 86
(SCA) paras 19 and 20). It is only where fraud is involved
that the issuing institution may decline liability. In
Sztejn
v J Henry Schroder Banking Corporation
(1941)
31 NYS 2d 631
, a judgment concerning an irrevocable letter of credit,
Shientag J formulated the ‘established fraud rule’ as
follows:
‘
No hardship will be caused by permitting
the bank to refuse payment where fraud is claimed, where the
merchandise is not merely
inferior in quality but consists of
worthless rubbish, where the draft and the accompanying documents are
in the hands of one who
stands in the same position as the fraudulent
seller, where the bank has been given notice of the fraud before
being presented
with the drafts and documents for payment, and where
the bank itself does not wish to pay pending an application of the
rights
and obligations of the other parties.’
See also
Phillips & another v
Standard Bank of South Africa Ltd & others
1985
(3) SA 301
(W) at 301A-J and
Edward Owen
Engineering Ltd v Barclays Bank International Ltd
[1978]
1 All ER 976
(CA) at 983
b-d
.
No question of fraud arises in this matter.
12] In the result the appeal is dismissed with costs.
_____________
F R Malan
Judge of Appeal
APPEARANCES:
For Appellant: F J Steyn
Instructed by:
Edward Nathan Sonnenbergs Inc
Sandton
McIntyre & Van der Post Attorneys
Bloemfontein
For Respondent: L J Morison SC and
X Stylianou
Instructed by:
Rina Caldeira Attorneys
Johannesburg
Honey Attorneys
Bloemfontein