Brief Summary

Interpretation — Demand guarantees — Interpretation of demand guarantees issued to secure performance under a construction contract — Eskom presented guarantees for payment without prior notice to Hitachi — High Court found Eskom required to give notice before demanding payment — Appeal upheld, confirming that no notice was necessary for on demand guarantees. Eskom Holdings SOC Limited (Appellant) sought to enforce demand guarantees issued by Mizhuo Corporate Bank Limited in favor of Hitachi Power Africa (Pty) Ltd and Hitachi Power of Europe GmbH (Respondents) to secure performance under a construction contract for the Medupi Power Station. Disputes arose regarding Hitachi's performance, leading Eskom to demand payment under the guarantees without prior notice. The legal issue was whether Eskom was required to provide notice to Hitachi before presenting the demand guarantees for payment. The Supreme Court of Appeal held that the guarantees were on demand guarantees, and as such, Eskom was not required to give notice prior to demanding payment. The appeal was upheld, and the High Court's order was set aside.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter was an appeal to the Supreme Court of Appeal of South Africa against a final interdict granted by the South Gauteng High Court, Johannesburg (Kgomo J). The interdict restrained Eskom Holdings SOC Limited (the appellant and beneficiary under the guarantees) from demanding payment under certain performance guarantees until 28 February 2013, and sought consequential relief to reverse any payment already made.

The respondents were Hitachi Power Africa (Pty) Ltd and Hitachi Power of Europe GmbH (together referred to in the judgment as Hitachi), who were contractors under a major construction contract for works at the Medupi Power Station. The performance guarantees in issue were issued by Mizhuo Corporate Bank Limited of Japan (the Bank) at Hitachi’s instance, in Eskom’s favour.

The dispute concerned the proper interpretation and operation of “demand guarantees” (also referred to as on demand or call guarantees) provided as performance security in a construction contract context. In particular, the question was whether Eskom was obliged to give Hitachi prior notice (under the construction contract) before presenting the guarantees for payment, and whether Eskom was bound by an asserted undertaking not to call the guarantees before 28 February 2013.

Hitachi elected not to oppose the appeal in the Supreme Court of Appeal and indicated it would abide the decision. The judgment further records that Eskom was not seeking a costs order against Hitachi.

2. Material Facts

During October 2007, Eskom and Hitachi concluded a construction contract for construction of certain works at the Medupi Power Station, a large electricity generation project. Under the construction contract, Hitachi procured the issuance of six performance guarantees drawn on the Bank. Three of those guarantees (in rand, pounds, and US dollars) were called up by Eskom and together amounted to a rand equivalent of over R600 million.

By September 2012, disputes had arisen concerning Hitachi’s performance under the construction contract. Eskom alleged material and ongoing breaches, including alleged delays in completing the first operating unit at Medupi. Discussions occurred between the parties aimed at avoiding Eskom calling up the guarantees.

On 1 February 2013, Eskom wrote to Hitachi accusing it of failing to effect certain corrections to construction work by 31 January 2013. Eskom stated it was prepared to postpone a decision to demand payment under the guarantees up to and until 28 February 2013, on condition that Hitachi remedied the alleged breaches in the meantime.

On 8 February 2013, Hitachi responded disputing Eskom’s entitlement to demand payment under the guarantees. Hitachi denied various allegations and advanced its own complaints and claims, including that Eskom should procure an engineer to determine Hitachi’s outstanding claims. The judgment notes that Hitachi’s letter did not address whether Hitachi accepted the “grace period” said to be extended until 28 February 2013.

On 12 February 2013, Eskom presented three guarantees to the Bank for payment. Thereafter, on 13 February 2013 at 23h00, Hitachi launched an urgent application in the high court seeking a final interdict restraining Eskom (until 28 February 2013) from demanding payment under the guarantees and seeking relief requiring Eskom to revoke any demand already made.

Hitachi relied on two bases for final interdictory relief. First, it alleged that Eskom’s demand was contrary to the construction contract because Eskom had failed to provide notice under sub-clause 2.5 (Employer’s Claims) prior to demanding payment. Second, Hitachi alleged Eskom had promised/undertaken not to present the guarantees before 28 February 2013.

The high court granted the interdict, accepting (in substance) that sub-clause 2.5 required notice to Hitachi before Eskom could present the guarantees for payment, and preferring Hitachi’s construction of Eskom’s “hold its horses” communication regarding 28 February 2013.

3. Legal Issues

The central legal questions concerned primarily the interpretation of contractual instruments, and in particular the classification and operation of the performance guarantees. The dispute was therefore largely a question of law (interpretation of the guarantee and relevant construction contract clauses), and the application of that interpretation to the established chronology of Eskom’s call on the guarantees.

The Supreme Court of Appeal was required to determine whether the guarantees were properly construed as on demand guarantees (independent undertakings requiring payment upon compliant demand) or as conditional guarantees (requiring proof or establishment of the contractor’s underlying contractual liability before payment could properly be demanded).

Flowing from that classification question, the court had to decide whether Eskom was required to provide Hitachi with prior notice under sub-clause 2.5 of the construction contract before making a demand on the Bank, and whether the notice requirements in the construction contract could be treated as a condition for a valid call on the guarantees.

A further issue arose as to whether the matter had become moot (because the 28 February 2013 date had passed) and, if so, whether the Supreme Court of Appeal should nonetheless decide the appeal under section 21A(1) of the Supreme Court Act 59 of 1959.

Finally, although not dispositive to the interpretation question, the court addressed whether Hitachi had met the requirements for a final interdict, including irreparable harm and the absence of an alternative remedy.

4. Court’s Reasoning

The Supreme Court of Appeal approached the matter by locating the dispute within established South African law distinguishing conditional guarantees from on demand guarantees. Relying on prior authority, it reiterated that an on demand guarantee operates in a manner akin to an irrevocable letter of credit: the bank’s obligation to pay is independent of disputes under the underlying contract, and (absent fraud) the bank must pay if the documentary and formal requirements of the guarantee are met.

The court considered the terms of the guarantee itself, focusing on the demand mechanism set out in clause 3 of the performance bond. That clause required that a demand be in writing, signed by specified Eskom officials, state the amount claimed, and state that the demand amount was payable in circumstances contemplated in sub-clauses (a) to (d) of clause 4.2 of the construction contract. The court reasoned that these provisions did not require Eskom to give notice to Hitachi before making demand, nor did they require the Bank to investigate whether any contractual preconditions (such as notice under sub-clause 2.5) had been met. The judgment emphasised that it would not make business sense to interpret the guarantee so as to require the Bank to undertake assessments and evaluations of construction contract compliance, because a bank’s function is to handle payment against stipulated demand requirements, not to adjudicate underlying contractual disputes.

The court then examined clause 4.2 of the construction contract, which limited when Eskom could claim under performance security. Of particular importance was clause 4.2(d), which permitted a claim in circumstances entitling Eskom to termination under sub-clause 15.2, “irrespective of whether notice of termination has been given”. The court read this as reinforcing that the right to claim under the performance security could arise without notice of termination having been given, and it treated Eskom’s asserted reliance on circumstances contemplated in the termination clause as sufficient for purposes of the demand mechanism.

The Supreme Court of Appeal rejected the high court’s approach of reading the notice provisions of sub-clause 2.5 into the whole of clause 4.2. It held that sub-clause 2.5 was relevant only in relation to claims under clause 4.2(b) (which expressly referenced determinations under sub-clause 2.5 or dispute resolution procedures), and that reading sub-clause 2.5 into all of clause 4.2 would render the specific reference to sub-clause 2.5 in clause 4.2(b) tautologous. The court also emphasised the structural separation between the guarantee and the underlying contract: Eskom’s right to payment from the Bank arose from the guarantee, and the Bank was not a party to the construction contract. The guarantee did not incorporate the contractual notice regime by reference or otherwise.

In addition, the court relied on the contractual scheme contemplated by clause 4.2, which expressly allowed for the possibility that Eskom might make a claim on the performance security and later be found not entitled to do so. The contract addressed that contingency by requiring Eskom to refund amounts not properly claimed and to pay interest at the stipulated rate. This contractual mechanism supported the court’s conclusion that Eskom’s entitlement need not be proven at the time of demand, and that the threshold for a compliant demand under an on demand guarantee was intentionally low.

Turning to Hitachi’s second ground (the alleged undertaking not to call before 28 February 2013), the court assessed the correspondence and concluded that Eskom could not be taken to have waived its rights to call up the guarantees until that date. The judgment stressed that Hitachi did not clearly accept the conditional indulgence Eskom articulated, but instead responded with denials and counter-complaints. On that basis, the court held that Hitachi could not rely on the indulgence to avoid the consequences of Eskom’s call.

On mootness, the court acknowledged that the 28 February 2013 date had passed, but held that it was in the public interest to decide the issue because Eskom is a public body involved in a matter of major public importance (electricity supply) and in similar contracts where guidance on demand guarantees was needed. The court therefore exercised its discretion to determine the appeal notwithstanding potential mootness under section 21A(1).

Finally, the court stated that Hitachi had sought and obtained a final interdict without satisfying the requirements for such relief. It highlighted in particular Hitachi’s failure to show irreparable harm and the absence of any other remedy. The claimed harm that Hitachi would have to pay interest was undermined by clause 4.2’s scheme permitting recovery of both capital and interest if Eskom’s call was later found unjustified, and by the availability of contractual dispute-resolution mechanisms. This reinforced the court’s conclusion that the high court ought to have dismissed the application.

5. Outcome and Relief

The Supreme Court of Appeal upheld the appeal. It set aside the order of the South Gauteng High Court and replaced it with an order that the application is dismissed.

The judgment records that Hitachi did not oppose the appeal and that Eskom did not seek a costs order against Hitachi. The order as reproduced in the judgment replaces the high court order with dismissal of the application, without setting out a separate costs order in the text quoted.

Cases Cited

Minister of Transport and Public Works, Western Cape, and Another v Zanbuild Construction (Pty) Ltd and Another 2011 (5) SA 528 (SCA)

Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd and Others 2010 (2) SA 86 (SCA)

Dormell Properties 282 CC v Renasa Insurance Company Ltd and Others NNO 2011 (1) SA 70 (SCA)

Coopers & Lybrand and Others v Bryant [1995] ZASCA 64; 1995 (3) SA 761 (A)

Western Cape Education Department and Another v George 1998 (3) SA 77 (SCA)

Natal Rugby Union v Gould [1998] ZASCA 62; 1999 (1) SA 432 (SCA)

Director of Public Prosecutions (Western Cape) v Midi Television (Pty) Ltd t/a E TV 2006 (3) SA 92 (C)

Basil Read (Pty) Ltd v Beta Hotels (Pty) Ltd and Others 2001 (2) SA 760 (C)

Legislation Cited

Supreme Court Act 59 of 1959, section 21A(1)

Rules of Court Cited

No rules of court are cited in the judgment.

Held

The Supreme Court of Appeal held that, on a proper interpretation, the performance guarantee in issue was an on demand (call) guarantee. Eskom was entitled to present a compliant written demand to the Bank without first giving Hitachi notice under sub-clause 2.5 of the construction contract, because the guarantee imposed only the formal demand requirements specified in its own clause 3, and did not incorporate contractual notice provisions.

The court further held that Hitachi failed to establish that Eskom was bound by a waiver or undertaking not to call the guarantees before 28 February 2013, particularly given the content of the correspondence and the absence of acceptance by Hitachi of the conditional indulgence articulated by Eskom.

The court also held that the matter should be determined notwithstanding potential mootness, because of the public interest and the practical need for guidance on similar guarantees in comparable contracts. In addition, the court held that the requirements for a final interdict were not met on the facts, including because irreparable harm and absence of alternative remedy were not established in light of the contractual refund-and-interest mechanism and dispute-resolution provisions.

LEGAL PRINCIPLES

An on demand guarantee creates an obligation on the guarantor (typically a bank) to pay the beneficiary upon presentation of a demand that complies with the guarantee’s stipulated formal and documentary requirements, and that obligation is independent of disputes arising from the underlying construction contract.

A construction contract’s internal claims and notice mechanisms (such as an employer’s claims notice provision) are not to be treated as implied conditions for payment under an on demand guarantee unless the guarantee incorporates them by reference or otherwise clearly makes them conditions of demand. Interpreting such notice provisions as binding the bank would be inconsistent with the commercial purpose of demand guarantees and would improperly require the bank to adjudicate underlying contractual compliance.

Where a construction contract contemplates that a beneficiary may call on performance security in circumstances later determined to be unjustified, and provides for refund and interest if the call is found improper, that scheme supports the conclusion that the beneficiary’s underlying entitlement need not be proven at the time of demand, and that disputes about entitlement are to be resolved after payment through contractual mechanisms.

Even where a dispute might appear moot due to the passing of time, an appellate court may decide it if there is a sufficient public interest and practical need for authoritative guidance, particularly where a public body is involved and similar issues are likely to recur.

A party seeking a final interdict must satisfy all requirements for that remedy, including demonstrating irreparable harm and the absence of an adequate alternative remedy; where the contract provides for recovery (including interest) and for dispute-resolution processes, those mechanisms may undermine an asserted need for final interdictory relief.

Eskom Holdings Soc Ltd v Hitachi Power Africa (Pty) Ltd and Another (139/2013) [2013] ZASCA 101 (12 September 2013)