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[2013] ZASCA 202
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Coface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association (050/2013) [2013] ZASCA 202; [2014] 1 All SA 536 (SCA); 2014 (2) SA 382 (SCA) (2 December 2013)

REPORTABLE
SUPREME
COURT OF APPEAL
OF
SOUTH AFRICA
JUDGMENT
CASE NO: 050/2013
DATE: 02 December2013
In the matter between:
COFACE SOUTH AFRICA INSURANCE CO
LTD
...............................
APPELLANT
and
EAST LONDON OWN HAVEN t/a OWN HAVEN
HOUSING
ASSOCIATION
..................................................................
RESPONDENT
Neutral citation:
Coface South Africa
Insurance Co Ltd v East London Own Haven t/a Own Haven Housing
Association
(050/13)
[2013] ZASCA 202
(02 December 2013).
Coram:
Navsa ADP, Maya,
Malan, Pillay JJA et Swain AJA
Heard:
19 November 2013
Delivered:
02 December
2013
Summary: Construction guarantee –
liability absolute and unconditional – disputes in relation to
the construction agreement
precluded – majority decision in
Dormell Properties v Renasa Insurance NNO
2011 (1) SA
70
(SCA) held to be clearly wrong – appeal dismissed.
ORDER
On appeal from:
South Gauteng High Court,
Johannesburg (Lamont J sitting as court of first instance):
The appeal is dismissed with costs.
JUDGMENT
Navsa ADP & Pillay JA (Maya JA, Malan, JA et
Swain AJA concurring)
[1] The respondent, East London Own Haven (ELOH), an
association incorporated in terms of s 21 of the Companies Act 61 of
1973,
trading under the name and style of Own Haven Housing
Association, instituted an action in the South Gauteng High Court,
against
the appellant, Coface South Africa Insurance Company Limited
(Coface), claiming payment of an amount of R1 172 583,80

owing in terms of a construction guarantee, pursuant to a
construction contract being cancelled by ELOH, ostensibly because of

default on the part of a building contractor. The construction
contract had been concluded between ELOH and Construct Construction

(Pty) Ltd (the contractor) and provided for the completion of
building works at Kenwick Close, East London.
[2] Conventionally, the construction contract required
the contractor to execute a construction guarantee in favor of ELOH,
in terms
of which a guaranteed sum would be paid to Coface upon
cancellation of the construction agreement on the basis of default by
the
contractor. Such a guarantee was executed by Coface in favor of
ELOH and in terms thereof Coface guaranteed payment by it to ELOH
of
the guaranteed sum. At this stage it is necessary to have regard to
clause 5.1 of the construction guarantee which provided
that Coface
undertook to make payment upon receipt of a first written demand from
ELOH, calling up the construction guarantee and
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: . . . . ’
[3] In its particulars of claim ELOH alleged that it had
cancelled the construction contract due to the contractor’s
default
and addressed a letter of demand to Coface as required by the
terms of the guarantee referred to in the preceding paragraph.
[4] In its plea denying liability, Coface sought to
contest ELOH’s assertion that it was entitled to cancel because
of default
on the part of the contractor. Indeed, it blamed ELOH for
faulty design and denied that the contractor had defaulted on its
obligations
and thus denied that it was liable to pay in terms of the
guarantee.
[5] ELOH excepted to this defence, which was based on
the construction agreement and disputes in relation thereto. ELOH
contended
that such a defence was precluded by reason of the terms of
the guarantee and was bad in law. The exception was heard by
Satchwell
J in the South Gauteng High Court. The learned judge had
regard to a number of decisions of this court and, relying on the
decision
in
Dormell Properties 282 CC v Renasa
Insurance Co Ltd & others NNO
2011 (1) SA
70
(SCA), she dismissed ELOH’s principal exception. In this
regard, Satchwell J at para 37 of her judgment said the following:
‘
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.’
[6] Thus fortified, and before the commencement of the
trial in the high court before Lamont J, Coface applied to amend its
plea
to introduce a defence on the following basis:
6.1 The final amount payable by the contractor to the
ELOH was finally determined by the issue of a final payment
certificate (incorrectly
labelled interim payment certificate) which
certificate purported to set out an amount constituting the recovery
of an overpayment
by the plaintiff to the contractor which was due by
the contractor to the plaintiff.
6.2 That a recovery statement had been issued
simultaneously with that certificate reflecting an amount of R nil
recoverable by
the ELOH from the contractor as damages.
6.3 That the issue of the certificate finally determined
that the contractor did not owe any amount to the ELOH as a result of
the
alleged breach of contract by the contractor.
6.4 In the premises Coface was not obliged to make the
payment in terms of the guarantee as the indebtedness due to the ELOH
by
the contractor did not fall within its terms.
[7] It was accepted by Coface that there had been a
mis-description by ELOH in relation to the payment certificate and
that it was
an interim certificate rather than a final one. Coface
nevertheless contended that, notwithstanding that it was an interim
certificate,
it reflected a nil balance and thus became the final
certificate because no further certificates had been issued.
[8] The application to amend was opposed. It was agreed
by the parties that, in the event of the application for amendment
being
dismissed, ELOH would be entitled to judgment in the following
terms:
‘
3.1 Payment of
R1 172 583-80;
3.2 Interest on the aforesaid
amount at the rate of 15.5 % per annum from 6 February 2009 to date
of payment;
3.3 Cost of suit including the
qualifying fees of Dean Arthur Jacoby.’
[9] In deciding the application to amend Lamont J had
regard to the purpose of a construction guarantee, namely, to enable
the person
relying thereon to readily obtain payment by production of
the required documents. Put simply, he held that a guarantee of the
kind under consideration was enforceable according to its terms. The
introduction of extraneous issues as a defence is precluded,
save for
very limited exceptions like fraud. He sought to distinguish
Dormell
on the basis that, in that case, it was
impossible for the plaintiff to establish an entitlement to its
claim. Returning to the
facts before him, Lamont J took the view that
the interim certificate did not become a final certificate by reason
of no further
certification. He dismissed the application for
amendment with costs, including the costs consequent upon the
employment of senior
counsel and gave judgment in favour of ELOH in
the terms set out in para 8 above.
[10] It is that decision which is before us with the
leave of the court below. In
Edward Owen
Engineering Ltd v Barclays Bank International Ltd
[1978]
1 All ER 976
(CA), Lord Denning MR considered letters of credit and
the law in relation thereto, and stated:
‘
It
has been long established that when a letter of credit is issued and
confirmed by a bank, the bank must pay it if the documents
are in
order and the terms of the credit are satisfied. Any dispute between
buyer and seller must be settled between themselves.
The bank must
honor the credit.’
He
continued:
‘
To
this general principle there is an exception in the case of what is
called established or obvious fraud to the knowledge of the
bank.’
[11]
Turning his attention to what the English refer to as performance
bonds, which is the equivalent of performance or construction

guarantees,
1
Lord Denning went on to state:
‘
So,
as one takes instance after instance, these performance guarantees
are virtually promissory notes payable on demand. So long
as the
Libyan customers make an honest demand, the banks are bound to pay
and the banks will rarely, if ever, be in a position
to know whether
the demand is honest or not. At any rate they will not be able to
prove it to be dishonest. So
they will have to pay.
All this leads to the conclusion
that the performance guarantee stands on a similar footing to a
letter of credit. A bank which
gives a performance guarantee must
honour that guarantee according to its terms. It is not concerned in
the least with the relations
between the supplier and the customer;
nor with the question whether the supplier has performed his
contracted obligation or not;
nor with the question whether the
supplier is in default or not. The bank must pay according to its
guarantee, on demand if so
stipulated, without proof or conditions.
The only exception is when there is a clear fraud of which the bank
has notice.’
[12]
In
Loomcraft Fabrics CC v Nedbank Ltd &
another
[1995] ZASCA 127
;
1996 (1) SA 812
(A) at 816G –
817A, this court stressed the autonomous nature of obligations by
banks to a beneficiary under a letter of
credit. It had regard to
Edward Owen
and stated
the following:
‘
The
importance of allowing banks to honour their obligations under
irrevocable credits without judicial interference has been repeatedly

stressed in subsequent cases. In
Intraco
Ltd v Notis Shipping Corporation (The Bhoja Trader)
[1981]
2 Lloyd’s Rep 256 (CA) Donaldson LJ, after upholding the
refusal of the Court below to interfere with the seller’s
right
to call upon a bank to make payment under its guarantee where fraud
was not involved, observed at 257:
“
Irrevocable
letters of credit and bank guarantees given in circumstances such as
that they are the equivalent of an irrevocable
letter of credit have
been said to be the lifeblood of commerce. Thrombosis will occur if,
unless fraud is involved, the Courts
intervene and thereby disturb
the mercantile practice of treating rights thereunder as being the
equivalent of cash in hand.”
Lord
Denning MR in
Power
Curber International Ltd v National Bank of Kuwait SAK
[1981] 3 All ER 607
(CA) at 613
b
sounded a similar
warning:
“
No
foreign seller would supply goods to that country on letters of
credit because he could no longer be confident of being paid.
No
trader would accept a letter of credit issued by a bank of that
country if it might be ordered by its courts not to pay.”’
[13]
In
Lombard
Insurance Company Ltd v Landmark Holdings (Pty) Ltd
2010
(2) SA 86
(SCA) para 20, this court said the following:
‘
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.’
[14]
Dormell
indicated
a divergence. Bertelsmann AJA, writing for the majority, after
referring to
Lombard
and
Loomcraft
, stated that:
‘
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. In the present case there is no suggestion that
Dormell did not properly demand payment of the guaranteed
sum. In the
normal course of events payment should have been effected within
seven days of demand.’
Seemingly reaffirming
what is set out in this court’s preceding decisions,
Bertelsmann AJA then had regard to an arbitration
award pursuant to
the construction contract which was in favour of the contractor. At
paras 41 and 42 of the
Dormell
judgment the following appears:
‘
[41]
There is no longer any dispute about the cancellation of the
underlying agreement that still has to be resolved. 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.
[42]
If it were to be ordered to honour the guarantee, Renasa or Synthesis
would be entitled to repayment of the full amount guaranteed.
Hudson
& Wallace
Hudson’s
Building and Engineering Contracts
11
ed para 17.078, quoted in
Cargill
International SA and Another v Bangladesh Sugar and Food Industries
Corp
[1996] 4 All ER
563
(QB Com Ct) at 570
b
-
f
states:
“
It
is generally assumed, and there is no real reason to doubt, that the
Courts will provide a remedy by way of repayment to the
other
contracting party if a beneficiary who has been paid under an
unconditional bond is ultimately shown to have called on it
without
justification . . . In cases where there has been no default at all
on the part of the contractor, there would additionally
be a total
failure of consideration for the payment.”
See
further
General Surety
& Guarantee Co Ltd v Francis Parker Ltd
(1977)
6 BLR 18
(QBD Commercial List) at 20.’
[15] In
Dormell
Cloete
JA, writing for the minority at para 61, succinctly described the
legal relationships that arise in relation to construction
guarantees
and associated construction agreements. The clause in terms of which
the construction guarantee in
Dormell
could be called up is
similar to the one presently under discussion. At para 63 Cloete JA
said the following:
‘
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. That is
clear from the passages quoted by my learned colleague in para [38]
of his judgment, from
Lombard
Insurance Co Ltd v Landmark Holdings (Pty) Ltd
;
and
Loomcraft
Fabrics CC v Nedbank Ltd
;
and also from . . . the judgment of Lord Denning MR in
Edward
Owen Engineering Ltd v Barclays Bank International Ltd
:
. . . . ’
[16] Cloete JA recorded
that there was no suggestion of fraud on the part of the employer. At
paras 64 and 65 he said:
‘
[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-á-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.
[65]
For these reasons, it is not in my view bad faith for an employer,
who has made a 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.’
[17]
At this stage it is necessary to consider cases that have come before
this court after
Dormell
dealing with letters of credit and
construction guarantees.
[18]
In
Casey v First Rand Bank
Ltd
(608/2012)
[2013] ZASCA 131
this
court, in relation to a letter of credit, had to deal with an
assertion that the principal debt had prescribed. The guaranteeing

bank’s client sought a
declarator
to
that effect, submitting that the claim that the client had made upon
the bank knowing that the claim had prescribed was fraudulent.
It was
contended that the effect of a declarator that the debt had
prescribed was to extend the ambit of legitimate challenges
to a
letter of credit beyond the narrow confines of the fraud exception.
In
Casey,
Swain
AJA noted that:
‘
[12]
. . . An irrevocable letter of credit is not accessory to the
underlying contract and is distinguishable in law from a suretyship

which is accessory to the principal obligation. See
Absa
Bank Bpk v De Villiers
2001
(1) SA 481
(HHA).’
Later,
he confirmed:
‘
[14]
The distinction sought to be drawn on behalf of Casey and Kimberley
is without merit. The issue of the irrevocable letter of
credit by
the Bank of America in favour of Firstrand, established a contractual
obligation on the Bank of America to pay Firstrand
as beneficiary,
provided that the conditions specified in the credit were met.
Reciprocal obligations in these terms were created
by the letter of
credit between the Bank of America and Firstrand. An order declaring
that Firstrand had no right to draw-down
on the letter of credit,
must inevitably have as a consequence that the Bank of America was
not obliged to honour this draw-down
claim. Such an order would
infringe upon the autonomy of the irrevocable letter of credit. The
argument was advanced simply to
circumvent the autonomy of the letter
of credit.’
[19]
In
First Rand Bank Limited v
Brera Investments CC
(385/2012)
[2013] ZASCA 25
, this court was faced with a situation where the
guaranteeing bank sought to rely on events that occurred after demand
had been
made in terms of the guarantee. In that regard the decision
in
Dormell
was
relied upon. Malan JA, preferred the minority view in
Dormell
.
At para 11 of
Brera
,
the autonomy of letters of credit, demand guarantees, performance
bonds and similar documents was restated. The dictum in
Lombard
referred
to above was reaffirmed. In
Brera
it
was in any event held that
Dormell
was
distinguishable on the facts.
[20]
In
Guardrisk
Insurance Company Ltd v Kentz
(Pty)
Ltd (92/2013)
[2013] ZASCA 182
, a case heard in the same term as the
one presently under discussion, payment of a performance guarantee in
relation to a construction
contract was in issue. There too disputes
arose concerning the principal contract and whether there had been
proper cancellation
of that agreement. A further point arose in that
case namely, whether the guarantees were conditional. It was held
that they were
unconditional guarantees. In the present case it is
not disputed that the construction guarantee is unconditional.
[21]
In
Guardrisk
Theron
JA said the following concerning the unconditional construction
guarantees there under consideration:
‘
[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 obligations in terms of the
construction contract.’
In
this regard reference was made to
Lombard
,
Loomcraft
and
Edward Owen.
[22]
Theron JA, like Malan JA in
Brera
,
indicated a preference for the approach of the minority in
Dormell
.
[23] The reliance by the
majority in
Dormell
on
Cargill
is misplaced. First,
that case involved, as contesting litigants, the parties to the
principal contract and did not involve a dispute
between the
guaranteeing bank and beneficiary. It was a case involving injunctive
relief. The plaintiffs in that case applied for
an injunction
restraining the defendants from drawing on the bond. Certain issues
were referred to trial. In
Cargill
the sanctity of performance
bonds was reaffirmed. The court in
Cargill
stated that a bond
is in effect ‘as valuable as a promissory note’ and that
it has to be met, pending the resolution
of the contractual disputes.
To do otherwise, so the court stated in
Cargill
, would be to
frustrate the commercial purpose of the bond. Put simply, the court
in
Cargill
held that performance bonds had to be met according
to their terms and that disputes concerning the principal agreement
could be
dealt with later.
[24] Since the decision
in
Dormell
and perhaps predictably, there has been an
increasing number of cases in which guaranteeing banks have sought to
introduce contractual
disputes in order to avoid meeting the
guarantee. In some cases the allegedly defaulting contractor sought
to join the fray. It
is the very consequence that the line of cases
prior to
Dormell
sought to avoid.
[25]
Moreover, in
Dormell
,
in dealing with claims for repayment after a bond has been met,
Bertelsmann AJA cited a passage from
Hudson
& Wallace
Hudson’s
Building and Engineering Contracts
11
ed para 17.078 as further justification for a financial institution
not paying when default on the part of a contractor was disputed.

That passage, referred to in para 14 above, states that there would
additionally be a total failure of ‘consideration’
for
the payment. First, it should be noted that the English doctrine of
consideration is not part of our law of contract.
2
Second, Cloete JA in
Dormell
,
at para 66, demonstrated why the
reliance on that passage in
Hudson
was fallacious. The decision of the
majority in
Dormell
was clearly wrong.
[26]
It was accepted on behalf of the appellant that, in the event of such
a conclusion, the appeal should fail. The following order
is made:
The
appeal is dismissed with costs.
M
S NAVSA
ACTING
DEPUTY PRESIDENT
R PILLAY
JUDGE OF APPEAL
APPEARANCES:
FOR APPELLANTS: P Ellis SC
Instructed by: Larson Falconer Hassan
Parsee Inc, Johannesburg
Symington & de Kok, Bloemfontein
FOR RESPONDENT: E A S Ford SC
Instructed by: Bax Kaplan Inc c/o
Geo Isserow & T L Friedman Inc, Johannesburg
Lovius Block, Bloemfontein
THE
SUPREME COURT OF APPEAL
REPUBLIC
OF SOUTH AFRICA
MEDIA
SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL
From:
The Registrar, Supreme Court of Appeal
Date:
02 December 2013
Status:
Immediate
Please note that the
media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme
Court of Appeal.
Coface South Africa
Insurance Co Ltd v East London Own Haven t/a Own Haven Housing
Association
The Supreme Court of
Appeal today dismissed an appeal by Coface South Africa Insurance Co
Ltd. against the judgment of the South
Gauteng High Court,
Johannesburg. Coface had executed a construction guarantee in favour
of the respondent, East London Own Haven
pursuant to a construction
contract it had entered into with Construct Construction (Pty) Ltd.
The construction contract
was cancelled by the respondent which then called up the construction
guarantee. Coface refused to honor
it claiming that the cancellation
was not the result of the default of the contractor but that of the
respondent.
The court held that the
construction guarantee which had to be honored save in cases where it
has been established that the claim
thereon was tainted by fraud on
the part of the claimant, in this case the respondent. It was
completely independent of any dispute
that might exist in terms of
the principle construction contract and consequently found that
Coface was liable to make payment
to the respondent.
1
Minister
of Transport and Public Works, Western Cape v Zanbuild Construction
(Pty) Ltd
2011 (5) SA 528
(SCA), para 13.
2
Conradie
v Rossouw
1919 AD 279
and R H Christie & G B Bradfield
Christie’s The
Law of Contract n
South Africa
6
ed (2011) at 8 to 10.