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[2010] ZASCA 15
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Kwikspace Modular Buildings Ltd v Sabodala Mining Company Sarl and Another (173/09) [2010] ZASCA 15; [2010] 3 All SA 467 (SCA) ; 2010 (6) SA 477 (SCA) (18 March 2010)
Links to summary
THE
SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH
AFRICA
JUDGMENT
Case No: 173/09
In
the matter between
KWIKSPACE
MODULAR BUILDINGS LIMITED
Appellant
and
SABODALA
MINING COMPANY SARL
First
Respondent
NEDBANK
LIMITED
Second Respondent
Neutral citation:
Kwikspace
Modular Buildings v Sabodala Mining Company
(173/09)
[2010] ZASCA 15
(18 March 2010).
Coram:
CLOETE,
LEWIS, SHONGWE JJA, GRIESEL
et THERON AJJA
Heard:
23 February 2010
Delivered:
18 March 2010
Summary:
Building contracts;
performance guarantees; whether a building contractor can rely on a
term of the building contract to interdict
the other contracting
party from presenting unconditional performance guarantees to the
issuing bank.
______________________________________________________________
ORDER
______________________________________________________________
On appeal from:
South Gauteng
High Court (Johannesburg) (Victor J sitting
as court of first instance):
The appeal is dismissed, with costs.
______________________________________________________________
JUDGMENT
______________________________________________________________
CLOETE JA (LEWIS, SHONGWE JJA, GRIESEL
et
THERON AJJA concurring):
[1] The present appeal concerns the right of a building
contractor to interdict the other party with whom it contracted for
the performance
of the building works, from presenting a performance
guarantee unconditional in its terms and furnished by a financial
institution
to the other party.
[2] On or about 30 December 2006 Kwikspace Modular
Buildings Ltd, a South African company which is the appellant in
these proceedings
and to which I shall refer as the Contractor,
entered into a written contract with Sabodala Mining Company SARL, a
company incorporated
in terms of the laws of Senegal which is the
first respondent in these proceedings and to which (taking my cue
from the contract
between the parties) I shall refer as the
Principal. The contract was for the supply and installation of an
accommodation village
at the Sabodala Gold Project Site in Senegal.
The contract documents comprised a formal instrument of agreement;
the special conditions
of contract (SCs) and Appendix A thereto (the
site specific conditions); the general conditions of contract (GCs),
being the Australian
Standard General Conditions of Contract AS 2124
â 1992, and annexures thereto; the contract schedules; the contract
specification
(Scope of Work); appendices, and drawings (to take
precedence in that order). GC 23 provided that the Principal was
obliged to ensure
that at all times there was a Superintendent and GC
24 made provision for the appointment by the Superintendent of
representatives
to exercise any of the functions of the
Superintendent under the contract. Annexure A to the GCs provided
that the law applicable
to the contract would be that of the State of
Western Australia.
[3] The appeal turns on the interrelationship of GC 5
and the guarantees provided pursuant thereto. It is necessary to
quote extensively
from both. GC 5 dealt with security, retention
moneys and performance undertakings. It provided inter alia (amended
as aforesaid)
as follows:
'5.1
Purpose
Security, retention moneys and
performance undertakings are for the purpose of ensuring the due and
proper performance of the Contract.
. . .
5.3 FORM OF SECURITY
The security shall be in the
form of cash or an approved unconditional irrevocable undertaking
given by an approved financial institution.
The costs (including
stamp duty and other taxes) of and incidental to the provision of the
security shall be borne by the party providing
the security.
The party having the benefit of
the security shall have the discretion to approve or disapprove the
form of an unconditional undertaking
from the financial institution
giving the undertaking. The form of unconditional undertaking
attached as Attachment 1 to the General
Conditions of Contract is
approved.
. . .
5.5
Recourse
to Retention Moneys and Conversion of Security
A party may have recourse to
retention moneys and/or cash security and/or may convert into money
security that does not consist of
money where â
(a) the party has become
entitled to exercise a right under the Contract in respect of the
retention moneys and/or security; and
(b) the party has given the
other party notice in writing for the period stated in the Annexure
[which was two days] of the party's
intention to have recourse to the
retention moneys and/or cash security and/or to convert the security;
and
(c) the period stated in the
Annexure [two days] has or have elapsed since the notice was given.'
[4] Two performance guarantees, each in identical terms
(save for their numbers and that one was dated 28 March 2007 and the
other,
2 April 2007) and each for a maximum amount of R2 651 254,
were issued by Nedbank Ltd, a well-known South African bank
(which
was cited as the second respondent in this appeal and in the court
below, but which took no part in the proceedings in either
court).
The undertaking attached to the GCs was not used. In terms of the
guarantees issued the Bank bound itself to the Principal
for the due
performance by the Contractor of all the Contractor's obligations in
terms of the contract:
'and for the payment of all
damages or other amount including interest due by the Contractor to
the Principal whether in terms of
the contract or consequent upon
determination thereof, and also all charges and expenses of
whatsoever nature, including, but without
derogating from the
generality of the aforesaid attorney and client legal costs incurred
by the Principal in endeavouring to secure
fulfilment of the
obligations.'
There were 13 further clauses in the performance
guarantees of which the following are relevant for present purposes:
'2. The Principal shall have the
absolute right to arrange his affairs with the Contractor in any
manner he deems fit and without
advising the Bank, and the Bank shall
not have the right to claim release on account of conduct alleged to
be prejudicial to the
Bank. Without derogation from the generality of
the foregoing, no compromise, extension of time, indulgence, release,
waiver of security,
release of co-sureties or variation of the
Contractor's obligation shall, in any manner, affect the Bank's
liability under this guarantee.
3. The Bank undertakes to be
bound to effect payment of the above-mentioned amount, or any lesser
portion thereof, to the Principal
upon receipt by the Bank at the
abovestated address of the Principal's first written demand that the
Contractor has committed a breach
of the contract and/or has
defaulted thereunder and/or has been provisionally or finally
sequestrated or liquidated or placed under
judicial management.
4. The Bank shall be bound by
any admission of liability by the Contractor and by an award or
judgement in arbitration proceedings
or litigation between the
Principal and the Contractor.
7. Notwithstanding anything to
the contrary contained herein, the Bank's obligations hereunder shall
be construed as principal and
not as accessory to the obligations of
the Contractor and compliance with any demand for payment received by
the Bank in terms hereof
shall not be delayed, nor shall the Bank's
obligations in terms hereof be discharged, by the fact that a dispute
may exist between
the Contractor and the Principal.
13. This guarantee shall be
governed by South African Law and subject to the jurisdiction of
South African Courts.'
[5] Various disputes arose between the parties during
the performance of the contract. Matters came to a head when on
Friday afternoon
24 October 2008 the Principal sent a notice to the
Contractor in the following terms:
'Sabodala Gold Project
CONTRACT NO. 1519/520 â
Supply & Installation of Accommodation Village
Notice of Conversion of
Security
Notice is hereby given under
clause 5.5 of the General Conditions of Contract of the Principal's
intention to convert into money the
security (Performance Guarantees
No 288/27805905 and 288/27918718) lodged by the Contractor under the
Contract.'
A request addressed on behalf of the Contractor to the
Principal's attorney for an undertaking that the guarantees would not
be presented
to the Bank prior to an urgent application for an
interdict preventing such presentation, was refused. The Contractor
then approached
the Johannesburg High Court as a matter of urgency
for such an interim interdict pending an application for a final
interdict. An
interim interdict was granted by consent by Victor J on
Monday 27 October 2008 that (apart from providing for dates for
filing of
further affidavits) interdicted the Principal 'from
presenting a first written demand for payment for any amounts in
terms of the
performance guarantees . . . and from claiming or
receiving payment from' the Bank 'in terms of the guarantees or
pursuant to the
presentation thereof' and interdicted the Bank from
making any payments to the Principal pursuant to the guarantees â
all pending
the outcome of the Contractor's application for final
relief. The final relief was refused by the same learned judge on 18
December
2008, but leave to appeal to this court was subsequently
granted by her. Makhanya J thereafter issued an interdict in the same
terms
as the interim interdict save that the relief granted was
pending the finalisation of all appeals. This appeal is against the
order
of Victor J refusing a final interdict.
[6] The argument on behalf of the Contractor before this
court involved three propositions: (1) that the underlying building
contract
between the Contractor and the Principal could, as a matter
of law, qualify the right of the Principal to present the guarantees
for payment to the Bank, despite the unconditional wording of the
guarantees; (2) that the building contract did indeed contain such
a
qualification, in particular, in GC 5.5(a); and (3) that GC 5.5
contained a tacit term so that GC 5.5(b) should be read as follows:
'The party has given the other
party notice in writing for the period stated in the annexure [two
days] of the party's intention to
have recourse to the retention
moneys and/or cash security and/or to convert the security,
setting
out the grounds on which the demand will be made
.'
[7] Counsel on both sides were content to submit that
there is a presumption
1
that the law of a foreign State is, in the absence of evidence to the
contrary, presumed to be the same as the law of South Africa.
2
But as I believe the law in Australia on the points in issue in this
appeal can be ascertained readily and with sufficient certainty,
as
contemplated in
s 1(1)
of the
Law of Evidence Amendment
Act 45 of 1988
,
3
I propose applying Australian law to the interpretation of the
building contract and in particular, GC 5. The High Court of
Australia
has not, so far as I have been able to ascertain, yet
pronounced on the first proposition advanced by counsel for the
Contractor.
It was left open in
Wood Hall Ltd
v Pipeline Authority & another
.
4
Gibbs J, with whom Barwick CJ and Mason J concurred, said:
5
'For the reasons I have given,
it seems to me clear that the Bank was obliged to the Authority to
make payment when demand was made.
It is unnecessary to consider
whether it would be possible to grant to the contractor any relief
against the Bank if it were established
that the making of a demand
by the Authority was a breach of its duty to the contractor, because,
for the reasons which I am about
to state, I consider that the
Authority was entitled, as between itself and the contractor, to make
the demands when it did.'
Stephen J said:
6
'Had the construction contract
itself contained some qualification upon the Authority's power to
make a demand under a performance
guarantee, the position might well
have been different. In fact the contract is silent on the matter.'
However, it seems well-established in Australian law
that the first proposition advanced on behalf of the Contractor is
correct. In
Clough Engineering Ltd (ACN 009
093 869) v Oil and Natural Gas Corporation Ltd & others
7
the Federal Court of Australia said:
'[75] The principles under which
a court will construe the terms of a bank's undertaking in a
performance guarantee, and the contract
between a contractor and an
owner, have been stated in a series of authorities over the last 30
years. The seminal decision is that
of the High Court in
Wood
Hall Ltd v Pipeline Authority
[1979] HCA 21
;
(1979) 141 CLR 443
,
24 ALR 385
(
Wood
Hall
).
[76] Reference was made in
Wood
Hall
to the
commercial purpose of the guarantees, which in that case was that
they be equivalent to cash . . .
[77] Nevertheless, the
authorities have recognised three principal exceptions to the rule
that a court will not enjoin the issuer
of a performance guarantee,
or bond, from performing its unconditional obligation to make
payment. The exceptions were succinctly
stated, with references to
relevant authorities, by Austin J in
Reed
Construction Services Pty Ltd v Kheng Seng (Aust) Pty Ltd
(1999) 15 BCL 158 at 164-5 (
Reed
):
First
â the court will enjoin the party in whose favour the performance
guarantee has been given from acting fraudulently: see, for example,
Wood Hall
per Gibbs J (at CLR
451; ALR 391-2).
As the primary judge observed at
[36] Clough does not assert that ONGC has made a fraudulent claim.
Accordingly, the first exception
has no application in the present
case.
Second
â the party in whose favour the performance bank guarantee has been
given may be enjoined from acting unconscionably in contravention
of
s 51AA
of the TPA [Trade Practices Act 1974]:
Olex
Focas Pty Ltd v Skodaexport Co Ltd
[1998] 3 VR 380
(
Olex
Focas
). On this
point, different views have been expressed about the reach of s 51AA.
The High Court has not determined which of these
views is correct:
Australian Competition
and Consumer Commission v CG Berbatis Holdings Pty Ltd
(2003) 214 CLR 51
;
197 ALR 153
;
[2003] HCA 18
at
[44]
-
[45]
(
CG
Berbatis Holdings
).
In any event, none of the categories of unconscionable conduct
recognised in
Australian
Competition and Consumer Commission v Samton Holdings Pty Ltd
(2002) 117 FCR 301
;
189 ALR 76
;
[2002] FCA 62
at
[48]
(
Samton
Holdings
) apply in
this case. Accordingly, the second exception has no application.
Third
â the most important exception for present purposes, is that, while
the court will not restrain the issuer of a performance guarantee
from acting on an unqualified promise to pay (
Reed
Construction Services
at 164 per Austin J):
. . . if the party in whose
favour the bond has been given has made a contract promising not to
call upon the bond, breach of that
contractual promise may be
enjoined on normal principles relating to the enforcement by
injunction of negative stipulations in contracts.
It may be preferable not to
describe this as an exception but rather as an over-riding rule
because it emphasises that the "primary
focus" will always
be the proper construction of the contract:
Bateman
Project Engineering Pty Ltd v Resolute Ltd
(2000) 23 WAR 493
;
[2000] WASC 284
per Owen J at [30]. Stephen J
recognised this in
Wood
Hall
at CLR
459; ALR
398-9
by observing that the provisions of the contract may qualify
the right to call on the undertaking contained in a performance
guarantee.
[78] Numerous authorities have
accepted the third proposition. Many were referred to in
Reed
at 165. Others include
Fletcher
Construction
at
826-7;
8
Bachman Pty Ltd v BHP
Power New Zealand Ltd
[1999] 1 VR 420
;
[1998] VSCA 40
at
[28]
(
Bachmann
);
Baulderstone
Hornibrook Pty Ltd v Qantas Airways Ltd
[2000] FCA 672
at
[10]
;
Rejan
Constructions Pty Ltd v Manningham Medical Centre Pty Ltd
[2002] VSC 579
at
[37]
.'
[8] In
Bachmann (Pty) Ltd v BHP
Power New Zealand Ltd
9
the Supreme Court of Victoria Court of Appeal dealt with a building
contract that contained a GC 5.5
10
in very similar terms to the contract which is the subject of this
appeal, and two letters of credit issued to the party who corresponds
to the Principal in this appeal. Brooking JA (with whom Tadgell and
Ormiston JJA concurred) said:
'28. It is plain that clause 5.5
of the general conditions of the contract before us is an express,
albeit qualified, contractual
prohibition on the conversion of a
security into cash. It is also plain that it is competent to the
holder of a security provided
by the other contracting party to
promise as part of the contract under which the security is provided
â the underlying contract
â not to do some act in relation to the
security except in a certain event. Such a contractual promise is
efficacious, not in the
sense, when the security is constituted by
the obligation of a third person, that the third person can rely by
way of defence as
against the security-holder on a term of the
underlying contract, to which he was not a party, but in the sense
that relief can be
afforded to the person who procured the security
in an action brought against the security-holder on the promise
contained in the
underlying contract. No principle or rule of law
would deny that a promise forming part of the underlying contract is
in this sense
efficacious, and the cases recognise this:
Wood
Hall Ltd v Pipeline Authority
[1979] HCA 21
;
(1979) 141 CLR 443
at 452-4 per Gibbs J (with whom
Mason J agreed) and at 459 per Stephen J; the
Pearson
Bridge
case;
11
Washington
Constructions Company Pty Ltd v Westpac Banking Corporation
(1983) Qd.R. 179
;
Hortico
(Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd
(1985) 1 NSWLR 545
AT 554;
Tenore
Pty Ltd v Roleystone Pty Ltd
(unreported, Supreme Court of New South Wales, Giles J 14 September
1990, at p 31);
J H
Evins Industries (N.T.) Pty Ltd v Diano Nominees Pty Ltd
(unreported, Supreme Court of the Northern Territory, Kearney J, 30
January 1989);
Hughes
Bros Pty Ltd v Telede Pty Ltd
(1989) 7 Building and Construction Law 210;
Barclay
Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd
(1991) 23 NSWLR 451
at 457;
Malaysia
Hotel (Aust) Pty Ltd v Sabemo Pty Ltd
(1993) 11 Building and Construction Law 50; the
Fletcher
Construction
case.
12
29. I do not overlook the
critical distinction between the effect of the underlying contract as
between the parties to it and its
effect (if any) as between the
holder of the security and the third person whose obligation
constitutes the security. One can for
brevity speak of a contractual
qualification upon the owner's powers in relation to the security
where the underlying agreement between
the owner and the contractor
or supplier contains a term which restricts the exercise of those
powers in some way.
30. In the present case the
supplier, in trying to stop the purchaser demanding payment under the
letter of credit, did not try to
make any case of fraud on the
purchaser's part: it relied solely on the contractual qualification
upon the purchaser's powers constituted
by clause 5.5 of the general
conditions. The present case appears to be novel so far as this
country is concerned, in that it is
clear, and is conceded, that
clause 5.5 does constitute a contractual qualification on the
purchaser's powers in relation to the
security. In all the other
Australian cases of which I am aware, the initial question was
whether the underlying contract, on its
proper construction, did
contain a qualification on the owner's powers as regards the
security. In particular, the question arose
in other cases whether a
stipulation not negative in form was negative in substance, in that
it laid down the only circumstances
in which something might be done.
See: the
Pearson
Bridge
case;
Selvas
Pty Ltd v Hansen & Yuncken (SA) Pty Ltd
(1987) 6 Aust. Const. L.R. 36; the
Barclay
Mowlem
case;
J
H Evins Industries (N.T.) Pty Ltd v Diano Nominees Pty Ltd
;
Hughes Bros Pty Ltd v
Telede Pty Ltd
; the
Fletcher Construction
case. But the present stipulation is negative in form; there is
undoubtedly a contractual qualification on the purchaser's powers
in
relation to the security; the only question is that of the content of
the qualification. This is the point of this appeal.'
[9] In
Fletcher Construction
Australia Ltd v Varnsdorf Pty Ltd
13
Callaway JA, in a concurring judgment in the Supreme Court of
Victoria Court of Appeal, said:
'In
Group
Josi Re v Walbrook Insurance Co Ltd
[1996] 1 WLR 1152
at 1161-2 Staughton L J said that the effect on the
lifeblood of commerce is precisely the same whether the guarantor,
typically
a bank, is restrained from paying or the beneficiary is
restrained from asking for payment. There is nevertheless an
important difference
between restraining a bank from honouring a
guarantee and restraining the beneficiary from calling upon it. In
the former case the
moving party seeks to prevent the bank from
performing its contract; in the latter case the moving party seeks to
prevent the beneficiary
from breaching a provision of the underlying
contract. A moment's reflection will show that the beneficiary,
unlike the bank, may
be restrained if there is an express prohibition
in the underlying contract against calling upon the guarantee. In
theory an implicit
or implied prohibition is just as good. The
practical problem is that it is much harder to establish. That is not
because of a requirement
that an implicit or implied prohibition
against calling upon a guarantee must be clear. It is because the
implication cannot be made
if it would stultify, or even if it would
be inconsistent with, the purpose for which the guarantee was taken.'
[10] Other cases to the same effect as the three from
which I have quoted are collected in
Ewing
International LP v Ausbulk Ltd
2008 WL
353205,
[2008] SASC 25
, a decision of Layton J given in the Supreme
Court of South Australia on 8 February 2008.
[11] It therefore seems to me that it can be said with
sufficient certainty that Australian law is to the following effect:
a building
contractor may, without alleging fraud, restrain the
person with whom he had covenanted for the performance of the work,
from presenting
to the issuer a performance guarantee unconditional
in its terms and issued pursuant to the building contract, if the
Contractor
can show that the other party to the building contract
would breach a term of the building contract by doing so; but the
terms of
the building contract should not readily be interpreted as
conferring such a right.
[12] I expressly refrain from considering whether, in
view of the decision of this court in
Loomcraft
Fabrics CC v Nedbank Ltd & another
14
(which dealt with a letter of credit) and the English decisions
referred to therein, in particular the decision of the English Court
of Appeal in
Edward Owen Engineering Ltd v
Barclays Bank International Ltd
15
(where Lord Denning MR
16
and Browne LJ
17
both said that a performance guarantee is akin to a letter of
credit), there is any room for a contention that the position in
South
Africa should be the same as in Australia. So far as Australian
law is concerned, English authority to the contrary notwithstanding,
the Federal Court of Australia held as recently as 2008 in
Clough
Engineering
:
18
'[81] In determining whether the
underlying contract confers an unfettered right to call upon the
performance guarantee, the importance
of such instruments in the
construction industry, both nationally and internationally, is a
factor which bears upon the question
of construction of the contract.
A number of authorities support this proposition:
(1) In
Wood
Hall
at CLR
457-8;
ALR 396-7
, Stephen J referred to English authority which described
the performance guarantee as standing on a similar footing to a
letter of
credit.
(2) In the passage from the
judgment of Callaway JA in
Fletcher
Construction
at 827
quoted above, his Honour emphasised the importance of commercial
practice in construing the contract. The reference in the
judgment of
Charles JA at 822 to the passage from Hudson's Building and
Engineering Contracts, is to similar effect.
(3) In
Bachmann
,
Brooking JA referred at [51] to the practice in the United States. He
said that the generally accepted view in that country is that
standby
letters of credit (and hence, performance guarantees) are intended by
the parties to the underlying contract to require the
supplier or
contractor to:
[51] ... stand out of the amount
of the credit in favour of the buyer pending resolution of the
underlying dispute.
(4) This approach is supported
by the observations of Hobhouse LJ in
Toomey
v Eagle Star Insurance Co Ltd
[1994] 1 Lloyd's Law Rep 516 at 520, that parties to a commercial
contract are to be taken to have contracted against a background
which includes the earlier authorities on the construction of similar
contracts.
[82] Notwithstanding the
importance of commercial practice, the statements in these
authorities do not suggest that the court should
depart from the task
of construing the terms of the contract in each case. What the
authorities emphasise is that the commercial
background informs the
construction of the contract . . . .'
[13] The next question is whether the Contractor is
correct in asserting that GC 5.5 in fact qualified the Principal's
right to present
the guarantees. The Contractor submitted that the
clause required that an actual enforceable right be vested in the
Principal before
it would be entitled to present the guarantees for
payment, and that it was not sufficient for the Principal to assert
that it bona
fide believed that it did have such a right; and
accordingly, the right could only be enforced, if it were disputed,
once the dispute
had been finally settled by arbitration or a court.
This contention is wrong in fact and in Australian law. As a matter
of law, it
is contrary to the decisions in
Clough
Engineering
,
19
Fletcher Construction
20
and
Bachmann
.
21
In
Bachmann
the court
held
22
(in respect of general conditions indistinguishable in their terms
from GC 5.5 and GC 42.11 in the contract at issue in this appeal):
'53. In the present case the
matters of conversion of and recourse to the security are dealt with
by two general conditions, which
should if possible be construed so
as to work in harmony. Clause 5.5
23
prohibits conversion into money until the purchaser becomes entitled
to exercise a right under the contract in respect of the security.
Clause 22.4
24
entitles the purchaser to deduct from moneys otherwise due to the
supplier any moneys due from the supplier to the purchaser and,
if
those moneys are insufficient, entitles the purchaser to have
recourse to the security. Like clause 3.13(b) in
Fletcher
,
it confers a right of recourse against the security to obtain the
balance if the exercise of the right of set-off which it also
confers
leaves a balance outstanding in favour of the purchaser. It would, as
Charles JA said in
Fletcher
,
be strange if the clauses concerned in that case and this â clause
3.13(b) and clause 22.4 â conferred the practical right of
recourse
only where moneys were "due" from the supplier to the
purchaser in some such sense as actually or indisputably
due. I would
treat clauses 5.5 and 22.4 of the present contract, read in
conjunction, as entitling the purchaser, as between itself
and the
supplier, to have recourse to the security where according to a bona
fide claim made by the purchaser moneys are due to it
from the
supplier which exceed any moneys due from it to the supplier.
54. The fact that one of the
forms of security recognised by clause 5.3, when regard is had to the
approved undertaking which is attached,
is cast in the now familiar
form of an unconditional promise to pay on demand without reference
to the supplier and notwithstanding
any notice by it not to pay
supports the view that the parties contemplated that it was the
supplier who should be out of pocket
pending the resolution of any
dispute.'
The cases to which I have just referred, although they
come to the same conclusion, are not harmonious in their reasoning. I
therefore
propose dealing with the Contractor's contention on the
facts. In order to explain why the Contractor cannot succeed on the
facts
either, it is necessary to examine several provisions in the
GCs.
[14] GC 42 deals with certificates and payments. GC 42.1
begins:
'
Payment
claims, certificates, calculations and time for payment
At the times for payment claims
stated in the Annexure and upon issue of a Certificate of Practical
Completion and within the time
prescribed by Clause 42.7, the
Contractor shall deliver to the Superintendent claims for payment
supported by evidence of the amount
due to the Contractor and such
information as the Superintendent may reasonably require. Claims for
payment shall include the value
of work carried out by the Contractor
in the performance of the Contract to that time together with all
amounts then due to the Contractor
arising out of or in connection
with the Contractor or for any alleged breach thereof.
Within 14 days after receipt of
a claim for payment, the Superintendent shall issue to the Principal
and to the Contractor a payment
certificate stating the amount of the
payment which, in the opinion of the Superintendent, is to be made by
the Principal to the
Contractor or by the Contractor to the
Principal. The Superintendent shall set out in the certificate the
calculations employed to
arrive at the amount and, if the amount is
more or less than the amount claimed by the Contractor, the reasons
for the difference.
The Superintendent shall allow in any payment
certificate issued pursuant to this Clause 42.1 or any Final
Certificate issued pursuant
to Clause 42.8 or a Certificate issued
pursuant to Clause 44.6 [adjustment on completion of the work taken
out of the hands of the
Contractor], amounts paid under the Contract
and amounts otherwise due from the Principal to the Contractor and/or
due from the Contractor
to the Principal arising out of or in
connection with the Contract including but not limited to any amount
due or to be credited
under any provision of the Contract.
If the Contractor fails to make
a claim for payment under Clause 42.1, the Superintendent may
nevertheless issue a payment certificate.
Subject to the provisions of the
Contract, within 28 days after receipt by the Superintendent of a
claim for payment or within 14
days of issue by the Superintendent of
the Superintendent's payment certificate, whichever is the earlier,
the Principal shall pay
to the Contractor or the Contractor shall pay
to the Principal, as the case may be, an amount not less than the
amount shown in the
Certificate as due to the Contractor or to the
Principal as the case may be, or if no payment certificate has been
issued, the Principal
shall pay the amount of the Contractor's claim.
A payment made pursuant to this Clause shall not prejudice the right
of either party
to dispute under Clause 47 [the dispute resolution
clause] whether the amount so paid is the amount properly due and
payable and
on determination (whether under Clause 47 or as otherwise
agreed) of the amount so properly due and payable, the Principal or
Contractor,
as the case may be, shall be liable to pay the difference
between the amount of such payment and the amount so properly due and
payable.
. . .'
GC 42.11 provides:
'Recourse for Unpaid Moneys
Where, within the time provided
by the Contract, a party fails to pay the other party an amount due
and payable under the Contract,
the other party may, subject to
Clause 5.5, have recourse to retention moneys, if any, and, if those
moneys are insufficient, then
to security under the Contract and any
deficiency remaining may be recovered by the other party as a debt
due and payable.'
GC 47.1 provides inter alia:
'Notwithstanding the existence
of a dispute, the Principal and the Contractor shall continue to
perform the Contract, and subject
to Clause 44 [default or insolvency
of either party], the Contractor shall continue with the work under
the Contract and the Principal
and the Contractor shall continue to
comply with Clause 42.1.'
[15] The Superintendent on 3 October 2008 issued a
certificate, certificate 10, which was in part based on variations 17
to 20 ordered
by him (which the Contractor's counsel accepted in oral
argument had been competently ordered)
25
and the amount certified in this regard considerably exceeded the
total amount of the guarantees. No part of the amount certified
has
been paid. Accordingly, unless the Contractor can advance some valid
reason for not doing so, the Principal would (in the words
of GC 5.5)
have 'become entitled to exercise a right under the contract in
respect of the . . . security', the right being that envisaged
in GC
42.11 to 'have recourse to . . . security under the contract' (the
guarantees) because the Contractor 'failed to pay . . .
an amount due
and payable under the contract', in terms of GC 42.1; and the
existence of a dispute is not a valid reason because
of the
provisions of GC 47.1.
[16] Several reasons were advanced in argument as to why
the Contractor was not obliged to make any payment under certificate
10.
The first was that the person who issued it, Mr Patterson, was
not the Superintendent's representative at the time he did so. That
argument is not open to the Contractor because the allegation by the
Principal in the answering affidavit filed on its behalf and
deposed
to by Patterson, that the latter was indeed the Superintendent's
representative at all material times, was not disputed by
the
Contractor in its replying affidavit;
26
and lack of authority of an agent must be specifically alleged:
Durbach v Fairway Hotel Ltd
.
27
[17] The second argument was that it would be improper
for the Contractor to rely on certificate 10 because it did not
contain a valuation
of the works performed subsequent to the previous
certificate. Reliance was placed on GC 23 which provides inter alia:
'The Principal shall ensure that
at all times there is a Superintendent and that in the exercise of
the functions of the Superintendent
under the Contract, the
Superintendent â
(a) acts honestly and fairly;
. . .
(c) arrives at a reasonable
measure or value of work, quantities or time.'
The short answer to this argument is that after the
previous certificate had been issued, the Contractor made no claim
for payment
as required by the first paragraph of GC 42.1 (quoted in
para 14 above) and the Superintendent was accordingly not obliged to
value
the work.
[18] The final submission on this point was that
reliance on the certificate would be fraudulent. As appears from the
quotation in
para 7 above from para 77 of the judgment of the Federal
Court of Australia in
Clough Engineering
,
fraud (in the sense of lack of good faith) is a recognised exception
in Australia (as it is in other countries)
28
to the rule that a court will not enjoin the issuer of a performance
guarantee (in this case, Nedbank) from performing its unconditional
obligation to make payment. But it would not be fraud for the
Principal to present the guarantees based on the Contractor's failure
to pay certificate 10, which the Superintendent validly and properly
issued (at least in regard to variations 17 to 20), when the
Principal knows that the Contractor might or even did have other
claims that would have reduced the amount payable under the
certificate
had they been made, but which the Contractor had not
advanced to the Superintendent, which had accordingly not been
certified and
which were therefore not due for payment. The Principal
was fully entitled to rely on the indebtedness created in its favour
by certificate
10 and to look to the guarantees when this debt was
not paid. In other words, it has not been demonstrated that the
Principal would
be acting in bad faith were it to present the
guarantees for payment.
[19] I accordingly find that the Contractor has no
defence to its failure to pay at least that part of certificate 10
which depends
upon variations orders 17 to 20, and that its failure
to pay entitles the Principal to present the guarantees for payment â
unless
the notice it gave the Contractor in terms of GC 5.5 was
invalid because there was a tacit term of the nature for which it
contended,
the question to which I now turn.
[20] I see no good reason for incorporating the tacit
term for which the Contractor contends (set out in para 6 above),
that would
require the Principal to furnish to the Contractor its
grounds for converting the guarantee into cash. First, to do so would
run
contrary to the position adopted in the last part of the passage
quoted in para 9 above from the judgment of Callaway JA in
Fletcher
Construction
. Second, the term is not
necessary to give the contract business efficacy. The law in this
regard was succinctly stated by the High
Court of Australia in
Con-Stan Industries of Australia Pty Ltd v
Norwich Winterthur Insurance (Australia) Ltd, Elastic Rail Spike Co
(Aust) Pty Ltd v Norwich
Winterthur Insurance (Australia) Ltd.
29
In that matter the court rejected the
argument that terms for which one of the parties contended were
incorporated into the contract
by custom or usage, and then dealt
with the argument that similar terms should be implied to give
business efficacy to the contract.
The court said in this latter
regard:
'The appellant suggested that an
alternative basis on which to imply terms of the kind just described
is that they are necessary to
give business efficacy to the contract.
For this argument to succeed, the term sought to be implied must be
necessary to make the
contract work and must be so obvious that it
goes without saying:
The
Moorcock
(1889) 14 PD
64
at 68;
Shirlaw v
Southern Foundries (1926) Ltd
[1939] 2 KB 206
at 227;
Reigate
v Union Manufacturing Co (Ramsbottom)
[1918] 1 KB 592
at 605;
BP
Refinery Pty Ltd v Hastings Shire Council
(1977) 52 ALJR 20
at 26;
16 ALR 363
at 376;
Secured
Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd
[1979] HCA 51
;
(1979) 26 ALR 567
;
144 CLR 596
at 605-6;
Codelfa
Construction Pty Ltd v State Rail Authority of NSW
[1982] HCA 24
;
(1982) 41 ALR 367
;
149 CLR 337
at 354, 404.
Neither of the implied terms
alternatively urged by the appellant satisfy these requirements.
Neither term is so obvious that both
the insurer and the assured
would clearly have agreed to its inclusion in the contract of
insurance had they directed their minds
to it at the time they
concluded their bargain. This will commonly be the situation where
the term sought to be implied is adverse
to the interests of one of
the parties, as they are adverse to the interests of the insurer
here. An implication which may be regarded
as obvious to one party
may not be so regarded by the party detrimentally affected:
Scanlan's
New Neon Ltd v Tooheys Ltd
[1943] HCA 43
;
(1943) 67 CLR 169
at 197; Treitel:
The
Law of Contract
(1983) 6
th
ed, at 159. Unless it can be said that both parties would have
consented to its inclusion, a term cannot be implied.'
30
In the present appeal it may be convenient to include
the term for which the Contractor contends; but it is not necessary
to do so.
If a contractor really was unaware of the basis on which
the principal would rely to present the guarantee and the contractor
was
of the view that there could not be any valid basis, it could
swear an affidavit to this effect â and, absent an undertaking by
the principal, it could obtain an interim interdict to prevent
presentation of the guarantee pending determination of the
application.
The principal's case would then have to be made out in
its answering affidavit to which the contractor would be able to
reply. This
may necessitate an application by the principal for leave
to file a fourth set of affidavits. But it is not unusual for a party
to
be unaware of the details of the case of its adversary. In an
application to restrain publication of a defamatory article, the
applicant
will seldom be able to attach a copy of what a newspaper
intends publishing. In applications for the enforcement of a
restraint of
trade, the applicant is not obliged to set out in its
founding affidavit the reason why it contends the restraint is
necessary for
its protection. And certainly at least before the
advent of the Prevention of Illegal Eviction from and Unlawful
Occupation of Land
Act 19 of 1998 when an owner brought a
rei
vindicatio
, it was not obliged to say why it
alleged that the defendant/respondent was in unlawful occupation of
its property. Therefore although
the term sought to be incorporated
would lead to efficiency in litigation, it is not essential and it is
therefore not necessary
to provide business efficacy to the contract.
[21] And finally on this point, the term is not so
obvious that both the Contractor and the Principal would clearly have
agreed to
its inclusion in the contract had they directed their minds
to it at the time that the contract was concluded. All that the
purchaser
was obliged to inform the issuing Bank was that 'the
Contractor has committed a breach of the contract and/or has
defaulted thereunder'
(or has been declared insolvent or put under
judicial management). It is not obvious at all that the Principal
would have agreed
to the inclusion of a term in the building contract
requiring it to give sufficient details to the Contractor of the
basis on which
it intended presenting the guarantee, to enable the
Contractor to challenge that basis before the guarantee was presented
â which
is the ambit of the tacit term for which counsel for the
Contractor contended. Nor is it necessary for the term to be included
so
as to enable the Contractor to remedy its breach (the alternative
reason relied upon for including the term) both because two days
is
manifestly too short a time for this purpose and because the term
would be irreconcilable with GC 5.5(a).
[22] To sum up: as a matter of law in Australia, a
building contract can contain provisions enforceable at the suit of
the contractor
which amount to preconditions to, and therefore limit,
the right of the beneficiary of an unqualified performance guarantee
to present
it to the issuer. But even assuming in favour of the
Contractor in this case that GC 5.5 requires the Principal to have an
enforceable
right under the contract before it is entitled to present
the guarantees issued by Nedbank, it had such a right which it was
entitled
to assert; and no tacit term is to be incorporated into GC
5.5 obliging the Principal, in its notice to the Contractor required
by
that clause, to set out the grounds on which the demand will be
made.
[23] The appeal is dismissed, with costs.
_______________
T D CLOETE
JUDGE OF APPEAL
A
PPEARANCES:
APPELLANTS: P H J van Vuuren
Instructed by Honey Attorneys, Johannesburg;
Honey Attorneys, Bloemfontein
FIRST RESPONDENT: A J Daniels
Instructed by Routledge Modise t/a Eversheds,
Johannesburg;
Lovius Block, Bloemfontein
1
See the authorities collected in
Harnischfeger
Corporation & another v Appleton & another
1993 (4) SA 479
(W) at 486A-D.
2
This view is challenged in
The
South African Law of Evidence
by D T
Zeffertt, A P Paizes and A Skeen (2003) p 313; and see also Kahn
(1970) 87 SALJ 145.
3
'Any court may take judicial notice of the law of
a foreign state . . . so far as such law can be ascertained readily
and with sufficient
certainty . . . .'
4
[1979] HCA 21
;
24 ALR 385.
5
At 393 lines 1 to 8.
6
At 398 lines 18 to 23.
7
[2008] FCAFC 136
;
249 ALR 458.
8
Fletcher Construction Australia Ltd v
Varnsdorp Pty Ltd
1998 3 VR 812.
9
[1998] VSCA 40
(11 September 1998).
10
Quoted in n 23 below.
11
Pearson Bridge (NSW) (Pty) Ltd v State Rail Authority of New
South Wales
(1982) Aust Const LR 81.
12
Above, n 8.
13
Above, n 8.
14
[1995] ZASCA 127
;
1996 (1) SA 812
(A), and see also
Lombard
Insurance Co Ltd v Landmark Holdings (Pty) Ltd & others
2010 (2) SA 86
(SCA) especially para 20.
15
[1978] QB 159
;
[1978] 1 All ER 976
(CA).
16
At 171A-B (QB); 983b-c (All ER).
17
At 172F (Ch); 984d-e (All ER).
18
Above, n 7.
19
Above, n 7 paras 85-112.
20
Above, n 8 para 53.
21
Above, n 9 particularly in the judgments of
Charles JA and Callaway JA.
22
In paras 53 and 54.
23
'A party shall not convert into money security
that does not consist of money until the party becomes entitled to
exercise a right
under the Contract in respect of the security.' Cf
GC 5.5 in para 3 above.
24
'
The Purchaser may deduct from monies otherwise
due to the Supplier any monies due from the Supplier to the
Purchaser and if those
monies are insufficient, the Purchaser can
have recourse to the security under the Contract.' Cf GC 42.11
quoted in para 14 below.
25
I do not seek to imply that there was anything
wrong with the remainder of the certificate which dealt with
liquidated damages arising
from the Contractor's failure to reach
practical completion by the required (extended) date; it is simply
unnecessary to have regard
thereto, or the disputes that have arisen
in this regard, for the purposes of the appeal.
26
Transnet Ltd v Rubenstein
2006 (1) SA 591
(SCA) para 28.
27
1949 (3) SA 1081
(SR) at 1082.
28
See
Loomcraft
Fabrics
, above n 14, at 823C-D for the
position in South Africa and
Team
Telecom International Ltd & another v Hutchinson 3G UK Ltd
[2003] 1 All ER (Comm) 914
,
[2003] EWHC 762
(TCC) paras 29â37 for
the position in England and Singapore. It is not necessary for the
purposes of this appeal to consider
other exceptions.
29
[1986] HCA 14
;
64 ALR 481
at p 489.
30
See also
Codelfa
Construction (Pty) Ltd v State Rail Authority of New South Wales
[1982] HCA 24
;
41 ALR 367
, a decision of the High Court of Australia, at 370-1 (per
Mason J); 392-3 (per Aickin J) and 417-8 (per Brennan J).