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[2011] ZASCA 10
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Minister of Transport and Public Works, Western Cape and Another v Zanbuild Construction (Pty) Ltd and Another (68/2010) [2011] ZASCA 10; 2011 (5) SA 528 (SCA) (11 March 2011)
Links to summary
THE SUPREME COURT OF
APPEAL OF SOUTH AFRICA
JUDGMENT
Case No: 68/2010
In
the matter between:
THE
MINISTER OF TRANSPORT AND PUBLIC
WORKS:
PROVINCIAL GOVERNMENT OF THE
WESTERN
CAPE
…........................................................................
FIRST
APPELLANT
THE
HEAD OF THE DEPARTMENT OF
TRANSPORT
AND PUBLIC WORKS:
PROVINCIAL
GOVERNMENT OF THE
WESTERN
CAPE
…...................................................................
SECOND
APPELLANT
v
ZANBUILD CONSTRUCTION
(PTY) LTD
…...............................
FIRST
RESPONDENT `
ABSA BANK LIMITED
…........................................................
SECOND
RESPONDENT
Neutral
citation:
Minister of Transport and Public Works, Western Cape
v Zanbuild Construction
(68/2010)
[2011] ZASCA 10
(11 March 2011)
Coram:
Brand,
Nugent, Lewis, Maya and Bosielo JJA
Heard:
17 February 2011
Delivered:
11 March 2011
Summary:
Interpretation of construction guarantee – whether liability of
guarantor is limited to the contractor’s liability
under the
construction contract – or whether it is for the full amount of
the guarantee on demand by the employer.
________________________________________________________________
ORDER
________________________________________________________________
On appeal from:
Western Cape High Court (Cape Town) (Louw J sitting as court of first
instance.)
The appeal is dismissed
with costs.
________________________________________________________________
JUDGMENT
________________________________________________________________
BRAND JA
(Nugent,
Lewis, Maya and Bosielo JJA concurring):
[1] The outcome of this
appeal turns on the interpretation of two construction guarantees
that are identical in their material terms.
The guarantees were
issued by the second respondent, Absa Bank Ltd (Absa) in favour of
the Western Cape Department of Transport
and Public Works (the
department), for which the two appellants hold responsibility. They
were issued at the behest of the first
respondent, Zanbuild
Construction (Pty) Ltd (Zanbuild). Though Absa was joined as a party,
both in the court of first instance
and on appeal, it abides the
decision of this court as it did in the court a quo.
[2] On 26 September 2008
the department demanded payment from Absa under the guarantees. When
this demand came to the notice of
Zanbuild, it approached the Western
Cape High Court for an order, essentially interdicting the department
from seeking –
and Absa from making – payment under the
guarantees. The matter came before Louw J who granted the interdict
sought. Subsequently,
he afforded the appellants leave to appeal to
this Court against that order.
[3] The guarantees were
issued with reference to two separate construction contracts entered
into between the department and Zanbuild
at the end of January 2007.
As in the case of the guarantees themselves, these contracts (the
construction contracts) were also
identical in their material
provisions. In terms of the construction contracts, Zanbuild
undertook to construct pathology laboratories
at the Eben Dönges
Hospital, Worcester (the Worcester project) and the TC Newman
Hospital in Paarl (the Paarl project). By
express agreement, the
construction contracts incorporated the standard terms proposed by
the Joint Building Contracts Committee
(the JBCC).
[4] Standard clause 14 of
the JBCC deals with security to be provided by the contractor. That
clause, however, is immaterial because
the department in its letters
accepting Zanbuild’s tenders for the two projects required a
guarantee in accordance with the
department’s standard
guarantee form, which is not an option provided for in clause 14. But
the department’s standard
guarantee form is also immaterial.
The guarantees issued by Absa, which gave rise to the present
dispute, were substantially different
from the department’s
standard form. Nonetheless, they were issued with the acquiescence of
Zanbuild and accepted by the
department.
[5] Each guarantee is for
an amount equal to 10 per cent of the value of the contract to which
it pertains. Thus the guarantee relating
to the Worcester project is
for R1 181 104.80, while the guarantee linked to the Paarl
project is for R1 106 500.00.
Other than this, the terms of
the two guarantees are identical. When it comes to the interpretation
of these terms I shall refer
to them in more detail. But continuation
of the present narrative requires reference to one of these terms
which reads as follows:
‘
The
bank reserves the right to withdraw the guarantee after the employer
has been given 30 (thirty) days written notice of its intention
to do
so, provided the employer shall have the right to recover from the
bank the amount owing and due to the employer by the contractor
on
the date the notice period expires.’
[6] Relying on this
provision, Absa notified the department on 28 August 2008 that it
wished to withdraw from the guarantees and
that, consequently, the
‘guarantees will be cancelled one month from the date of this
letter on 28 September 2008 whereafter
no further claims or payments
will be considered’.
[7] Two days before the
stipulated expiry date, ie on 26 September 2008, the department
responded to this notice by demanding immediate
payment of the full
amount of both guarantees. Amongst other things the letter of demand
stated that:
‘
The
contractor has defaulted on both contracts, see attached Annex “A”
but the contracts have not been cancelled yet.
In terms of your
letter of withdrawal of guarantees dated 28 August 2008, you intend
to cancel the guarantees on 28 September 2008.
The
department therefore in accordance with the terms of the guarantee
which affords us the right to recover this amount from the
bank . . .
demands payment of the guaranteed amounts.’
[8] Annex ‘A’
referred to is a letter of 4 August 2008 by the architect acting as
principal agent for the department
in terms of the construction
contracts, to Zanbuild. In essence it informed Zanbuild that:
both the department and
the principal agent were of the view that Zanbuild was in breach of
the construction contracts in that
it had failed to execute the
works ‘with due skill, diligence, regularity and expedition’;
Zanbuild was afforded a
period of ten days to remedy its breach, ‘failing which the
employer may proceed and give you notice
of cancellation’.
[9] As it happened, the
department purported to cancel the construction contracts on 9
October 2008. Zanbuild disputed that it was
entitled to do so, but
chose to accept the purported cancellation as a repudiation by the
department. The upshot is that on any
account the construction
contract came to an end before either of the projects had reached
completion.
[10] The department does
not contend that at present it has an identifiable monetary claim
under the construction contract against
Zanbuild. In this regard
clause 33 of the construction contracts provides for different
potential claims sounding in money against
the contractor. Pertinent
amongst these are penalties for late completion and claims for
expenses and loss flowing from the need
to employ an alternative
contractor. But the department does not allege that any claim of this
nature arose against Zanbuild when
the guarantees expired on 28
September 2008. In fact, the last payment certificates issued under
the construction contracts on
the eve of their termination (8 October
2008) tend to show otherwise.
[11] This brings me to
the analysis of the guarantees. According to the interpretation
contended for by Zanbuild – which found
favour with the High
Court – the guarantees are inextricably linked to the
construction contracts in a manner akin to a suretyship
agreement.
Hence, so Zanbuild argued, Absa’s liability under the guarantee
is limited to the extent that the department can
demonstrate a
monetary claim against Zanbuild under the construction contracts.
Because Absa did not even allege that it had any
claim in terms of
the construction contracts, it follows that it had no claim against
Absa under the guarantees.
[12] The contrary
interpretation contended for by the department is that the guarantees
are independent from the construction contracts
in a manner
comparable to irrevocable letters of credit issued by banks where the
obligation of the bank is wholly independent
of the underlying
contract of sale. Hence, so the department contended, the guarantees
can be invoked without any allegation or
evidence of any claim
against Zanbuild under the construction contracts. All the department
had to do to procure payment of the
full amounts guaranteed was to
submit a statement to Absa that Zanbuild was in default in terms of
the construction contracts.
[13]
In the parlance of the English authorities
1
the dispute can be usefully
paraphrased as being whether the guarantees are ‘conditional
bonds’
2
(as suggested by Zanbuild) or ‘on
demand bonds’ (as suggested by the department). The essential
difference between the
two, as appears from these authorities, is
that a claimant under a conditional bond is required at least to
allege and –
depending on the terms of the bond –
sometimes also to establish liability on the part of the contractor
for the same amount.
An ‘on demand’ bond, also referred
to as a ‘call bond’, on the other hand, requires no
allegation of liability
on the part of the contractor under the
construction contracts. All that is required for payment is a demand
by the claimant, stated
to be on the basis of the event specified in
the bond.
[14]
Our law is familiar with the distinction. In
Dormell
Properties 282 CC v Renasa Insurance Co Ltd & others NNO
3
and
Lombard
Insurance Co Ltd v Landmark Holdings (Pty) Ltd,
4
for example, the construction
guarantees involved were construed by this court as ‘on demand’
bonds while in
Basil Read
(Pty) Ltd v Beta Hotels (Pty) Ltd & others
5
the guarantee was interpreted to
create conditional liability akin to that of a surety. In English
law, as in our law, it is accepted
that the question whether the
guarantee under consideration constitutes the one or the other is
dependent on the interpretation
of the terms of that guarantee.
[15]
As support for its contention that the guarantees under consideration
constitute ‘on demand’ or ‘call’
guarantees,
the department relied on the statement in
Lombard
Insurance
6
that:
‘
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 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.’
[16]
In addition the department also sought to rely on certain statements
in
Dormell Properties
7
which essentially endorsed the
approach in
Lombard
Insurance
. It is clear to
me, however, that the statements relied on by the department must be
confined to the terms of the guarantees considered
in those cases.
The exact terms of the guarantee in
Lombard
Insurance
do not appear
from the reported judgment. But examination of the record of that
case filed in this court shows that the terms of
the
Lombard
guarantees were, for present purposes,
exactly the same as those of the guarantee in
Dormell
Properties,
which are in
turn fully recorded in the latter judgment.
8
[17] Moreover, it appears
that the terms of the guarantees in
Lombard Insurance
and
Dormell Properties
are essentially identical to those of the
standard guarantee that the department called for in its letters
accepting the Zanbuild
tenders for both projects. But, as we know,
what the department wanted is not what the department got. A
comparison of the terms
of the department’s standard guarantee,
as appears from the judgment in
Dormell Properties,
on the one
hand, with those of the guarantees in this case – to which I
will presently return – on the other hand,
reveals substantial
differences. The consequence of these differences is, in my view,
self-evident. The Absa guarantees cannot
be interpreted, as the
department sought to do, with reference to the terms of the standard
guarantee, or, indirectly, with reference
to statements in
Lombard
Insurance
and
Dormell Properties
with regard to those
terms.
[18] I now turn to the
terms of the guarantees under consideration. In relevant part they
provide:
‘
.
. . whereas it is stipulated in the [construction] contract that the
contractor [ie Zanbuild] shall provide the employer [ie the
department] with a bank guarantee of 10% of the contract value . . .
as security for the compliance of the contractors performance
of
obligations in accordance with the contract,
and
whereas the bank [ie Absa] is willing to agree to guarantee an amount
. . . which is equal to 10% of the contract value under
certain
conditions stipulated hereafter . . . .
Now
therefore we the undersigned . . . in our capacities as [employees
of] the bank do hereby guarantee and bind the bank as guarantor
for
the due and faithful performance by the contractor of all its
obligations in terms of the said contract subject to the following
conditions . . .
With
each payment under this guarantee the bank’s obligation shall
be reduced pro rata.
Each
claim by the employer must be made in writing accompanied by a signed
statement that the contractor has failed to fulfil his
obligations in
terms of the contract and shall be sent to the bank’s
domicilium address as indicated below . . .
The
bank reserves the right to withdraw the guarantee after the employer
has given 30 (thirty) days written notice of its intention
to do so,
provided the employer shall have the right to recover from the bank
the amount owing and due to the employer by the contractor
on the
date the notice period expires.’
[19] Construing the Absa
guarantees as a whole, I agree with the view of the High Court that
they support the interpretation contended
for by Zanbuild. In other
words, that they do not constitute ‘on demand’ bonds, but
that they give rise to liability
on the part of Absa akin to
suretyship. The first indicator in that direction is the assertion at
the outset that the guarantee
‘provide security for the
compliance of the contractor’s performance of obligations in
accordance with the contract’.
And in the body of the document
the bank guarantees ‘the due and faithful performance by the
contractor’. This accords
with language associated with
suretyships.
[20]
In argument the department’s answer to this indicator was
twofold. First, that the interpretation of guarantees of this
kind is
often bedevilled by loose language. For the sake of argument, I
accept that this is so.
9
The second answer was that the Absa
guarantees contain an indicator to the contrary. This answer relied
solely on the stipulation
that ‘each claim by the employer must
be made in writing accompanied by a signed statement that the
contractor has failed
to fulfil his obligations in terms of the
contract’. What this provision means, so the department
contended, was that, in
order to obtain payment of the guarantees in
full, the department has to do no more than to submit two documents
to the bank: (a)
a claim in writing and (b) a signed statement that
the contractor is in default under the construction contract. This,
so the department’s
argument concluded, renders the guarantee
payable on demand whenever the contractor is in default, irrespective
of liability on
the part of the contractor.
[21] What goes against
this interpretation is that the provision upon which the department
relies as the sole basis of its argument,
contemplates more than one
claim under the guarantee. This is also in line with the provision
that ‘with each payment under
this guarantee the bank’s
obligation shall be reduced pro rata’. The department’s
interpretation, on the other
hand, leaves no room for more than one
claim. Any breach of contract by the contractor would render the full
amount of the guarantee
due and payable on demand. In argument the
department sought to overcome this difficulty by reference to the
example of a payment
certificate, issued by the principal agent,
reflecting a penalty owing to the department in a specific amount. In
that event, so
the argument went, the department would probably only
claim the amount of the penalty under the guarantee. But that is not
the
point. The point is that on the department’s argument, it
is entitled to claim the full amount of the guarantee on the basis
of
a single default. If this is so, I can think of no reason why the
department would claim less than what it is entitled to.
[22] Finally there is the
provision that reserves the right to the bank to withdraw from the
guarantees after 30 days notice, which
was as we know, invoked by the
Absa. That provision expressly limits the liability of the bank to
the amount owing by the contractor
under the construction contract.
Counsel for the department conceded, rightly in my view, that the
bank’s liability in terms
of this provision is clearly akin to
that of a surety.
[23] The interpretation
of the provision contended for by counsel for the department was,
however, that it only applies where the
employer demands payment
after the expiry of the 30 day period. Departing from that premise,
the argument proceeded as follows.
After expiry of the guarantee the
liability of the bank is limited to that of the contractor at the
time of expiry. But prior to
the expiry of the guarantee the employer
is entitled to claim the full amount of the guarantee on demand. In
this case the department
demanded payment before the expiry of the 30
days notice of termination by Absa. Demand was therefore made prior
to the expiry
of the guarantee. In consequence the department was
entitled to the full amount of the guarantees. Had the demand been
made after
the 30 day period and thus after the expiry of the
guarantee, the department would only be entitled to payment of the
amount for
which the contractor was liable or the date that the
notice period – and consequently, the guarantee itself –
had expired.
[24]
I do not accept this argument. It would mean that the 30 days’
notice changes the whole nature of the guarantee. Prior
to the expiry
of the period, the guarantee is the equivalent of a letter of credit.
After expiry it retrospectively converts into
a suretyship. I can
simply find no basis for this interpretation in the wording of the
guarantee. The 30 days’ notice provision,
as I see it, is one
typically found in suretyships for an indefinite period. It affords
the right to the surety to terminate the
suretyship by not less than
a stated period of notice to the creditor.
10
The effect of the notice is rather
obvious. The surety is not liable for amounts that become due by the
principal debtor after expiry
of the notice period. Yet the surety’s
liability for amounts owing by the principal debtor before expiry of
the period, remain
unaffected.
11
That, I believe, is the effect of the
30 days notice provision in the Absa guarantees. The notice does not
change the liability
of the bank prior to the expiry of the notice
period. The bank remains liable, as it always was during the currency
of the guarantee,
for the amounts due to the employer by the
contractor under the construction contracts. Since the department had
established no
amount due to it by Zanbuild during the currency of
the guarantees, the High Court rightly held that it was not entitled
to demand
payment under the guarantees from Absa.
[25] For these reasons
the appeal is dismissed with costs.
…………………
..
F D J BRAND
JUDGE OF APPEAL
Counsel
for Appellants: H M Scholtz SC
C
Tsegarie
Instructed
by: State Attorney
CAPE
TOWN
Correspondents:
State Attorney
BLOEMFONTEIN
Counsel
for First Respondent: D Borgström
Instructed
by: Maurice Phillips Wisenberg
CAPE
TOWN
Correspondents: Lovius Block
Attorneys
BLOEMFONTEIN
1
See
eg LN Duncan Wallace
Hudson’s Building and Engineering
Contracts
Vol 2 11 ed (1995) paras 17.003-17.009 at p 1497-1501;
Trafalgar House Construction (Bregions) Ltd v General Surity and
Guarantee Co Ltd
[1995] 3 All ER 737
(HL) at 742j-743d;
Vossloh
Aktiengesellschaft v Alpha Trains (UK) Ltd
[2010]
EWHC 2443
(Ch) paras 19-28.
2
Since
the liability of the bondsman is conditional upon the liability of
the contractor for the same amount. See eg
Vossloh
Aktiengesellschaft supra.
3
2011
(1) SA 70
(SCA).
4
2010
(2) SA 86
(SCA). See also
Petric Construction CC t/a AB
Construction v Toasty Trading t/a Furstenburg Property Development &
others
2009 (5) SA 550
(ECG).
5
2001
(2) SA 760
(C).
6
Supra
para 20.
7
Paras
38 and 63-66.
8
P
ara
5.
9
As
also appears to be the position in English law. See eg
Vossloh
Aktiengesellschaft supra
para 20.
10
CF
Forsyth and JT Pretorius
Caney’s
The Law of Suretyship
, 6ed at 112.
11
See
eg
Kalil v Standard Bank of South
Africa Ltd
1967 (4) SA 550
(A) at 555.