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[2011] ZASCA 149
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Compass Insurance Company Ltd v Hospitality Hotel Developments (Pty) Ltd (756/10) [2011] ZASCA 149; 2012 (2) SA 537 (SCA) (26 September 2011)
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no
:
756/10
In the
matter between:
COMPASS
INSURANCE COMPANY LTD
….............................................
Appellant
and
HOSPITALITY HOTEL DEVELOPMENTS (PTY) LTD
…......................
Respondent
Neutral citation:
Compass Insurance v Hospitality Hotel
(756/10)
[2011 ZASCA 149
(26 September 2011)
Coram:
Lewis, Van Heerden, Cachalia, Malan and Leach JJA
Heard:
09 September 2011
Delivered 26 September 2011
Summary:
Where construction guarantee requires that court
order of liquidation of contractor be attached to demand for payment,
in absence
of order, demand non-compliant and guarantor not liable to
pay.
______________________________________________________________
ORDER
______________________________________________________________
On appeal from:
South
Gauteng High Court, Johannesburg (Willis J sitting as court of first
instance):
The appeal is upheld with costs. The order of the court below is
replaced with:
‘
The application is dismissed with costs.’
JUDGMENT
______________________________________________________________
LEWIS JA (VAN HEERDEN, CACHALIA, MALAN AND LEACH JJA concurring)
[1] The sole question in this appeal is whether the respondent,
Hospitality Hotel Developments (Pty) Ltd (Hospitality Hotel),
complied with the requirements of a performance guarantee given by
the appellant, Compass Insurance Company Ltd (Compass Insurance),
in
making demand for payment.
[2] Hospitality Hotel is a property development company that had been
engaged to carry out an upgrade of a hotel. It engaged the
services
of a construction company for this purpose, and that in turn engaged
a subcontractor to install a computer network, wireless
and internet
system in the hotel. Compass Insurance is a short term insurer which
issues construction (performance) guarantees
to employers or owners.
On 4 February 2008 it issued a construction guarantee to Hospitality
Hotel for the performance of the work
undertaken by the
subcontractor. The sum guaranteed was R1 444 428.51 and the guarantee
expiry date was 30 April 2008.
[3] The subcontractor breached the contract, and was issued a breach
notice. It was provisionally wound up in the Western Cape
High Court
on 23 April 2008. On 25 April Hospitality Hotel sent a letter to
Compass Insurance demanding payment of the sum guaranteed.
The latter
refused to pay on the basis that the demand did not comply with the
terms of the guarantee in that it was not accompanied
by a copy of
the court order of provisional sequestration of the subcontractor.
Hospitality Hotel accordingly applied to the South
Gauteng High
Court, Johannesburg, for an order compelling payment. Willis J
granted the order on the basis that, because the order
had been
furnished subsequently, there had been sufficient compliance with the
terms of the guarantee. The appeal to this court
against that order
is with its leave.
[4] Clause 4 of the construction guarantee provided that, subject to
the guarantor’s maximum liability, Compass Insurance
undertook
to pay Hospitality Hotel the full outstanding balance ‘upon
receipt of a first written demand from the Employer
[Hospitality
Hotel]’. The sub-clauses that follow are the subject of the
dispute. For they provide that the written demand
must state:
‘
4.1
The agreement has been cancelled due to the Recipient’s [the
subcontractor’s] default and that the Advance Payment
Guarantee
is called up in terms of 4.0.
The
demand shall enclose a copy of the notice of cancellation
;
OR
4.2 A provisional sequestration
or liquidation court order has been granted against the Recipient and
that the Advance Payment Guarantee
is called up in terms of 4.0.
The
demand shall enclose a copy of the court order
.’
(My emphasis.)
[5] It is common cause that there had in fact been no cancellation at
the time the letter of demand was sent, though the letter
did state
that there was, and that the subcontractor was provisionally
liquidated prior to the issue of the demand. But it is further
common
cause that the court order was not attached to the letter of demand,
as required by clause 4.2 of the guarantee. The copy
of the court
order was delivered only months later, on 26 November 2008, long
after the expiry of the guarantee on 30 April 2008.
[6] The high court, referring to cases dealing with contractual
interpretation, held that on a reading of the guarantee it was
‘perfectly obvious’ that it was not the intention of the
parties that a failure to furnish the copy of the court order
with
the demand would be ‘fatal’ to it. The sentence relating
to the furnishing of the copy of the court order was
‘divisible’
from the aspects entitling the beneficiary to payment. The copy could
thus be provided after the expiry
of the guarantee date. Compass
Insurance was thus liable to pay the sum claimed.
[7] Hospitality Hotel’s argument in opposing the appeal is that
all concerned knew that the subcontractor had in fact been
liquidated; there was some difficulty in obtaining the order,
however, and that once there was knowledge of the existence of the
order that was sufficient for demand to be made. The demand was not
defective, it contended, despite the failure to attach the
order to
it. Strict compliance with the terms of the guarantee was not
required.
[8] Hospitality Hotel argued that while strict compliance with
letters of credit has been required by South African courts,
performance
guarantees should be treated differently. Although this
court said in
Lombard Insurance Co Ltd v Landmark Holdings (Pty)
Ltd
1
that the performance guarantee in question was not unlike an
irrevocable letter of credit, Hospitality Hotel contended that there
is no authority to suggest that there must be strict compliance with
the terms of the guarantee.
[9] The reason for requiring strict compliance with a letter of
credit is that it is an instrument that compels a bank to pay on
demand irrespective of the status of the underlying debt. Nugent JA
put it thus in
OK Bazaars (1929) Ltd v Standard Bank of South
Africa Ltd
:
2
‘
[The
bank’s] interest is confined to ensuring that the documents
that are presented conform with its client’s instructions
(as
reflected in the letter of credit) in which event the issuing bank is
obliged to pay the beneficiary. If the presented documents
do not
conform with the terms of the letter of credit the issuing bank is
neither obliged nor entitled to pay the beneficiary without
its
customer’s consent. The obligation of the issuing bank was
expressed as follows in
Midland
Bank Ltd v Seymour
[1955]
2 Lloyd’s Rep 147 at 151:
“
There
is, of course, no doubt that the bank has to comply strictly with the
instructions that it is given by its customer. It is
not for the bank
to reason why. It is not for it to say: ‘This, that or the
other does not seem to us very much to matter.’
It is not for
it to say: ‘What is on the bill of lading is just as good as
what is in the letter of credit and means substantially
the same
thing.’ All that is well established by authority. The bank
must conform strictly to the instructions which it receives.”’
[10] Some years after the decision in
Midland Bank
Lord
Denning, then MR, said in
Edward Owen Engineering Ltd v Barclays
Bank International Ltd
3
that performance bonds stand ‘on a similar footing’ to
letters of credit. ‘A bank which gives a performance guarantee
must honour that guarantee
according to its terms
.’ (My
emphasis.)
[11] However, Hospitality Hotels argued that performance bonds should
be treated differently and that strict compliance with the
terms of
the bond was unnecessary. It contended that there is English
authority for this proposition. It cited
Siporex Trade SA v Banque
Indosuez
4
in which Hirst J said that a contrast between a letter of credit and
a performance guarantee was ‘sound’, since with
the
former the bank deals with the documents themselves, whereas with the
latter the guarantor can rely on a statement that a ‘certain
event has occurred’. This statement was approved by the Court
of Appeal in
IE Contractors Ltd v Lloyds Bank plc
and
Rafidain Bank
5
where Staughton LJ said that there is less need for a doctrine of
strict compliance in the case of performance bonds. But he said
also
that ‘it is a question of construction of the bond’.
[12] Dr Michelle Kelly-Louw in her LLD thesis
Selective Legal
Aspects of Bank Demand Guarantees
6
suggests that English courts have in fact started to apply the same
degree of ‘strict compliance’ to demand guarantees
as to
letters of credit, citing in support
Frans Maas (UK) Ltd v Habib
Bank AG Zurich.
7
She states that courts in South Africa will also apply to demand or
performance guarantees the same ‘standard of strict documentary
compliance’ as they do to letters of credit.
8
However, that case turned, like most, on the interpretation of the
guarantee itself, and while observing that strict compliance
might
not be necessary for performance bonds (citing
Siporex
and
IE
Contractors
), the court held that the demand in question did not
comply with the terms of the guarantee.
[13] In my view it is not necessary to decide whether ‘strict
compliance’ is necessary for performance guarantees,
since in
this case the requirements to be met by Hospitality Hotel in making
demand were absolutely clear, and there was in fact
no compliance let
alone strict compliance. The guarantee expressly required that the
order of liquidation be attached to the demand.
It was not.
[14] It should not be incumbent on the guarantor to ascertain the
truth of the assertion made by the beneficiary that the subcontractor
had been placed under provisional liquidation. That is why Compass
Insurance required a copy of the order itself. Similarly, the
guarantor should not have to establish whether a contract has in fact
been cancelled. That is why a copy of the notice of cancellation,
if
there has in fact been cancellation, is required to be attached to
the demand (clause 4.1). The very purpose of a performance
bond is
that the guarantor has an independent, autonomous contract with the
beneficiary and that the contractual arrangements with
the
beneficiary and other parties are of no consequence to the guarantor.
[15] There may be cases where what is referred to as a guarantee
constitutes no more than an accessory obligation.
9
However, it is the terms of the guarantee itself that will determine
its nature. The guarantee in this case is an independent contract
that must be fulfilled on its terms. There is no justification for
departure and indeed allowing the furnishing of the copy of
the court
order months after the guarantee had expired would have defeated its
very purpose.
[16] Accordingly the appeal is upheld with costs. The order of the
court below is replaced with:
‘
The application is dismissed with costs.’
_____________
C H Lewis
Judge of Appeal
APPEARANCES:
APPELLANT: T Dalrymple
Instructed by Frese, Moll & Partners, Roosevelt Park
Webbers, Bloemfontein
RESPONDENT: C J McAslin
Instructed by Mkhabela Huntley Adekeye Inc, Waverley
McIntyre & Van Der Post, Bloemfontein.
1
Lombard
Insurance Co Ltd v Landmark Holdings (Pty) Ltd
2010 (2) SA 86
(SCA) para 20.
2
OK
Bazaars (1929) Ltd v Standard Bank of South Africa Ltd
2002
(3) SA 688
(SCA) para 25.
3
Edward
Owen Engineering Ltd v Barclays Bank International Ltd
[1978]
QB 159
(CA) at 171A-B. The case was cited and approved in
Loomcraft
Fabrics CC v Nedbank Ltd
[1995] ZASCA 127
;
1996 (1) SA
812
(A) at 816G-H and in the judgment of Cloete JA in
Dormell
Properties 282 CC v Renasa Insurance Co Ltd & others NNO
2011 (1) SA 70
(SCA) para 63.
4
Siporex
Trade SA v Banque Indosuez
[1986] 2 Lloyd’s
Rep 146 at 159.
5
IE
Contractors Ltd v Lloyds Bank plc and Rafidain Bank
[1990] 2 Lloyd’s Rep 496 (CA)
at 501.
6
University
of South Africa (2008) at 68-69.
7
Frans
Maas (UK) Ltd v Habib Bank AG Zurich
[2001]
Lloyd’s Rep Bank 14 paras 57-60.
8
Op
cit at 332-333.
9
As
in
Minister of Transport and Public
Works, Western Cape v Zanbuild Construction (Pty) Ltd
(68/2010)
[2011] ZASCA 10.