Lombard Insurance Company Ltd v Landmark Holding (Pty) Ltd and others (343/08) [2009] ZASCA 71; 2010 (2) SA 86 (SCA); [2009] 4 All SA 322 (SCA) (1 June 2009)

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Lombard Insurance Company Ltd v Landmark Holding (Pty) Ltd and others (343/08) [2009] ZASCA 71; 2010 (2) SA 86 (SCA); [2009] 4 All SA 322 (SCA) (1 June 2009)

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THE
SUPREME COURT OF APPEAL
REPUBLIC
OF SOUTH AFRICA
JUDGMENT
Case no: 343/08
­
LOMBARD
INSURANCE COMPANY LIMITED
Appellant
and
LANDMARK HOLDINGS (PTY) LTD
First Respondent
HAY TREVOR BRUCE
Second Respondent
THE
TRUSTEES FOR THE TIME BEING OF THE Third Respondent
PRINGLE
BAY TRUST
______________________________________________________________
Neutral citation:
Lombard
v Landmark & others
(343/08)
[2009] ZASCA 71
(1 June 2009)
CORAM:
Navsa,
Nugent, Lewis, Jafta
et
Ponnan JJA
HEARD:
21
May 2009
DELIVERED:
1
June 2009
CORRECTED:
SUMMARY: Construction guarantee
and indemnities ─ construed independently of construction contract
─ undertaking to pay upon
the happening of an event ─ obligation
to honour undertaking.
______________________________________________________________
______________________________________________________________
ORDER
______________________________________________________________
On appeal from:
High
Court, Cape Town (Potgieter AJ sitting as court of first instance).
1. The appeal is upheld with costs,
including the costs occasioned by the employment of two counsel.
2. The order of the court below is set
aside and substituted as follows:
‘
Judgment is granted against the
first, second, and third respondents, jointly and severally, the one
paying the others to be absolved
in accordance with prayer 1 of the
notice of motion.’
______________________________________________________________
JUDGMENT
______________________________________________________________
NAVSA JA (Nugent, Lewis, Jafta and
Ponnan JJA concurring):
[1] This appeal, with the leave of the
court below, turns on the interpretation and application of certain
documents. The background
is set out hereafter.
[2] The appellant company (Lombard) is
registered as a short-term insurance company in terms of the Short
Term Insurance Act 53
of 1998 and is thus entitled to issue guarantee
policies as defined in that Act.
1
During 2002 the appellant issued a construction guarantee on behalf
of Landmark Construction (Pty) Ltd (Landmark), a construction

company, in favour of the South African Maritime Training Academy
(the Academy). The basis for the guarantee was a construction

contract
2
concluded between Landmark and the Academy, with the latter being the
employer and the former the contractor. The building work
undertaken
was a two-storey training centre for the Academy. In terms of the
construction contract the principal agent was Herbert
Penny (Pty) Ltd
(HP).
[3] The construction contract records
that the Academy shall have the right to select security for the
fulfilment of the contractor’s
obligations. Clause 14.5 of the
contract records that the security ‘shall be for the due fulfilment
of the contractor’s liability
in terms of the agreement’. The
guarantee referred to in para 2 above was the security selected by
the Academy. It is in the
form of a variable construction guarantee
in terms of which the maximum liability is limited to the diminishing
amounts of the
guaranteed sum in relation to certificates of
completion, as provided for in the guarantee itself.
[4] Subject to the maximum liability
provided for, Lombard bound itself as principal debtor in favour of
the Academy. It undertook
to pay the Academy, on demand, the
guaranteed sum or the full outstanding balance upon the happening of
one of two eventualities,
namely, default by Landmark resulting in
cancellation, or a liquidation order being granted against Landmark.
[5] The following clause in the
guarantee is of importance:
‘
3. The Guarantor
hereby acknowledges that:
3.1 Any reference in
this Guarantee to the Agreement is made for the purpose of
convenience and shall not be construed as any
intention whatsoever
to create an accessory obligation or any intention whatsoever to
create a suretyship
3.2 Its obligation under
this Guarantee is restricted to the payment of money
3.3 Reference to a
practical completion certificate or to a final completion
certificate shall mean such certificate as issued
by the Principal
Agent.’
[6] On 14 October 2003, HP issued a
certificate of practical completion, but prior to that Landmark was
placed in liquidation.
[7] On 17 March 2004 the Academy
called up the guarantee, recording in its demand that Landmark had
been placed in liquidation,
that a final completion certificate had
not been issued and that consequently an amount of R241 429.77 was
due to it by Lombard,
purportedly the value of work done post the
issue of the practical completion certificate.
[8] Prior to all of this, during April
1999, the first respondent, Landmark Holdings (Pty) Ltd (LH),
executed a document entitled
‘RECIPROCAL INDEMNITY AND SURETYSHIP’
in favour of Lombard, in terms of which LH undertook to ‘indemnify
and keep indemnified
[Lombard] and hold it harmless from and against
all and any claims, losses, demands, liabilities, costs or any other
expenses of
whatsoever nature, including legal costs as between
attorney and client, which [Lombard] may at any time sustain or incur
by reason
or in consequence of having executed or hereafter executing
any guarantees...’. Further, LH undertook and agreed to pay Lombard

on demand any sum which the latter may have been called upon to pay
under any guarantee, whether or not the contractor on whose
behalf
Lombard furnished the guarantee admitted the validity of the claim.
[9] During April 1999, Hay and the
third respondent, the trustees for the time being of the Pringle Bay
Trust (the trust), executed
two written documents in similar terms in
favour of Lombard. Although both documents bear the title ‘DEED OF
SURETYSHIP’ they
have the following identical feature. In both, Hay
and the trust undertook as principals, to ‘indemnify’ Lombard
against ‘any
claims of whatsoever nature’ which Lombard may incur
by reason of it having executed or in the future executing any
guarantee.
[10] On 25 March 2004, subsequent to
the demand referred to in para 7 above, Lombard paid the Academy the
amount of R241 429.77.
[11] On 5 April 2004 Lombard addressed
a demand to LH, Hay and the trust, in terms of the Reciprocal
Indemnity and Suretyship documents
referred to in paras 8 and 9
above.
[12] They all refused to pay,
resulting in an application to the Cape High Court in terms of which
Lombard claimed against them,
jointly and severally, the one paying
the other to be absolved, payment in the sum of R241 429.77 with
interest, and costs
on the scale as between attorney and client.
[13] The application was opposed on a
number of grounds. The only one with which we need be concerned and
on which this appeal turns
is that the claim in respect of which
Lombard paid was invalid due to a fraud perpetrated by HP with the
consequence, so it was
alleged, that neither Lombard nor the
respondents were liable to pay. The details of the fraud are set out
in the following two
paragraphs.
[14] Although Landmark was responsible
for performing remedial work it did not have an obligation, in terms
of the construction
contract, to do work in relation to a change in
design specifications. This would be work beyond the terms of the
construction
contract. It was uncontested that the work in respect of
which the claim was made upon Lombard related to the replacement of
glass
and other materials in an atrium within the Academy training
centre. The glass and materials that were replaced were within the

design specifications of the construction contract. The problem was
that, after the atrium was completed, it proved unsuitable
in that it
was too hot and required further ventilation. It required glass that
was substantially thicker and other materials in
order to overcome
the original design flaws in the construction contract. A further
significant design change was that horizontal
sliders were to replace
vertical sliders, apparently to facilitate ventilation.
[15] The redesigning of the atrium,
with the concomitant change in constituent materials, was beyond the
terms of the construction
contract and Landmark’s responsibility.
HP, in order to overcome the problem, appears to have perpetrated a
fraud in order to
obtain the benefits of the construction guarantee.
HP framed the claim as one relating to remedial work, which it
clearly was not.
[16] The court below, in dealing with
the application, referred one issue to oral evidence, namely, whether
Lombard had colluded
in the fraud perpetrated by HP. Evidence was led
and, upon its conclusion, the parties accepted that collusion had not
been proved.
[17] Before Potgieter AJ, it was
contended on behalf of Lombard, that the documents executed by
Lombard and the respondents were
self-contained and created
obligations distinct and separate from those created by the
construction contract. In terms of the guarantee
Lombard undertook to
pay upon the occurrence of an event that materialised, namely, the
liquidation of Landmark. It was submitted
that Lombard was obliged to
pay when called upon to do so by the Academy and the three
respondents were in turn obliged to pay
Lombard.
[18] The court below decided the
matter on the basis that the guarantee must be interpreted in
conjunction with the construction
contract. With reference to clause
14.5 referred to in para 3 above, the court below held that Lombard
was only obliged to pay
a claim under the guarantee if the claim was
within the terms of the construction contract. It reasoned that,
because the claim
did not fall within that purview, Lombard was not
obliged to pay and, consequently, neither was any one of the
respondents.
[19] In my view the court below
misconstrued the nature of the guarantee and the indemnities provided
by the three respondents.
The terms of the guarantee by Lombard
referred to in paras 2, 3 and 4 above are clear. The guarantee
creates an obligation to pay
upon the happening of an event. The
guarantee itself records that reference to the construction contract
is solely for the purpose
of convenience and that there is no
intention to create an accessory obligation or suretyship. Clause
14.5 of the construction
contract merely records that security exists
in respect of the contractor’s obligations. The guarantee was to
protect the Academy
in the event of default by Landmark and it is to
the guarantee that one should look to determine the rights and
obligations of
the Academy and Lombard.
[20] 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 misrepresents the material facts.
3
[21] In the present case Lombard
undertook to pay the Academy upon Landmark being placed in
liquidation. Lombard, it is accepted,
did not collude in the fraud.
There was no obligation on it to investigate the propriety of the
claim. The trigger event in respect
of which it granted the guarantee
had occurred and demand was properly made.
[22] The same applies to the
undertaking by the three respondents. They undertook to indemnify
Lombard in the event that it paid
a claim based on the guarantee
provided by it. That event occurred and the respondents were thus
likewise liable.
[23] In light of the reasoning set out
above there is no need to address the constitutionality of the
wording of the indemnities
provided by the three respondents. It was
contended that the wording was such as to render the clauses in
question unconscionable,
unduly harsh and prejudicial, against public
policy,
contra bonos mores
and offensive to the respondents’ constitutional rights. This
submission was based on a mistaken view of the basis of the
indemnity.
Nothing further need be said on this issue.
[24] There is one final aspect in
respect of costs to be considered. It was contended on behalf of the
appellant that the decision
in the court below materially affected
the manner in which it did business, that it impacted on the industry
as a whole and that
it was consequently necessary to employ two
counsel. I agree.
[25] In the result the appeal should
succeed. The following order is made:
1. The appeal is upheld with costs,
including the costs occasioned by the employment of two counsel.
2. The order of the court below is set
aside and substituted as follows:
‘
Judgment is granted against the
first, second, and third respondents, jointly and severally, the one
paying the others to be absolved
in accordance with prayer 1 of the
notice of motion.’
_________________
M S NAVSA
JUDGE OF APPEAL
APPEARANCES:
For
Appellant: Panayiotis Stais SC
C
J McAslin
Instructed
by
Frese,
Moll & Partners c/o Butler Blankenberg Cape Town
Webbers
Attorneys Bloemfontein
For
Respondent: Peter J Berthold SC
Instructed
by
DLA
Cliffe Dekker Hofmeyer Cape Town
McIntyre
& Van der Post Bloemfontein
1
In terms of s 1 of the Act ‘guarantee policy’ means ‘a
contract in terms of which a person, other than a bank, in return

for a premium, undertakes to provide policy benefits if an event,
contemplated in the policy as a risk relating to the failure
of a
person to discharge an obligation, occurs.’
2
The agreement was a JBCC series 2000 contract.
3
Loomcraft Fabrics CC v
Nedbank Ltd & another
[1995] ZASCA 127
;
1996 (1) SA 812
(A) at 815G-816G.