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[2021] ZASCA 118
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SA National Roads Agency SOC Limited v Fountain Civil Engineering (Pty) Ltd and Another (395/2020) [2021] ZASCA 118 (20 September 2021)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Not reportable
Case No: 395/2020
In
the matter between:
SOUTH
AFRICAN NATIONAL
ROADS
AGENCY SOC LIMITED
APPELLANT
and
FOUNTAIN
CIVIL ENGINEERING (PTY) LTD
FIRST RESPONDENT
LOMBARD
INSURANCE COMPANY LTD
SECOND RESPONDENT
Neutral
citation:
SA
National Roads Agency SOC Limited v Fountain Civil Engineering (Pty)
Ltd and Another
(395/2020)
[2021] ZASCA 118
(20 September 2021)
Coram:
PONNAN,
SCHIPPERS,
MOKGOHLOA, MOTHLE AND MABINDLA-BOQWANA JJA
Heard:
24
August 2021
Delivered:
This
judgment was handed down electronically by circulation to the
parties’ representatives by email, publication on the Supreme
Court of Appeal website and release to SAFLII. The date and time for
hand-down is deemed to be 10h00 on 20 September 2021.
Summary:
Law
of Contract – unconditional performance guarantee –
interdict to restrain beneficiary from lodging claim under guarantee
– no right established – dispute resolution – court
impermissibly ordering arbitration when contract provides
for
mediation and litigation – appeal upheld.
ORDER
On
appeal from:
Gauteng
Division of the High Court, Pretoria (Basson J sitting as court of
first instance):
1
The appeal is upheld with costs.
2
The order of the court below is set aside and replaced with the
following order:
‘
The
application is dismissed with costs.’
JUDGMENT
Schippers
JA (Ponnan, Mokgohloa, Mothle and Mabindla-Boqwana
JJA
concurring
):
[1]
The
central issue in this appeal is whether an interdict restraining the
beneficiary of an unconditional performance guarantee from
making a
claim under it, pending an arbitration to resolve disputes arising
from the execution of a building and engineering contract,
should
have been granted by the court below. The appeal is with the leave of
this Court.
[2]
On 30
September 2016 the appellant, South African National Roads Agency SOC
Limited (SANRAL), and the first respondent, Fountain
Civil
Engineering (Pty) Ltd (FCE), concluded a contract for certain
improvements to be effected to a section of the R23 Freeway
near
Standerton, for the sum of R352 878 309.80 (the contract). The
contract was based on the standard contract for building
and
engineering works (Red Book 1999 edition) issued by the Fédération
Internationale des Ingénieurs-Conseils
(FIDIC).
[3]
The
contract required FCE to obtain security to the value of 10% of the
contract sum, for the proper performance of its obligations.
The
second respondent, Lombard Insurance Co Ltd (Lombard), issued a
performance guarantee on behalf of FCE in favour of SANRAL
in the sum
of R35 287 830.98 including VAT, for the due fulfilment by
FCE of its obligations under the contract, effective
until completion
of the works (the performance guarantee).
[4]
The
relevant provisions of the performance guarantee were the following:
‘
3.
The Guarantor undertakes and agrees to pay to SANRAL the said amount
of R35 287 830.98 . . . including VAT, or such portion as
may be
demanded on receipt of a written demand from SANRAL, which demand may
be made by SANRAL if (in your opinion and at your
sole discretion),
the said Contractor fails and/or neglects to commence the work as
prescribed in the contract or if he fails and/or
neglects to proceed
therewith or if, for any reason, he fails and/or neglects to complete
the services in accordance with the conditions
of contract, or if he
fails or neglects to refund to SANRAL any amount found to be due and
payable to SANRAL, or if his estate
is sequestrated or if he
surrenders his estate in terms of the Insolvency Law in force within
the Republic of South Africa.
4. Subject to the
above and without in any way detracting from your rights to adopt any
of the procedures set out in the contract,
the said demand can be
made by you at any stage.’
[5]
In
accordance with standard industry practice, Lombard protected itself
by an equivalent counter-guarantee by FCE for the maximum
amount of
the performance guarantee. In terms of the counter-guarantee, Lombard
was entitled to claim from FCE any amount paid
to SANRAL under the
performance guarantee. Lombard was not a party to the appeal and
abided by the decision of the high court.
[6]
FCE
did not complete the works. On 15 October 2018 it gave SANRAL a
notice of termination of the contract on the grounds that it
had
become impossible for FCE to fulfil its obligations under it, ‘due
to the community unrest, riot, commotion, lockout
and disorder in the
area’; that SANRAL had misrepresented the site conditions; and
that it had failed to assess multiple
claims by FCE for extensions of
time. FCE also informed SANRAL that it would cease all work and
remove its machines and personnel
from the site.
[7]
After
FCE had issued its termination notice, the parties engaged in
discussions concerning the resumption of the works by FCE, but
without success. Consequently, by letter dated 6 November 2018 FCE
confirmed its election to terminate the contract. FCE alleged
that
the agreed date upon which its termination would take effect was 6
November 2018, following the unsuccessful engagement between
the
parties in October 2018.
[8]
SANRAL,
on the other hand, alleged that it had given FCE notice to terminate
the contract on 15 May 2019, as envisaged in clause
15.2 thereof
(SANRAL’s notice of termination).
[1]
The reasons for that notice were these. Since 5 September 2018 no
work had been done by FCE or its subcontractor on section km
0-4 of
the R23 Freeway. The conditions that led to FCE allegedly being
prevented from executing the works on that section of road,
were
caused by FCE’s own subcontractor. FCE had demonstrated its
intention not to continue performance of its obligations
under the
contract and had effectively abandoned the site on 31 January 2019.
In SANRAL’s notice of termination it informed
FCE that a claim
would be made on the performance guarantee.
[9]
In
June 2019 FCE applied to the Gauteng Division of the High Court,
Pretoria (the high court), for an order restraining SANRAL from
making a claim on the performance guarantee. The relevant orders
sought were these:
‘
2.
Pending the outcome of the appropriate dispute resolution proceedings
under the dispute
resolution provisions agreed to by the Applicant
and the First Respondent (being based on the FIDIC Red Book (1999
edition), with
particular conditions (“the Contract”) to
be instituted by the Applicant within 21 days from the date of this
order,
an order interdicting and restraining the First Respondent
from making a claim under the performance guarantee issued by Lombard
Insurance Company Limited in favour of the first respondent on 7
November 2016 under guarantee no: C201660828;
3.
Declaring that any demand made by the First Respondent on the Second
Respondent
is of no force and effect pending the outcome of the
aforementioned dispute resolution proceedings.’
[10]
The
grounds for the application were the following. A claim by SANRAL
under the performance guarantee ‘would be unlawful’,
because SANRAL was precluded from claiming any amount under the
guarantee, save in the circumstances contemplated in clause 4.2
of
the contract. Clause 4.2 provided:
‘
The
Employer shall not make a claim under the Performance Security,
except for amounts to which the employer is entitled under the
contract in the event of:
(a)
failure by the Contractor to extend the validity of the Performance
Security as described
in the preceding paragraph, in which event the
Employer may claim the full amount of the Performance Security,
(b)
failure by the Contractor to pay the Employer an amount due, as
either agreed by the
Contractor or determined under Sub-Clause 2.5
[
Employer’s Claims
] or Clause 20 [
Claims, Disputes
and Arbitration
], within 42 days after this agreement or
determination,
(c)
failure by the Contractor to remedy a default within 42 days after
receiving the Employer’s
notice requiring the default to be
remedied,
(d)
circumstances which entitle the Employer to termination under
Sub-Clause 15.2 [
Termination by Employer
], irrespective of
whether notice of termination has been given.
The Employer shall
indemnify and hold the Contractor harmless against and from all
damages, losses and expenses (including legal
fees and expenses)
resulting from a claim under the Performance Security to the extent
to which the Employer was not entitled to
make the claim.’
[11]
FCE
expressly disavowed reliance on clause 4.2(a) and (b). Regarding
clause 4.2(c), FCE alleged that it had not been issued with
a notice
of default which it had failed to remedy within 42 days. As a result
of FCE’s notice to SANRAL that it was prevented
from performing
its obligations under the contract due to force majeure, it was
excused from performing all site-related obligations.
As to clause
4.2(d), there were no circumstances which entitled SANRAL to
terminate the contract in terms of clause 15.2, because
FCE’s
termination was lawful.
[12]
The
right upon which FCE relied was stated thus:
‘
FCE
has a clear negative right against a claim of security, unless such
claim against it complies with the terms of the Contract,
which in
this case it would not.’
FCE
further alleged that it had established a prima facie right to
enforce the dispute resolution provisions of the contract, because
there were disputes concerning its notice terminating the contract on
the ground of force majeure; whether the engineer’s
engagement
with FCE between November 2018 and February 2019 constituted
compliance with clause 16.3 of the contract;
[2]
whether SANRAL had substantially failed to perform its obligations
under the contract; and whether SANRAL had acquired any right
to
terminate the contract.
[13]
SANRAL
opposed the application on the basis that it was entitled to submit a
claim on the performance guarantee as contemplated
in clause 4.2(b)
of the contract, because FCE had admitted that it was liable to
SANRAL for delay damages prior to its purported
termination thereof.
SANRAL alleged that clause 4.2(d) did not require it to establish an
entitlement to payment in accordance
with the procedure in respect of
claims by the employer, set out in clause 2.5 of the contract, or a
determination by the engineer
as envisaged in clause 3.5. In terms of
clause 4.2 of the contract, SANRAL had indemnified FCE against all
damages, losses and
expenses resulting from claims on the performance
guarantee which SANRAL was not entitled to make. The indemnity was
therefore
an adequate alternative remedy to an interdict.
[14]
The
high court (Basson J) found that FCE had demonstrated a prima facie
right to terminate the contract on the basis of force majeure
due to
community unrest which led to the hijacking of the site by third
parties. As a result of the latter event, the court concluded
that
FCE had ‘prima facie exercised the right to terminate the
contract’ or was entitled ‘at least to have the
legality
of the termination of the contract determined by the dispute
resolution mechanisms available under the contract’.
The court
agreed that FCE had established irreparable harm and that the balance
of convenience favoured it.
[15]
FCE
had proposed an arbitral process to address the concern that the
dispute resolution procedures agreed upon by the parties in
terms of
the contract (mediation and litigation) would delay finalisation of
the disputes. SANRAL rejected this proposal. On 13
June 2019 the high
court however made the following order:
‘
Pending
the outcome of dispute [resolution] by means of an arbitral process
to be instituted by the applicant within 21 days from
the date of
this order the first respondent [is] interdicted and restrained from
making a claim under the performance guarantee
issued by Lombard
Insurance Co Ltd in favour of the first respondent on 7 November 2016
under guarantee no: C201660828. Failing
an agreement, the Arbitrator
to be appointed by the Association of Arbitrators.’
[16]
In
her reasons for the order of 13 June 2019 furnished on 1 August 2019,
Basson J said:
‘
The
applicant, in an attempt to address the concerns that the agreed
dispute resolution procedures may unduly delay the finalisation
of
the dispute, proposed an arbitral process.
Taking
into account the concerns raised, I have proposed an arbitral process
to be instituted within 21 (twenty-one) days of this court’s
order.’
[3]
[17]
As was
accepted before us on appeal, the high court had no power to compel
the parties to submit to arbitration to resolve their
disputes. The
contract provided that the contractor (FCE) and the employer (SANRAL)
had the right to refer disputes arising from
it to mediation by a
mediator selected by agreement between the parties. Failing such
agreement, a mediator would be nominated
by the President of the
South African Institute of Civil Engineering on the application of
either party. If the dispute was not
resolved by mediation, it had to
be determined by court proceedings. The effect of the high court’s
order referring the disputes
between the parties to arbitration, was
to amend the contract.
[18]
FCE
rightly conceded that in the light of this Court’s recent
decision in
Aveng
,
[4]
that the high court’s order could not be sustained.
Aveng
was directly in point. There, the issue was whether SANRAL was
precluded by an underlying FIDIC building and engineering contract,
from demanding payment in terms of a performance guarantee, also
issued by Lombard, in precisely the same terms as the one in this
case. The Court held that the purpose of the performance guarantee
‘undoubtedly was to secure SANRAL’s position in
the event
of a dispute and pending resolution thereof’;
[5]
that the guarantee was unconditional; that SANRAL could demand
payment under the guarantee for any reason; and that the contractor’s
failure to complete the works on account of force majeure (as alleged
in this case), did not prevent SANRAL from making a demand
on the
performance guarantee.
[6]
[19]
Faced
with the difficulty that SANRAL could not be interdicted from making
a demand on the performance guarantee pending the resolution
of
disputes under the contract, which counsel for FCE called the
‘primary relief’ granted by the high court, he then
submitted that it would be appropriate for this Court to issue the
following order:
‘
1.
The appeal is dismissed with costs, such costs to include the cost of
one counsel;
2.
The order of the court a quo is set aside and replaced with the
following order:
2.1
Pending the appellant’s compliance with clause 4.2 (b) and/or
clause 4.2(d) of the
construction contract concluded between the
Appellant and the First Respondent, the Appellant is interdicted from
demanding payment
under the performance guarantee issued by the
Second Respondent in favour of the appellant on 7 November 2016 under
guarantee no:
C201660828; and
2.2
The Appellant is ordered to pay the costs of the application (the
order sought on appeal).’
[20]
Subsequently,
counsel for FCE suggested that paragraph 2.1 of the order sought on
appeal be amended by removing the references to
clauses 4.2(b) and
4.2(d) of the contract and replacing them with clauses 15.3 and 15.4,
respectively. In effect then, this Court
was asked to amend the
interdict granted by the high court, to read that pending its
compliance with clauses 15.3 and 15.4 of the
contract, SANRAL was
restrained from making a demand on the performance guarantee.
[21]
FCE’s
counsel contended that the order sought on appeal could be granted,
since it was a ‘lesser’ form of relief
than the primary
relief granted by the high court. The order merely provided, so it
was contended, that pending a determination
by the engineer (in terms
of clause 15.3 of the contract) of the value of the works and any
other amounts due to the contractor
after a notice of termination had
taken effect,
[7]
and a decision
by the employer regarding amounts due by the contractor in respect of
delay, losses and damages incurred, under
clause 15.4,
[8]
SANRAL was precluded from invoking the performance guarantee.
[22]
These
contentions however do not bear scrutiny, for the following reasons.
First, the high court’s order restraining SANRAL
from making a
claim on the performance guarantee, was inextricably linked to the
resolution of the disputes between the parties
by arbitration. That
order preserved the status quo pending the final determination of the
rights of the parties in the arbitration
proceedings. If the high
court’s order was incompetent, as FCE conceded, then it cannot
stand and the appeal must succeed.
This renders it unnecessary to
decide whether the high court’s order was interim in nature and
thus not appealable (as the
court seems to have accepted), or final
in effect, as FCE contended. The interests of justice require that an
order which cannot
withstand scrutiny, should be set aside.
[9]
In any event, even approaching the matter as the high court did, FCE
did not establish the first requirement for an interim interdict,
namely a prima facie right.
[23]
Second,
the order sought on appeal is unsustainable on the founding papers,
and is based on an entirely new case. FCE’s case
– that
SANRAL was called upon to meet – was for an interdict
restraining SANRAL from making a claim on the performance
guarantee,
pending the outcome of dispute resolution proceedings. Indeed, the
prima facie right asserted was FCE’s right
to invoke the
dispute resolution provisions of the contract. What is more, the
founding affidavit stated that SANRAL’s right
to terminate the
contract in terms of clause 15.2 was ‘invalid’ and
‘bizarre’. However, the order sought
on appeal proceeds
from the premise that SANRAL’s cancellation was valid.
[24]
Third,
and as was held in
Aveng
,
the performance guarantee is unconditional.
[10]
Clause 4.2 does not require SANRAL to prove an entitlement under the
contract, before it can make a demand on the guarantee. Any
other
construction would render meaningless the indemnity in clause 4.2,
that SANRAL would reimburse the contractor for any loss
resulting
from a claim on the performance guarantee to which it is not
entitled.
[11]
A claim on the
guarantee is permissible, regardless of disputes under the
contract.
[12]
In fact, FCE
furnished the performance guarantee, and it was accepted by SANRAL,
on the basis that it was subject to the sole approval
of SANRAL.
[13]
[25]
In the
result, the following order is issued:
1
The appeal is upheld with costs.
2
The order of the court below is set aside and replaced with the
following order:
‘
The
application is dismissed with costs.’
A SCHIPPERS
JUDGE OF APPEAL
APPEARANCES
For
appellant:
S Tshikila
Instructed
by:
Dube N Attorney Inc, Johannesburg
McIntyre
Van der Post, Bloemfontein
For
first respondent:
J G Wasserman SC
Instructed by:
Pinsent Masons Africa LLP, Johannesburg
Lovius
Block, Bloemfontein
[1]
SANRAL relied on clauses 15.2(a)
and (b) which read:
‘
The
Employer shall be entitled to terminate the Contract if the
Contractor:
(a)
fails to comply with
Sub-Clause 4.2 [
Performance
Security
] or with a
notice under Sub-Clause 15.1 [
Notice
to Correct
],
(b)
abandons the Works or otherwise
plainly demonstrates the intention not to continue performance of
his obligations under the Contract.
. . .’
[2]
Clause 16.3
of the contract provided:
‘
After
a notice of termination under Sub-Clause 15.5 [
Employer’s
Entitlement to Termination
],
Sub-Clause 16.2 [
Termination
by Contractor
]
or Sub-Clause 19.6 [
Optional
Termination, Payment and Release
]
has taken effect, the Contractor shall promptly:
(a)
cease
all further work, except for such work as may have been instructed
by the Engineer for the protection of life or property
or for the
safety of the Works,
(b)
hand
over Contractor's Documents, Plant, Materials and other work, for
which the Contractor has received payment, and
(c)
remove
all other Goods from the Site, except as necessary for safety, and
leave the Site.’
[3]
Emphasis added.
[4]
Joint
Venture between Aveng (Africa) (Pty) Ltd and Strabag International
GmbH v South African National Roads Agency SOC Ltd and
Another
[2020] ZASCA 146; 2021 (2) SA 137 (SCA).
[5]
Aveng
fn
4 para 27.
[6]
Aveng
fn
4 para 28.
[7]
Clause 15.3
provided:
‘
As
soon as practicable after a notice of termination under Sub-Clause
15.2 [
Termination
by Employer
]
has taken effect, the Engineer shall proceed in accordance with
Sub-Clause 3.5 [
Determinations
]
to agree or determine the value of the Works, Goods and Contractor's
Documents, and any other sums due to the Contractor for
work
executed in accordance with the Contract.’
[8]
Clause 15.4
read:
‘
After
a notice of termination under Sub-Clause 15.2 [
Termination
by Employer
]
has taken effect, the Employer may:
(a)
proceed
in accordance with Sub-Clause 2.5 [Employer's Claims],
(b)
withhold
further payments to the Contractor until the costs of execution,
completion and remedying of any defects, damages for
delay in
completion (if any), and all other costs incurred by the Employer,
have been established, and/or
(c)
recover
from the Contractor any losses and damages incurred by the Employer
and any extra costs of completing the Works, after
allowing for any
sum due to the Contractor under Sub-Clause 15.3 [Valuation at Date
of Termination]. After recovering any such
losses, damages and extra
costs, the Employer shall pay any balance to the Contractor.’
[9]
National
Treasury and Others v Opposition to Urban Tolling Alliance and
Others
[2012] ZACC
18; 2012 (6) SA 223 (CC); 2012 (11) BCLR 1148 (CC).
[10]
Aveng
fn
4 para 28.
[11]
Aveng
fn
4 para 26.
[12]
Aveng
fn
4 para 27.
[13]
Clause 4.2 of the contract
provided, in relevant part:
‘
The
Contractor shall deliver the Performance Security to the Employer
within 14 days of the date of issue of the Letter of Acceptance.
The
Performance Security shall be issued by a bank or insurance company
. . . approved by the Employer . . . The Performance
Security shall
be subject to approval by the Employer and shall be in the form
prescribed in the tender documents or in another
form approved by
the Employer.’