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[2018] ZAGPJHC 663
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Group Five Power International (Pty) Limited v Cenpower Generation Company Limited and Others (2008/41068) [2018] ZAGPJHC 663 (16 November 2018)

REPUBLIC
OF SOUTH AFRICA
IN THE HIGH COURT OF SOUTH AFRICA
GAUTENG DIVISION, JOHANNESBURG
CASE
NO:  2008/41068
[1]
REPORTABLE:  YES
/ NO
[2]
OF INTEREST TO OTHER
JUDGES:  YES / NO
[3]
REVISED
.
Date:
WHG
VAN DER LINDE
In
the matter between
:
Group Five Power International (Pty)
Limited

Applicant
and
Cenpower Generation Company
Limited

1
st
Respondent
HSBC Bank PLC, Johannesburg
Branch

2
nd
Respondent
Standard Chartered
Bank                                                                                            3
rd
Respondent
J U D G M E N T
Van der Linde, J
:
Introduction
[1]        This is an application
to interdict the paying out of a retention bond and a performance

bond which the 2
nd
and 3
rd
respondents,
financial institutions, had given in favour of the 1
st
respondent, the owner of a construction project for a power plant in
Ghana, in which the applicant as main contractor had, according
to
the 1
st
respondent, defaulted. I set out below at some
length the parties’ submissions.
The contractor’s case
[2]        Mr Gautschi, SC who
appeared with Mr Smit for the applicant, commenced his submissions
by
moving for an amendment to the Notice of Motion to introduce in the
alternative prayers for an interim interdict pending an
arbitration.
That application was opposed by Mr Subel, SC who appeared with Mr
Bresler for the 1
st
respondent.  I ruled that all of
the arguments including that in favour of and against the amendment
should be dealt with
by the parties when they make their main
submissions.
[3]       Mr Gautschi submitted that
the issue of an interim interdict was fully covered both in
the
founding, the answering, and the replying affidavits.  He
referred to pages 24 to 28 of the founding papers, page 311
of the
answering affidavit and page 616 paragraph 38 of the replying
affidavit.
[4]        As to urgency, Mr
Gautschi submitted that the bonds were only called on the 1
st
November 2018 and this was not preceded by threats that they would be
called.  The applicant had no choice, he submitted,
but to come
to court in the manner and at the time that it did.
[5]       Starting with the retention
bond, Mr Gautschi pointed out that the full amount under that
bond
was being called up. He submitted that a retention bond in
construction law substitutes for retention monies of usually 10%
that
are held back from payments made during the course of the execution
of the project. The necessary implication is therefore,
he submitted,
that retention bond monies can only be used for repair work that had
to be done.  He pointed to clause 4.2 of
the contract in which
the retention was fixed at 10%.
[6]        He pointed out that in
that clause the performance bond was fixed at 15%.  With

reference to clause 17.6.3(a) at page 113, he pointed out that delay
damages were capped at 15%, equating to the extent of the
performance
bond required.  He pointed out that in terms of clause 8.7.6 at
page 72, delay damages were the only damages that
were recoverable.
Therefore the implication was that the only bond that could be called
for a delay damages was the performance
bond and not the retention
bond; the retention bond was earmarked for defects.
[7]       With reference to pages 42 to
46 of the founding papers he stressed that the expiry date
of the
retention bond was 3 October 2017.  In contrast to this, as
appears from page 482, the expiry date of the performance
bond was 30
December 2017.  The retention bond was to be released on taking
over certificate as appears from page 42 clause
4.2.4.
[8]        Mr Gautschi accordingly
concluded that the retention bond could not be called to
recover
delay damages:  the retention bond was intended to cover defects
in the works.  He referred to the contracts
bundle page 64
clauses 7.5 and 7.6 in support of this proposition.  Yet, he
submitted, the 1
st
respondent called the whole of the
retention bond to cover for delay damages, and only a portion of the
performance bond for delay
damages.
[9]        He submitted that the
1
st
respondent did not disclose to the financial
institutions that it was calling the retention bond for delay damages
to its full
extent, and only a portion of the performance bond for
delay damages. He submitted that failure to disclose this is
misleading.
He submitted that no honest belief could have been held
that the retention bond could be called for delay damages.
[10]     With reference to the underscored words
“
final determination
” in the bond, he submitted
that this anticipated an arbitration process which is the contractual
mechanism for resolution
of disputes.
[11]      Mr Gautschi pointed out, as
regards the merits, that the owner alleged a breach as appears from

FA34 dated 1 November 2018, and relied in this context on the
performance bond.  With reference to the retention bond at page

37, the owner asserted that the contractor was in breach.
[12]      But there could not have been any
honest belief in this statement of fact. In this regard Mr
Gautschi
referred to the contractor’s obligations in terms of clause
9.1.1, which provides that no tests on completion shall
be carried
out in respect of the works unless the contractor has constructed and
installed all materials, plant and equipment constituting
the works
“
in accordance with the design book
”.  The
design book at Appendix “A” page 86 provides in clause
2.1 under “
Scope of Services
” and “
Owner’s
Responsibilities
”, that the owner shall provide, to the
limits specified, the following services, including “
fuel
for commissioning and testing purposes, up to and including the first
performance test only (excluding reliability testing).
The quantity
of fuel that will be provided will be kept at an agreed level
commensurate with normal commissioning and testing purposes
and the
kept volumes will be included in Appendix ‘F’. Additional
fuel for repeating failed performance tests will
be for the
contractor’s account
”.
[13]      Clause 12, dealing with
commissioning and testing, sets out the following:
“
12.1
GENERAL
REQUIREMENTS
The contractor shall be responsible for delivering a fully
commissioned, tested and reliable plant that needs all contract
requirements.
Commissioning and testing shall follow the
following sequence:
1.
Pre-commissioning.
2.
Commissioning.
3.
Functional
testing.
4.
Performance
testing.
5.
Reliability
testing.
Acceptance testing will comprise a sequence of functional,
performance and reliability tests to establish that the plant can
function
as designed, achieves all performance guarantees and that
the plant will operate reliably.  Reliability testing shall be
carried
out only after the successful completion of all specified
functional and performance tests.
”
[14]       The “
acceptance
testing
” referred to here is further expanded upon at
clause 9.4:
“
12.4
ACCEPTANCE
TESTING
12.4.1
General
The works will not be accepted by the owner until satisfactory
completion of all acceptance tests.  Acceptance testing shall

include:
·
Function
tests to demonstrate functionality of plant requirements and
different operation modes.
·
Performance
tests to validate that the plant can achieve guaranteed electrical
power output, heat rate and environmental limits.
·
Reliability
tests to establish the ability of the plant to operate reliably in a
representative operating state.
The tests shall be performed in sequence; the performance tests
shall commence after completion of commissioning and functional tests

and shall be satisfactorily passed prior to commencement of the
reliability test.
”
[15]       Mr Gautschi’s
submission was that it follows that each test must follow
sequentially
and successfully.  As to the fuels that must be
used for the testing, the contract provides that:
“
The contractor and the owner acknowledge and agree that as
at the commencement date the contractor shall use only one of the
fuels
in accordance with the specifications set out in Appendix “1”
[fuel quality specifications] as the fuel for the following

commissioning and testing activities:
(i)
Commissioning
under section 12.1 of the design book (although it is agreed that
functional testing will be performed using input
LCO, distillate
oil and natural gas);
(ii)
Performance
testing under section 12.4.3 of the design book; and
(iii)
Reliability
testing under section 12.4.4 of the design book (the ‘primary
fuel’)
.”
[16]      Mr Gautschi accordingly
stressed that for functional testing all three fuels, being input

LCO, distillate oil and natural gas had to be used.
[17]      Clause 8.4 deals with
extension of time for completion and in terms of it, the contractor

is entitled to an extension of time for completion if and to the
extent that taking over for the purposes of sub-clause 10.1 is
or
will be delayed by (in each case) any of the following causes, being
a variation, a cause of delay giving an entitlement to
extension of
time, or any delay, impediment or prevention caused by or
attributable to the owner.
[18]      As regards “
delay
damages
” it is provided in clause 8.7.2 that the contractor
shall, subject to prior notification by the owner, pay or allow to
the
owner liquidated and ascertained damages, also known as “
delay
damages
” for each day or part of a day for the period
commencing on the day after the relevant time for completion and
expiring on
the taking over date for the works.  In terms of
clause 1.1.153, “
time for completion
” is defined
as including extensions of time granted under sub-clause 8.4.
As to variations, clause 1.1.155  defines
these as “
any
change, modification, addition or deletion to, in or from the design
book or the works or a change or restriction in the contractor’s

sequence, timing, conditions or methods of working which is
instructed or approved as a variation is issued under clause 13
”.
[19]      As to the facts, Mr Gautschi
submitted that it turned out that the supply of natural gas
was
unattainable, and the owner advised the contractor that it need not
use natural gas.  In the owner’s letter of 27
April 2018
to the contractor, the owner wrote in paragraph 5.2, with reference
to clause 2.5.8 of the contract, that “
the contractor
maintains that the owner has failed to provide natural gas and that
the contractor has proceeded with the commissioning
and testing of
the plant with distillate fuel and light crude oil.  For the
reasons given in section 4 above, the owner denies
that the lack of
natural gas has had any impact upon the contractor (as claimed by the
contractor or otherwise).  However,
the owner is willing to
proceed on the basis that the commissioning has commenced and that
natural gas was not available at the
date upon which the contractor
maintains that commissioning commenced. Therefor clause 2.5.8 of the
EPC contract automatically
applies.  Therefore, the contractor
is relieved of the obligation to conduct any testing and any
commissioning on natural
gas.  The contractor should proceed to
conduct the testing and commissioning on other fuels.
”
[20]      Mr Gautschi stressed that
this letter only came seven months after the time for completion.

In the contractor’s letter of 29 June 2018, the contractor
wrote that it was within the knowledge of the owner that the time
for
completion was 13 September 2017, and that to enable the contractor
to achieve that date, all three fuels had to be supplied
by no later
than 21 May 2017.
[21]      On 10 May 2017 the owner
notified the contractor that natural gas would only be available
in
November 2017, and therefore not be available within the timeline
provided for in the contract.  This indicates that the
owner was
still intent on supplying natural gas, and it required the taking
over of the whole of the works, tested and commissioned
with all
three fuels.  That, so contended the contractor, extended the
time for completion.
[22]      At paragraphs 3.1 to 3.11 of
that letter, the contractor spells out the argument that this
conduct
on the part of the owner, if not an abandonment of clause 2.5.8,
certainly extended the effect of clause 2.5.8.  The
contractor
argued that when the owner’s representative notified the
contractor on 14 September 2017 that the contractor had
failed to
achieve completion of the whole of the works, he was clearly not
entitled to do so having regard to the fact that the
owner itself had
notified the contractor that natural gas would only be available in
November 2017.
[23]      Mr Gautschi stressed that
clause 2.5.8 referred to the failure of the owner to provide
natural
gas, and not the mere postponement. The first occasion on which a
failure occurred was on 27 April 2018 and not before.
[24]      The submission was that this
illustrates clearly that the contractor was entitled to an
extension
of time. Mr Gautschi argued that the absence of natural gas in the
testing sequence either constitutes a variation for
purposes of
clause 8.4.1, or at least a “
delay
” for purposes
of clause 8.4.3, in both instances entitling the contractor to an
extension of time for completion.
[25]      The commissioning had to be
completed, on the contractor’s case, by the 21
st
August 2018.  By 30 September 2018 the contractor found
contamination in the input LCO.  The contractor advised the
owner, and this resulted in a dispute as to whose fault it was.
The owner advised the contractor to use different fuel, but
of course
it must give the contractor an appropriate instruction in this
regard; but this the owner would not want to do, because
it implies a
variation which in turn entitles the contractor to an extension of
time.
[26]      As from the 30
th
September 2018 the contractor argued that it could not complete the
work because the owner had provided the contractor of contaminated

fuel.  The basis for the extension of time claim beyond 30
September 2018 is therefore this contaminated fuel.
[27]      Mr Gautschi submitted that
there were about 40 days between 21 August 2018 and 30 September

2018, and pointed out that this was an issue that would be subjected
to arbitration.  Accordingly, submitted Mr Gautschi,
even if the
owner was not in breach of its contractual obligations, the
contamination was caused by the owner thus entitling the
contractor
to an extension of time. That being so, the owner cannot honestly
contend that the contractor had committed a breach,
and so the
calling of the bonds by the owner was not honest.
[28]      This pattern of dishonesty
was reflected in the outright rejection by the owner of the

contractor’s claims for extension of time.
[29]      By virtue of clause 8.7.3 of
the contract, if the owner wishes to claim payment or a deduction
in
respect of delay damages incurred by the contractor in terms of
clause 8.7.2, the owner is obliged first to serve notice to
that
effect on the contractor.  The owner cannot proceed under clause
3.5 of the contract to agree or determine any matter
unless it will
first have given such a notice. In this matter the owner gave a
notice under clause 2.4, which governs an asserted
entitlement “
to
any payment under any clause of these General Conditions
”;
this was therefore the general provision which had to succumb to the
specific provision of clause 8.7.3.
[30]      What the owner did in this
case is reflected in its letter of 31 May 2018, in which the
owner
preferred a claim of some US $62,7 million.  The letter by the
owner on 25 June 2018 was the second notice, and this
was a notice
under clause 3.5 of the General Conditions. A third relevant letter
that of 25 June 2018 (the same date) contains
the demand by the owner
that it requires payment in respect of delay damages in the sum of US
$62,7 million.  There is no
date for payment set.
[31]      But, submitted Mr Gautschi,
the correct contractual provisions had not been followed, and
there
could not have been any honest belief on the part of the contractor
that it had in fact followed the correct contractual
provisions. Mr
Gautschi accordingly submitted that the contractor’s
entitlement to an extension of time could not be reasonably

disputed.
[32]      He submitted that the other
requirements for an interim interdict were also satisfied.
The fact
that there was no satisfactory alternative remedy, is illustrated by
the fact that the owner is a mere special purpose
vehicle, and it
vaguely asserts to have “
free equity
” of greater
than US $200 million.  But there is no evidence that it has cash
in the bank or liquid assets and one cannot
execute against the kind
of asset which the owner asserts it has.
[33]      He submitted that the
contractor’s prejudice far outweighs the prejudice of the
owner.  The owner has bonds as security and their period has
been extended.
[34]      The lack of
bona fides
on the part of the owner is illustrated by the fact that it could
have enforced the delay damages by April 2018 but waited until

November 2018 before it attempted to do so.
[35]      In terms of clause 4.2.6 of
the General Conditions, it is provided that the retention bond
and
the performance bond is to be returned to the contractor immediately
after it becomes null and void save where there are pending
claims;
in that case they are only to be returned following final
determination and payment if applicable of such claims, and in
the
meantime they remain valid.
[36]     Mr Gautschi concluded by asking for
an interim interdict in terms of the Notice of Amendment;
therefore
in terms of prayers 2A, and 3 of the Amended Notice of Motion, as
well as the costs of two counsel.
The owner’s case
[37]      In answering the case on
behalf of the owner, Mr Subel handed up a fresh affidavit which
deals
with the loss suffered by the owner.  That affidavit, which was
dated 5 November 2018 by the contractor’s Director
of Legal and
Corporate Affairs, asserts that the Kpone project is currently
suffering damages in the form of lost revenue arising
out of the
delay to the date for completion in the magnitude of approximately US
$15 million per month, equating to US $500 000
per day.
She says also that the owner estimates that it has lost approximately
US $195 million in revenue for the period
from the agreed date for
completion up to 13 October 2018.
[38]      Mr Subel submitted that the
amendment to the Notice of Motion is bad and ought not to be

granted.  To the extent that it seeks to pend the interim
interdict which it seeks to the final determination of the disputes

between the contractor and the owner by arbitration, this excludes
the banks because they are not party to the arbitration agreement.

Further, he submitted that fraudulent claims cannot be the subject of
arbitration proceedings.  He pointed out that the agreed

arbitration will be concerned with extensions of time, and not with
the question of fraud.  He pointed out that the original
Notice
of Motion was for a final interdict and what was now being sought was
an interim interdict. Yet he submitted that the issue
which is before
the court in the current matter will never be revisited and is
therefore final in effect in any event.
[39]      He submitted that there was
no evidence to show an entitlement on the part of the contractor
to
an extension of time.  He submitted further that the centrality
of the argument advanced by Mr Gautschi was never raised
as a basis
of the application on the papers.  The criticism that the owner
was relying on the retention bond was not raised
in the papers; the
submission that the owner could not rely on a retention bond to
satisfy a delay claim was a new point.
[40]      Apart from these points Mr
Subel submitted that the matter was not urgent.  Already
on 31
May 2018 the owner had given the contractor notice that it was going
to call the bonds.  Further correspondence followed
after the
letter of 31 May 2018, and yet the LCO contamination issue was not
raised until now.  Further, the arbitration to
which the
contractor refers has not been initiated.
[41]      In the contractor’s
letter of 7 June 2018, particularly paragraphs 4.8, 4.9 and 4.10,
the
contractor’s argument centered around the natural gas issue. In
paragraph 4.8 for example the contractor argues that
the owner’s
performance and adherence to its own obligations as set out in the
contract are required so as to enable the
contractor to comply with
its obligations to attain taking over for the whole of the works.
The contractor argues in that
letter that as of date thereof, the
owner has failed to provide natural gas, this being the dominant
cause of the delay that is
preventing the contractor from attaining
taking over for the whole of the works.  The contractor
therefore argued that the
determination of an indebtedness of US
$62.7 million is premature until and unless the owner has itself
complied with its contractual
obligation to supply the natural gas.
[42]      The response to the
contractor’s letter is by the owner on 25 June 2018, and after

that followed the contractor’s letter of 29 June 2018.
[43]      Mr Subel submitted that there
was no obligation upon the owner in terms of clause 2.5.8
to issue a
variation, or to instruct the contractor to proceed with its testing
and commissioning obligations without natural gas.
That was an
automatic consequence of the owner’s failure to provide natural
gas.  Since that is so, by definition the
absence of natural gas
could not cause a delay.  All it serves to do, is to relieve the
contractor of the obligation to include
natural gas in its testing
and commissioning obligations.  Therefore, the absence of
natural gas was irrelevant to the completion
date of 17 September
2017.
[44]      The contractor asserts that
it was only on 27 April 2018 that the owner “
formally
instructed the applicant that it was to proceed with the testing and
commissioning … with the remaining two fuels
… due to
the 1
st
respondent’s failure to
provide natural gas
”. But submitted Mr Subel the contractor
did not need such an instruction.
[45]      Mr Subel submitted that the
contractor has failed to make out any case that it was in a
position
to test and commission the plant with other types of fuel until 30
September 2018; the owner was only advised in October
2018.  By
the letter of 31 May 2018 the owner advised the contractor that on 14
September 2017 the owner had given the contractor
notice of
non-completion by the contractual completion date of 13 September
2017, duly and properly in accordance with clause 8.7.1
of the
General Conditions.  The letter further advised the contractor
that in terms of clause 8.7.2 of the General Conditions,
the
contractor was to pay liquidated and ascertained damages calculated
in accordance with Appendix “L”, being liquidated

damages, at the rate of US $310 000 for every day.  The cap
in respect of penalties was reached in April 2018.
[46]      The contamination of LCO was
also raised late. The whole issue about LCO is in any event

irrelevant, submitted Mr Subel.  The founding affidavit does not
say that the contractor was ready to test at any stage earlier
than
September 2018 with other fuels. It was only in September 2018 when
suddenly the contractor raised the complaint about LCO
contamination.
[47]     If the contractor was not able to
start testing and commissioning the plant before April 2018,
then all
that remains of the contractor’s alleged case, is the point
about natural gas not being available.
[48]      With reference to clause
2.5.1 of the General Conditions the obligation of the owner to

provide at the owner’s cost, LCO, distillate oil and natural
gas was timed at, “…
when the contractor is ready to
commence commissioning …
”.  But, submitted Mr
Subel, there is no word in the founding affidavit as to when in fact
the contractor was in fact
ready to commence commissioning.
[49]     On a proper interpretation of
clause 2.5.8 it means no more than that the contractor is simply

relieved of its duty if the owner fails to provide natural gas.
The completion date remains completely unaffected.
The failure
to supply natural gas can never lead to a delay in the completion of
the works. But, submitted Mr Subel, even if there
was an arguable
case in this regard, this cannot be decided on paper. And in any
event, even if it was an arguable case, it still
does not show fraud.
Fraud, it was submitted, is a serious allegation; and it has not been
shown on these papers.
[50]      Mr Subel pointed to the
owner’s correspondence of 14 September 2017 to the contractor,

in which the owner recorded that the contractor had failed to attain
taking over for the whole of the works within the time for

completion, and recording that the owner was reserving all of its
rights.  On 28 September 2017 the contractor responded to
the
owner’s letter denying the owner’s contentions.  On
2
nd
October 2017 the owner responded to the contractor,
declining the contractor’s request to the owner to provide a
written
undertaking that the owner will not deduct any liquidated
damages until such time as the contractor’s twelve claims will
have been finally determined. Mr Subel pointed out that in the
contractor’s letter of 6 October 2017 there is no complaint

raised that the natural gas was being delayed.
[51]      The contractor’s letter
of 25 October 2018 for the first time raised the contamination
which
the contractor asserts came to its knowledge on the 30
th
September 2018.  On 31
st
October 2018 the owner
responded, denying that the LCO was not in accordance with the fuel
quality specifications; and contending
that it is apparent that the
source of contamination must be downstream of the fuel connection
point.  The contractor’s
letter of 25 October 2018 is
therefore written at a high level and way after the completion date.
It notifies that the contractor
will submit a fully detailed claim
for extension of time and additional payment in due course.
[52]      Mr Subel submitted that the
contractor therefore does not make out a case at all that the
LCO
contamination caused a delay.  Also, he submitted that no case
was made out that it was the owner that caused the contamination.

The high watermark of the contractor’s case is the letter of 2
November 2018 by Greg Combrink to Charl Janse van Rensburg.
The
last paragraph of that letter says:
“
Considering the above it seems very likely that the water
has been fed to the FOPT in the feed. The most likely source of this
is
the supplier fuel tanks.  We are still performing tests for
water in the fuel on samples of LCO taken from various locations
in
the KIPP plant including in the upstream line from the ILCO.  We
are also running tests to evaluate the efficiency of the
FOTP.
”
This letter stressed Mr Subel was written a day after the owner
called the two bonds.  The assertions in this email are not

common cause.
[53]     He submitted that the applicant has
known of the contamination all along.  This appears
from the
letter of 31 October 2018, and yet there is no evidence that can
attribute the contamination to the owner.  Neither
is there any
evidence of a delay as result of the contamination.
[54]      Insofar as the contractor
relies on a fraud constituted by the owner calling the retention
bond
(which was allegedly intended for defects) in respect of delay
damages, Mr Subel pointed to the definition of “
performance
bond
” in clause 1.1.119 (which refers to Appendix “U”);
the definition of “
retention bond
” at paragraph
1.1.142, which also refers to Appendix “U”; and the
definition of “
time for completion
” at paragraph
1.1.153.
[55]      The performance bond at page
478, and the retention bond at page 490, contain identical
trigger
provisions for the call up of the bonds.  It is simply:
“
The bank hereby irrevocably and unconditionally undertakes
to pay to owner within three business days following that on which it

receives a written demand from owner in accordance with clause 4
below, stating that the contractor is in breach of its obligations
in
terms of the contract or an event as stated in sub-clause 15.2.5 of
the contractor has occurred in respect of the contractor,
an amount
equal to the lesser of:
(a)
The amount specified in such
demand; or
(b)
The bond amount stated in the
first schedule less the aggregate of all previous payments made under
this bond.
”
(This is the clause as it appears in the performance bond; in the
retention bond the only difference is the insertion of the word

“
either
” after “
stating
”.)
[56]      Mr Subel submitted that the
purpose of retention is to give security.  All that is
required
to trigger the entitlement on the part of the owner to be paid out of
the retention bond, is the statement of a breach.
He submitted
that such a payment is not irreversible, because the contractor can
always claim in back if it should be able to prove
that it did not
actually commit a breach. But the banks are not obliged to become
involved in the underlying dispute between the
owner and the
contractor.
[57]      As regards the submission
that the owner was obliged first to notify the contractor of
a breach
and to negotiate its resolution, this was denied. In any event,
submitted Mr Subel, the terms of the bonds do not require
such
prerequisites.
[58]      As to the law, Mr Subel
referred to
Loomcraft Fabrics CC v Nedbank Limited and Another
[1995] ZASCA 127
;
1996 (1) SA 812
(A) where at page 816 Scott, AJA referred with
approval to the English case of
R D Harbottle (Mercantile) Ltd and
Another v National Westminster Bank Ltd and Others
[1977] 2 All
ER 862
(QB) where at 870b-d it was said that it was only in
exceptional cases that the courts will interfere with the machinery
of irrevocable
obligations assumed by banks.  “
They are
the lifeblood of international commerce.  Such obligations are
regarded as collateral to the underlying rights and
obligations
between the merchants at either end of the banking chain. Except
possibly in clear cases of fraud of which the banks
have notice, the
courts will leave the merchants to settle their disputes under the
contracts by litigation or arbitration as available
to them or
stipulated in the contracts. The courts are not concerned with their
difficulties to enforce such claims; these are
risks which the
merchants take.
”
[59]      Mr Subel refer also to
Guardrisk Insurance Company Limited v Kentz (Pty) Limited
2013
JDR 2727 (SCA).  At paragraph [13] the court stated that the
liability of the bank as principal is absolute and unconditional,
and
should not be construed to create an accessory or collateral
obligation.  The court referred to
Lombard Insurance Co Ltd v
Landmark Holdings (Pty) Limited and Others
, in which the court
compared bonds of this kind with irrevocable letters of credit issued
by banks and used in international trade.
The essential feature
is the establishment of a contractual obligation on the part of the
bank to pay the beneficiary, and this
obligation is wholly
independent of the underlying contract.
[60]      Reference was also  made
to
Dormell Properties 282 CC v Renasa Insurance Co Ltd and Others
NNO
,
2011 (1) SA 70
(SCA).
[61]      As to the balance of
convenience Mr Subel submitted that the contractor called on its own

subcontractor in exactly the same terms as the owner is now calling
upon the contractor in this case, and the subcontractor, Worley

Parsons launched an urgent application to interdict the payment of
the on-demand bonds issued in favour of the contractor.
The
contractor’s explanation for calling those bonds against Worley
Parsons was that it was “
a cautionary response
” to
the owner’s initial threat to impose delay damages against the
contractor, “
on a back to back basis
”.  As it
happens, in that matter the application for an interdict by Worley
Parsons against the contractor was successful.
[62]     Mr Subel concluded his argument by
asking for a dismissal of the application with costs of two
counsel.
Reply
[63]      In reply Mr Gautschi moved a
further amendment to the notice of motion, to provide for
the interim
interdict to pend a referral to oral evidence of the question whether
or not there was a fraud on the part of the owner
in calling up the
bonds.
[64]      As to the prayer to pend the
interim interdict to the arbitration proceedings, Mr Gautschi
pointed
out that several claims for extension of time by the contractor had
been made and rejected as appears from page 580 to
595. These issues
have to go to arbitration in any event.  In terms of clause 20
of the General Conditions disputes are to
be referred to arbitration
in accordance with the ICC Rules. That arbitration process has
started, and the interim interdict which
the contractor seeks, can
simply be pended to that arbitration.
[65]      Mr Gautschi submitted that
whether or not the banks were party to the arbitration agreement
is
irrelevant.  The question is whether the owner knew that it
could not honestly assert that the contractor was in breach
of its
contractual obligations.
[66]      He submitted that the
contamination of the LCO only came after the natural gas problem

which was the first basis for an extension of time.  As to the
facts, he submitted that there was initially on the part of
the owner
a postponement of the failure to supply natural gas and not a failure
in itself as envisaged in clause 2.5.8.  With
reference to the
owner’s letter of 10 May 2017 he pointed out that the owner
there advised the contractor that natural gas
would only be available
in November 2017.  He submitted that this kind of postponement
was perpetuated until 27 April 2018
when the owner first advised the
contractor that it could not supply natural gas.
[67]      With reference to the
sequence of the testing, he submitted that this was interrupted until

27 April 2018 when it became clear that natural gas could not be
supplied. Until then the contractor could not progress beyond

functional testing. Mr Gautschi pointed out that the contamination
was raised in the founding affidavit at paragraphs 41.5 and
41.6, and
that the letter and the report was annexed and that this was
sufficient raising of the dispute in the founding papers.
It was
dealt with fully in the answering affidavit but when the response is
considered, it is in fact no more than a bare denial.
The owner
says that the contractor could have used diesel, but for that an
instruction is required which of course the owner would
not give.
[68]      He submitted that the
contractor was never put, in this litigation, to establish that it

was ready to receive natural gas and uncontaminated crude oil. In any
event on 24 November 2017 the contractor wrote that it was
ready to
commence with testing and commissioning associated with the fuel gas
system.  In that letter the contractor specifically
requested
the owner to make natural gas available by 27 November 2017 in order
to enable the contractor to commence with the testing
and
commissioning of the works on natural gas, and the contractor’s
rights were strictly reserved.  So, submitted Mr
Gautschi,
clearly the contractor has established an entitlement to an extension
of time. The owner could not honestly have believed
otherwise.
[69]      Mr Gautschi submitted that
for his case on fraud he relied on first that the owner knew
that the
contractor could not test until 27 April 2018; and that the owner is
in bad faith in rejecting the numerous applications
for extension of
time that the contractor had put in.  Based on these two facts,
the owner could not honestly believe when
it said that a breach had
been committed, certainly not to call the US $62 million.
[70]      As concerns the entitlement
to call the retention bond, Mr Gautschi submitted that the
retention
bond itself is the wrong place to look to see whether there was such
an entitlement.  He submitted that one must
look at the
contractual relationship between the parties, and if they are agreed
that the retention bond was for a specific purpose,
and that purpose
was not being honoured, then the contractor was entitled to apply to
stop its payment out.
[71]      In this context he stressed
that the retention bond was kept at 10% and the performance
bond at
15%, which coincided exactly with the only form of damages claimable,
being delay damages, which was also kept at 15%.
He submitted
that in fact the contractor did not even need to prove fraud:
if the contractual intention was that the retention
bond was to be
used solely for defects and not delays, then the owner could not, as
a matter of contract, call on it for delays.
But he submitted that
the decision to call the retention bond was a deliberate decision
anyway.
[72]      On the contractor’s
calculation the extended date for completion ought to be 21 August

2018 in respect of the delay caused by the natural gas issue; and the
period from 21 August 2018 to 2 November 2018 would fill
the period
in respect of the delay damages.
[73]      He denied that there was any
admission of liability by the contractor in calling up the
bonds
against the subcontractor; it was a standard precaution in matters of
this kind. In any event, he pointed out that the delay
complained of
as against Worley Parsons occurred long before the commissioning
stage and was related to problems with the design
function as appears
from the contractor’s letter of 3 August 2015 to Worley
Parsons. He referred also to the contractor’s
letter of 19
October 2015 and of 14 January 2016 in this regard.  So, he
submitted, it was not dealing with a delay in commissioning.
[74]      As to balance of convenience
he submitted that the contractor’s case remained that
the owner
was an SPV; and whatever its contention of “
free equity
”
meant, it was not cash in the bank.  He submitted that it was
unthinkable that the contractor should execute against
a power plant
in Ghana and therefore the balance of convenience hugely favoured the
contractor.
[75]      In further submissions Mr
Subel argued that the 2
nd
and 3
rd
respondents,
the banks, might not want to be involved in a reference to fraud.
He submitted that if this Court cannot find
that the contractor had
an entitlement to an extension of time; or if this Court experienced
uncertainty in that regard, the contractor’s
case must fail.
[76]      He submitted too that the
argument that the contractor need not prove fraud at all and
could
obtain an interim interdict on a contractual basis was new; it was
based on a tacit term argument; and no such case has been
pleaded.
He referred again to the General Conditions of contract clause 4.2.4
which provide for the release of the retention
bond upon the taking
over date of the whole of the works and the substitution for it by a
replacement performance bond, upon which
the performance bond held
until then would also be released.
[77]      He disputed that the contract
required a specific instruction by the owner to proceed without

natural gas and submitted that clause 2.5.3 of the General Conditions
is the source of the owner’s obligation.  It does
not
provide there that the contractor has to wait for an instruction; if
the natural gas is not supplied by the date when the contractor
is
ready to commence commissioning as referred to in clause 2.5.3, then
that constitutes a failure in terms of clause 2.5.8 of
the General
Conditions.
[78]      It was for the contractor to
show that it was ready to commence commissioning in terms
of clause
2.5.3, yet this was nowhere asserted. He submitted that there were
three references in the correspondence that preceded
the litigation
in which this point was issuably raised.  First, in the owner’s
letter of 27 April 2018 paragraph 6.3
where the owner denied that the
lack of natural gas has had any impact on the contractor’s
performance of its obligations.
There it is asserted that the
contractor is simply not ready to receive the gas and has never
particularised what impact the lack
of gas is alleged to have had.
[79]      Then in the letter of 28
November 2017 by the owner in paragraph 3.5 the owner again asserted

that the contractor was not ready to commence testing and
commissioning on natural gas and accordingly does not require natural

gas to be made available on 27 November 2017.  Also in that same
letter at paragraph 4.2 the owner asserted that the contractor
was
not then ready to receive natural gas and so the owner’s
obligation had not yet been triggered. Therefore Mr Subel submitted

that no case was made out that the owner delayed. Mr Subel submitted
further that one could go beyond the functionality testing
without
natural gas:  each of the three fuels had to be tested
independently.
[80]     In a further response Mr Gautschi
submitted that there was no impediment to asking for a reference
to
oral evidence because the banks are in any event simply abiding.
He reiterated that the fraud is not required to be proved
on the
calling of the retention bond because that is a legal argument.
The retention bond could only be used for defects
and not delays.
Yet the owner called it for delays.
[81]      As to clause 2.5.8 he
submitted that until there was a statement from the owner that they

are unable to supply the natural gas, the contractor was unable to
proceed as if there was a failure. He reiterated his submission
that
without successful completion of the functional testing with all
three fuels, one could not move on to do the performance
and
reliability testing.
[82]      Finally, he submitted that
the contractor was implicitly ready, in any event, to do the

commissioning.  This appears from the letters.
Discussion
[83]      As I see it, the issues that
arise in this matter are: has the contractor shown that there
is a
contractual prohibition (with or without having to show absence of
honest belief in the asserted breach) against calling on
the
retention bond for delay damages? And has the contractor shown that
there was no honest belief on the part of the owner in
asserting
breach by the contractor?
The contractual case
[84]       The contractual case,
whether in the form of the fraudulent call on the retention
bond as
delay damages are allegedly not covered by it, or in the more nuanced
form raised in reply (that the call on the retention
bond could be
interdicted without having to show fraud) was not pleaded in the
founding affidavit. The terms of the bonds do not,
certainly not
expressly, contain the limitation contended for. Mr Gautschi argued
that the limitation would not be found there
anyway; the limitation
exists within the contractual scheme arranged between the owner and
the contractor.
[85]      Accepting that if such a
limitation exists, that is where it is to be found, the contention

still requires the importation of an implied term (within its
narrower meaning of a tacit term) into the parties’ contract.

The “entire agreement” provision at clause 1.20 would not
be an impediment to such a clause (
Ranch International Pipelines
(Transvaal) (Pty) Ltd v L M G Construction (City) (Pty) Ltd; LMG
Construction (City) (Pty) Ltd v Ranch
International Pipelines
(Transvaal) (Pty) Ltd and Others
1984
(3) SA 861
(W)), nor was it argued to be such; but it was
argued that it should have been pleaded.
[86]      In
Triomf Kunsmis (Edms)
Bpk v AE & CI Bpk en Andere, 1984(4) SA 261 (W)
the applicant
asserted a new cause of action, based on a tacit contract, in the
replying affidavit. When the court was confronted
with the
proposition that a tacit term need not be expressly pleaded, because
it arises from all the facts already pleaded as part
of the papers,
the argument was rejected. The court held that where a tacit contract
is relied upon it must, amongst other things,
be averred that the
party concerned relies on a thus proven contract from which the
remedies which he seeks to enforce flow.
[87]      That case applies to tacit
contracts as opposed to tacit terms, but in my view the same

principle applies. Insistence on pleading the very term said to have
been breached is, as I see it, essential for the proper running
of
motion court proceedings. If it is not done, the court does not have
the benefit of both sides’ evidence and submissions
on the very
issue that arises in the case. That is a fundamental omission that
negates the most essential tenet of our legal process,
being that
both sides must be heard. The contractual case therefore cannot be
considered.
No honest belief in the contractor’s alleged breach?
[88]      That brings me to the second
point. The parties are not disagreed on the legal test. It
is,
essentially, fraud: does the owner call up the bond well knowing that
it is not entitled to assert the essential prerequisite,
viz a
contractor’s breach?  The language used in the cases is
strong: Scott, AJA in Loomcraft, borrowing from judgments
in the UK,
speaks of “the most exceptional cases”. And equally
important is to stress that the minority judgment of
Cloete, JA in
Dormell was held to be correct in
Coface South Africa Insurance Co
Ltd v East London Own Haven t/a Own Haven Housing Association,
2014
(2) SA 382
(SCA).
Coface held that the majority judgment in
Dormell was wrong.
[89]       The Coface court
stressed that the relationship between the owner and the banks
(guarantors) is unrelated and unaffected by the relationship between
the owner and the contractor; these two sets of relationships
are, in
the words of Cloete, JA in Dormell, res inter alios acta. The banks
must pay; the underlying disputes between owner and
contractor are –
barring fraud – none of their business.
[90]      In this context I should say
something about the contractor’s application to amend
its
notice of motion to include an application for an interim, as opposed
to final, interdict in the alternative. The four requirements
for an
interim interdict are well-known: a prima facie right although open
to some doubt; irreparable harm if the interdict is
refused; no
satisfactory alternative remedy; and balance of convenience.
[91]      In the context of bonds such
as are involved in this case, it seems to me that, generally,
this
last requirement will be satisfied only with considerable difficulty.
The very point about such bonds is that they should
serve as
unclouded immediate cash despite the underlying real dispute between
an owner and a contractor as to the respective legal
entitlements of
the parties.
[92]      That underlying dispute is
required to be resolved in the manner provided for in the contract

between them; and its determination may even come to a conclusion
wholly different from that which the owner asserted to the banks.

Moreover, as happened in Dormell, such a wholly different conclusion,
even if it is reached before the bonds are called, affords
no defence
at all to the calling of the bonds.
[93]      The point is that the
arbitration process binds those two parties to it only; and it is
a
different process, dehors the process involved in the calling up of
the bonds. Self-evidently, ultimately there has to be, as
between the
owner and the contractor, a final determination of their respective
rights and obligations and pursuant thereto, a
squaring of accounts.
And in that process the owner will not be permitted to cling to a
credit following payment by the banks under
performance bonds, should
the final dispute resolution between the owner and the contractor
reflect that the owner owes the contractor
money and not vice versa.
[94]      But in the meantime, the
contractually required bond is there to be called up, excepting
only
where in the clearest of cases a fraud is illustrated. To my mind,
that implies that there is, generally, little if any scope
to refer
the determination of the question of fraud to the very arbitration
which is the place for merits determination between
the owner and the
contractor.
[95]      Perhaps put differently: the
final resolution of the underlying contractual dispute between
owner
and contractor by viva voce evidence is the province of the
contractual arbitration proceedings; by definition, given the

structure and purpose of bonds such as these, that arbitration
process is anathematic to the demand of speedy determination of
the
question, between the owner and the banks, as to whether there is an
impediment to the bonds being called up.
[96]      This conclusion implies, of
course, that the applicant who wants to interdict the calling
of a
bond must pass the muster of the approach to factual disputes in an
application for final relief: the applicant must succeed
on the
respondent’s version, together with those allegations of the
applicant which the respondent cannot (really) dispute.
It is
for this reason that the parties’ contentions are set out in
some detail above. To my mind, they show that the applicant
cannot
succeed, essentially for the reasons that I now state briefly.
[97]      First, the dispute about
claimed extensions of time (EOTs) is what underlies the calling
of
the bonds, as will appear from the parties’ contentions.
Generally, in construction arbitrations such disputes are often

complex, and the more complex, the less the scope for finding on
affidavit that no honest opposing belief can be held.
[98]      Second, in this case, the
debate about whether the contractor was “ready to commence

commissioning” is very real. The owner contends that the
contractor was in fact not ready to commence commissioning at any

time before 27 April 2018. The owner’s letter of that date is
referred to above. Its contention, as advanced before the court,
was
that clause 2.5.8 implies that the contractor need not wait for the
owner; if natural gas is not available, the commissioning
goes ahead
without it.
[99]      That argument, namely that
absence of natural gas does not require a variation under clause

8.4.1, and does not imply a delay attributable to the owner under
clause 8.4.3, is not obviously without merit. The argument is
that
these two clauses do not impact clause 2.5.8, which has its own
internal mechanism for what occurs if the owners fails to
provide
natural gas.
[100]    The contractor’s argument, that it
cannot be said that there has been a failure until the owner
has
conveyed that there is an inability, really shows where the rub lies.
A failure and an inability are not necessarily the same
thing; a
failure will have occurred when the owner will have failed to provide
when the time to provide has arrived. Accordingly
I do not believe
that it can be said on these papers that the contractor’s
position on clause 2.5.8 and its application to
these facts are so
axiomatically correct, that in truth the owner knew them to be
correct.
[101]    Third, the correspondence war between
the parties had been on-going for some time before the bonds
were
called. That is indicative, to some extent, of the substance of the
opposing contentions. If the owner’s position was
completely
unmeritorious, one would have expected the contractor, who must have
seen the calling of the bonds on the horizon, applying
for an
anticipatory interdict the moment the owner’s contention was
first raised.
[102]    Fourth, the parties’ respective
positions on the LCO contamination are starkly different. The

contractor says the owner supplied contaminated fuel; the owner,
having examined the issue, disputes this. It is not possible on
these
papers to conclude that the clearest of cases has been made out that
the owner dishonestly believes in its own position.
Conclusion
[103]    In these circumstances the application
cannot succeed. The application to amend the notice of motion
is
dismissed; and the main application is dismissed with costs,
including the costs consequent upon the employment of two counsel.
WHG
van der Linde
Judge,
High Court
Johannesburg
For
the applicant:
Adv. A Gautschi, SC
Adv. JG Smit
Instructed
by:
Tiefenthaler Attorneys Inc
Applicant’s attorneys
c/o Dockrat Inc
Office Suite B
Dunkeld Court
16 North Road
Dunkeld West
Johannesburg
O11-8070834
jenna@constructionlaw.co.za
martin@constructionlaw.co.za
danielle@constructionlaw.co.za
For
the respondent:
Adv A Subel, SC
Adv. CJ Bresler
Instructed
by:
Herbet Smith Freehills
South Africa Attorneys Inc
First respondent’s attorneys
4
th
floor Rosebank Towers
15 Biermann Avenue
Rosebank
jonathan.ripley-evans@hsf.com
Date
argument: 7 November 2018
Date
judgment: 16 November
2018