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[2016] ZAKZPHC 91
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Lombard Insurance Company Limited v Stewart and Others (15923/15) [2016] ZAKZPHC 91 (11 October 2016)
IN
THE HIGH COURT OF SOUTH AFRICA
KWAZULU-NATAL
DIVISION, PIETERMARITZBURG
CASE
NO: 15923/15
In the
matter between:
LOMBARD
INSURANCE COMPANY
LIMITED APPLICANT
(Reg.
No: 1990/001253/06)
and
KENNETH
LOGAN JOSEF
STEWART 1
ST
RESPONDENT
KENNETH LOGAN JOSEF STEWART
N.O. 2
ND
RESPONDENT
MOIRA STEWART
N.O. 3
RD
RESPONDENT
J U D
G M E N T
Delivered
on : TUESDAY, 11 OCTOBER 2016
OLSEN
J
[1] The
applicant, Lombard Insurance Company Limited, is in the business of
issuing what are commonly called construction guarantees.
It
issued one in favour of Umgeni Water relating to a construction
contract concluded between Umgeni Water and a contractor
called
Cyclone Construction (Pty) Limited. Lombard had earlier secured
an indemnity from Cyclone as well as undertakings
(I use a neutral
term, for the time being) from Mr Stewart, the first respondent, and
two trusts, in terms of which, Lombard claims,
those parties
undertook to make good if Cyclone did not honour its indemnity.
[2] Lombard
paid Umgeni Water R2 690 028,36 against a demand made under
the construction guarantee, and now claims that
amount from Mr
Stewart and one of the trusts (the other being incapacitated for want
of the appointment by the Master of an additional
trustee). The
claims are made because Cyclone, which has gone into liquidation, did
not honour its undertaking to indemnify
Lombard when the latter paid
Umgeni Water under the construction guarantee. The trust which
is now properly before the court
is the Bankenbrig Trust. It is
represented by the second and third respondents as well as its
attorney of record, Mr Geyser,
who is the third of its three
trustees. The Trust makes common cause in the defences raised
by Mr Stewart in his answering
affidavit. For the reason that
the Trust is not in my view in precisely the same position as Mr
Stewart, I will deal with
the claim against him first.
[3] All
the undertakings relied upon by Lombard are written. The proper
construction of them, and the nature of the liabilities
they impose,
are in dispute. In addition Mr Stewart challenges the
proposition that the indemnity furnished by Cyclone ever
gained
contractual force.
The
Construction Guarantee
[4] In
dealing with these issues it is convenient to start with the last
executed of the various documents which feature in this
case, namely
the construction guarantee. It was issued by Lombard in favour
of Umgeni Water on 28 March 2012. It provided
for a maximum
liability in the precise sum claimed in these proceedings. The
letter conveying the demand for payment under
the guarantee gave no
explanation for the making of it other than the simple statement that
Umgeni Water had terminated the contract
with Cyclone.
[5] According
to Lombard after some delay it paid Umgeni Water in accordance with
the demand. The founding affidavit offers
no explanation for
the payment to Umgeni Water besides the fact that the latter had made
the demand. There is no evidence
before me to the effect that
Cyclone owed anything to Umgeni Water. According to Lombard
none is necessary, because the guarantee
it provided is a so-called
“on-demand guarantee”. Mr Stewart disputes that.
He contends that the construction
guarantee is in fact a deed
of suretyship conveying only an accessory obligation, the liability
of Lombard thereunder having been
entirely dependent on the existence
of a due and undischarged principal obligation owed by Cyclone to
Umgeni Water. Mr Stewart
argues that as the founding affidavit
does not allege the existence of such a principal obligation, it has
not been established
that Lombard was obliged to pay Umgeni Water.
[6] In
Minister of Transport v Zanbuild
Construction
2011 (5) SA 528
(SCA) at
para [20] Brand JA accepted, for the purposes of the argument in that
case, that the interpretation of construction guarantees
is often
bedevilled by loose language. That is the case here, where each
of the interpretations advanced is generated by
a focus upon one part
of the document to the near exclusion of all else. Of course
the focus of the conflicting interpretations
is not the same.
[7] As
pointed out in
Zanbuild
(at
para [13]), the characteristics of an on-demand guarantee are that it
specifies an event which generates a right to make a claim
under it,
and provides for payment on demand. Such a demand would
be accompanied by notification that the specified
event has occurred.
Fraud aside, the guarantor must pay forthwith, without going
behind the demand with a view to avoiding
payment by challenging the
assertion by the employer that payment is due. It is not a
requirement of the guarantor’s
liability that anything should
be owing by the contractor to the employer when the demand is made.
(See
Coface South Africa
Insurance Co Limited v East London Own Haven t/a Own Haven Housing
Association
2014 (2) SA 382
(SCA),
paras [10] to [25], and the cases referred to there.)
[8] The
alternative form of construction guarantee is in the nature of a
suretyship, or indeed a simple deed of suretyship. The
guarantee may stipulate when, or in what circumstances, a demand for
payment may be made, but the legitimacy of the demand depends
on the
existence of a principal debt owed by the contractor to the employer.
It is uncontentious that in our law a surety
is entitled to
raise any defence that the principal debtor might raise. Given
that, it would take clear language in such
a construction guarantee
to convey that, despite the fact that the right to demand payment
depends on the existence of a debt owed
by the contractor to the
employer, the guarantor is not entitled to avoid payment by
challenging the existence of the principal
debt when called upon to
pay by the employer.
[9] In
Zanbuild
the
court concluded that the language employed in the guarantee in that
case was akin to language associated with suretyships. In
this
case the language employed in the guarantee provided by Lombard is
the language of suretyship. The preamble records
that the
construction contract required Cyclone to provide “security by
way of suretyship for the due and faithful fulfilment”
of the
building contract by Cyclone. The operative provision in the
guarantee records that Lombard’s representatives
signing the
document
“
do
hereby guarantee and bind [Lombard] jointly and severally as surety
and co-principal debtor to [Umgeni Water] under renunciation
of the
benefits of division and excussion for the due and faithful
performance by [Cyclone] of all the terms and conditions of
the said
contract subject to the following conditions: …”
[10] Seven
conditions follow this statement of the undertaking made by Lombard.
Two of them are relevant to the present enquiry
because they
are relied upon by Lombard in contending that, despite what is set
out immediately above, the guarantee it furnished
to Umgeni Water is
an on-demand guarantee, not dependent on the existence of a debt owed
by Cyclone to Umgeni Water. They
read as follows.
“
4. The
guarantor’s total liability hereunder shall not exceed the sum
of R2 690 028,36 (Two million six hundred
and ninety
thousand and twenty eight rand and thirty six cents) (10% of the
contract price) which amount the guarantor agrees to
hold at the
employer’s disposal.
5. The
guarantor declares that it is fully acquainted with the terms and
conditions of the said contract and that the guarantor
waives the
legal exceptions available to a guarantor and undertakes to pay the
said amount or such portion thereof as may be demanded
immediately on
receipt of a written demand from you. A certificate issued by
the employer shall be sufficient and satisfactory
evidence as to the
amount of the guarantor’s liability for the purpose of enabling
provisional sentence or any similar relief
to be obtained against the
guarantor.”
[11] The
first thing of importance to note is that these two clauses do not
introduce or identify an event which will justify the
making of the
demand. As the document has already specified that the
liability of Lombard is an accessory to the liability
of Cyclone,
that accordingly remains the position.
[12] Both
conditions 4 and 5 record that the claim (or claims, presumably) may
amount to less than Lombard’s maximum liability
under the
instrument. That also supports the conclusion that the two
clauses recognise that the amount which may be demanded
may be
restricted by some or other circumstance, which can only be the fact
that the principal debt at the time of demand is less
than the
stipulated maximum. It is legitimate to ask why Umgeni Water
would claim less than the stipulated maximum if the
provisions of the
instrument did not oblige it to do so. (See
Zanbuild
,
para [20].)
[13] The
argument for Lombard is in essence that the undertaking to pay
immediately on receipt of a written demand makes this a
demand
guarantee. I do not agree. It is not provided that, as
between Umgeni Water and Lombard, the making of a demand
by Umgeni
Water will be regarded as irrefutable proof of the existence of a
co-extensive principal obligation owing by Cyclone
to Umgeni Water.
[14] In
my view the language of clauses 4 and 5 is reconcilable with the
primary statement of Lombard’s liability, namely
that of a
surety. The word “demand” is in my view employed in
clause 5 to mean what it ordinarily means in common
usage, such as
when one says that any existing liability (for instance an
overdfraft) is payable on demand. What the word
conveys in the
document now under consideration is that the amount must be paid, not
seven days or a month after demand, but immediately
upon demand.
When used in that sense the word “demand” is not a
necessary requirement for the creation of a debt,
as it is in the
case of a true on-demand guarantee.
[15] The
construction guarantee in issue in this case stands in sharp contrast
to the one issued by Lombard and considered in
Lombard
Insurance Company Limited v Landmark Holdings (Pty) Limited and
Others
2010 (2) SA 86
(SCA), where a
clause in the guarantee provided specifically that it should not be
“construed as any intention whatsoever
to create an accessory
obligation or any intention whatsoever to create a suretyship”.
Here the guarantee was expressed
as a deed of suretyship. It
is not an on-demand guarantee.
[16] As
mentioned earlier Lombard has not attempted to establish that any
principal debt was owed by Cyclone to Umgeni Water at
the time when
it (Lombard) paid Umgeni Water. Given my interpretation of the
construction guarantee the conclusion must be
that Lombard has failed
to establish that it was obliged to pay Umgeni Water. The
question as to whether that means that
Lombard’s claims against
Mr Stewart and the Trust must be denied depends on the provisions of
the undertakings made in favour
of Lombard by those persons and by
Cyclone itself. I deal with the last mentioned undertaking
first.
Cyclone’s
Undertaking
[17] The
written undertaking furnished by Cyclone is headed “Deed of
Indemnity”. In the document Cyclone is called
the
“guarantor”. The document was signed on 11 August
2006, and was executed on behalf of Cyclone by Mr Stewart
who, on the
same day, executed the undertaking upon which he is sued in these
proceedings.
[18] In
the preamble to the document it is recorded that Lombard had agreed
to execute or procure the execution of guarantees for
Cyclone and
that it did so upon the strength of the security and indemnity
provided by Cyclone in the document. Cyclone’s
undertaking follows that preamble.
[19] The
body of the document defines “guarantees” to
include suretyships. Clause 2 is the principal statement
of the
undertaking. Omitting words which make no contribution to its
understanding in the present context, it provides as
follows.
“
In
consideration of the insurance company executing or procuring the
execution of any guarantee or guarantees, the guarantor hereby
indemnifies and keeps indemnified the insurance company and holds it
harmless from and against all claims, liabilities, costs,
expenses,
damage and/or losses (including loss of interest) of whatsoever
nature sustained or incurred by the insurance company
under or by
reason or in consequence of having executed or procured or hereafter
executing or procuring any guarantee or guarantees,…
There
shall be no obligation upon the insurance company to resist or defend
any claim in terms of a guarantee.”
[20] In
paragraph 3 of the document Cyclone undertook and agreed to pay to
Lombard
“
immediately
on first written demand any sum or sums of money which the insurance
company may be called upon to pay under the guarantee/s,
whether or
not the insurance company at such date shall have made such payment,
and whether or not the guarantor admits the validity
of such claim
against the insurance company under the guarantees; …”
[21] The
obligations of Cyclone are expressed in the widest possible terms in
clause 2 of the undertaking. Umgeni Water undoubtedly
made a claim
under Lombard’s guarantee. We do not know whether it was
capable of being resisted. But clause 2
provides that Lombard
was under no obligation to resist any claim; which must mean that
(fraud aside) it was entitled to pay the
claim. (There is no
suggestion in this matter that any fraud is involved.)
[22] The
guarantee renders the undertaking made by Cyclone an equivalent of
the “on-demand guarantees” discussed earlier.
Lombard
was called upon to pay under it’s guarantee. That is the
event which triggered Lombard’s right
to deliver a demand to
Cyclone. Cyclone was then obliged to pay, and for the sake of
clarity clause 3 records that such payment
would be due even if
Cyclone did not admit the validity of the claim against Lombard.
[23] I
accordingly conclude that Cyclone became obliged to meet Lombard’s
claim against it whether or not Lombard would have
been entitled to
resist the claim made by Umgeni Water upon the basis that it was in
fact not ancillary to an underlying principal
debt then owed by
Cyclone to Umgeni Water under the construction contract concluded
between those parties.
[24] Mr
Combrink, arguing for the respondents, contends that, whatever its
proper construction, the contract of indemnity between
Lombard and
Cyclone did not ever gain contractual force. The argument is
structured around the proposition that the form
of indemnity signed
by Cyclone also provided for the document to be signed by Lombard,
which was not done. With reference
inter
alia
to
Goldblatt
v Fremantle
1920 AD 123
, Mr Combrink
argues that this is a case where the parties had decided that their
contract be reduced to writing, and that it would
only come into
existence once it had been signed by both of them. The relevant
passage in the judgment of Innes CJ in
Goldblatt
appears
at pages 128 – 129. (References are excluded in the
quotation below.)
“
Subject
to certain exceptions, mostly statutory, any contract may be verbally
entered into; writing is not essential to contractual
validity. And
if during negotiations mention is made of a written document, the
court will assume that the object was merely
to afford facility of
proof of the verbal agreement, unless it is clear that the parties
intended that the writing should embody
the contract. At the
same time it is always open to parties to agree that their contract
shall be a written one; and in that
case there will be no binding
obligation until the terms have been reduced to writing and signed.
The question in each case
is one of construction.”
[25] Accepting
that it is a question of construction, Mr Combrink argues that the
document is unlike a unilateral indemnity such
as a suretyship, and
was intended to impose positive obligations on Lombard. He
refers in this regard to the contents of
the preamble which I have
already mentioned. He argues that signature by both parties
must have been contemplated as the
only method of creation of
enforceable rights and obligations because the contract imposes
reciprocal obligations.
[26] The
operative provisions of the indemnity signed by Cyclone deal only
with promises made by Cyclone. I call this section
of the
document the operative one because it is introduced by the words
“
Now
this Deed Witnesses and it is hereby agreed
as
follows:”.
The
position is that not all words contained in a written agreement or
undertaking are intended to be the expression or embodiment
of rights
and obligations which are granted and imposed by the document
concerned. Cameron JA put it as follows in
ABSA
Bank Limited v Swanepoel NO
2004
(6) SA 178
(SCA), para [6].
“
At
its simplest, a contract is an enforceable promise to do or not to do
something. But when parties record an agreement in
writing,
they often add provisions that do not embody such promises. A
contract may have a preamble. It may contain
‘recordals’
and ‘recitals’. It may document prior events, or
record the parties’ future intentions.
It may contain
clarificatory or explanatory statements. The parties may place
on record matters that bear on the interpretation
of what they have
undertaken. It is therefore wrong to approach a written
contract as though every provision is intended
to create contractual
obligations.”
[27] In
plain words the two paragraphs of the preamble or recital which
precede the operative part of the deed of indemnity record
what the
insurance company has already done. They record that the
insurance company “has agreed” to provide guarantees
for
Cyclone and that it “has agreed” to execute them on the
condition that it receives the indemnity from Cyclone.
In my
view these were recordals not intended to be the embodiment of
promises made by Lombard which, to gain contractual
force, required
that Lombard sign the document in question.
[28] In
my view it is beyond question that Lombard accepted the indemnity
furnished by Cyclone. The document was delivered
by Cyclone to
Lombard. The undertaking upon which Mr Stewart is sued in this
case was signed on the same day as Cyclone’s
indemnity, and in
it he records that Cyclone “has agreed to indemnify”
Lombard. Subsequent to the execution of
the indemnity Lombard
provided guarantees for Cyclone. In his answering affidavit Mr
Stewart states that
“
the
applicant never signed the document and certainly did not convey its
acceptance of the terms thereof either to Cyclone or any
one of the
respondents”.
Mr
Stewart does not explain this statement by illustrating any terms or
mode of business subsequently conducted between Cyclone
and Lombard
which are inconsistent with those set out in Cyclone’s
indemnity. Neither does he explain the inconsistency
between
the undertaking he signed and the proposition that Cyclone had not on
the very same day indemnified Lombard. To
the extent that
it may be said that there is a dispute of fact concerning the
question as to whether Lombard accepted Cyclone’s
indemnity, I
do not regard it as
bona fide
.
Mr
Stewart’s Undertaking
[29]
Mr
Stewart’s undertaking is embodied in a document which is headed
“Deed of Suretyship”. In its preamble
it records
that Lombard has undertaken to provide construction guarantees for
Cyclone, that Cyclone has agreed to indemnify Lombard
in respect of
those guarantees, and that Mr Stewart has agreed to bind himself as
surety and co-principal debtor with Cyclone for
the due payment by
Cyclone to Lombard on demand of amounts which Cyclone may be liable
to pay to Lombard under the indemnity. The
operative provisions
appear under those recitals.
[30] Despite
the heading to Mr Stewart’s undertaking, it is more than a
suretyship. In clause 1, having bound himself
as surety, Mr
Stewart’s undertaking proceeds further with the words
“…
and
[I] further indemnify and keep indemnified [Lombard] and hold it
harmless from and against all and any claims, losses, demands,
liabilities, costs and expenses of whatsoever nature, including legal
costs between attorney and client which it may at any time
sustain or
incur by reason or in consequence of having executed or hereafter
executing any guarantee on behalf of the contractor,
…”.
[31] The
clause then goes on further as follows.
“
And
I/we further undertake and agree to pay to the insurance company on
demand any sum or sums of money which the insurance company
may be
called upon to pay under any guarantee whether or not the insurance
company shall, at such a date, have made such payment,
and whether or
not the contractor or me/us admit the validity of such claims against
the insurance company under the guarantee.”
[32] On
the plain wording of the written undertaking provided by Mr Stewart,
he bound himself not only as surety, but also as an
indemnifier of
Lombard in much the same way as did Cyclone. In both the
answering affidavit and in argument the complaint
was advanced that
the provision for an indemnity brings about that the document
incorporates both principal and accessory obligations,
which is
unfair (and indeed in the answering affidavit it is said to be
unconstitutional, without any explanation for that contention),
and
therefore unenforceable. However it is not stated in the
answering affidavit that Mr Stewart, a civil engineer who proclaims
his understanding of these matters, was misled in any respect as
regards the content of the undertaking which he signed.
[33[ In
my view his undertaking is enforceable, and given my finding
regarding the liability of Cyclone, it is enforceable whether
Mr
Stewart is regarded as Cyclone’s surety or Lombard’s
indemnifier. This is made clear in clause 7 (a) of the
document
which reads as follows.
“
This
deed shall be enforceable against me/us in accordance with the tenor
thereof, whether as an indemnity or otherwise, notwithstanding
that
the indemnity may in any way be invalid or unenforceable against
[Cyclone].”
[34] I
accordingly conclude that the claim against Mr Stewart must succeed.
It includes a claim for interest which has elicited
no
objection from the respondents.
The
Trust’s Undertaking
[35] The
position of the Trust is a little different. In its content the
undertaking signed on behalf of the Trust is in all
material respects
precisely the same as the one signed by Mr Stewart. However the
Trust’s undertaking was signed in
2002, four years or so before
Cyclone signed the indemnity in favour of Lombard. The founding
affidavit does not deal at
all with the arrangements which subsisted
before the Cyclone indemnity and Mr Stewart’s undertaking were
signed on 11 August
2006; that is save for the fact that it was
recorded that at that time (August 2006) Lombard had already
undertaken to provide
guarantees for Cyclone. According to Mr
Stewart, for many years prior to 11 August 2006 Lombard and Cyclone
had conducted
business without any formal agreement being in place.
[36] Accordingly,
the papers do not disclose the terms of the indemnity under which
Cyclone was obliged to Lombard as at November
2002, the breach
whereof would have brought about the Trust’s obligation as
Cyclone’s surety. In other words
the principal debt upon
the existence of which the Trust’s obligation as surety rests
has not been proved.
[37] The
founding papers do not specifically address the question as to
whether the indemnity provided by Lombard to Umgeni Water
may
properly be regarded as a construction guarantee which fell within
its undertaking to provide such guarantees for Cyclone prior
to the
execution of the Trust’s undertaking in 2002.
[38] Having
said the aforegoing, I am nevertheless satisfied that Lombard’s
claim against the Trust must succeed for the following
reasons.
(a) The
founding affidavit does assert that the Trust’s obligations set
out in its written undertaking (in the same terms
as the undertaking
of Mr Stewart) operate with respect to the contract guarantee
furnished by Lombard to Umgeni Water, and to the
claim for
reimbursement of Lombard’s expenditure under that guarantee.
(b) In
its terms the undertaking made by the Trust operates indefinitely,
subject to it’s right in terms of clause 9
to give notice to
terminate it’s undertaking in respect of guarantees postdating
such a notice.
(c) The
defences raised on behalf of the Trust do not extend beyond those
raised on behalf of Mr Stewart. There is no
allegation to the
effect that the Trust’s undertaking was terminated. There
is no allegation that the contract guarantee
furnished to Umgeni
Water is not one which falls within the ambit of the indemnity
provided by the Trust, despite the fact that
on the plain wording of
the indemnity, it does.
(d) In
the absence of such challenges specific to the position of the Trust
(as opposed to Mr Stewart) it seems to me that
Lombard’s
assertion that the Trust is also liable must be upheld, but only in
the Trust’s capacity as indemnifier.
The
Order
[39] The
Trust’s undertaking in respect of interest is expressed with
respect to the prime overdraft rate of ABSA, and not
of Nedbank, as
is the case with Mr Stewart’s undertaking. The prayer for
interest makes reference to the prime overdraft
rate of Nedbank. I
have already mentioned that no objection is taken to it, and I assume
that, as far as the Trust is concerned,
the absence of objection
signifies that it is satisfied with it’s obligation for
interest being expressed with respect to
the prime overdraft rate of
Nedbank.
[40] The
Trust and Mr Stewart are not found liable as co-sureties, but as
debtors each individually responsible for the same debt.
Payment
by one will release the other, but not in circumstances where there
is an automatic right of contribution. The
order must be framed
accordingly.
[41] As
to costs, they are claimed on the attorney and client scale. In
my view a proper construction of the undertakings
made by Mr Stewart
and the Trust does not support that claim. Attorney and client
costs are mentioned only in the statement
of the indemnity given with
respect to losses incurred in consequence of Lombard having executed
guarantees. The costs in
the present proceedings are incurred
in consequence of Mr Stewart and the Trust refusing to pay in terms
of their own undertakings.
The documents are silent on the
question as to the scale of costs in such proceedings. The
prayer for costs does not
extend to joint and several liability.
The
following order is made.
1. Each
of the first respondent and the Bankenbrig Trust (represented by it’s
trustees in their nominal capacities) are
ordered to pay to the
applicant the sum of R2 690 028,36, together with interest
thereon from 11 December 2013 to date
of payment at a rate 2% above
the prime overdraft rate charged from time to time by Nedbank Limited
(Fox Street branch), the one
paying, the other to be absolved.
2. The
first respondent and the said trust are ordered to pay the costs of
this application.
______________
OLSEN J
Date of
Hearing:
TUESDAY, 20 SEPTEMBER 2016
Date of
Judgment:
TUESDAY, 11 OCTOBER 2016S
For the
Applicants’ :
MR AJ DANIELS
Instructed
by:
FRESE MOLL & PARTNERS
APPLICANT’S ATTORNEYS
129 BEYERS NAUDE DRIVE
cnr MENDELSSOHN ROAD
ROOSEVELD PARK
(Ref.: Mr IP Gurvich/cl/L0060.1397)
c/o TOMLINSON MNGUNI JAMES INC
165 PIETERMARITZ STREET
PIETERMARITZBURG
(Ref.: V Reddy/ma/64F1993/15)
(Tel No.: 033 – 341 9100)
For the
Respondents :
MR LE COMBRINK)
Instructed
by:
VENNS ATTORNEYS
RESPONDENTS’ ATTORNEY
270 PIETERMARITZ STREET
PIETERMARITZBURG
(Ref.: AJLG/lp/23156591/S3310a)
(Tel.: 033 – 355 3205)