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[2009] ZAGPJHC 39
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KNS Construction (Pty) Limited v Genesis on Fairmount and Another (08/31859) [2009] ZAGPJHC 39 (21 August 2009)
IN
THE SOUTH GAUTENG HIGH COURT
(JOHANNESBURG)
CASE
NUMBER: 08/31859
In
the matter between:
KNS
CONSTRUCTION (PTY) LIMITED
Applicant
and
GENESIS
ON FAIRMOUNT
First
Respondent
LOMBARD
INSURANCE COMPANY
Second Respondent
JUDGMENT
MOKGOATLHENG
J
INTRODUCTION
(1) This application is
instituted by the applicant against the respondents for an order
interdicting the second respondent from
effecting payment to the
first respondent under a
Construction Guarantee
pending the
final resolution of arbitration proceedings to be commenced between
the applicant and the first respondent.
FACTUAL
BACKGROUND
(2) A consideration of
the materiality of the factual matrix predicating the application is
necessary to determine whether the applicant
has succeeded in showing
that the first respondent’s invocation of the
Construction
Guarantee
was legally impermissible.
(3) In November 2006 the
applicant and the first respondent concluded a written building
agreement in terms whereof the applicant
as the principal contractor
agreed to construct a retail and residential development at Erf 219,
Fairmount, Extension 2, No 3 Bradfield
Drive, Fairmount, for the
first respondent.
(4) The applicant
furnished the first respondent with security in the form of a
variable
Construction Guarantee
issued by the second
respondent. By mutual consent the
Construction Guarantee
was
replaced by a similar one expiring on the 31 December 2008.
(5) The
Construction
Guarantee
is a typical unconditional “
demand guarantee
”
similar to an irrevocable letter of credit issued by a bank and
utilized in international trade. Its essential feature is
to
establish a contractual obligation not accessory to any underlying
contract, and ensures that the second respondent’s
liability to
the first respondent under such
Construction Guarantee
is not
dependent upon any claims that the first respondent may have against
the applicant.
(6) In terms of the
agreement the applicant was obliged to achieve practical completion
of the entire works on the 28 February 2008.
Subsequently the
agreement was varied and the practical completion dates in respect of
the retail and residential sections were
extended to the 14 May 2008
and 9 June 2008 respectively.
(7) The applicant did not
achieve practical completion of the residential section on the 9 June
2008. It achieved practical completion
of the retail section on the
10 July 2008.
(8) On the 15 July 2008
the first respondent addressed a notice in terms of
clause 36.2
of the agreement to the applicant notifying it of its alleged breach
of the contract, namely, that it had failed to proceed with
the
execution of the residential section with due skill, diligence,
regularity and expedition, and to bring same to practical completion
in terms of
clause 15.3 and 24
of the agreement. The applicant
was also notified that should it not purge its default within a
period of 10 working days after
the date of the notice, the first
respondent intended to cancel the agreement.
(9) On the 12 September
2008 the first respondent cancelled the agreement due to the
applicant’s failure to extirpate its
default and achieve
practical completion of the residential section on the 25 July 2008.
(10) The first respondent
alleges that it has complied with the provisions of
clauses 5.0
and 5.1
of the contract and is entitled to make a call on the
second respondent to effect payment in terms of the
Construction
Guarantee
as it has “
lawfully and properly cancelled its
agreement with the applicant.”
(11) In contradistinction
the applicant alleges that the cancellation of the contact was
invalid because in terms of
clause 38.6
thereof, the first
respondent was precluded from cancelling the contract in that it was
in breach of the material terms thereof,
consequently its invocation
for payment under the
Construction Guarantee
being fully aware
of its misrepresentation, rendered such cancellation unlawful and its
conduct fraudulent.
LOCUS
STANDI
(12) Mr. Cook on behalf
of the first respondent argued that the
Construction Guarantee
is an independent contract between the first and second respondents;
consequently, the applicant had no privity of contract entitling
it
to
locus standi
to institute these proceedings.
(13) Counsel contended
further that the applicant had failed to establish a clear right or
the requisites for an interim interdict,
consequently, such failure
rendered the application nugatory.
(14) Although the
applicant seeks relief in the form of an interim interdict, in
substance the order ought is in effect final. I
am thus obliged to
approach this application as being substantially an application for
final relief and am consequently enjoined
to apply the principles
enunciated in
Plascon-Evans Plaints Ltd v Van Riebeeck Paints
(Pty)
[1984] ZASCA 51
;
1984 (3) SA 623
at 634H-638 and Carrara and Lecuona (Pty) Ltd v
Van der Heever Investment Ltd and Others
1973 (3) SA 716
(T)
in determining the application.
(15) It is trite that
where there is a fraudulent call on a
Construction Guarantee
the applicant having secured the guarantee, has a protectable
proprietary interest. In the unreported case of
Stafanutti and
Bressan (Pty) Ltd v Nedbank Limited and Another case NO (5311/2008)
ZAKZH50 (30 August 2008),
even without fraud being alleged,
locus standi
was found to exist because there was a
proprietary interest worthy of protection by way of an interdict.
(16) The second
respondent at the applicant’s behest issued a variable
Construction Guarantee
in favour of the first respondent. The
underlying agreement between the applicant and the first respondent
vis-a-vis
such procurement invests the applicant with a
protectable proprietary interest.
THE
JUSTICIABLE ISSUE
(17) The justiciable
issue is whether the first respondent was entitled to cancel the
agreement and correlatively, whether its invocation
of the
Construction Guarantee
was lawful and not fraudulent.
(18) The applicant’s
contention that first respondent’s cancellation of the contract
was invalid is premised on the
following factors:
(a) failed to pay an
Interim
Payment Certificate
in terms of the agreement;
(b) issued three
Interim
Payment Certificates
numbers 16, 17 and 18
late, and also
deducted and or “recovered” amounts from payments due to
the applicant;
(c) failed to provide
explanatory documentation to support the amounts of the unilateral
“
recoveries”
deducted from
Interim Payment
Certificates
;
(d) Unlawfully made
deductions from amounts certified as due to the applicant;
(e) unlawfully levied and
deducted penalties from
Interim Payments Certificates
;
(f) continues to withhold
funds unlawfully deducted; and
(g) fraudulently made a
demand on the second respondent to make payment of the “
full
outstanding balance of the guaranteed sum in the amount of R7 937
952.82.”
THE
FIRST RESPONDENT’S ALLEGED FRAUD
(19). The applicant
alleges that first respondent’s fraud resides in its invocation
of the
Construction Guarantee
in making a representation to
the second respondent that the agreement between itself and the
applicant “
has been lawfully and properly cancelled,”
notwithstanding the fact that it was aware that it was in material
breach thereof. The applicant contends therefore that such
cancellation was unlawful thus rendering the first respondent’s
invocation for payment fraudulent. In support of this proposition
Mr.
Jordaan on applicant’s behalf referred me to the unreported
case of
Basil Read v Government of Uganda, 2006 (WLD) case
number 4790/2005 and Deutche Ruchversicherung v Walbrook Ins [1994.
THE
APPLICANT’S SUBMISSIONS
(20) Mr. Jordaan argued
that there was no lawful basis predicating the first respondent’s
cancellation of the contract consequently
the notice of cancellation
was invalid because “
there was in fact no prescribed time
within which practical completion was to be achieved.”
(21) He submitted that a
notice of cancellation issued
post facto
the agreed practical
completion date to purge a default cannot found a ground for
cancellation because “
a notice requiring compliance with a
time clause cannot be validly issued after the date of performance
has been exceeded.
” In support of this proposition Mr
Jordaan referred me to the case of
Jacobs v Tenner
1971 (1) SA
263
(T)
.
(22) Counsel further
contended that delayed performance in not achieving practical
completion did not
per se
entitle the first respondent to
cancel the contract because
clause 30
of the agreement
prescribes an exclusive and specific remedy in the form of penalties;
contextually counsel submitted that clause
30
is inconsistent
with the notion of cancellation. In support of this contention
counsel referred me to the cases of
Nel v Cloete
1972 (2) SA
150
(AD) at 160D; Goldberg v Buytendag Boerdery Belegings,
1980 (4)
SA 775
(AD) at 782G-H, and Ponisammy and Another v Versailles Estates
(Pty) Ltd 1973 (SA) 372AD.
(23) Mr. Jordaan
contended that delayed performance is not a ground for cancellation
because it is not a material breach of the
contract. In support of
this proposition Mr. Jordaan referred me to the case of
Stefanutti
and Bressan (Pty) Ltd v Nedbank Limited and Another (5311/2008) ZAKZ
HC 50 (30 JULY 2008).
He submitted that the
right to resile from a contract does not arise simply by virtue of
the fact that a contracting party has failed
to carry out an
obligation under the contract timeously after having being placed in
mora
in terms of a notice of rescission. In addition, he
argued an essential requirement was that the default should relate to
a vital
or material term of the agreement.
(24) Mr. Jordaan argued
that the contract did not have a
lex commissoria
or forfeiture
clause prescribing a right to rescission; he contended that
clause
15.3
read with
clause 24
only required the applicant to
commence the works within the stated time, and proceed with due
skill, diligence, regularity and
expedition and bring the works to
practical completion. No time for practical completion was stipulated
consequently “
the contract is not concerned with the time of
completion or its consequences.”
THE
FIRST RESPONDENT’S SUBMISSIONS
(25) Mr. Cook argued that
the crux of the matter was whether the first respondent had a
bona
fide
belief that is was entitled to cancel the contract. He
contended that the second respondent was obliged to honour the behest
of
the Construction
Guarantee
on presentment of the demand by
the first respondent; he submitted that such payment was not
dependant on the first respondent’s
entitlement to cancel the
contract. In support of this proposition he relied on the case of
Loomcraft Fabric CC v Nedbank Ltd and Another
[1995] ZASCA 127
;
1996 (1) SA 812
(AD).
(26) Mr. Cook submitted
that the cancellation of the contract in terms of
clause 36.1
was based upon the failure by the applicant to proceed with due skill
and diligence and reach practical completion in terms of
clause
15.3 and 24
of the contract respectively. The first respondent’s
cancellation was not necessarily predicated on a date. Before
cancelling
the contract the first respondent on the 15 July 2008 had
issued a notice in terms of clause 36.3 through the principle agent
notifying
the applicant to purge its default. The applicant’s
failure to rectify the breach entitled the first respondent to cancel
the contract.
(27) Counsel’s
further argument was that, because the applicant had not in terms of
clause 24.3
given timeous notice to the principal agent of the
anticipated date of practical completion to enable the latter to
inspect the
works, there could be a deemed practical completion.
(28) Mr. Cook submitted
that, there is no merit in the applicant’s contention that the
first respondent was in material breach
of the contract when it
cancelled the contract. The cancellation was lawful and proper;
consequently, there is no basis that the
invocation of the
Construction Guarantee
was fraudulent.
THE
APPLICABLE LEGAL PRINCIPLES
(29) Before analysing the
parties submissions it is apposite to restate the applicable legal
principles. The civil law onus of proving
fraud is on the applicant.
In
Lawsa 2
nd
edition Vol
6 Criminal Law
it is stated that although mere civil fraud
is not necessarily equivalent to criminal fraud, it must still be
established that when
a person through misrepresentation, that is
“the perversion of the truth” alleges that a set of facts
exist when it
does not, he or she has the intention to commit fraud
(for purposes of civil law) which results in actual or potential
prejudice
to the representee.
(30)
The requisites of
fraud were authoritatively stated by then Appellate Division in
R
v Myers
1948 1 SA 375
(A),
a case where the issue was
whether a person was guilty of fraud or was merely negligent.
Greenberg AJ, expressed himself thus at
382-383:
“
In
English law the house of Lords decision in Derry v Peek
(14 AC 337)
is the locus classicus on the question of the state of mind of a
person who makes a false representation which justifies a finding
that he has been fraudulent in making such representation. I think it
can be summed up, for the purposes of the present case, by
saying
that if the maker of the representation which is false has no honest
belief in the truth of his statement when he makes
it, then he is
fraudulent……………………………………
At page 374 of the
report in Derry v Peek, Lord Herschell said:
‘…
fraud
is proved when it is shown that a false representation has been
made(1) knowingly or (2) without belief in its truth, or
(3)recklessly, careless whether it be true or false. Although I have
treated the second and third as distinct cases, I think the
third is
but an instance of the second, for one who makes a statement under
such circumstances can have no real belief in its truth.’
‘
To
prevent a false statement being fraudulent, there must, I think,
always be an honest belief in the truth…………………….
For
one who knowingly alleges that which is false, has obviously no such
honest belief.’
(31) The significance of
allowing banks to honour their obligations under irrevocable letters
of credit or
Construction Guarantees
without judicial
interference is settled in our law.
See Phillips and
Another v Standard Bank of South Africa Ltd and Others
1985 (3) SA
301
(W).
(32)
IN LOOMCRAFT
FABRIC CC supra at 817E it was held
“
Nonetheless
it is now well established that a Court will grant an interdict
restraining a bank from paying the beneficiary under
a credit in the
event of it being established that the beneficiary was a party to
fraud in relation to the documents presented
to the bank for payment.
For, as was observed by Lord Diplock in the
United
City Merchants (Investment’s) Ltd and Others v Royal Bank of
Canada and Others,
(1982) 2 All ER 720
(HL) case supra at 725j
“…
.fraud
unravels all”. The courts will now allow their process to be
used by a dishonest person to carry out a fraud.
But the fraud on the
part of the beneficiary will have to be clearly established
. Tukan
Timber Ltd v Barclays Bank plc
[1987] 1 Lloyds Rep 171
(QB) at 175.
The onus, of course, remains the ordinary civil one which has to
be discharged on a balance of probabilities but, as in any other
case
where fraud is alleged, it will not lightly be inferred.
See Gates v Gates
1939 AD 150
at 155; Gilbey Distillers & Vintners (Pty) Ltd and
Others v Morris NO and Another
1990 (2) SA 217
(SE) at 226A.
(33)
In Loomcraft
Fabrics CC supra 815
Scott A.J.A restated the principle that:
“
The
liability of the bank of the beneficiary to honour the credit arises
upon presentment to the bank to the document specified
in the credit,
including typically a set of bills of lading, which on their face
conform strictly to the requirements of the credit.”
(34) It is therefore
clear that the second respondent is only entitled to honour the
Construction Guarantee
, if the presented documents conform
strictly to the requirements of the
Construction Guarantee
.
What must be presented to the second respondent is a written demand
for payment, together with the
Construction Guarantee
,
accompanied by any letters of amendment.
THE
CONCEPT OF
MORA
(35)
Mora
occurs
when a date for performance is fixed and the debtor fails to perform
on or before such date. Even where the guilty party
culpably fails to
perform on due date it does not automatically fall into
mora
,
a demand is necessary for the guilty party to be placed in
mora.
(36) Where no date has
been fixed or agreed upon for performance, a demand is a prerequisite
for
mora.
Where time is made of the essence of a contract, a
notice of rescission which incorporates a
lex commissoria
entitles the innocent party to exercise a right to cancel the
contract.
See
Repinz v Dacombe
1994 (3) SA
756
(E) at 760.
THE
CONCEPT OF A MATERIAL BREACH
(37) A material term
underpins a contract and defines its essence; the breach thereof
undermines and negates such essence. A material
breach entitles an
innocent party to cancel a contract.
(38) A
lex commissoria
may be implied
ex consensus
if the objective facts are
indicative of a tacit agreement to that effect.
See Greenfield
Manufacturers (Temba) (Pty) Ltd v Royton Electrical Engineering (Pty)
Ltd
1976 (2) SA 565
(A) at 569.
(39) Delayed performance
does not
per se
give rise to an entitlement to cancel. The
innocent party must show that time is of essence and that the guilty
party is in
mora
, because an innocent party acquires a right
to cancel after issuing a notice encapsulating a
lex commissoria
affording the guilty party an opportunity to purge its default.
(40) A notice of
rescission should afford the guilty party reasonable time to purge
its default having regard to the nature of the
contract and the
surrounding circumstances.
See Nel v Cloete
1972 (2) SA 150
A at 165-166.
EVALUATION AND
ANALYSIS OF EVIDENCE
(41)
I
turn to consider
ad
seriatim
the
applicant’s contentions regarding the first respondent’s
alleged breach of contract, regarding the “
Failure
to pay an Interim Certificate in terms of the agreement,”
clause 38.1.4
entitles the applicant to cancel the contract if the principal agent
has failed to issue a
Payment
Certificate.
The
objective facts show that the principal agent issued all
Payment
Certificates
.
Although issued late,
Payment
Certificates
were
issued. The applicant’s argument that because the
Payment
Certificates
were
issued late, and consequently were not issued in terms of the
contract has no merit. Because a
Payment
Certificate
is
issued late it does not follow that it is not issued in terms of the
contract.
(42) The consequence of
the late issuing of a
Payment Certificate
entitles the
applicant to issue a notice to the principal agent informing it to
purge its default within (7) days. The late issuing
of a
Payment
Certificate
does not
per se
without a notice to purge
entitle the applicant to cancel the contract on the basis that it has
been repudiated. The late payment
of a certified amount in the
Payme
nt
Certificate
by the first respondent does not
amount to a repudiation of the contract. The applicant’s remedy
is the invocation of the
clause
33.1.1
which in the
event of the first respondent’s failure to pay an amount due in
terms of an interim certificate timeously entitles
the applicant to
claim interest in respect of such default. Only on failure by the
first respondent to remedy the default of paying
the amount certified
in the
Payment Certificate
does the applicant acquire a right
of cancellation.
(43) The contention that
each of the Interim
Payment Certificate
s were not accompanied
by explanatory documentation to support the recoveries is
unsustainable. The objective facts show that all
the explanatory
statements are attached to the founding affidavit.
(44) The applicant’s
argument that it was impermissible for the principal agent to have
made deductions for expenses and loss
in the
Payment Certificates
it issued is unsustainable.
Clause 31 and 33
expressly empower
the principal agent to include amounts deducted in terms of the
recovery statements in the accompanying
Payment Certificates
.
(45) The applicant is
incorrect when it contends that the first respondent cannot deduct
future expenses, indeed the first respondent
in terms of
clause
33.2
is empowered to recover expenses and loss incurred or to be
incurred.
(46) In each instance
where the principal agent issued a recovery and loss statement, it
did so on the basis of a calculation made
by the quantity surveyors.
The applicant did not object to these deductions.
(47) The applicant’s
contention that there was an unlawful deduction of penalties
misconceives the application of
Clause 30;
this clause
entitles the first respondent to impose penalties from the date
scheduled if practical completion has not been achieved
or on
cancellation of the contract.
(48) The principal
agent’s letter of 23 April 2008 addressed to the applicant
confirms that the date for practical completion
was extended as a
result of its concession and on condition “
penalties will be
levied against you by us should you exceed the above extension”.
(49) When the parties
agreed to revise the practical completion dates of the two sections,
they expressly reiterated that penalties
would be paid if practical
completion was not achieved as agreed. It does not mean that because
they did not divide the penalties
into two proportionate shares in
respect of the two sections that liability for penalties was
abrogated.
(50) The applicant by its
failure to achieve practical completion of the entire residential
section on the 9 June 2008 it repudiated
its duty to perform its
obligation in terms of the contract, that is to achieve practical
completion of the residential section
on the 9 June 2008
consequently, it was in breach of the contract.
(51) The first respondent
was entitled to issue a notice placing the applicant in
mora
and on its failure to rectify the default, to cancel the contract.
See Erasmus v
Pienaar
1984 (4) SA 9
(t) 20H -21C and Nel v Cwete
1972 (2) SA 150
(a) 160-161 and 5 LAWSA Contact paragraph 224.
(52) It is illogical for
the applicant to contend that because there was no specified
practical completion date therefore it was
entitled to achieve
practical completion of the works at any unspecified undetermined
future date.
Clause 15.3
provides that the contractor shall
commence the works within the period stated in the schedule and
proceed with due skill and diligence
and bring the works to practical
completion in terms of
clause 24
. It logically follows that
time is of the essence of the contract.
(53) I proceed to
consider whether the first respondent was entitled to cancel the
contract, correlatively whether its invocation
of the
Construction
Guarantee
was lawful.
Clause 2.1
provides that the
objective of the agreement
is the execution of and payment for
the works for which there has been an offer by the contractor and an
acceptance thereof by the
employer
(my underlining).
(54) The main objective
of the contract is the building and the completion of the works by
the applicant and the correlative reciprocal
payment for the works by
the first respondent. This forms the material term of the contract.
Practical completion of the works
is a material term of the contract,
delayed performance, inability to perform, defective performance,
inadequate or in complete
performance are material breaches which
constitute grounds for cancellation by the first respondent.
(55) The
raison detrê
of a building contract is that at some stage the applicant has to
achieve practical completion of the works. If the applicant fails
despite due notice to achieve practical completion the first
respondent acquires the right to cancel the contract.
(56) The applicant’s
contention that delayed performance does not in terms of the contract
found a right to cancel because
the achievement of practical
completion after the 9 June 2008 was not predicated on a fixed date
or that delayed performance is
not a material breach is consequently
unsustainable.
(57)
The applicant’s contention that because no date after the 9
June 2008 was mutually agreed upon for practical completion
of the
residential section, that the first respondent was not entitled to
cancel the contract because the applicant after the 9
June 2008 could
not possibly be in
mora,
misconceives the behest of the concept of
mora
being continuous in
nature until the default is purged.
See
Contract General Principles 3
rd
Edition by Van Der Merwe Hyssteen Reinecke and Lubbe, Under the
Heading Nature and Form of Mora Debitoris at Page 337 et seq.
(58) The applicant was in
mora
as at the 9 June 2008, and despite the fact that through
delayed performance it was possible according to the applicant’s
contention to achieve practical completion, legally the applicant was
in breach of the contract and remained in
mora
in spite of the
first respondent’s indulgence in not having exercised its right
of cancellation as a result of the applicant’s
default on the 9
June 2008. The first respondent by affording the applicant an
indulgence after 9 June 2008 did not thereby waive
its right of
cancellation.
(59)
Mora
is a
continuous phenomenon. Even if, the applicant could eventually
through delayed performance have achieved practical completion
of the
residential section; its delayed performance cannot and does not cure
its breach of the contract as at the 9 June 2008.
See Minister of
Public Works and Land Affairs v Group Five Building Ltd
[1996] ZASCA 63
;
1996 (4) SA
280
at 289 (f)
(60) The fact that the
date for practical completion has passed, does not mean that the
first respondent forfeits the right to cancel
the contract. If the
applicant is in default of its obligations under
clause 15.3,
in
that it had failed to achieve practical completion on the 9 June
2008, the first respondent was entitled to issue a notice to
the
applicant to purge its default. The right to cancel accrued because
the default was not purged.
(61) It follows that the
applicant’s proposition that after the date for practical
completion had expired the applicant’s
sole and exclusive
remedy is the entitlement to penalties in terms of
clause 30
is unsustainable. So too is the applicant’s contention that the
first respondent’s other remedy in respect of delayed
performance is in terms of
clause 29.9
which accelerates
practical completion obliging the first respondent to pay additional
building costs. These remedies can never
be a substitute to the first
respondent’s right of cancellation; they are subservient to
such right.
(62) There was no legal
obligation on the first respondent to engage the applicant and
renegotiate the date of practical completion.
The first respondent
was entitled after the 9 June 2008 to unilaterally place the
applicant on terms to achieve practical completion
of the residential
section. The only legal requirement reposing on the first respondent
after the applicant’s failure to
perform its obligation to
achieve practical completion of the residential section by the 9 June
2008 was to give notice to the
applicant to rectify its default
within a reasonable time and bring the retail section to practical
completion.
(63) Even if, the
applicant’s contention is that the contract did not stipulate a
date for practical completion or conversely
stated, no time was
agreed in respect thereof after the 9 June 2008, it was still within
the first respondent’s right to
determine the date for
practical completion unilaterally through the juristic act of
demanding practical completion within a reasonable
time.
See Brytenbach v
Van Wyk
1923 Ad 541
, Repinz v Dacombe 1994 (3) 756 (E) 760 (C); Lawsa
‘Contract’ paragraph 220.
(64) The applicant has
not contended that the period afforded it to rectify its default was
unreasonable under the prevailing circumstances,
consequently, having
regard to the fact that the parties initially fixed the 28 April 2008
as the date for practical completion
of the works and subsequently
varied same to 9 June 2008 regarding the practical completion in
respect of the entire residential
section, it cannot be cogently
argued that the 25 July 2008 was not a reasonable time within which
the applicant was to achieve
practical completion.
See Van Elst v
Sabena Belgian World Airline
1983 (3) SA 637
(A)
(65) There is no merit in
the applicant’s contention that the first respondent’s
cancellation of the contract predicated
on the applicant’s
failure to bring the residential section to practical completion on
the agreed date did not in law constitute
a valid basis for a valid
cancellation.
(66) The objective facts
show that the first respondent was not in breach of a material term
of the contract when it cancelled same;
consequently it was entitled
to invoke payment under the
Construction Guarantee.
(67) Nothing in law
precluded the first respondent from exercising its contractual rights
when pursuant to the cancellation of the
agreement it demanded
payment from the second respondent in terms of
clause 5.0
of
the
Construction Guarantee
.
(68)
Loomcraft
Fabrics CC v Nedbank & Another
[1995] ZASCA 127
;
1996 (1) SA 812
(SCA) at 815I
Scott A.J.A restated the principle that:
“
The
liability of the bank to the beneficiary to honour the credit arises
upon presentment to the bank of the document specified
in the credit,
including typically as a set of bills of lading, which on their face
conform strictly to the requirements of the
credit.”
(69) It is therefore
clear that the second respondent is only entitled to honour the
Construction Guarantee
, if the presented documents conform
strictly to the requirements of the
Construction Guarantee.
(70) The first
respondent’s counsel referred me to the unreported judgment of
Lombard Insurance Company Limited v Landmark and Others
(343/08) [2009] ZASCA
delivered on the 1 June 2008. The
parties lodged supplementary heads of argument as a consequence of
the said judgment. Although
the facts in
Lombard
’
s
case are distinguishable from the present matter, it
adumbrates the fact that the principles enunciated therein relating
to letters
of credit as well a
Construction Guarantee
are the
same.
(71) The written demand
in the instant case contains the following statement “
We
hereby confirm and state that the principle building agreement
between us and the Contractor, KNS Construction (Pty) Ltd has
been
lawfully and properly cancelled due to the Contractor’s
default.”
(emphasis added)
(72) No misrepresentation
can be imputed to this statement. No fraud has been shown by the
applicant. When regard is had to the
agreement it is manifest that,
on the objective facts, the statement is not false. The contract
permits cancellation for a failure
to achieve practical completion.
The first respondent was not precluded by
clause 36.6
from
exercising its right of cancellation because that it was not in
material breach of contract.
(73) The second
respondent is under no obligation to investigate the merits of a
demand which is
prima facie
in order; it consequently is not
precluded from making payment on demand by the first respondent.
(74) Proper demand was
made as required by the
Construction Guarantee
a copy of the
notice of cancellation was attached. The applicant has not shown that
the first respondent knowingly presented to
the second respondent
documents that misrepresented the material facts.
(75) In all the
prevailing circumstances I am satisfied that the applicant has not
clearly established, as it must, that the first
respondent was acting
fraudulently when it invoked the
Construction Guarantee
for
payment by the second respondent. Consequently that being the case
the application falls to be dismissed.
THE
ORDER
(74) The application is
dismissed with costs, including the costs consequent upon the
employment of two counsel.
Signed
at:
Delmas
on
the
21 August 2009
.
………………………………………
MOKGOATLHENG
J
JUDGE
OF THE HIGH COURT
DATE
OF HEARING:
DATE
OF JUDGMENT: 21
st
AUGUST 2009
COUNSEL
FOR THE APPLICANT: MR C.W. JORDAAN
ASSISTED
BY MR G.D. DOUBELL
INSTRUCTED
BY: SMIT JONES AND PRATT
TELEPHONE
NUMBER: (011) 532-1500
FAX
NUMBER: (011) 532-1532
COUNSEL
FOR THE RESPONDENT: MR A.O. COOK S.C
ASSISTED
BY: MR J.F. STEYN
INSTRUCTED
BY: DENEYS REITZ INC
TELEPHONE
NUMBER: (011) 685-8834
FAX
NUMBER: (011) 535-5222