Desertmoon Trading 355 CC v Clyde Bergeman Africa (Pty) Ltd and Another (63193/15) [2015] ZAGPPHC 914 (4 September 2015)

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG DIVISION. PRETORIA

DATE: 4 September 2015

CASE NO: 63193/15

In the matter between:

DESERTMOON TRADING 355 CC................................................................................APPLICANT

And

CLYDE BERGEMAN AFRICA (PTY) LTD...................................................FIRST RESPONDENT

HOLLARD INSURANCE COMPANY LIMITED...................................SECOND RESPONDENT

JUDGMENT

RANCHOD J:

[1] This application was launched for hearing in the urgent court initially on 11 August 2015. The parties then agreed on time frames

within which affidavits would be exchanged and the matter was set down for hearing, again in the urgent court, on 25 August 2015 when it served before me.

[2] I determined that the matter was urgent and it was argued on the merits.

[3] In terms of the amended notice of motion the applicant seeks (apart from abridgement of the time frames in Rule 6(5) of the Uniform Rules of Court for the following relief:

“2. That the Second Respondent be interdicted and restrained from making any payment to the First Respondent in terms of the demand for payment on 29 July 2015 under the performance guarantee number PS GUA 367 6164 pending the finalization of the Dispute Adjudicating Process as Envisaged in the Agreement between the parties.

3. That the First Respondent be ordered to pay the costs of this Application on an Attorney and Client scale.

4. Further and/or alternative relief.”

[4] The first respondent made an application at the hearing of the matter to strike out certain sub-paragraphs in the applicant’s

replying affidavit on the grounds that their content constituted new matter, alternatively, was inadmissible evidence. I was informed at the hearing that the application was not being proceeded with. Nothing more need be said about it for purposes of this judgment

[5] From the papers it is apparent that second respondent is of the view that it should honour the guarantee. However, I was informed during the hearing that the second respondent abides by the decision of the court. It was also agreed between applicant and first respondent, that the relief sought was a final interdict.

The Issue

[6] The crisp issue to be determined as it emerged from the papers and arguments are whether a performance guarantee issued by second

respondent in favour of the first respondent at the request of the applicant is a demand guarantee which is payable irrespective of any contractual disputes between the applicant and the first respondent.

The Facts

[7] The applicant and first respondent entered into a construction contract in terms of which the applicant was appointed as a sub-contractor to the first respondent which was in turn a contractor to Eskom for the construction of the Khusile Power Station. In terms of the sub-contract, the applicant was to supply, fabricate, deliver and install structural steelwork for the dust handling and conditioning plant for the power station.

[8] Due to various disputes between the applicant and the first respondent the applicant purported to cancel the contract between them. The cancellation was communicated to the first respondent by applicant’s attorneys in a letter dated 26 June 2015[1]. The relevant portions read as follows:

“Our client hereby in terms of the provisions of Clause 16.2(f) give notice of its cancellation of the agreement on the basis that the aforesaid action is an act that is done or event that occurs which has a similar effect to any of the provisions pertaining to the clause as it effects your ability to pay.

In the alternative to the aforesaid, and only if an arbitrator eventually finds that our client was not entitled to cancel as alluded to aforesaid, the manner in which the agreement is being handled has the effect that it constitutes a repudiation of the agreement, which repudiation our client accepts subject to its rights to claim payment and damages and therefore hereby cancels the agreement.

At present the monies and claims as reflected in the attached schedule is outstanding.

Finally and in the alternative to the aforesaid and only to the extent that an arbitrator were to find that our client was not entitled to cancel as alluded to aforesaid this letter will also under such circumstances serve as notice as envisaged in terms of Clause

16(2)(b), (c), (d) and (e)."

[9] The first respondent was of the view that as a result of the purported cancellation, the applicant “unilaterally and without just cause abandoned the Kusile site on 30 June 2015”[2]. Therefore, says the first respondent, it (first respondent) terminated the sub-contract and called for payment of the guarantee.

Applicant contends that first respondent is not entitled to call up the guarantee as it had not abandoned the site but cancelled the contract due to non-payment of amounts due by first respondent. An amendment had been made to the sub-contract between the parties which made the performance guarantee a conditional guarantee and not a demand guarantee - so says the applicant.

[10] In a letter dated 3 August 2015[3] to the second respondent the applicant says inter alia:

“The claim under the performance guarantee holds no merit, is completely baseless, and not only opportunistic but also made in very bad faith and fraudulently.”

Reference is then made to clause 15.2 and the relevant portion of clause 4.2 of the sub-contract.

[11] It falls to be noted that clause 4.2 was amended on 14 June 2014 by the parties in terms of a document titled “Formal Contract Amendment

Number 1[4]. An additional clause was inserted in sub-clause 4.2. The clause provided as follows:

3. Amendment

“Insert the following clause below the 5th paragraph in Sub-clause 4.2 [Performance Security]:

For items 4.2(b), 4.2(c) and 4.2(d) and in the case of 4.2(d) Termination in terms of 15.2(a) or 15.2(c) only [my underlining], the Contractor is not permitted to make a claim under the Performance Security unless one of the following is satisfied:

i) The Contractor and Subcontractor agree in writing that a claim may be made against the Performance Security; or

ii) A mutually agreed third party (one person) or a person nominated by the Chairman for the time being of the Association of Arbitrators (Southern Africa) or its successors or his nominee, has been consulted and determines that a claim may be made against the Performance Security. The costs of the party are to be born in equal shares between the Contractor and Subcontractor,

Or

iii) The dispute process described in Clause 20[Claims, Disputes and Arbitration] has been followed and the DAB concludes that a claim may be made against the Performance Security.

4. Agreement of Amendment

By signature hereof the Parties indicate their acceptance and agreement in respect of the above mentioned amendment and intend same to form part of the Contract.

The Parties agree that aside from the above mentioned amendment to Sub-clause 4.2 [Performance Security], no other amendment to the Contract is contemplated or agreed.”

[12] The relevant portions of clause 4.2 provides:

“The Contractor shall not make a claim under the Performance Security, except for amounts to which the Contractor is entitled under the Subcontract Agreement in the event of:

(a) Failure by the Subcontractor to extend the validity of the Performance Security as described in the preceding paragraph, in which event the Contractor may claim the full amount of the Performance Security and retain the proceeds as cash security.

(b) Failure by the Subcontractor to pay the Contractor an amount due, as either agreed by the Contractor or determined under Sub-Clause 2.5 [Contractor’s Claims] or Clause 20 [Claims, Disputes and Arbitration], within 42 days after this agreement or determination,

(c) Failure by the Subcontractor to remedy a default within 42 days after receiving the Contractor’s notice requiring the default to be remedied, or

(d) Circumstances which entitle the Contractor to termination under Sub-Clause 15.2 [Termination by Contractor], irrespective of whether notice of termination has been given.

The Contractor shall give the Subcontractor not less than 7 days’ notice, in writing of the Contractor’s intention to make a claim under the Performance Security.”

[13] At first blush it would appear - as contended for by applicant’s counsel, that the first respondent was not entitled to call up the guarantee as none of pre-conditions for doing so - as listed in (i), (ii) and (iii) have been satisfied. However, a closer scrutiny of the amended portion reveals that it is of limited scope. It is only in respect of “items 4.2(b), 4.2(c) and 4.2(d) and in the case of 4.2(d) Termination is in terms of 15(2)(a) or 15.2(c) only (my underlining) the Contractor is not permitted to make a claim under the Performance Security [Guarantee] unless one of the following is satisfied...”

[14] First respondent says it terminated the sub-contract pursuant to clause 15.2(b) which is not covered or affected by the amendment. Sub clause 15.2 (b) provides:

“Termination by Contractor. The Contractor shall be entitled to terminate the sub -contract if the subcontractor:

(a) ...

(b) abandons the subcontract Works or otherwise plainly demonstrates the intention not to continue performance of his obligations under the Subcontract.

(c) ....”

The determination

[15] In my view Clause 15.2(b) is thus not subject to the conditions listed in (i), (ii) and (iii) listed above notwithstanding

applicant’s reliance on clause 4.2.

[16] It is common cause or not in dispute that the first respondent gave the applicant the requisite notice in writing of its intention to make a claim under the performance guarantee.

[17] That there are disputes between the applicant and the first respondent relating to performance of their respective obligations in terms of the subcontract is common cause. It is not necessary for the purposes of this judgment to set them out here in light of the view I take of the relevance of these disputes to the issue whether first respondent in entitled to call up the guarantee.

[18] Guardrisk Insurance Company Ltd and Others v Kentz (Pty) Ltd [2014] 1 All SA 307 (SCA) was a case involving a performance guarantee from a financial institution. It was held that the court had to determine the nature of the guarantees [there were two] in that matter by having regard to their terms. The terms were clear. They created an obligation on the part of the guarantor (Guardrisk) to pay Kentz (the “employer") on the happening of a specified event. The purposes of the guarantees was to protect Kentz in the event that

Brokrew (the party to a construction contract with Kentz) could not perform its obligations in terms of the construction contract which provided that Brokrew was obliged at its own cost, to secure “an irrevocable, on demand bank guarantee or a demand guarantee from a recognised financial institution” for proper performance. The guarantee was referred to as the performance guarantee. On 24 February 2010 Kentz informed Brokrew that it was in breach of its obligations under the contract “and/or” its intention to abandon the contract and that it (Brokrew) had admitted that it had become insolvent. Alternatively, said Kentz, Brokrew had, by its conduct, repudiated the contract which it was entitled to accept and cancel the contract. Kentz went on to state that it reserved all its rights. On 9 March 2010 Kentz addressed a further letter to Brokrew cancelling the contract with immediate effect. On 11 March 2010 Brokrew’s attorneys addressed a letter to Kentz disputing its right to cancel the contract and contended that Kentz had thereby repudiated the contract, which repudiation it accepted and it then purported to cancel the contract. It also alleged that Kentz’s call on the guarantees was fraudulent given the latter’s knowledge that it was not entitled to cancel the contract.

[19] The many similarities in the Guardrisk matter and in casu are immediately apparent.

[20] In its letter dated 3 August 2015 to second respondent’s attorneys[5] as well as in submissions during the hearing applicant alleged the call on the guarantee by first respondent was in bad faith and

therefore fraudulent. It was held[6] that the onus was on the party alleging fraud to prove it on a balance of probabilities. In my view, the applicant has failed to

discharge the onus for the reasons that follow.

[21] In Guardrisk the issues were whether the guarantee was a “conditional” guarantee rather than an “on demand” guarantee and whether fraud on the part of the beneficiary had been proved. Theron JA said at paragraph [10]:

“The essential difference between these two types of bonds was described by Brand JA in Minister of Transport and Public Works, Western Cape & another v Zanbuild Construction (Pty) Ltd & another as follows:

[A] claimant under a conditional bond is required at least to allege and - depending on the terms of the bond - sometimes also to establish liability on the part of the contractor for the same amount. An “on demand" bond, also referred to as a “call bond”, on the other hand, requires no allegation of liability on the part of the contractor under the construction contracts. All that is required for payment is a demand by the claimant, stated to be on the basis of the event specified in the bond.’

[22] In order to determine the nature of the guarantee in this matter, regard must be had to its terms (Guardrisk para [11]). In Eskom Holdings SOC Limited vs Hitachi Power Africa (Pty) Ltd and Another (139/2013)[2013] ZASCA 101 (12 September 2013) Mthiyane AP said at paragraph [12]:

“A claimant under a conditional guarantee is required, not only to allege but sometimes also to establish liability on the part of the contractor for the amount claimed. An on demand guarantee requires no allegation of liability on the part of the contractor under the construction contracts. All that is required for payment is a demand stating the claimant’s compliance with the terms of the guarantee.”

[23] In Lombard Insurance Co Ltd v Landmark Holding (Pty) Ltd & Others 2010(2) SA 86 (SCA), Navsa JA discussed the nature of an “on demand” or “call guarantee” at paragraph 20 as follows:

“The guarantee by Lombard is not unlike irrevocable letters of credit issued by banks and used in international trade, the essential

feature of which is the establishment of a contractual obligation on the part of a bank to pay the beneficiary (seller). This obligation

is wholly independent of the underlying contract of sale and assures the seller of payment of the purchase price before he or she parts with the goods being sold. Whatever disputes may subsequently arise between buyer and seller is of no moment insofar as the bank’s obligation is concerned. The bank’s liability to the seller is to honour the credit. The bank undertakes to pay provided only that the conditions specified in the credit are met. The only basis upon which the bank can escape liability is proof of fraud on the part of the beneficiary. This exception falls within a narrow compass and applies where the seller, for the purpose of drawing on the credit, fraudulently presents to the bank documents that to the seller’s knowledge misrepresents the material facts.”

[24] In casu, in my view, the guarantee has ail the characteristics of an “on demand” or "call guarantee” which is independent of the construction subcontract notwithstanding the insertion of the additional (amendment) clause 4.2 referred to above, in the

subcontract. The relevant portions of the Performance Guarantee issued by the second respondent reads as follows:

“3. A demand for payment under this guarantee shall be made in writing at the Guarantor’s address and shall:

3.1 ...

3.2 ...

3.3 state that the Demand Amount is payable to the Contractor in the circumstances contemplated in terms of both the Contract and Annexure “A” attached hereto (and initialled by the Guarantor for identification purposes).

5. The Guarantor’s obligations in terms of this Guarantee:

5.1 ...

5.2 shall not be discharged and compliance with any demand for payment received by the Guarantor in terms hereof shall not be delayed by the fact that a dispute may exist between the Contractor and the Sub-Contractor..

6. The Contractor shall be entitled to arrange its affairs with the Sub- Contractor in any manner which it sees fit, without advising us and without affecting our liability under this Guarantee. This includes, without limitation, any extensions, indulgences, release or compromise granted to the Sub-Contractor or any variation under or to the Sub- Contract.

7. This Guarantee:

7.1 shall expire on the Expiry Date until which time it is irrevocable’

7.2 ...”

[25] It is therefore apparent in light of the first respondent’s reliance on sub­clause 15.2(b) and the wording of the guarantee that it is a demand guarantee which is independent of any disputes arising between applicant and first respondent[7]. Second respondent was of a similar view as that of first respondent that the demand guarantee was independent of the sub­contract.

[26] In Guardrisk[8] the legal position regarding the fraud exception was stated as follow:

“[17] It would be useful to briefly consider the legal position in relation to the fraud exception. It is trite that where a beneficiary who makes a call on a guarantee does so with knowledge that it is not entitled to payment, our courts will step in to protect the bank and decline enforcement of the guarantee in question. This fraud exception falls within a narrow compass and applies where:

' ... the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain,

expressly or by implication, material representations of fact that to his (the seller’s) knowledge are untrue.’

[18] Insofar as the fraud exception is concerned, the party alleging and relying on such exception bears the onus of proving it. That onus is an ordinary civil one which has to be discharged on a balance of probabilities, but will not lightly be inferred. ... Mere error, misunderstanding or oversight, however unreasonable, would not amount to fraud. Nor was it enough to show that the beneficiary’s contentions were incorrect. A party had to go further and show that the beneficiary knew it to be incorrect and that the contention was advanced in bad faith.”

The applicant’s submission that first respondent fraudulently called up the guarantee cannot stand in light of the facts.

[27] In the result the following order is made:

The application is dismissed with costs including the costs of two counsel where so employed.

N. RANCHOD

JUDGE OF THE HIGH COURT

Appearances:

Counsel on behalf of Applicant : Adv Dreyer (SC)

: Adv De Kock

Instructed by : Langenhoven Pistorius & Partners

Counsel on behalf of Plaintiff : Adv De Villiers

: Ms Grobler

Instructed by : DMO Attorneys

Date heard : 26 August 2015

Date delivered : 4 September 2015

[1] Paginated pages 170-174 of the papers at page 173.

[2] Answering affidavit paginated page 208 at paragraph 7.9.

[3] Paginated page 54 - annexure “D04” to founding affidavit.

[4] Paginated page 41.

[5] Paginated page 54 - Annexure “D04”.

[6] Guardrisk at 313 paragraph [13] infra paragraph [26].

[7] See also COFACE South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association 2014(2) SA 382 (SCA).

[8] At 313 paragraph [17].