Kwazulu Natal Federated Insurance Guarantee Brokers (Pty) Ltd v Johannesburg Development Agency (Pty) Ltd (AR9/08) [2007] ZAKZHC 58 (1 January 2007)

IN THE HIGH COURT OF SOUTH AFRICA

KWA-ZULU NATAL PROVINCIAL DIVISION

CASE NO. AR9/08

In the matter between

FEDERATED INSURANCE GUARANTEE BROKERS

(PTY) LTD …........................................................................................Appellant

and

JOHANNESBURG DEVELOPMENT AGENCY (PTY) LTD …..............Respondent

JUDGMENT

Hurt J.

[1] I shall refer to the parties by their designations in the Court a quo, namely to the Johannesburg Development Agency (Pty) Ltd (Respondent on appeal) as 'the Applicant' and to Federated Insurance Guarantee Brokers (Pty) Ltd (Appellant) as 'the Respondent'.

[2] The application was brought to obtain an order directing the Respondent to pay the Applicant an amount of R 1 754 279,26 plus

interest at 15.5% from 9th March, 2006 to date of payment. Such an order was granted by Niles-Duner J on 30lh April, 2007, but the learned Judge granted leave to the Respondent to appeal to this Court.

[3] The ground upon which the Applicant brought the application was that the Applicant had concluded a contract (herein referred to as 'the Contract') with a construction company, Dlamini Construction (Pty) Ltd ('the Contractor") for the construction of certain public works in Soweto. The Applicant contended that the Respondent, who had furnished a performance guarantee on behalf of the Contractor, was obliged to pay the Applicant the amount claimed under the guarantee.

[4] The Contract was on the standard Joint Building Contracts Committee form (3rd Edition), with certain variations, none of which is relevant to the matter under " '' consideration. The Contract sum was R 23 390 390.04. The works involved various professional disciplines and the Contract provided for the appointment by the Applicant of a number of professional 'agents' to act on behalf of the Applicant and protect its interests in relation to the proper performance of the Contract work. It also provided for the appointment of a Principal Agent whose functions were, generally, to manage the Contract, co-ordinate the other 'agents' and to compile and issue certificates relating to the work performed from month to month and amounts payable in respect thereof. These certificates were to contain (where applicable) a statement of amounts which the Applicant was entitled to claim from the Contractor in respect of various items listed in clause 33.1 and 33.2, such as penalties levied, default interest and

"expense and loss incurred or to be incurred resulting from

33.2.1. the employer effecting insurance upon the contractor's default..

33.2.2. work executed by other parties ....

33.2.3. cancellation of a nominated subcontract...

33.2.4. recoupment of advance payments...

33.2.5. the contractor not paying the amount due to the employer. ..

33.2.6. the agreement being cancelled in terms of 36.0."

Such a statement is referred to in the Contract as a 'recovery statement'.

[5] In order to protect the Applicant against non-payment by the Contractor of amounts listed in such recovery statements, clause 14 stipulated that the Contractor was to furnish security. The relevant portions of the clause read as follow:

'14.1 The Contractor shall have the right to select the security to be provided in terms of 14.3 or 14.4 as stated in the schedule. The choice of security shall be included in the Contractor's tender, failing which the security in terms of 14.3 shall be deemed to have been selected. Such security shall be provided to the employer within twenty-one (21) calendar days of written acceptance of the contractor's tender

14.2 Where security as a cash deposit has been selected :

14.2.1 The Contractor shall furnish the employer with a cash deposit equal in value to ten percent (10%) of the Contract sum. The employer shall place such deposit in a separate interest-bearing account at a registered financial institution. Such account shall be in the name of the employer;

14.2.2.......

14.2.5 The employer shall be entitled to recover expense and loss from the cash deposit in terms of 33.0 provided that the employer complies with the provisions of 33.4 in which event the employer's entitlement shall take precedence over his obligations to refund the cash deposit security or portions thereof to theContractor;

14.2.6

14.3 Where security as a variable construction guarantee has been selected :14.3.1 ... " ' •'

14.3.4 Where the employer has a right of recovery against the Contractor in terms of 33.0, the employer may issue a written demand in terms of the variable construction guarantee.

14.4

14.8 A security held by the employer in terms of 14.2, 14.3 or 14.4 and 14.5 shall be for the due fulfillment of the Contractor's liability in terms of this agreement only and the employer hereby waives all common law rights to recover from or set off such security.

In terms of clause 33.5, the Applicant was obliged, if it wished to recover any amount from the construction guarantee, to first issue a written demand to the Contractor. Clause 33.6 then provided that where the Contract was cancelled in terms of clause 36, the Applicant was entitled to issue a demand to the Guarantor in terms of the guarantee. Clause 36 provided for cancellation of the Contract by the Applicant where the Contractor failed to remedy a breach or breaches despite due notice to do so. However, clause 36.6 provided that the Applicant's right to cancel 'may not be exercised should the (Applicant) be in material breach of (the Contract)'.

[6] The Contractor selected a 'variable construction guarantee' from the options afforded him in clause 14, and the guarantee was duly furnished by the Respondent. By the time that this dispute arose the guaranteed amount had been reduced to that referred to in para 2, above. It is convenient to set out the relevant terms of the guarantee, which are as follow:

'3.0 The Guarantor hereby acknowledges that:

3.1. Reference herein to the agreement, and the incorporation herein of provisions thereof in terms of clause 3.1 hereof shall not be construed to constitute this guarantee as being a suretyship or an accessory obligation pf any nature whatsoever.

3.2. Its obligation under this Guarantee is restricted to the payment of money.

3.3. Reference to a practical completion certificate or to a final completion certificate shall mean such certificate as issued by the Principal Agent.

4.0. Subject to the guarantor's maximum liability-referred to in clause 1.0 and 2.0 above, the guarantor hereby binds itself in favour of the Employer (for?/ to pay?)1 the certified sum upon receipt of the documents identified in Clauses 4.1 to 4.3, below:

4.1. A copy of the first written demand issued by the Employer to the Contractor stating that payment of a sum certified by the Principal Agent has not been made in terms of the agreement, and failing such payment within seven (7) calendar days, the Employer intends to call upon the Guarantor to make payment in terms of 4.2;

4.2. A first written demand issued by the Employer to the Guarantor at the Guarantor's domicilium citandi et executandi with a copy to the Contractor stating that a period of seven (7) calendar days has elapsed since the first written demand in terms of 4.1 and that the sum has still not been paid therefore the Employer calls up this Construction Guarantee and demands payment of the sum certified from the Guarantor. '

4.3. A copy of the payment certificate which entitles the Employer to receive payment in terms of the Agreement of the amount certified in clause 4.0 above.

5.0. Subject to the Guarantor's maximum liability referred to in Clauses 1.0 and 2.0 above, the Guarantor undertakes to pay the Employer (the) Guaranteed sum or the full outstanding balance upon receipt of the first written demand from the employer to the Guarantor at the Guarantor's domicilium citandi et executandi calling up this Construction Guarantee stating that

5.1 The Agreement has been cancelled due to the Contractor's default andthat the Construction Guarantee is called up in terms of 5.0. The demandshall enclose a copy of the notice of cancellation;

5.2

6.0. It is recorded that the aggregate amount of payments required to be made by the Guarantor in terms of 4.0 and 5.0 shall not exceed the Guarantor's maximum liability in terms of 1.0 and 2.0.

7.0. Where the Guarantor is a registered insurer in terms of the Short Term Insurance Act No. 53 of 1998 and has made payment in terms of 5.0, the Employer shall, upon the date of issue of the final payment certificate submit an expense account to the Guarantor showing how all monies received in terms of the Construction Guarantee have been expended and shall refund to the Guarantor any resulting surplus. All monies refunded to the Guarantor in terms of this Construction Guarantee shall bear interest at Standard bank of South Africa Limited's prime overdraft rate compounded monthly and calculated from the date payment was made by the Guarantor to the Employer until the date of refund.

8.0. Payment by the Guarantor in terms of 4.0 and 5.0 shall be made within seven (7) calendar days (of) receipt of the first written demand to the Guarantor.

9.0

12.0. This Construction Guarantee, with the required demand notices in terms of 4.0 and 5.0, shall be regarded as a liquid document for the purpose of obtaining a court order.

[7] To complete the historical picture, it is common cause that, on 26th January, 2006, the Applicant, through its Principal Agent, put the Contractor on terms to remedy certain breaches within ten days. The Contractor having failed to comply with this demand, the Applicant addressed a further letter to the Contractor on 13th February, cancelling the Contract in terms of clause 36. On 9th March 2006 the 'first written demand ' contemplated in clause 5 of the Guarantee was duly delivered to the Respondent and the balance of the guaranteed amount was called up. The Respondent having resisted this demand as well as several subsequent ones, the Applicant duly lodged this application to enforce payment.

[8] The respondent opposed the Applicant's claim on two grounds. The first was that on a proper construction of the Contract and the guarantee, taken together, the Applicant would only become entitled to payment of the guaranteed sum when its loss had been duly certified by the Principal Agent. The contention was that the Guarantee could not be interpreted so as to provide for payment by the Guarantor on the mere receipt of the first written demand accompanied by the copy of the notice of cancellation to the

Contractor. The second was that the Applicant was itself in breach of its obligations under the Contract and that its tardy payment of the amounts properly due to the Contractor had precipitated the Contractor's inability to perform the work properly. This, at least, was the tenor of the affidavits filed on the Respondent's behalf, and in the light of the well-known rule in Plascon-Evans Paints Ltd v van Riebeeck Paints (Pty) Ltd [1984] ZASCA 51; 1984 (3) SA 623 (A), so ran the contention, the Court could not assume, in the Applicant's favour, that the Applicant was not, as a matter of fact, in breach of its Contractual obligations at the time when the notice of cancellation was given to the Contractor. [9] As to the first of these grounds, Niles-Duner J analysed the terms of the Guarantee, read with the applicable provisions of the Contract and came to the conclusion that it was expressly contemplated by the parties to the Guarantee that, on cancellation

in terms of clause 36 of the Contract, payment in terms of the guarantee would be made prior to the preparation of the final

account and, accordingly, that it could not have been contemplated that the Guarantor could wait to have the Contractor's liability

liquidated by the final account before tendering payment. She found that the Applicant's compliance with the provisions of clause 5 of the Guarantee would, of itself, render the Guarantor liable to pay the balance of the guaranteed sum to the Applicant. As to the second question of whether the Applicant was precluded from cancelling because of the prohibition in clause 36.6 of the Contract, the learned Judge found that that clause was irrelevant to the issues as between the Applicant and the Respondent. It will suffice for me to say that I agree fully with her findings on these points and it would be an exercise in supererogation to repeat her reasoning in this judgment. [10] On appeal before us, however, Mr Kemp, for the Respondent sought to persuade us to view the points argued on his client's behalf from a new perspective. He suggested that the approach taken by the Court a quo had resulted from a failure to give true weight to an important principle of interpretation of contracts. He contended that it was inimical to the precepts of equity and reasonable business practice that the Respondent should bind itself to pay the Applicant money on the mere receipt of an unsubstantiated (and possibly unjustified) notice of cancellation given to the Contractor, accompanied by a demand for payment from the Respondent. Such a construction would reduce the status of the Guarantee to a mere letter of credit. He submitted that the principles of contextual interpretation must be employed to "find the common intention of the parties in the plain, ordinary and popular meaning of the language of their contract". Parties should be presumed, he said, to contemplate reasonable, businesslike results from their agreements, and the clearest, most explicit language would be required before a Court would construe a contract to arrive at an unusual or unbusinesslike result. Such an approach would make it clear that the true intention of the parties to the Guarantee was that the provisions of clauses 4 and 5 were to be read subject to the provisions of clauses 14.3.4 and 33.6 of the Contract. Since the system of payment against certificates (issued by the Principal Agent) "pervaded" the operation of the whole Contract, Mr Kemp submitted, and since the two documents had to be read as one, it could only have been contemplated that the Guarantor's obligation to make payment would arise when the amount the Applicant was entitled to recover had been certified in a certificate issued in terms of the Contract. Expanding on this Iheme, Mr Kemp submitted that this approach would give proper effect to the negation of the Applicant's right to cancel the Contract, provided for in clause 36.6. This would be so because the dispute as to the validity of the cancellation would have to be resolved before the Applicant could invoke clause 5. [11] The major premise of the Respondent's contentions is that a literal construction of clause 5 of the Guarantee would lead to an unusual and unbusinesslike result. Prima facie, I suppose, the bald assertion that a party can be rendered liable to pay over a substantial sum of money on the mere 'say-so' of the other party, in circumstances where the claimant may, as a matter of fact and/or law, not have a right to claim payment, may be regarded as unusual or even unbusinesslike. But that involves isolating the provisions of clause 5 from their context, an impermissible exercise in the process of interpretation. Clearly a two-fold purpose was intended to be served by the Guarantee. In the first place it was intended to provide the Applicant with an indemnity against the losses or expenses listed in clause 33.1 and 33.2.1 to 33.2.5 of the Contract. These the Applicant was entitled to recover (on failure by the Contractor to pay them) under clause 4 of the Guarantee. In keeping with Mr Kemp's submission that the system of payment against certificates 'pervaded' the administration of the Contract, clause 4 of the guarantee expressly refers to the payment, by the Respondent, of 'the sum certified' in the recovery statement and subsequent payment certificate. Clause 5, however, makes no reference at all to a certificated claim. It refers to payment of the Guaranteed sum or the full outstanding balance'. Furthermore, it is clear that the parties did not intend the Applicant to retain the whole guaranteed amount, on cancellation, regardless of the loss or expense which it actually suffered. The provisions of clause 7 of the Guarantee explicitly provide for an accounting by the Applicant, in, or concurrently with the issue of, the final certificate, showing the precise extent of the loss or additional expense suffered as a result of the cancellation. Neither party, in the affidavits or in argument before us, appeared to be prepared to tackle, head-on, the curious wording of the first clause in clause 7, i.e. the words Where the Guarantor is a registered insurer in terms of the Short-term Insurance Act No. 53 of 1998 .. .' This is hardly surprising. The Guarantee was clearly drawn by, and under the official cover of, the Respondent. It emerges in the answering affidavit that the Respondent is not, in fact, a

registered short-term insurer, so prima facie the Respondent was depriving itself of the benefits conferred on the Guarantor! But this could hardly have been the common intention of the parties. Indeed this much is clear from the contents of the letter of demand written by the Applicant to the Respondent on ' 9th March 2006, calling up the guarantee in terms of clause 5.2 The letter states, in the third paragraph : 'The Johannesburg Development agency shall upon the date of issue of the Final Payment Certificate submit an expense account to Federated Insurance Guarantees (Pty) Limited indicating how all monies received in terms of the Construction Guarantee have been expended and shall refund to the Guarantor any surplus that may become evident.' Even if clause 7 is to be interpreted (without rectification) as precluding the Respondent from invoking its benefits, there can be no doubt that it would be necessarily implied in a contract of guarantee such as this one, that the guarantee was intended only to indemnify the Applicant and not to afford it a source of profit if the loss which it suffered turned out to be less than the amount paid over by the Respondent. [12] It follows from the above that the view taken by Nites-Duner J that the Contract was intended to provide for a payment of the guaranteed amount in advance of the liquidation by certificate of the Applicant's loss is correct and the Respondent's contentions about the meaning of the Contract are not.

[8] The respondent opposed the Applicant's claim on two grounds. The first was that on a proper construction of the Contract and the guarantee, taken together, the Applicant would only become entitled to payment of the guaranteed sum when its loss had been duly certified by the Principal Agent. The contention was that the Guarantee could not be interpreted so as to provide for payment by the Guarantor on the mere receipt of the first written demand accompanied by the copy of the notice of cancellation to the

Contractor. The second was that the Applicant was itself in breach of its obligations under the Contract and that its tardy payment of the amounts properly due to the Contractor had precipitated the Contractor's inability to perform the work properly. This, at least, was the tenor of the affidavits filed on the Respondent's behalf, and in the light of the well-known rule in Plascon-Evans Paints Ltd v van Riebeeck Paints (Pty) Ltd [1984] ZASCA 51; 1984 (3) SA 623 (A), so ran the contention, the Court could not assume, in the Applicant's favour, that the Applicant was not, as a matter of fact, in breach of its Contractual obligations at the time when the notice of cancellation was given to the Contractor.

[9] As to the first of these grounds, Niles-Duner J analysed the terms of the Guarantee, read with the applicable provisions of the Contract and came to the conclusion that it was expressly contemplated by the parties to the Guarantee that, on cancellation

in terms of clause 36 of the Contract, payment in terms of the guarantee would be made prior to the preparation of the final

account and, accordingly, that it could not have been contemplated that the Guarantor could wait to have the Contractor's liability

liquidated by the final account before tendering payment. She found that the Applicant's compliance with the provisions of clause 5 of the Guarantee would, of itself, render the Guarantor liable to pay the balance of the guaranteed sum to the Applicant. As to the second question of whether the Applicant was precluded from cancelling because of the prohibition in clause 36.6 of the Contract, the learned Judge found that that clause was irrelevant to the issues as between the Applicant and the Respondent. It will suffice for me to say that I agree fully with her findings on these points and it would be an exercise in supererogation to repeat her reasoning in this judgment.

[10] On appeal before us, however, Mr Kemp, for the Respondent sought to persuade us to view the points argued on his client's behalf from a new perspective. He suggested that the approach taken by the Court a quo had resulted from a failure to give true weight to an important principle of interpretation of contracts. He contended that it was inimical to the precepts of equity and reasonable business practice that the Respondent should bind itself to pay the Applicant money on the mere receipt of an unsubstantiated (and possibly unjustified) notice of cancellation given to the Contractor, accompanied by a demand for payment from the Respondent. Such a construction would reduce the status of the Guarantee to a mere letter of credit. He submitted that the principles of contextual interpretation must be employed to "find the common intention of the parties in the plain, ordinary and popular meaning of the language of their contract". Parties should be presumed, he said, to contemplate reasonable, businesslike results from their agreements, and the clearest, most explicit language would be required before a Court would construe a contract to arrive at an unusual or unbusinesslike result. Such an approach would make it clear that the true intention of the parties to the Guarantee was that the provisions of clauses 4 and 5 were to be read subject to the provisions of clauses 14.3.4 and 33.6 of the Contract. Since the system of payment against certificates (issued by the Principal Agent) "pervaded" the operation of the whole Contract, Mr Kemp submitted, and since the two documents had to be read as one, it could only have been contemplated that the Guarantor's obligation to make payment would arise when the amount the Applicant was entitled to recover had been certified in a certificate issued in terms of the Contract. Expanding on this Iheme, Mr Kemp submitted that this approach would give proper effect to the negation of the Applicant's right to cancel the Contract, provided for in clause 36.6. This would be so because the dispute as to the validity of the cancellation would have to be resolved before the Applicant could invoke clause 5.

[11] The major premise of the Respondent's contentions is that a literal construction of clause 5 of the Guarantee would lead to an unusual and unbusinesslike result. Prima facie, I suppose, the bald assertion that a party can be rendered liable to pay over a substantial sum of money on the mere 'say-so' of the other party, in circumstances where the claimant may, as a matter of fact and/or law, not have a right to claim payment, may be regarded as unusual or even unbusinesslike. But that involves isolating the provisions of clause 5 from their context, an impermissible exercise in the process of interpretation. Clearly a two-fold purpose was intended to be served by the Guarantee. In the first place it was intended to provide the Applicant with an indemnity against the losses or expenses listed in clause 33.1 and 33.2.1 to 33.2.5 of the Contract. These the Applicant was entitled to recover (on failure by the Contractor to pay them) under clause 4 of the Guarantee. In keeping with Mr Kemp's submission that the system of payment against certificates 'pervaded' the administration of the Contract, clause 4 of the guarantee expressly refers to the payment, by the Respondent, of 'the sum certified' in the recovery statement and subsequent payment certificate. Clause 5, however, makes no reference at all to a certificated claim. It refers to payment of the Guaranteed sum or the full outstanding balance'.

Furthermore, it is clear that the parties did not intend the Applicant to retain the whole guaranteed amount, on cancellation, regardless of the loss or expense which it actually suffered. The provisions of clause 7 of the Guarantee explicitly provide for an accounting by the Applicant, in, or concurrently with the issue of, the final certificate, showing the precise extent of the loss or additional expense suffered as a result of the cancellation. Neither party, in the affidavits or in argument before us, appeared to be prepared to tackle, head-on, the curious wording of the first clause in clause 7, i.e. the words Where the Guarantor is a registered insurer in terms of the Short-term Insurance Act No. 53 of 1998 .. .' This is hardly surprising. The Guarantee was clearly drawn by,

and under the official cover of, the Respondent. It emerges in the answering affidavit that the Respondent is not, in fact, a

registered short-term insurer, so prima facie the Respondent was depriving itself of the benefits conferred on the Guarantor! But this could hardly have been the common intention of the parties. Indeed this much is clear from the contents of the letter of demand written by the Applicant to the Respondent on ' 9th March 2006, calling up the guarantee in terms of clause 5.2 The letter states, in the third paragraph :

'The Johannesburg Development agency shall upon the date of issue of the Final Payment Certificate submit an expense account to Federated Insurance Guarantees (Pty) Limited indicating how all monies received in terms of the Construction Guarantee have been expended and shall refund to the Guarantor any surplus that may become evident.'

Even if clause 7 is to be interpreted (without rectification) as precluding the Respondent from invoking its benefits, there can be no doubt that it would be necessarily implied in a contract of guarantee such as this one, that the guarantee was intended only to indemnify the Applicant and not to afford it a source of profit if the loss which it suffered turned out to be less than the amount paid over by the Respondent.

[12] It follows from the above that the view taken by Nites-Duner J that the Contract was intended to provide for a payment of the guaranteed amount in advance of the liquidation by certificate of the Applicant's loss is correct and the Respondent's contentions about the meaning of the Contract are not.

[13] As to the contention that the Applicant could not call up the guarantee in terms of clause 5 while there was a dispute about the Applicant's entitlement to cancel the Contract in terms of clause 36, the conclusion by Niles-Duner J that such a dispute was not relevant to the right to invoke clause 5 is also plainly correct. The parties to the Guarantee are not the same as those to the Contract. Once it is accepted that clause 5 of the Guarantee contemplates immediate payment to the Applicant once it has notified the Guarantor that it has cancelled, it is clear that if, after applying the provisions for dispute resolution in the Contract, it is found that the Applicant's cancellation was unjustified, the Applicant will have suffered no loss and will be obliged to refund the whole amount paid to it. [14] For these reasons the appeal cannot succeed. The Appeal is dismissed with costs, such costs to include those occasioned by the employment by the Respondent- on- Appeal of two counsel.

[13] As to the contention that the Applicant could not call up the guarantee in terms of clause 5 while there was a dispute about the Applicant's entitlement to cancel the Contract in terms of clause 36, the conclusion by Niles-Duner J that such a dispute was not relevant to the right to invoke clause 5 is also plainly correct. The parties to the Guarantee are not the same as those to the Contract. Once it is accepted that clause 5 of the Guarantee contemplates immediate payment to the Applicant once it has notified the Guarantor that it has cancelled, it is clear that if, after applying the provisions for dispute resolution in the Contract, it is found that the Applicant's cancellation was unjustified, the Applicant will have suffered no loss and will be obliged to refund the whole amount paid to it.

[14] For these reasons the appeal cannot succeed.

The Appeal is dismissed with costs, such costs to include those occasioned by the employment by the Respondent- on- Appeal of two counsel.

Theron J: I agree. Ntshangase J: I agree

Theron J: I agree.

Ntshangase J: I agree

1The Contract omits a crucial word here.

2Annexure LIB 5, p64.