Sulzer Pumps (South Africa) (Proprietary) Limited v Covec-MC Joint Venture (1672/2013) [2014] ZAGPPHC 695 (2 September 2014)

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG DIVISION, PRETORIA

CASE NUMBER: 1672/2013

DATE: 2 SEPTEMBER 2014

NOT REPORTABLE

OF INTEREST TO OTHER JUDGES

In the matter between: -

SULZER PUMPS (SOUTH AFRICA) (PROPRIETARY) LIMITED...........................................Applicant

and

COVEC-MC JOINT VENTURE....................................................................................................Respondent

JUDGMENT

JANSEN J

[1] This application has been divided into two parts: a part A and a part B.

[2] The relief sought in part A, namely an interim interdict, was brought on approximately two hours’ notice to the respondent, in the Gauteng division of the High Court, and not the Gauteng local division of the High Court which would have made more sense, given the fact that the attorneys are based in Johannesburg.

[3] The resolution to bring the urgent application was dated 14 February 2013 but it was argued, from the bar, without instructions, that it was only signed on 19 February 2013. This “fact” was never confirmed on oath.

[4]It would appear to have been well neigh impossible for the applicant to generate 83 pages of a founding affidavit in two hours, although the applicant contends that that is what happened. The explanation proffered is that the legal representatives of the applicant were very well acquainted with the facts due to negotiations which had preceded the launch of the application. The respondent received the urgent application via e-mail at 12h02, without annexures, in Sandton at Werksmans attorneys’ office, and was called upon to be at court at 14h00 in Pretoria on the same day.

[5] The urgent application was preceded by the following events: —

[5.1] On 16 January 2013 the respondent once again extended the performance guarantee, the interpretation of which forms the subject matter of this application, for a year, once again reiterating that it did not have any impact on the respondent’s rights.

[5.2] The parties, by agreement, extended the expiry date of the guarantee to 11 February 2013 and again to 18 February 2013 because of confidential discussions pertaining to arbitration proceedings. By way of an additional affidavit introduced by the applicant, it transpired that the performance guarantee had, in fact, already been extended until 28 February 2015, and that the parties had lost sight of this fact.

[5.3] Hence the applicant, on the information it relied upon at that time, knew that the performance guarantee would have lapsed on 14 January 2013 (absent the further letters of extension referred to below). It was also aware of the further indulgences. It would seem as though the applicant prepared its urgent application intentionally or due to negligence at the last minute, leaving the respondent no time to file an answering affidavit. Such conduct, prima facie, warrants a costs order on an attorney and own client basis.

[5.4] The applicant applied, on an urgent basis, for an interim interdict, which was granted, prohibiting the respondent from proceeding to call up a performance guarantee, held by Nedbank Limited. The costs of the urgent application were reserved. The respondent had already requested Nedbank Limited to call up the performance guarantee and the interdict nipped the applicant’s request to Nedbank Limited in the bud. On the return day, when this application was heard, it sought a final interdict against the respondent prohibiting it to call up the performance guarantee.

[6] I pause here to state that it is incorrect to refer to an interdict when an agreement is sought to be enforced. As stated by Christie The Law of Contract South Africa LexisNexis, 6th Edition at pages 555-556: —

"One way of breaching a contract is by doing something expressly or impliedly forbidden by the contract or inconsistent with the obligations imposed by the contract. A plaintiff who asks for an interdict to prohibit such a breach is in reality asking for specific performance in the negative form of non-performance of the forbidden or inconsistent act to ensure performance of the contract. His entitlement to an interdict, subject only to the court’s discretion, is therefore as unquestionable as in the case of a plaintiff who seeks specific performance in the positive form. Especially, his entitlement is not subject to the requisites for an application for an interdict set out by Van der Linden 314 7.”

[7] However, the court may consider the inadequacy or otherwise of damages in exercising its discretion.

[8] Although this principle was not argued by either of the parties, it is trite.

[9] The parties are involved in arbitration proceedings regarding an alleged breach of the construction agreement by the respondent and it is the applicant’s case that the parties agreed on or about 29 November 2010 that the performance guarantee would not be called up pending such arbitration proceedings. Allegedly, in breach of this agreement, the respondent called up the performance guarantee on 17 January 2013 and handed over the original documentation to Nedbank Limited on 19 February 2013 in order to receive payment of the guarantee amount. Hence, so it was alleged, the need to approach the court as a matter of alleged critical urgency.

[10] The rationale for the performance guarantee is of relevance. The respondent contracted with the applicant to perform certain work for and on behalf of the respondent in respect of the Vaal River Eastern Subsystem Augmentation Project (“the construction agreement”).

[11] The applicant at the outset provided the respondent with a performance guarantee in respect of the construction agreement, which was renewed on an annual basis. This fact is of importance. The applicant alleges that the respondent’s entitlements to the fruits of the performance agreement were agreed between the parties to be dependent on the outcome of arbitration proceedings which have not been finalised. The existence of such an agreement is vehemently disputed by the respondent which alleges that no agreement has been properly pleaded as required by rule 18 of the Uniform Rules of Court; and that no such agreement exists.

[12] This contention is inaccurate on the respondent’s own version. Clearly an agreement was reached by the parties in terms of the correspondence exchanged between them, which correspondence is self-explanatory, properly dated and signed by the parties’

representatives. In fact, in its answering affidavit, after denying the existence of the agreement, the respondent admits the existence

of the agreement, and even stipulates the terms thereof. It can therefore be accepted that the applicant and the respondent indeed

entered into an agreement and that the denial of the existence of the agreement is without merit. One could still have understood the denial of the existence of an agreement had the respondent argued, for example, that there had been no consensus ad idem. However, this was not the respondent’s defence. Its defence was one of the interpretation of the contract and whether the agreement between the applicant and the respondent had any bearing on the performance guarantee.

[13] It follows, on the applicant’s argument, that the performance guarantee can only be called up once the dispute regarding the applicant’s alleged breach of the performance agreement by the respondent has been resolved by way of the arbitration route.

[14] That it was in the contemplation of the parties that the arbitration proceedings would be finalised during or about 2012 is apparent from the applicant’s and the respondent’s affidavits. Initially, the thought was to extend the performance guarantee for an indefinite period, but the bank insisted on a date being inserted.

[15] In contrast to the respondent, the applicant alleges that the term of the alleged agreement, entered into on or about 29 November 2010, was that the expiry date of the performance guarantee was to be postponed, on an annual basis, to expire on the final determination

of the issues to be arbitrated upon by the parties. However, the respondent draws a distinction between “the extension” and “the calling up” of the performance guarantee. Hence, there are no disputes of facts between the parties. The real dispute relates to the interpretation

of the contract entered into between the parties, which can be resolved on the written documents.

The proper construction to be placed on the performance guarantee

[16] For purposes of the judgment, the terms of the bank guarantee are important. Paragraph 3 thereof is of cardinal importance and is quoted in full: —

“3. Payment shall be made to the Employer on receipt by the Bank, at the Bank’s domicilium citandi et executandi of the Employer’s

first written demand and which written demand shall be accompanied by this original guarantee as well as the following:

3.1 Written confirmation, signed by the employer, stating that the Contractor is in breach of any contract in terms of which this guarantee was required, or that any event trisserins payment in terms of this suarantee has occurred:

3.2 Written confirmation, signed by the Employer, of the amount being claimed in both figures and words, with such amount not to exceed the maximum amount of this guarantee[emphasis added]

[17] Clearly at all relevant times to the extension of the guarantee letter, the respondent had been in a position to state that the applicant (contractor) was in a breach of the underlying construction agreement (not appended to the papers).

[18] Also of importance is clause 5 thereof and which reads as follows: —

"This guarantee is personal to the Employer and is neither negotiable nor transferable, and must be returned to the Bank upon payment, withdrawal or expiry”

[19] The applicant contends that Nedbank Limited, as the guarantor, is an independent contractor of the respondent. This raises the question whether Nedbank Limited should have been joined in these proceedings - a point taken by the respondent.

[20] In the very first letter written by the respondent’s attorney to Nedbank Limited on 12 November 2010, the following is stated: —

“3.1 we have, on behalf of C-MC. requested Sulzer’s legal representatives, Messrs Pagel Schulenburg Incorporated (“PSI”) on 12 November 2010 to extend the current expiry date of 28 February 2011 of the euarantee to expire only upon the final determination of the disputes between C-MC and Sulzer;

3.2 we are currently awaiting a response from PSI to our attached letter of 12 November 2010, marked “B

3.3 in the event that Sulzer does not asree to extend the expiry date as indicated in 3.1 above and deliver the orisinal amendment of the guarantee to our offices by no later than IShOO on Friday 3 December 2010, C-MC shall proceed to demand payment of the suaranteed amount in respect of the guarantee from your offices[emphasis added]

[21] This letter demonstrates that if the applicant were not to extend the expiry date of the guarantee, the respondent would proceed to demand payment. By necessary implication, it follows that the respondent’s agreed only to call up the guarantee should it not be extended as agreed.

[22] The precise wording used in the applicant’s attorneys of record’s letter dated 25 November 2010 in response to the letter of 12 November 2010 is as follows: —

“1. The abovementioned matter refers, as well as your letter dated 12 November 2010.

2. We confirm that the guarantee will be extended as per your request.

3. Kindly take notice that the bank is unfortunately not willing to extend the guarantee for an indefinite period but insists that a date be inserted.

4. We, however, have instructions to provide you with an undertaking that the suarantee will be extended until the final determination of the disputes between Covec-Mc Joint Venture and Sulzer Pumps (South Africa) (Pty.) Limited.

5. Consequently if the dispute between Covec-Mc Joint Venture and Sulzer Pumps (South Africa) (Pty.) Limited are not resolved by the time of the extended expiry date of the guarantee, the euarantee will vet again be extended

6. Our Client will arrange for delivery of the original guarantee by no later than 15:00 on Friday, 03 December 2010, which guarantee will be extended until 28 February 2012

7. We trust you find same in order." [emphasis added]

[23] On 29 November 2010 the bank responded as follows: —

“1 We refer to the above matter and your attached letter dated 25 November 2010, which we have forwarded to our client for instructions.

2. We are instructed that our client is prepared to accept -

2.1 the extension of the expiry date of the guarantee to 28 February 2012;

2.2 your client’s undertaking to further extend the guarantee in the event that the disputes between our respective clients have not been resolved by 28 February 2012,

on the basis that, in the event that it is anticipated by our client that the disputes between our client and your client will not be determined, to finality, within three months before the expiry date of the suarantee. being by 28 November 2011, that your client will proceed to extend the guarantee, by no later than 28 November 2011, for a further period of 12 months and furnish our client with the original amendment to the guarantee reflecting such further extension.

3. In the event that the position referred to in 2 above transpires and your client fails and/or refuses and/or neglects to -

3.1 further extend the expiry date of the guarantee, from 28 February 2012 to 28 February 2013, as referred to in 2 above; and

3.2 deliver the original amendment to the guarantee, reflecting the requested extension, to our offices by no later than IShOO on Monday, 28 November 2011,

our client shall proceed to demand immediate payment of the guaranteed amount in respect of the guarantee from the Nedbank Limited

4. The above position regarding the timeframes and the extension will then also apply in respect of the anniversary of the expiry date of the guarantee in the event that the disputes between our respective clients have not been resolved and been finally determined within a period of three months before the further extended expiry date of the guarantee

5. Kindly confirm your client’s agreement and undertakings in respect of the above process

6. We await your urgent reply

7. Our client’s rights remain reserved1” [emphasis added]

[24] The agreement is clear in that an extension was agreed to conditionally. Read in context, the respondent agrees that the expiry date may be extended until the disputes have been resolved on condition that the guarantee be extended as stipulated. Read in context, the agreement that was reached was that the performance guarantee would only be called up should the conditions

stipulated in paragraphs 3.1 and 3.2 not be met. It is also important that the parties deemed it necessary to mention the final

determination of the disputes between Covec-MC Joint Venture and Sulzer Pumps (South Africa) (Pty) Limited. If this were not part of the agreement between the parties, there would have been no necessity to refer to this occurrence. One simply cannot read these words as pro non scripto. They were inserted and agreed to for a specific purpose.

[25] The crucial paragraph 4 is reiterated for ease of reference: —

"4 The above position regarding the timeframes and the extension will then also apply in respect of the anniversary of the expiry date of the guarantee in the event that the disputes between our respective clients have not been resolved and been finally determined within a period of three months before the further extended expiry date of the guarantee.”

[26] The respondent’s attorneys of record sought the applicant’s agreement and undertaking in respect of the process set out above, which undertaking was given in writing on the same day.

[27] The wording of this letter demonstrates that the construction guarantee would still exist at the time of the expiry date, because if it were to be called up before then, it would be terminated and there would be nothing to extend.

[28] It bears mention that the guarantee was indeed extended twice in the year 2010 and annually in the years 2011, 2012 and 2013. Such extensions were not effected prior to or on 28 November of any particular year, save for the fifth extension. It is common cause that the initial agreement of 29 November 2010 does not contain a non-variation clause nor a non-estoppel or non-waiver clause.

[29] The applicant filed a supplementary affidavit, which affidavit was not opposed by the respondent, which indicates that the fifth amendment letter of the construction guarantee was electronically transferred to the respondent’s attorneys of record on 28 August 2013 and hand delivered to them on 30 August 2013. No further correspondence was received from the respondent’s attorneys of record.

[30] The 2013 amendment letter to the respondent, is on a NEDBANK LTD’s letterhead dated 28 August 2013 and the amendment letters of 19 January 2010, 30 November 2010, 13 December 2011, and 15 January 2013 as well as a copy of the original guarantee are annexed to this letter.

[31] On 17 January 2013, unbeknown to the applicant, the respondent, in writing, demanded payment of the guarantee from Nedbank into the applicant’s attorneys’ trust account. This letter was forwarded by Ms Pansegrouw, on behalf of the respondent’s attorneys of record, to the applicant’s attorneys of record.

[32] In it, the following is conveyed to the respondent by Nedbank Limited: —

“1. ...

2.

The Expiry Date of the Guarantee has been extended from the 28™ FEBRUARY 2014 to 28™ FEBRUARY 2015.

3. No claim under this Guarantee will be entertained unless this Amendment, the original Guarantee together with the original Amendment Letters, referred to in point 1 above are presented.

4. All other terms and conditions under the abovementioned Guarantee remains (sic) the same.”

[33] The insertion of the fourth sentence that “(A)ll other terms and conditions under the abovementioned Guarantee remains (sic) the same” does not change anything. What was agreed upon was the extension of the construction guarantee on an annual basis until all the disputes between the parties had been finally resolved. Thus, the term of the extension of the construction guarantee was agreed upon in conjunction with when it could be called up. These two concepts are, by necessity, intertwined.

[34] It is important to note that Nedbank Limited, at all relevant times, acted on behalf of the respondent when conveying the information relating to the letter of guarantee and its various extensions to the applicant.

The underlying dispute regarding the construction agreement:

[35] Due to the alleged breach of the construction agreement, the applicant is claiming R45 million from the respondent, and the respondent has counterclaimed for R178 504 073.16. The pleadings run into nearly three thousand pages and the issues are stated to be complex. Hence this application was launched to ensure that the guarantee remains operative until the fmalisation of the arbitration.

[36] In an article by written Peter S. O'Driscoll entitled Performance Bonds, Bankers' Guarantees, and the Mareva Injunction, 7 Nw. J. Int'l L. & Bus. 380 (1985-1986) at pages 384-385 the following is stated:—

“In dealing with parties seeking to enjoin payment of a demand bond or bank guarantee, English courts have almost uniformly compared such instruments to the irrevocable or confirmed letter of credit.1 The courts have held that, as with the irrevocable letter of credit, the establishment of an unconditional performance bond or bank guarantee by the seller in favour of the buyer constitutes a contract between the seller and the seller's banker that is separate and distinct from the contract of sale between the seller and the buyer.2 The performance bond agreement or contract between the seller and the seller's banker imposes upon the banker the absolute obligation to pay the bond in the event of a demand, irrespective of any dispute there may be between the buyer and seller with regard to the performance of the contract3" [emphasis added]

[37] This proposition is trite, and accepted by courts in most overseas jurisdictions, including South Africa. A performance bond may be enforced without reference to the underlying contract. The bearer is obliged to pay when demand is made. This trite legal principle is accepted by the applicant. However, the applicant’s defence is that it contracted with the respondent that the guarantee would not be called up before the arbitration proceedings had been finalised. It is once again emphasised that Nedbank Limited was, at all relevant times, involved

in the negotiations leading to the extension of the performance guarantee.

[38] In argument the respondent’s counsel referred to the various South African cases in which this principle has been reiterated, such as the Supreme Court of Appeal case Compass Insurance Co Ltd v Hospitality Hotel Developments (Pty) Ltd 2012 (2) SA 537 (SCA) at paragraph [10] where it was held that a performance guarantee stands “on a similar footing” to letters of credit, and that the issuing bank must honour the guarantee in accordance only with the terms of the guarantee. This legal principle was readily conceded by the applicant.

[39] It is also common cause that an extension letter from Nedbank Limited, extending the operation of the guarantee for a further year from 28 February 2013 to 28 February 2014 was delivered by hand by the applicant on 18 January 2013 and that it is was retained by them. The further amendment letter was electronically transmitted on 28 August 2013 by the applicant’s attorneys of record and the original was delivered on 30 August 2013 as set out above. As stated, in terms of this amendment letter the guarantee was yet further extended to 28 February 2015.

[40] In a comprehensive paper titled Calling on a Performance Security: As Good as Cash? presented by Michael Whitten (18 June 2012) to the Commercial Bar Association Construction Law Section (The Victorian Bar) injunctions

to restrain the calling on a security are discussed at page 13 thereof. Usually such injunctions are doomed to fail. As was stated

by Charles JA in in Olex Focas Pty Ltd v Skodaexport Co Ltd, (unreported, Vic Sup Ct, CA, No 7050/1996,17 September 1996 at pp 2-4):—

“The courts will intervene to prohibit a bank from paying under a performance guarantee in very limited circumstances. The wholly exceptional case in which an injunction might be granted at common law is where it is proved that the bank knows that any demand for payment already made, or which may thereafter be made, will clearly be fraudulent; Bolivinter Oil SA v Chase Manhattan Bank and Ors [1984] 1 Lloyds Rep 251, at 257 per Donaldson MR. Otherwise the whole commercial purpose of such guarantees (or, for that matter, irrevocable letters of credit) would be destroyed and the international reputation of a bank issuing such documents would be at risk of serious damage when the bank is caught between the competing demands of the guarantor (its customer) and the beneficiary of the guarantee. The bank is in no wav concerned with any dispute the guarantor may have with the beneficiary; Power Curber International Ltd v National Bank of Kuwait [1981] 3 All ER 607per Lord Denning MR at 612-613, and per Griffiths LJ at 614. ” [emphasis added]

[41] In the said article the following is stated at pages 14-15:—

“As a starting proposition, traditionally, the approach of the courts is to allow the beneficiary proprietor to call on a bank guarantee in its favour.

With equal tradition, the courts have repeatedly decreed that, as a general proposition, they will not intervene to prevent a party from calling upon a bank guarantee, except in cases of: —

a) fraud - a court may grant an injunction restricting a party accessing a bank guarantee where there has been fraud on the part of the beneficiary,

such as a dishonest intent or recklessness as to the truth of a statement;

b) unconscionability - generally involves ‘taking advantage of a special disadvantage of another ’ or ‘unconscientious reliance on strict legal rights ’ or ‘action showing no regard for conscience, or that are irreconcilable with what is right or reasonable In Olex Focas Pty Ltd v Skodaexport Co Ltd and ACCC v Samton Holdings Pty Ltd (2002) 117 FCR 301, unconscionability was held to include: —

(i) exploitation of vulnerability or weakness;

(ii) abuse of a position of trust or confidence;

(iii) insistence upon rights in circumstances which make that harsh or oppressive; and

(iv) inequitable denial of legal obligations.

c) breach of a negative stipulation in the underlying contract -where calling on the security would be in breach of an express or implied negative stipulation in the underlying contract, the courts may restrain a beneficiary from invoking the financier’s autonomous obligation.

(In the present case, the agreement between the parties pertaining to when the performance guarantee could be called up was entered into separately from the underlying building contract.)

See Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812; Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40; [1999] 1 VR 420.

The last exception is a common basis for contractors challenging a principal’s entitlement to call upon the guarantee. A contractor needs to prove that there are terms in the contract that restrain the calling of security. The main focus is the ‘proper construction of the contract ’. ” [emphasis added]

[42] It should be borne in mind that to introduce qualifications on the entitlement of owners to call up guarantees, will deprive such guarantees of their commercial currency. As a general rule a court will not prevent a party from calling upon a bank guarantee unless the party calling up the bank guarantee is acting fraudulently or unconscionably or has made a contractual promise not to call upon the guarantee as was held in Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd [2005] FCAFC 136. [emphasis added]

The respondent's conduct:

[43] Ms Pansegrouw of the respondent’s attorneys of record on 17 November 2013 forwarded the following e-mail (addressed by her to Nedbank Limited on the same day) to the applicant’s attorneys of record: —

"Our client has demanded payment of performance guarantee 29611806 as your client has failed and/or refused and/or neglected to extend the expiry date of the guarantee and to deliver the extended guarantee to our offices by 28 November 2012 or since 28 November 2012.”

[44] As stated above the extension letters of the guarantee are dated 19 January 2010, 30 November 2010, 13 December 2011, 15 January 2013 and 28 August 2013. None of these extensions were effected prior to or on 28 November of any particular year, save for the letter of 28 August 2013. All the extension letters extended the guarantee to 28 February of the next year.

[45] It bears mention that the respondent’s attorneys accepted all the “late” extension letters (and called such acceptances “indulgences”), reiterated the previous time frames BUT expressly stated the acceptance of all such “late”

extensions, did not constitute a waiver or a relaxation of the respondent’s rights or the right to demand payment in terms of the guarantee. The precise wording is as follows: —

“3. Kindly note that the above indulgences sranted to vour client in respect of the annual extension of the expiry date of the suarantee —

3.1 in no way whatsoever detracts front our client’s rights and entitlements to, at any time, demand payment of the guaranteed amount from Nedbank Limited in respect of the guarantee;

3.2 does not constitute a waiver and/or relaxation of our client’s rights and entitlements to, at any time, demand payment of the guaranteed amount from Nedbank Limited in respect of the guarantee, and

all of our client’s rights in this regard remain strictly reserved”.

[46] Notwithstanding the said “indulgences”, the following paragraph of the 8th of December 2011 letter, written by the respondent’s attorneys of record, expressly states: —

“2.6 as recorded in paragraph 4 of our letter of 29 November 2010, the above position regarding the timeframes and the extensions will also apply in respect of the anniversary of the expiry date of the guarantee in the event that the disputes between our respective clients have not been resolved and been finally determined within a period of three months before the further extended expiry date of the guarantee. ”

[47] On the same day the applicant’s attorneys sent the following e-mail to the respondent’s attorneys of record. The e-mail was sent to Ms Pagel and copied to Mr N Kirby, Ms Pansegrouw and Ms Candice Pillay. The e-mail reads as follows: —

“1. We refer to the above matter.

2. Our client hereby gives undertaking (sic) as sought in your letter dated 29th November 2010.

3. We trust that you find the above in order”

[48] In the said e-mail of 8 December 2011 the following is stated: —

‘1. We refer to the above matter, the guarantee and the attached correspondence exchanged between our respective offices on 29 November 2010.

2. We advise that -

2.1 on 29 November 2010, as is evident from your attached letter, your client undertook, inter alia, to extend the expiry date of the guarantee, from 28 February 2012 to 28 February 2013 and to deliver the original amendment to the guarantee, reflecting the requested extension, to our offices by no later than IShOO on Monday, 28 November 2011 (“the extended guarantee”);

2.2 your client has failed and/or neglected and/or refused to delivery (sic) the extended guarantee to our offices by 28 November 201 or since 28 November 2011;

2.3 on the basis of our letter of 29 November 2010 and your undertakinss of 29 November 2010. our client is fully entitled to now proceed to demand immediate payment of the guaranteed amount in respect of the guarantee from Nedbank Limited;

2.4 our client is however prepared, as a gesture of goodwill, to furnish your client with an indulgence and to allow your client an opportunity to deliver the extended guarantee to our offices, for the attention of Ms Monique Pansegrouw, by no later than 12hOO on Friday, 13 January 2012;

2.5 should your client fail and/or refuse and/or neglect to deliver the extended guarantee to our offices by 13 January 2012, our client shall proceed to demand immediate payment of the guaranteed amount in respect of the guarantee from Nedbank Limited;

2.6 as recorded in paragraph 4 of our letter of 29 November 2010, the above position regarding the timeframes and the extensions will also apply in respect of the anniversary of the expiry date of the guarantee in the event that the disputes between our respective clients have not been resolved and been finally determined within a period of three months before the further extended expiry date of the guarantee.

3. Kindly note that the above indulgences sranted to vour client in respect of the annual extension of the expiry date of the guarantee —

3.1 in no way whatsoever detracts from our client’s rights and entitlements to, at any time, demand payment of the guaranteed amount from Nedbank Limited in respect of the guarantee;

3.2 does not constitute a waiver and/or relaxation of our client’s rights and entitlements to, at any time, demand payment of the guaranteed amount from Nedbank Limited in respect of the guarantee, and all of our client’s rights in this regard remain strictly reserved.

4. We await your urgent reply.

5. All of our client’s rights remain reserved[emphasis added]

[49] Paragraphs 3.1 and 3.2 were NOT included in the agreement entered into between the applicant and the respondent on or about 29 November 2010. The indulgences only relate to the late extensions of the guarantee and it follows that clauses 3.1 and 3.2 quoted above, only relate to indulgences regarding late extensions.

[50] On 16 January 2012 the respondent once again sent an e-mail to Mr A Pagel which reads as follows: —

“1. We refer to the above matter and our letter of 8 December 2011.

2. We confirm receipt on 12 January 2012 of the original amendment to the guarantee, as per Amendment Letter No. 3 dated 13 December 2011, reflecting the extension of the expiry date of the guarantee to 28 February 2013.

3. We confirm that -

3.1 the timeframes and the extensions will continue to apply in respect of the anniversary of the expiry date of the guarantee in the event that the disputes between our respective clients have not been resolved and been finally determined within a period of three months ((being 28 November of the particular year) before the further extended expiry date of the guarantee;

3.2 the indulgences granted to your client in respect of the annual extensions of the expiry date of the guarantee -

3.3 in no wav whatsoever detracts from our client’s riehts and entitlements to. at any time, demand payment of the guaranteed amount from Nedbank Limited in respect of the guarantee;

3.4 does not constitute a waiver and/or relaxation of our client’s rights and entitlement to, at any time, demand payment of the guaranteed amount from Nedbank Limited in respect of the guarantee; and

all of our client’s rights in this regard remain strictly reserved. ” [emphasis added]

[51] Clauses 3.2 and 3.4 were NOT inserted in the initial extension of the construction guarantee of 29 November 2010.

[52] These new clauses complete contradict the raison d’etre of the extension of the construction guarantee to 28 February 2013. If it were to be called up then nothing remained which could be extended until 28 February 2013. What, then, is one to make of these clauses?

[53] The respondent can convincingly argue that it could grant extensions on such conditions as it wished. Had the earlier extensions not contained the clauses referred to above then it was entitled to renegotiate “indulgences” on its own terms. But were these “new” clauses inserted bona fide by the respondent or rather as a band aid in order to have its cake and eat it? Therein lies the rub. This question is discussed below.

[54] On 19 January 2010 Nedbank Limited addressed the following e-mail to the applicant’s attorneys of record which reads as follows: —

'1 Attached is a copy of the abovementioned guarantee.

2. At the request of and on the instruction of the Contractor we hereby advise that in terms of this Amendment, the Guarantee is amended as follows with effect from the date hereof:

The Expiry Date of the abovementioned Guarantee has been extended from 28 February 2010 to 28 February 2011.

3. No claim under the Guarantee will be entertained unless this Amendment and the original guarantee referred to in point 1 above are presented.

4. All other terms and conditions under the abovementioned Guarantee remains the same.”

[55] In the record, the following extensions of the construction guarantee by Nedbank Limited are to be found.

[56] On 30 November 2010 a letter addressed to the applicant’s attorneys of record by Nedbank Limited which reads as follows: —

“AMENDMENT LETTER NO 2. (“THIS AMENDMENT”) TO GUARANTEE NUMBER 29611806 DATED 24™ FEBRUARY 2009 FOR AN AMOUNT OF R13 821 639.89 ISSUED ON BEHALF OF SULZER PUMPS (SOUTH AFRICA) (PTY) LTD REG. NO. 1922/007245/07

1. Attached is a copy of the abovementioned guarantee as well as previously issued amendments.

Amendment Letter No 1 dated 19th January 2010 (collectively referred to as the “the Guarantee”)

The Expiry Date of the Guarantee has been extended from 28 February 2011 to 28 February 2012.

4. All other terms and conditions under the Guarantee remains the same.”

[57] On 13 December 2011 a letter addressed to the applicant’s attorneys of record by Nedbank Limited which reads as follows: —

“AMENDMENT LETTER NO 3. (“THIS AMENDMENT”) TO GUARANTEE NUMBER 29611806 DATED 24th FEBRUARY 2009 FOR AN AMOUNT OF R13 821 639.89 ISSUED ON BEHALF OF SULZER PUMPS (SOUTH AFRICA) (PTY) LTD REG. NO. 1922/007245/07

Amendment Letter No 1 dated 19th January 2010 Amendment Letter No 2 dated 3(fh November 2010 (collectively referred to as the “the Guarantee”)

The Expiry Date of the Guarantee has been extended from 28 FEBRUARY 2012 to 28 FEBRUARY 2013.

3. No claim under the Guarantee will be entertained unless this Amendment, the original guarantee and amendment letters as referred to in point 1 above are presented.

[58] On 16 January 2013 a letter addressed to the applicant’s attorneys of record which reads as follows: —

“AMENDMENT LETTER NO 4. (“THIS AMENDMENT’) TO GUARANTEE NUMBER 29611806 DATED 24th FEBRUARY 2009 FOR AN AMOUNT OF R13 821 639.89 ISSUED ON BEHALF OF SULZER PUMPS (SOUTH AFRICA) (PTY) LTD REG. NO. 1922/007245/07

1. Attached is a copy of the abovementioned guarantee as well as previously issued amendment letters.

Amendment Letter No 1 dated ltfh January 2010 Amendment Letter No 2 dated 30th November 2010 Amendment Letter No 3 dated 13th December 2011 (collectively referred to as the “the Guarantee”)

2. At the request of and on the instruction of the Contractor we hereby advise that in terms of this Amendment, this Guarantee is amended as follows with effect from the date hereof:

The Expiry Date of the Guarantee has been extended from 28 FEBRUARY2013 to 28 FEBRUARY 2014.

3. No claim under the Guarantee will be entertained unless the originals of this Amendment, the abovementioned guarantee and the previously issued amendment letters as referred to in point 1 above are presented.

4. All other terms and conditions under the Guarantee remains the same

[59] The applicant contends that the primary concern of the respondent was that the guarantee be extended annually to 28 February of the following year. It was alleged that the time lines were devised for that purpose. The most recent extension letter was obtained from Nedbank Limited on 28 August 2013. The only riders added by Nedbank Limited to the extension letters were identical to the previous extension letters quoted above: —

‘1. …

2. ...

[60] On 17 January 2013 Ms Pansegrouw and Mr Edward Francis of the respondent’s attorneys of record received the following e-mail which reads as follows: —

‘1. We refer to the above matter, the guarantee and the amendment letters, of which we attach copies for ease of reference, marked “A”.

2. We confirm that -

2.1 we represent C-MC (the employer) and that your offices have previously been copied on communications from our offices to that of Sulzer’'s attorneys, Messrs Pagel Schulenburg Incorporated (“PSI”);

2.2 with reference to our attached letter of 16 January 2012, marked “B”, on which Nedbank Limited was copied, Sulzer had an obligation. as per the previous agreement reached between C-MC and Sulzer, to extend the expiry date of the guarantee to 28 February 2014 and to furnish us with a copy of the extended guarantee by no later than 28 November 2012;

2.3 we have to date not received any such an extended guarantee from PSI and C-MC has instructed that we proceed to demand payment of the funds in terms of the guarantee from Sulzer [emphasis added]

(This allegation is inaccurate as can be seen from the fifth extension letter.)

[61] Effectively, what the respondent is doing is to approbate and reprobate. That it is clearly not entitled to do.

[62] This indicates that the “trigger” for the right to ask for immediate payment was non-extension of the construction guarantee. Given the applicant’s disregard for the time periods in which extensions had to take place, one can safely state that none of the parties perceived it as an important clause. Apparently, so long as the construction guarantee was renewed before 28 February of each year, until all the disputes between the parties had finally been resolved, the construction guarantee would be extended.

[63] A without “prejudice meeting” was arranged for 31 January 2014. This meeting was preceded by the following e-mail dated 17 January 2013 e-mailed to the applicant’s attorneys of record and which reads as follows: —

“1. We refer to the above matter and the attached letter to Nedbank Limited in which our client has demanded payment of performance guarantee number 29611806 as your client has failed and/or refused and/or neglected to extend the expiry date of the guarantee and to deliver the extended guarantee to our offices by 28 November 2012 or since 28 November 2012.

2. We propose that our client’s respective legal teams, excluding its clients, meet on a without prejudice basis in order to discuss the status of the arbitration proceedings.

3. Kindly advise your legal to team’s availability for purposes of such a meeting on either Monday, 28 January 2013 or Thursday, 31 January 2013 at Advocate Cedric Puckrin SC’s chambers situated at Circle Chambers, Brooklyn, Pretoria.

4. The venue of Circle Chambers is suggested as Advocate Puckrin SC is recovering from recent back surgery and cannot travel long distances.

5. We await your urgent reply.” [emphasis added]

[64] It transpired that a dispute of great proportions had arisen between the respondent and Trans Caledon Tunnel Authority (“TCTA”).

What Ms Pansegrouw demanded at the 31 January 2010 meeting was a stay of the demand for payment of the guarantee from Nedbank should the applicant agree to a two year stay of the arbitration with the respondent in order for the applicant to resolve its dispute with TCTA. She referred to these two issues as being intertwined. The applicant points out that they were intertwined in the following

respect - if TCTA were to be successful in its claim against the respondent, it would mean that the arbitration proceedings against

the respondent would fail, and vice versa.

[65] The respondent undertook not to demand payment of the guarantee until close of business on the 18th of February 2013. On 18 February 2013 the applicant advised the respondent’s attorneys that it did not agree to a stay of the arbitration proceedings between the applicant and the respondent. The respondent therefore requested Nedbank to pay out the guarantee and the applicant’s attorneys informed the respondent’s attorneys of record that they had no option but to bring this application.

[66] As stated, the application was initially brought as an urgent application.

[67] The contention by the applicant is that the parties varied the 29 November 2010 performance guarantee by conduct and that any “non-variation” and “no waiver” clauses included into the subsequent correspondence between the parties after the initial agreement of 29 November 2010 cannot unilaterally be imposed by the respondent.

[68] It is the respondent’s case that it was made clear, whenever an indulgence was granted, that the grant thereof did not vary the original agreement of 29 November 2010. It is trite that when an indulgence is granted, the person relaxing its right, may do so conditionally. The party seeking the indulgence can accept or reject the condition. In this case, the applicant, so the respondent argues, by its conduct, accepted the condition imposed. However, one has to scrutinise this alleged condition within the larger context of the entire agreement which clearly states that the performance guarantee would not lapse before the final determination of the disputes between the parties by way of arbitration proceedings.

[69] Furthermore, it was contended that the date of 28 November had only been inserted in order to ensure that on the 28th of February each year, the credit guarantee would have been extended. The precise wording used was: —

“3.1 the timeframes and the extensions will continue to apply in respect of the anniversary of the expiry date of the guarantee in the event that the disputes between our respective clients have not been resolved and been finally determined within a period of three months ((being 28 November of the particular year) before the further extended expiry date of the guarantee;

3.2 the indulgences granted to your client in respect of the annual extensions of the exoirv date of the guarantee -

3.3 in no wav whatsoever detracts from our client’s rights and entitlements to, at any time, demand payment of the guaranteed amount from Nedbank Limited in respect of the guarantee;

3.4 does not constitute a waiver and/or relaxation of our client’s rights and entitlement to, at any time, demand payment of the guaranteed amount from Nedbank Limited in respect of the guarantee: and...” [emphasis added]

[70] It was also stated, as demonstrated above, that in some of the letters referred to above that "(a) 11 other terms and conditions under the guarantee remain the same”.

[71] However, the alleged agreement that the credit guarantee would be extended until the finalisation of the arbitration proceedings, undoubtedly runs counter to this argument. In each letter where a reference was made to the final determination of the issues in arbitration it was conditional upon the applicant agreeing to the extension of the bank guarantee.

[72] Based on these facts an interim injunction was obtained before Raulinga J.

[73] As set out above, the respondent professes not to know on which agreement the applicant relies or what it terms were. As stated earlier, these statements are contradicted in the answering affidavit: —

“ In the letter, I attached the guarantee and set out the undertaking by the applicant to extend the guarantee pending finalisation of the forthcoming arbitration between the parties. I indicated that the applicant had not complied with its obligations to extend the guarantee and I, thus, on behalf of the respondent. proceeded to make the demand As required in terms of the guarantee itself, I further set out, in paragraphs 3.1. 3.2, 4 and 5 of the letter that the applicant was in breach. I further provided the respondent's written confirmation thereof and the amount as claimed in numbers and words, [emphasis added]

[74] This paragraph clearly indicates that the respondent knew full well what the agreement between the parties was, namely that failure to extend the construction guarantee would result in it being called up.

[75] The same holds true for the following paragraph. On the respondent’s own version in its answering affidavit: —

“Importantly, the letter further stated, in paragraph 7, that the original guarantee and the original amendment letters of which were both a sine qua non to any demand in terms of the guarantee1 age currently being held in safekeeping bv our offices and will be provided to vou once vou have confirmed receipt of this letter, arrangements have been put in place for the payment of R13 821 639.89 into our trust account and you have indicated when the payment into our trust account will be effected, [own emphasis added4] remphasis added]

[76] Furthermore, notwithstanding the respondent’s protestations to the effect that no agreement existed, it then goes on to state the following in its answering affidavit: —

“Approximately two years before the current demand, a written agreement (“the extension agreement”), was entered into between the parties which agreement arose from the following steps that were taken, in correspondence between the parties, as dealt with in annexures “D” to “I” (pages 47 to 56) of the applicant’s founding papers and as quoted in paragraphs 34 to 41 above. The steps taken by the parties to the extension agreement, appearing, as they do, expressly, from the correspondence itself, comprises an undertaking from the applicant and an acceptance thereof by the respondent, of procedures and the process that would ensure the extension of the guarantee until such time as finalisation of the arbitration had occurred[emphasis added]

[77] The real problem arises as follows: —

[77.1] there is therefore, as stated above, an inherent contradiction in the letters. Were the applicant to fail to renew the guarantee, the respondent could demand payment of the bank guarantee.

[77.2] the extensions of the bank guarantee expressly stipulated that they did not vary or detract from the original terms of the bank guarantee; and

[77.3] simultaneously, confirmed that the guarantee would not lapse until such time as the finalisation of the arbitration proceedings had been finalised.

[78] If one were, arguendo, to accept the applicant’s position, then the following question can be asked: which of these two diametrically opposed positions was agreed upon? The only manner in which the two stances can co-exist is to accept that they should be read together and that after the finalisation of the arbitration proceedings, the guarantee could be called up at any time. Such an interpretation is also the less onerous of the two interpretations. Nedbank Limited called for an annual extension of the performance guarantee. This also tallies with the fact that the applicant found it necessary not simply to call up the bank guarantee in its letter, but to add that the bank guarantee had not been extended as agreed. This sentence is telling. It puts the lie to the respondent’s contention what it could call up the bank guarantee at any time. It could only call up the guarantee at any time were the applicant not to extend the guarantee as agreed.

[79] It is further trite that a contract may also not be interpreted in a manner which renders it absurd.

[80] The so-called “ticket cases” no longer hold good, viewed through the prism of the Constitution.5 At the very least, when a fundamental change in the terms of an agreement are sought to be introduced, the contracting party saddled

with the new obligation has to be told pertinently what the consequences of the introduction of seemingly innocuous contract terms are. The applicant clearly had not anticipated the respondent’s volte-face nor accepted that the extensions actually amounted to nought as the performance guarantee could, in theory, be called up the very next day at the respondent’s request. Such terms would render the entire alleged extension of the performance guarantee absurd.

[81] A third gloss can be placed on the alleged agreement not to call up the bank guarantee: the agreed process and procedures to extend the bank guarantee had to be followed in order to ensure that it was not called up before the arbitration proceedings had been finalised. Should this be the correct reading of the agreement, then the caveats of the respondent that a certain process and procedure had to be followed in order to extend the bank guarantee would kick in, accompanied by the express caveats that any indulgences regarding this process and procedure would not constitute a waiver of rights or variation or renewal of the agreement.

[82] However, the respondent shies away from even such an interpretation as it contends that, notwithstanding the prescribed process and procedure, it had stipulated the following at page 129 paragraph 112.1: —

“The letter of 8 December 2011, Annexure “H” to the founding papers, pages 53 to 54 (see also Annexure “MP24” to this answering affidavit:

‘Kindly note that the above indulgence granted to your client in respect of the annual extensions of the expiry date of the guarantee —

in no way whatsoever detracts from our client’s rights and entitlements to, at any time demand payment of the ... guarantee;

does not constitute a waiver and/or relaxation of our client’s rights and entitlements to, at any time. demand payment of the guaranteed amount from Nedbank Limited in respect of the guarantee; and

all our client’s rights in this regard remain strictly reserved, [own emphasis added]”

[83] From what has been set out above, this was not the agreement reached between the parties.

[84] No process or procedure would have been called for if the respondent were accurate in its contention set out above. The extract from the answering affidavit set out above, read in context, in the court’s opinion, simply stipulated that the applicant was not waiving its right to demand payment were the guarantee not to be extended as agreed. If the respondent’s contention were correct, then there would not have been any reason whatsoever to prescribe a process or procedure. The only construction one can place on the caveat set out above, is that once an extension had been granted, then the respondent had to wait to see whether the applicant sought a further extension as agreed. If it did not, it could call up the guarantee.

[85] In order to interpret the agreement accurately due regard has been had to the latest Supreme Court of Appeal case on the interpretation

of contracts namely the case of Bothma Batho Transport v S Bothnia & Seun Transport (802/2012) [2013] ZASCA 176 (28 November 2013) at paragraph [10] where the following dictum from Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) (pararagraph [18]) is quoted with approval: —

“Over the last century there have been significant developments in the law relating to the interpretation of documents, both in this country and in others that follow similar rules to our own. It is unnecessary to add unduly to the burden of annotations by trawling through the case law on the construction of documents in order to trace those developments. The relevant authorities are collected and summarised in Bastian Financial Services (Pty) Ltd v General Hendrik Schoeman Primary School. The present state of the law can be expressed as follows: Interpretation is the process of attributing meaning to the words used in a document, be it legislation, some other statutory instrument, or contract, having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence. Whatever the nature of the document, consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production. Where more than one meanins is possible each possibility must be weished in the lisht of all these factors. The process is objective, not subjective. A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document. Judges must be alert to, and guard against, the temptation to substitute what they regard as reasonable, sensible or businesslike for the words actually used. To do so in regard to a statute or statutory instrument is to cross the divide between interpretation and legislation; in a contractual context it is to make a contract for the parties other than the one they in fact made. The ‘inevitable

point of departure is the language of the provision itself, read in context and havins resard to the purpose of the provision and the backsround to the preparation and production of the document. [emphasis added]

[86] As stated by Wallis JA at paragraph [12] op. cit. the correct approach to interpreting a contract is thus as follows: —

“Whilst the starting point remains the words of the document, which are the only relevant medium through which the parties have expressed their contractual intentions, the process of interpretation does not stop at a perceived literal meaning of those words, but considers them in the light of all relevant and admissible context, including the circumstances in which the document came into being. The former distinction between permissible background and surrounding circumstances, never very clear, has fallen away. Interpretation is no longer a process that occurs in stages but is ‘essentially one unitary exercise’.6 Accordingly it is no longer helpful to refer to the earlier approach.”

[87] The only other possible interpretation is that should the applicant wish to seek an extension, it had to follow the process and procedure, but that the applicant, in its discretion, was not bound in any way to grant such an extension even if the process and procedure were followed. However, this interpretation is also open to doubt as each extension endured until 28 February of the next year, and was inevitably extended. Copious references are made to the “annual” extensions. Neither can the respondent be correct in asserting that it could call up the guarantee “at any time”. Clearly it could not. To do so, given the circumstances of this case, would be unconscionable.

[88] It is the respondent’s case that: —

“ What is clear from the letters as highlighted above, is that, at all material times, the indulgences and non-waiver riders were intended to refer to the whole ‘process’ which formed the subject of the extension agreement.

It is further patent from that which has been quoted that the respondent viewed the entire ‘process’ of the extension procedures and the extension agreement as an ‘indulgence’ and that the respondent considered that it had, ‘at any time’, the entire ambit of rights available to it under the guarantee, [own emphasis added]”

[89] The question to be posed is therefore - did the extension agreements simply ensure that the performance guarantee did not lapse, but had no impact on the respondent’s right to call it up at any time?

[90] From what has been set out above, it is clear that Nedbank Limited was instrumental in changing the wording of the written performance guarantee expressly, and not by implication, as was argued on behalf of the applicant. It conveyed the wishes of its client (the respondent) directly to the applicant.

[91] Although the court is in full agreement with the respondent that a guarantee which cannot be called up at any time is antithetical to a performance guarantee, Nedbank Limited, on behalf of the respondent, agreed to exactly that when it allowed its client (the respondent) to amend the performance guarantee. As such the respondent is correct in contending that Nedbank Limited is an interested party and should

have been joined in these proceedings.

[92] However, in the circumstances of this case, no relief was sought from Nedbank Limited and its interest would merely stem from the fact that it was a party to the extension agreements. To non-suit the applicant in circumstances where Nedbank Limited’s stance is set out in the correspondence, would lead to an unwarranted delay which would serve no purpose. Nedbank Limited would no doubt have sought to intervene if it had a material, substantial interest.

[93] The further question that arises is whether the extensions of the guarantee are to be interpreted as an agreement not to call up the guarantee during the period for which it was extended. When interpreting the letters exchanged between the parties via Nedbank Limited it seems nonsensical for the applicant and the respondent to have agreed that the performance guarantee would not lapse until the final determination of the disputes between the applicant and the respondent, if the performance guarantee could be called up at any time within the respondent’s discretion. An agreement as set out above would make no commercial sense, as the performance

guarantee would automatically “lapse” when called up. Once it was called up, its existence would, by necessity, terminate.

[94] In Rainy Sky S.A. & Ors v Kookmin Bank [2011] UKSC 50 ([2012] Lloyds Rep 34 (SC)) paragraph 21, Lord Clarke SCJ relied also on the following passage in Society of Lloyd’s v Robinson [1999] 1 All ER (Comm) 545, 551 (referred to with approval by the SCA in the case of Bothma Batho Transport v S Bothma & Seun Transport supra): —

"(w)ords ought therefore to be interpreted in a way in which a reasonable commercial person would construe them. And the reasonable commercial person can safely be assumed to be unimpressed with technical interpretations and undue emphasis on niceties of language”.

[95] As can be seen from the correspondence, the respondent’s attorneys, initially, of their own volition, drew a bright line distinction between the extension of the expiry date of the performance guarantee on the one hand, and the condition upon which it would call up the performance guarantee, on the other hand. An objective, commercial reading of the agreement makes it clear that the performance guarantee could only be called up should the performance guarantee not be extended by the respondent.

[96] The court does not agree with the applicant’s contention that it was agreed that the guarantee could only be called up once the respondent proved (not merely alleged) a breach of the construction agreement by the applicant. What was agreed upon was that the disputes that had been referred to arbitration be finalised. (It would, of course, not be possible for the respondent to issue a letter stating that the applicant was in breach of the construction agreement were it to be proved that the respondent was the party who had breached the agreement. In such circumstances, the respondent would, as a result, not be in a position to call up the performance guarantee. However, on the papers, no such agreement that the respondent had to prove a breach of the construction agreement was entered into).

[97] However, to borrow a term from the respondent’s heads of argument, the necessary implication of the request for extensions of the guarantee until the disputes between the parties has been resolved, is that the guarantee would not be called up before then. This interpretation is cemented by the fact that the sanction for the respondent not extending the agreement, would be that the guarantee would be called up. Read within content and all the relevant circumstances, the objective interpretation to be placed on the parties’ agreement is that the performance guarantee would only be called up once the disputes between the parties had been finalised.

[98] The court holds that the reliance placed on the parol evidence rule and the case of Group Five Building Ltd v Minister of Community Development [1993] ZASCA 75; 1993 (3) SA 629 (A) at 650-3 is misplaced, as nothing prevented the parties to amend the original guarantee and Nedbank Limited itself referred to the amendment letters relating to the initial agreement. Hence, the parties were at liberty to amend the express terms of the initial construction guarantee.

[99] The court was referred to the case of Kwikspace Modular Buildings Ltd v Sabodala Mining Company Sari and Another 2010 (6) SA 477 (SCA) at paragraph 12. It cannot be stated that the amendment letters are inconsistent with the purpose for which the guarantee was taken. Nor is the court going behind the express terms of the guarantee. The construction guarantee was renewed year after year and the bank itself expressly stated that should the respondent fail to extend the performance guarantee it follows that, then (and clearly only then) the guarantee could be called up. The court is giving effect to the objective construction to be placed on the agreement between the parties as reasonable commercial contracting parties.

[100] The court is not implying anything. It is relying on the express wording of the amended construction guarantees. For this reason, it is unnecessary to deal with the argument addressed by the respondent of the alleged waiver of rights. The wording of the amended construction guarantees, read in context, bear the meaning attributed to them by the court. That is what the parties agreed to and that is what the court has to enforce.

[101] If this argument were sound, any written amendment of a contract could be sought to be argued away as a “waiver” of certain rights. Such an argument is clearly untenable.

[102] The next aspect to be addressed is the alleged dispute of fact. There is no factual dispute. Only a dispute as to the correct objective interpretation to be given to agreements entered into. This argument similarly flounders.

[103] Regarding the applicant’s reliance on why the extensions were sought, it is accurate, as was argued by counsel for the respondent, that this was solely necessitated by the fact that the bank refused to grant an indeterminate construction guarantee. But the bank went further. It stated that the guarantee would be called up should no extension be sought by the respondent. This term was entered into in addition to the applicant’s rights under an unconditional construction guarantee. Effectively, this term changed the unconditional guarantee into a conditional guarantee.

[104] In terms of section 8(3) of the Constitution, a court is enjoined to develop the common law to the extent that legislation does not give effect to a right enshrined in the Constitution and may develop rules of the common law to limit the right provided that the limitation is in accordance with section 36(1).

[105] Furthermore, when interpreting the Bill of Rights, a court must promote the values that underlie an open and democratic society based on human dignity, equality and freedom; must consider international law and may consider foreign law. This is prescribed by section 39(2) of the Constitution.

[106] In the seminal article “The Demise of the Exceptio Doli: Is There Another Route to Contractual Equity?78 Judge Lewis (then still a professor) uttered the following prophetic words: —

“I shall argue that if our rules of interpretation of contracts were different, equity could be achieved in another way, and the exception

doli could be buried without qualm.”

[107] In her article, at page 29, Lewis adopts the approach of courts to develop an equitable result in particular circumstances. Consensual contracts are bilateral and based on the bona fides of all contracting parties. All consensual Roman contracts contained the phrase “ex bona fides” in their intentions.

[108] Given the emphasis on the actual intention of the parties, there is no doubt in the court’s mind that the agreement between the parties was that the building guarantee could only be called up once the disputes between the parties had been resolved by way of the pending arbitration proceedings.

[109] Effectively, in adding the extra wording that notwithstanding the reference to the final arbitration of the disputes between the parties, the respondent could still effect payment of the performance guarantee at any time, the respondent sought to insert a condition si voluere, which is abortive. It should be borne in mind that, under normal circumstances, the performance guarantee would have been called up after the first letter of demand due to the breach of the construction contract. Why this never happened, is not explained.

[110] Given the circumstances in which the renewal of the performance guarantee was agreed upon, the respondent was not at liberty to exclude an intention to create an obligation. It had already agreed to a condition, namely to wait until the final determination of the arbitration proceedings. The respondent was not at liberty to vest itself with a discretion in respect of its own performance.

This aspect is discussed exhaustively in the book entitled Contract General Principles9 sub cap Contractual powers or discretions. This principle derives from the maxim “nulla promissio potest consistere quae ex voluntate promittentis statum capit. ” D 45.1, 46.3 and D 45.1.17.

[111] However, it should be borne in mind that this general rule is complex in that it may relate, as stated in Van der Merwe et al op. cit. at 213: —

“...to the initial determination of the performance due, to the variation of an agreed performance or to virtually any other aspect of the consequences of the contract. Powers may also vary greatly in their effect on the relationship of the parties. ” (Read with the cases quoted in footnote 63 pertaining to this paragraph.)

[112] However, where such a discretion is restricted by objective considerations the situation is different.10

[113] One should also always keep in mind the famous utterance by Paulus quoted by Voet Ad Pandectas BK XII Tit 1. Section 1911: —

“It is quite true that in all obligations to which no time has been attached the debt is presently due. None the less, we oueht not on that account to take the view that humane feeline and also judicial discretion have been barred out. The result is that when a borrower is sued a moderate period of grace to suit the changing character of the transaction is vouchsafed either by the lender or by the judge. It follows that you would rightly apply to this case the famous saying of Paulus - ‘Though law fails me, equity prompts such a conclusion.'n'’ [emphasis added]

[114] Given the fact that this matter falls to be decided on the correct interpretation of the contract it is unnecessary to delve any further into the common law pertaining to similar situations.

[115] What the old authorities do demonstrate though, is that not only fraud may prohibit the calling up of a construction guarantee, but also unconscionable conduct and also when a contract to the contrary has been entered into between the relevant parties (in this instance, including the bank).

[116] Given the fact that Nedbank Ltd was a party to the amended construction guarantees, it is bound by these terms. These terms include the extension of the construction guarantees until the issues have been finally determined by arbitration.

[117] Certain paragraphs of Christie’s The Law of Contract in South Africa 6th edition RH Christie and GN Bradfield are instructive: —

“It is hardly necessary to add that it will not avail one of the parties to say that he personally did not understand the contract in the way the court interprets it, unless he can show that this misunderstanding was induced by a misrepresentation or was known to the other party.”12

“On the other hand the words may be modified sufficiently to avoid an absurdity, or a result repugnant to or inconsistent with the contract as a whole, if it is clear that the common intention of the parties was not to achieve such a result. One of the clearest and most frequently quoted guides to the whole process is in the judgment of Wessels CJ in Scottish Union and National Insurance Co. Ltd. v Native Recruiting Corporation Ltd 1934 AD 458 at pp 465-466:

‘It has been repeatedly decided in our Courts that in construing every kind of written contract the Court must give effect to the grammatical and ordinary meaning of the words used therein. In ascertaining this meaning, we must give to the words used by the parties their plain, ordinary and popular meaning, unless it appears clearly from the context that both the parties intended them to bear a different meaning. If, therefore, there is no ambiguity in the words of the contract, there is no room for a more reasonable interpretation than the words themselves convey. If, however, the ordinary sense of the words necessarily leads to some absurdity or to some repugnance or inconsistency with the rest of the contract, then the Court may modify the words just so much as to avoid that absurdity or inconsistency but no more. ”’13

“Purposive interpretation is appropriate, not only when the wording of the contract is ambiguous, as in Venter v Credit Guarantee Insurance Corpn of Africa Ltd [1996] ZASCA 50; 1996 3 SA 966 (AJ, but when the clear meaning of the words, if put into effect, would ‘nullify the essential purpose of the contract’ as in Turner Morris (Pty) Ltd v Riddell 1996 4 SA 397 (E) 404H-J. The adoption of a purposive construction in such circumstances is consistent with the cases on absurdity, repugnancy and inconsistency. ”14

[118] In the case of Barkhuizen v Napier CC [2007] ZACC 5; 2007 (5) SA 323 (CC) at 333 the approach of the court was to use the common law principle of public policy to determine whether a contract should be enforced or not. Where a term is in conflict with a provision of the Constitution, or not compatible with the values underlying the Constitution, it would be found that the term is contrary to public policy and it would not be enforced.15 Mention was made here for the first time to the African value of unbuntu in relation to the law of contract. The Constitutional Court would revisit this idea in 2011 in Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers Ltd 2012 (1) SA 256 (CC); 2012 (3) BCLR 219 (CC).

[119] Notwithstanding the judgment of Barkhuizen v Napier supra it appears that no significant inroads have been made in challenging the constitutionality of contractual terms or provisions, however unfair or unreasonable their results.16 the contribution made by our courts in developing the South African jurisprudence in the law of contract, is sparse. It is especially, in the light of the obiter remarks made by the Chief Justice, Langa CJ, in the fore stated case that an investigation on how section 8 of the Bill of Rights impact on the law of contract, is indicated.

[120] The court also held that contractual autonomy, as encapsulated in the common law maxim of pacta sunt servande, forms part of the value of freedom and is thus protected in the Constitution.

[121] Relying on the common law principles, it would appear that a contractual provision which is unfair, on the basis that it is in conflict with the public interest, is unenforceable. This is in line with the South African common law position that agreements contrary to law, morality or public policy are unenforceable, or void.

[122] It is generally accepted that public policy, as a doctrine, places a limitation on contractual freedom or contractual autonomy, as well as the enforcement of contractual agreements once entered into, i.e. the doctrine of pacta sunt servanda.

[123] The recognition of the principle of good faith, has received very mixed reactions in the South African jurisdiction. Whereas jurists generally opined that the principle of good faith or fairness is a means of curtailing unlimited freedom of contract and the concept of pactum sunt servanda, the South African courts have not grasped the nettle of pronouncing with clarity what the precise role of bona fides in the law of contract entails.

[124] In Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers Ltd 2012 (1) SA 256 (CC); 2012 (3) BCLR 219 (CC) the minority judgment, written by Justice Zakeria Mohammed Yacoob, makes the point even more explicitly: —

“Good faith is a matter of considerable importance in our contract law and the extent to which our courts enforce the good faith requirement in contract law is a matter of considerable public and constitutional importance. The question whether the spirit, purport and objects of the Constitution require courts to encourage good faith in contractual dealings and whether our Constitution insists that good faith requirements are enforceable should be determined sooner rather than later. Many people enter into contracts daily and every contract has the potential not to be performed in good faith. The issue of good faith in contract touches the lives of many ordinary people in our country

[125] Given the interpretation of the agreement between the parties set out above, it is unnecessary to delve further into the thorny issue of the role of good faith in contracts. However, the court holds that it is clear that when it is unconscionable to rely on the literal wording of a contract without reading such wording within the context of the background facts, the surrounding circumstances and the purpose of the agreement, then a construction guarantee cannot be called up.

[126] What remains to be dealt with is the further heads of argument which were filed at court, by counsel for the applicant, without the initial consent of counsel for the respondent. They dealt with the compliance or otherwise with the wording of the construction

guarantee when the respondent sought to call up the construction guarantee. In particular the matter of Denel Society Ltd v Absa Bank Ltd and Others [2013] 3 All SA 81; (GSJ) (4 March 2013) was relied upon.

[127] Clearly it is improper to file additional heads of argument without the consent of the respondent’s counsel and the court. Nonetheless, the respondent dealt with the heads of argument and hence these supplementary sets of heads of argument will be briefly dealt with herein. When calling up a construction guarantee the conditions for calling up the guarantee have to be complied with. This fact is common cause between the parties.

[128] However, as correctly pointed out by the respondent in its heads of argument, imminent payment of a construction guarantee on a defective demand made, would call for relief to be sought against Nedbank Limited and not the respondent. The argument that a defective demand was made also runs counter to the argument which was relied upon in order to get interim relief before his Lordship Rauling J as well as the argument which was presented to this court. It also conflicts with the applicant’s position in its affidavits. The supplementary heads therefore do not take the matter any further. As correctly pointed out by the respondent, the applicant cannot rely on two diametrically opposed arguments. In the result the costs occasioned by the filing of the further heads of argument are to be borne by the applicant on an attorney and client scale.

Order

In the result, the following order is made: —

1. The respondent is prohibited from calling up the performance guarantee until the final determination of the pending arbitration proceedings between it and the applicant, save if the applicant fails to extend the performance guarantee in accordance with the terms of the performance guarantee in its amended format.

2. The applicant is ordered to pay the costs in respect of the interim relief obtained in relation to part A of the notice of motion on an attorney and client scale.

3. The respondent is ordered to pay the costs of this application, relating to part B of the Notice of Motion, including the costs occasioned by the employment of two counsel.

JUDGE OF THE HIGH COURT

For the Applicant

R du Plessis SC

C. Acker

Instructed by PAGEL SCHULENBURG INCORPORATED c/o MALAN & NORTJÉ ATTORNEYS

For the Respondent

C. Puckrin SC

AJR Booysen

K Serafino-Dooley

Instructed by WERKSMANS ATTORNEYS c/o EDELSTEIN & BOSMAN INCORPORATED

1 See Harbottle, [1978] 1 Q.B. 146; Howe Richardson Scale Co. Ltd. v. Polimex-Cekop, [1978] 1 Lloyd's L.R. 161 (1977); Edward Owen, [1978] 1 Q.B. 159; and Bolmnter Oil, [1984] 1 Lloyd's L.R. 251. But see Potton Homes Ltd. v. Coleman Contractors Ltd. (C.A. Feb. 24, 1984) (available on LEXIS, Enggen library, Cases file) (statement by Lord Justice Eveleigh that he did not regard Lord Denning, M.R., in Edward Owen "as saying that one should approach every case upon the basis that the bond is a letter of credit and to have no regard to the circumstances which brought it into existence.").

2See Hamzeh Malas, [1958] 2 Q.N. At 129 (statement of Jenkins, L.J., that: “the opening of a confirmed letter of credit constitutes

a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective

of any dispute there may be between the parties as to whether the goods are up to contract or not”) ; Harbottle, [1978] 1 Q.B. At 156 (statement of Kerr, J., that: “[banks are not concerned with the rights or wrongs of the underlying disputes but only with the performance of the obligations which they themselves have confirmed.”); Howe Richardson. [1978] 2 Lloyd's L.R. At 165 (statement of Lord Justice Roskill that: Whether the obligation arises under a letter of credit or under a guarentee, the obligation of the bank is to perform that which it is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to the may be under the sale and purchase contract; the bank here is simply concerned to see and Edward Owen, [1978] 1 Q.B. At 169 (statement of Lord Denning, M.R., that: A performance bond...has many similarities to a letter of credit...It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it [the parties] must be settled beyween themselves).

2See Hamzeh Malas, [1958] 2 Q.N. At 129 (statement of Jenkins, L.J., that: “the opening of a confirmed letter of credit constitutes

a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective

of any dispute there may be between the parties as to whether the goods are up to contract or not”) ; Harbottle, [1978] 1 Q.B. At 156 (statement of Kerr, J., that: “[banks are not concerned with the rights or wrongs of the underlying disputes but only with the performance of the obligations which they themselves have confirmed.”); Howe Richardson. [1978] 2 Lloyd's L.R. At 165 (statement of Lord Justice Roskill that:

Whether the obligation arises under a letter of credit or under a guarentee, the obligation of the bank is to perform that which it is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to the may be under the sale and purchase contract; the bank here is simply concerned to see and Edward Owen, [1978] 1 Q.B. At 169 (statement of Lord Denning, M.R., that: A performance bond...has many similarities to a letter of credit...It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it [the parties] must be settled beyween themselves).

3 See id.

4 Respondent's answering affidavit: double underlining is to indicate the respondent's “own emphasise added”.

5 See Christie op cit at page 187: “The question is whether the supplier took such steps as would draw the attention of the reasonable customer to the terms so that the supplier, on the basis of quasi-mutual assent, is reasonably entitled to assume from the customer’s conduct in going ahead with the contract that he has either read and assented to the terms or is prepared to be bound by them without reading them. The supplier does not have to go further and do everything reasonably possible in the sense of employing every available method of publicity. ”

6 Masstores (Pty) Ltd v Murray & Roberts Construction (Pty) Ltd [2008] ZASCA 94; 2008 (6) SA 654 (SCA) para 7; KPMG Chartered Accountants (SA) v Secure/in Ltd & another 2009 (4) SA 399 (SCA) para 39 and Ekurhuleni Municipality v Germiston Municipal Retirement Fund 2010 (2) SA 498 (SCA) paras 12-14.

7 Inaugral address as Professor of Law, University of the Witwatersrand, Johannesburg, delivered on 26 October 1989.

8 Published as an article in 107 South African L.J. 26 (1990).

9 Contract General Principles 2nd ed 2003 - Schalk van der Merwe, LF Van Huyssteen, MFB Reinecke and GF Lubbe.

10 See especially Benlou Properties (Pty) Ltd v Vector Graphics (Pty) Ltd 1993 1 SA 179 (A).

11 The Selective Voet being the Commentary on the Pandects, Paris Edition of 1829 by Johannes Voet (1674 - 1713) and the Supplement to that work by Johannes van der Linden (1756-1835), translated with explanatory notes and notes of all South African reported cases by Percival Gane, formerly judge of the Supreme Court of South Africa assigned to the Eastern Districts’ Local Division, Extremum bunc, Aretbusa, mibi concede laborein Virgil, Eclogues, 10, Volume Two, Durban, Butterworth & Co. (Africa) Ltd. Beach Grove 1955.

12 Op cit page 218.

13 Op cit at page 218.

14 Op cit at page 222.

15 Barkhuizen v Napier CC [2007] ZACC 5; 2007 (5) SA 323 (CC) 333. See also The role of good faith in the South African law of contract by Elsabé van der Sijde (Under the supervision of Advocate A du Pisani - Submitted in partial fulfilment of the requirements for the degree: LLM) - In the Faculty of Law, University of Pretoria October 2012.

16 [2007] ZACC 5; 2007 (5) SA 323 (CC). In this case Ngcobo J, delivering the majority judgment, held that the only acceptable approach to challenging the constitutionality of contractual terms is indirect application under section 39(2). Langa CJ also stated albeit obiter that “ I am not convinced that Section 8 does not allow for the possibility that certain rights may apply directly to contractual terms or the common law that underlies thení'.