Joint Venture between Aveng (Africa) Pty (Ltd.) and Strabag International Gmbh vs. South African National Roads Agency Soc Ltd. and Another

South Africa

13.11.2020

Contract

A bank which gives a performance guarantee must honour that guarantee according to its terms

Appeal was filed by the Joint Venture between Aveng (Africa) Pty (Ltd) and Strabag International Gmbh (the Joint Venture) against the order of the High Court, which dismissed the Joint Venture’s application for an interdict restricting the South African National Roads Agency Soc Ltd. (SANRAL) from demanding payment in terms of a performance guarantee issued in its favour by Lombard Insurance Company Ltd (Lombard). The guarantee was issued pursuant to a written construction contract concluded between SANRAL and the Joint Venture in August, 2017 for the construction of the Mtentu River Bridge on the N2 Wild Coast Toll Road in the Eastern Cape. The relationship between the Joint Venture and SANRAL broke down, and each of the parties purported to terminate the contract. The dispute as to who was lawfully entitled to terminate the contract was referred to arbitration in terms of the provisions of the contract.

The Joint Venture applied to the high court to restrain SANRAL from demanding payment from Lombard in terms of the performance guarantee, pending the outcome of the arbitration proceedings. The Joint Venture contended that, the underlying contract between the parties restricted Sanral’s right from calling up the performance guarantee. The high Court did not decide the issue, and instead considered the application on the basis that the Joint Venture had not made out a prima facie case for an interdict. It accordingly dismissed the Joint Venture’s application.

Law is well settled, and firmly recognises the autonomy principle, ie the autonomy of the performance guarantee from the underlying contract. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions. The only exception is where there is a clear fraud of which the bank has notice.

After a survey of English and Australian law, the SCA assumed, for the purposes of the appeal, that there was room in South African law to follow the same path as that taken in English and Australian law, with the clear caveat expressed in Kwikspace Modular Buildings Ltd vs. Sabodala Mining Company Sarl and Another that, a building contractor may, without alleging fraud, restrain the person with whom he had covenanted for the performance of the work, from presenting to the issuer a performance guarantee unconditional in its terms and issued pursuant to the building contract, if the Contractor can show that the other party to the building contract would breach a term of the building contract by doing so; but the terms of the building contract should not readily be interpreted as conferring such a right.

The Court pointed out that the caveat will often provide the basis to resolve the inherent tension between a performance guarantee, framed without conditionality, and usually required in circumstances such as these, and an underlying contract that contains some asserted restriction.

For SANRAL to make a call on the performance guarantee, it must act in the bone fide belief that, it is entitled to payment under the provisions of the agreement. Whether it is in fact so entitled is immaterial at the time that the call is made. There is no suggestion that SANRAL’s call is actuated by malice or that its stance, that it is entitled to payment, is far-fetched. Regard must also be had to the purpose for which the performance guarantee was provided, which undoubtedly was to secure SANRAL’s position in the event of a dispute and pending resolution thereof.

Furthermore, given the significance of performance guarantees and letters of credit in international trade and commerce, such claims as are made by the Joint Venture in relation to the underlying contract, should be approached with caution. The Court then interpreted the provisions of the performance guarantee together with the relevant provisions of the underlying contract and concluded that the Joint Venture had failed to show that the parties had intended anything other than that SANRAL would be entitled to payment before any underlying dispute between them was determined. Appeal dismissed.

Tags : Beneficiary Performance guarantee Payment

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