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Bulletin

The autonomous nature of performance guarantees and underlying contracts

Fasken
Reading Time 5 minute read
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In Joint Venture between Aveng (Africa) (Pty) Ltd and Strabag International GmbH v South African National Roads Agency Soc Ltd and Another (“SANRAL”),[1] the Supreme Court of Appeal (“SCA”) considered whether SANRAL, by virtue of the underlying contract concluded with Aveng (Africa) Proprietary Limited and Strabag International GmbH (the “Joint Venture”), was restricted from asserting its claim for payment in terms of the performance guarantee.  The guarantee was issued in SANRAL’s favour by the second respondent following a construction contract concluded between SANRAL and the Joint Venture for the construction of a bridge in the Eastern Cape.


The SCA was tasked with ironing out the tension that exists between autonomous performance guarantees and the restrictions woven into the underlying contracts.


Background


Following violent protests by the local community causing the cessation of the works, the Joint Venture issued a notice to SANRAL purporting to terminate the contract.  The Joint Venture argued force majeure as a reason for non-performance of the works and considered itself released from further performance of the obligations under the contract.


However, SANRAL disputed the existence of force majeure, and argued that the alleged force majeure event had come to an end following a meeting with the local community. As such, SANRAL instructed the Joint Venture to continue with the works, but this was refused by the Joint Venture.  Following the refusal, SANRAL also purported to terminate the contract.  Accordingly, a dispute arose as to whether the disruptions at the construction site constituted force majeure, which entitled the Joint Venture to terminate the contract.  The dispute was referred to arbitration.

 

Following SANRAL’s purported notice of termination, the Joint Venture requested an undertaking from SANRAL not to call upon the guarantee pending the arbitration proceedings.

 

The Joint Venture argued that SANRAL was not entitled to call on the guarantee because:

 

  • although the autonomy principle is applicable, an exception to this principle ought to be applied in accordance with Australian and English law jurisprudence; and
  • certain conditions in the underlying contract limited SANRAL’s right to call up the guarantee.These conditions namely regulate the circumstances in which SANRAL is permitted to make a demand under the performance guarantee.

SANRAL declined to provide such undertaking not to call on the guarantee and notified the Joint Venture of its intention to do so.  Pursuant thereto the Joint Venture applied to the court aquo for an interlocutory interdict, restraining SANRAL from calling up the guarantee, pending the outcome of the arbitration proceedings.

 

The decision of the SCA

 

It is settled law that the autonomy principle is applicable to performance guarantees and underlying contracts.  This means that the performance guarantee exists independently from the underlying contract. The court qualified this notion of autonomy by making reference to a passage from Lord Denning’s speech in Edward Owen which stated that a party providing a performance guarantee must honour that guarantee as stipulated in its terms, without proof or condition. The only exception is where there is a clear fraud.[2]

 

Although the Joint Venture agreed with this principle, the Joint Venture argued that an exception should be applicable (the “Exception Caveat”):

 

“… so that, where the underlying contract restricts or qualifies a beneficiary’s right to call up the guarantee, a contractor is entitled to interdict a beneficiary from doing so until the conditions in the underlying agreement have been met.”[3]

 

After considering Australian and English law, the SCA ruled that, for present purposes, the Exception Caveat is not applicable in South African law if South African jurisprudence is applied and such claims, as are those made by the Joint Venture, in relation to the underlying contract should be approached with caution.[4]  This is considering:

 

  • that the Exception 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”;[5] and
  • the significance of performance guarantees and letters of credit in international trade and commerce.

The Joint Venture further relied on sub-clause 4.2(d) which stated that:

 

“The employer [SANRAL] shall not make a claim under the performance security, except for an amount to which the employer is entitled under the contract in the event of: …

 

(d) circumstances which entitle the employer to termination under sub-clause 15.2 [termination by employer], irrespective of whether notice of termination has been given.”

 

In this regard, the Joint Venture argued that if force majeure is successfully proven in arbitration, SANRAL would be barred from terminating the contract. The court disagreed stating that the entitlement that the Joint Venture refers to is not one established under the dispute resolution provisions of the underlying contract and that the prospects of success in the pending arbitration is of no moment.

 

The Joint Venture further submitted that SANRAL ought to have established a factual basis for its entitlement to make a call on the performance guarantee and that it should be precluded from demanding payment under the guarantee until that basis is established. However, due to the unconditional nature of the contract, SANRAL’s demand to call on the performance guarantee based on the Joint Venture’s failure to commence works would be sufficient to trigger the second respondent’s obligation to pay.

 

Accordingly, the SCA held 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 is determined.  As a result, the SCA dismissed the appeal with costs.

 

This bulletin was prepared by partner Bianca Da Costa, associate Emma Alimohammadi and candidate attorney Kedibone Seroka.

[1] (Case no 577/2019) [2020] ZASCA 146 (13 November 2020) (“Joint Venture SCA decision”).

[2] Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 All ER 976 (CA) ((1977) 3 WLR 764) at 983b – d.

[3] Joint Venture SCA decision at para 9.

[4] Kwikspace Modular Buildings Ltd v Sabodala Mining Co Sarl and Another [2010] ZASCA 15; 2010 (6) SA 477 (SCA). 

[5] Joint Venture SCA decision at para 17.

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