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Sanctity of unconditional performance guarantees reaffirmed

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The Supreme Court of Appeal (“SCA”) recently reaffirmed the following legal principles relating to unconditional performance guarantees in South Africa:

  • that the purpose of the performance guarantee is to secure the position of the beneficiary in the event of a dispute and specifically pending the resolution thereof;
  • that the beneficiary can demand payment under the performance guarantee for any reason related to the principal’s obligations pursuant to the underlying but independent Contract;
  • that the beneficiary does not need to first prove any entitlement before making a demand on the performance guarantee; and
  • that the principal’s reasons for failure to fulfil its obligations under the Contract are irrelevant.

This was addressed in the SCA’s judgment handed down on 20 September 2021 in the matter between SA National Roads Agency SOC Limited v Fountain Civil Engineering (Pty) Ltd and Another (395/2020) [2021] ZASCA 118 (20 September 2021).

This case was an appeal by the South African National Roads Agency SOC Limited ("SANRAL") from the decision of the Gauteng Division of the High Court, Pretoria (the "High Court"), which granted an order restraining SANRAL from making a demand on an unconditional performance guarantee, pending an arbitration to resolve a dispute arising from a building and engineering contract.

The dispute emanated from an agreement which was concluded between SANRAL and Fountain Civil Engineering (Pty) ("Contractor") on 30 September 2016 for certain improvements to be effected to a section of the R23 Freeway near Standerton, for the sum of R352 878 309.80 ("Contract").  In accordance with the Contract, the Contractor delivered a performance guarantee to the value of 10% of the contract sum as security for the due and proper performance of its obligations under the Contract.

In terms of the performance guarantee, the issuer thereof undertook to pay SANRAL the amount of R35 287 830.98 or such portion as SANRAL may demand if, in SANRAL’s opinion and sole discretion, the Contractor among others, fails to commence with or complete the works in terms of the Contract. SANRAL furthermore, under the Contract, indemnified the Contractor against all damages, losses and expenses which would result from any claim against the performance guarantee to which SANRAL was not entitled.

The Contractor failed, for various reasons, to complete the works and proceeded to give SANRAL a notice of termination of the Contract on the grounds of, among others, force majeure emanating from community unrest in the area which was preventing the Contractor from continuing with the works. SANRAL subsequently also gave the Contractor a notice of termination of contract on the grounds that, among others, the Contractor had abandoned the site and that the community unrest was caused by one of the Contractor’s subcontractors. SANRAL, in its notice, also informed the Contractor that it intended to make a claim under the performance guarantee.   

The Contractor then applied to the High Court for an interdict restraining SANRAL from making a claim under the performance guarantee pending the outcome of an arbitration to determine the dispute between the parties.

The High Court found that the Contractor had satisfied the requirements for an interdict and an interdict was accordingly granted. The High Court reasoned that as a result of the force majeure event, the Contractor had a prima facie right to terminate the Contract or “was entitled at least to have the legality of the termination of the contract determined by the dispute resolution mechanisms available under the contract”.

The SCA however found that the High Court had erred in its decision to grant an interdict in the present case and made reference to its earlier decision in Joint Venture between Aveng (Africa) (Pty) Ltd and Strabag International GmbH v South African National Roads Agency SOC Ltd and Another [2020] ZASCA and in so doing confirmed that the performance guarantee in the present case was also an unconditional guarantee. There was accordingly no requirement under the Contract for SANRAL to prove any entitlement before making a demand on the performance guarantee. The SCA held that this was especially so given that SANRAL had provided an indemnity under the Contract in respect of claims to which it was not entitled. According to the SCA, any contrary interpretation of the Contract would have rendered the indemnity provided by SANRAL meaningless.

The SCA further held that a claim under the performance guarantee was permissible and enforceable, regardless of any pending or related disputes under the Contract. The performance guarantee was issued and accepted on the basis that it was capable of being called upon at the sole and absolute discretion of SANRAL.

This judgment reaffirms some of the legal principles relating to unconditional performance guarantees, as set out above. The judgment also reinforces the importance of the wording used in the performance guarantee and the Contract itself. In concluding that the performance guarantee is unconditional, the SCA in this case had regard to the wording used in the performance guarantee in the first instance but also considered the wording used in the Contract.

This bulletin was prepared by senior associate Antoinette van der Merwe and candidate attorney Thulisile Cingo.

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