Less is more: Thoughts following the SCA’s decision in Raubex Construction v Bryte Insurance Company by Phologo Pheko and Tshepo Makomene

The Supreme Court of Appeal of South Africa (the “SCA”) recently made a ruling in Raubex Construction v Bryte Insurance Company. Raubex Construction (the “Appellant”) was a beneficiary of a retention money guarantee (the “Guarantee”) issued by Bryte Insurance Company (the “Respondent”) pursuant to the terms of a construction subcontract between the Appellant and Peak Star 133 (Pty) Ltd, trading as Dolphin Construction (“Dolphin”). When the Appellant called upon the Respondent to make payment in terms of the Guarantee, the Respondent declined to do so. The Appellant therefore successfully applied to the High Court to compel payment under the Guarantee. An appeal to the Full Court by the Respondent followed with the result that the order in favour of the Appellant was set aside. The Appellant appealed against that finding with special leave obtained from the SCA.

Without going into too much detail, the ‘call’ on the Guarantee was pursuant to a dispute between the Appellant and Dolphin in respect of the work listed in a punch list and Dolphin refused to perform any further remedial work. Thereafter the Appellant called on the Respondent to perform under the Guarantee which, as mentioned above, the Respondent declined to do. The reason advanced therefor by the Respondent was that the demand for payment in terms of the Guarantee did not comply with the provisions of the Guarantee itself as it contained fraudulent misrepresentations.

It is worth setting out the portions of the Guarantee considered by the SCA on its way to the ruling, and they are the following:

The Guarantor renounces the benefits of excussion and division and undertakes to pay to (Raubex) upon demand all such monies as (Raubex) may require to be paid to it in lieu of any retention monies which have been repaid by (Raubex) to (Dolphin) and which (Dolphin) would otherwise be liable to pay to (Raubex) under and in terms of the Subcontract, and such monies shall be paid by the Guarantor conditionally upon receipt of demand from (Raubex) that any such retention monies are due and payable to (Raubex) by (Dolphin) as provided for in terms of the Subcontract, provided however, that the liability to the Guarantor hereunder shall not exceed the sum of R1686721.89 (One Million Six Hundred and Eighty Six Thousand Seven Hundred and Twenty One Rand and Eighty Nine Cents) and is subject to the following further conditions:

(1)    Each demand by (Raubex) shall be in writing signed by (Raubex) and delivered to the Guarantor . . . and shall be accompanied by a certificate complying with Clause 2, signed by (Raubex’s) authorised representative.

(2)    Each demand by (Raubex) shall certify:

(a)          That the signatory is (Raubex’s) authorised representative;

(b)          That (Dolphin) is in breach of its obligations under the Subcontract;

and (Raubex) is entitled to be paid amounts for which (Dolphin) is liable under the Subcontract; and

(c)           That the amount demanded, which amount the certificate shall specify:

(i)              Does not exceed the amount of Retention monies which, but for this Guarantee, would have been retained by (Raubex) as Retention Monies in terms of the Subcontract at the date of the certificate, less the aggregate of the amounts, if any, of retention money and other securities actually retained or held by (Raubex) in terms hereof; and

(ii)             Does not exceed a good faith estimate of the costs to (Raubex) of having the breach referred to in paragraph (b) remedied less aggregate (sic) of any amounts withheld by (Raubex) from payments due to (Dolphin) in terms of the Subcontract by reason of the breach referred to, and any amount of the Retention money actually held by (Raubex) save to the extent that the same had been deducted from any previous demand in terms hereof.

(3)    The Guarantor shall within 21 days after its receipt of a demand complying with the provisions of Clause 1 and 2 make payment to (Raubex) of the amount demanded at such address as (Raubex) should in writing notify the Guarantor.

(4)    Subject to compliance with the provisions hereof, the Guarantor’s liability to make the payment herein referred to shall be unconditional and shall not be affected or diminished by any disputes, claims or counterclaims between (Raubex) and the Subcontractor.” (our emphasis)

The decision of the SCA in this dispute centred around two issues. The first issue related to the purpose for which the Guarantee was provided by the Respondent. In this regard, the SCA not only considered the Guarantee itself, but the subcontract between the Appellant and Dolphin as well as the terms of the main contract upon which the subcontract between the Appellant and Dolphin was based. The second issue related to the Respondent’s allegation of fraud on the side of the Appellant. On the latter, the court clarified that the person alleging fraud bears the burden of proving such. That such burden has to go further and show that the representor advanced the contentions in bad faith, knowing them to be incorrect. On both issues the SCA found in favour of the Appellant.

The appeal was thus successful, and a costs order granted against the Respondent.

Of particular interest to us was the SCA’s approach in interpreting the Guarantee. More specifically the words “[T]he nature of the guarantee is to be determined by its terms” (our emphasis). The court sourced this position from SCA decisions Minister of Transport and Public Works, Western Cape & another v Zanbuild Construction (Zanbuild) and Compass Insurance v Hospitality Hotel Developments. The context in which the words are used is in relation to whether the guarantee is an accessory obligation or an independent principal obligation. The latter was not in dispute in the case forming the subject matter of this article. For purposes of clarity, an accessory obligation is dependent on the existence or coming into existence of a valid and effective principal obligation, whilst an independent principal obligation is not dependent on the existence of any other obligation.

It does not matter what you title your document. If the terms thereof lead the court to an accessory obligation, the court will give effect thereto. As important as the language of a guarantee is, the terms associated with any demands thereunder have become of equal importance, as evidenced by the Raubex case.

The purpose of any guarantee, especially in construction contracts, is to give the beneficiary thereof the comfort that such security is intended to provide. An enforcement process which requires a great deal of interpretation of the relevant document, falls short of such comfort.

As much as the Appellant got the decision which we believe it deserves, the journey to get there should have been a lot more bearable. We don’t think that paragraph 2(c) of the Guarantee should have been included especially having regard to paragraph 4 of the Guarantee. The purpose of any guarantor under a payment guarantee is, absent of fraud, to pay following demand by the beneficiary. It is not to immerse itself in the merits surrounding such payment. It is a matter strictly within the confines of the contract giving rise to the issue of the guarantee concerned. Language similar to the one set out in Paragraph 2(c) of the Guarantee invites guarantors, courts or any other arbiter considering the matter to consider the merits of any demand under a guarantee.

The requirement for a valid demand under a guarantee should be an allegation by the beneficiary to this effect (i) there has been a breach by the principal under the relevant contract; and (ii) they are entitled to payment of the amount claimed by them. Such language obviously does not give you full assurance of an absence of objection from the guarantor to the payment concerned. However, it does limit the scope of objection from the guarantor if the demand is disputed.

Phologo Pheko, Director and Tshepo Makomene, Candidate Attorney in Banking and Finance at TGR Attorneys

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