Construction guarantees, whether styled as performance bonds, on-demand guarantees, or otherwise, have long occupied an uncertain regulatory space in South Africa. Practitioners, contractors, and the entities that issue such instruments have frequently debated whether they are governed by the National Credit Act, 2005 (NCA) or the Insurance Act, 2017 (Insurance Act). The Gauteng High Court has now provided a definitive answer in Elasah Risk Consultants (Pty) Ltd and Another v National Credit Regulator and Others, holding that construction guarantees which meet the definition of a non-life insurance policy must be issued by a licensed insurer, and that no amount of creative labelling will alter that conclusion.
The applicants, Elasah and Fusion Guarantees, sought to challenge the regulators' position that all guarantors must be licensed insurers. Elasah, a financial services provider, arranges construction guarantees on behalf of contractors in the municipal sector, while Fusion issues those guarantees. Their case rested on the contention that the guarantees in question constituted credit agreements under the NCA, rather than insurance policies under the Insurance Act.
A threshold argument advanced by the applicants was that the case law relied upon by the Financial Services Conduct Authority (FSCA), most notably the decisions in Becker and Fern Finance, had been decided under the Short-term Insurance Act (STIA), a statute repealed and replaced by the Insurance Act with effect from 1 July 2018. On this basis, those decisions were said to have no precedential value under the current legislative framework. The court rejected this argument without hesitation. Both the STIA (section 7(1)(a)) and the Insurance Act (section 5(1)) impose the same fundamental obligation: entities that issue guarantee policies must be registered. The Insurance Act did not introduce any new legal concept in the form of non-life insurance business, but rather replicated the existing framework with updated terminology. The jurisprudence developed under the STIA accordingly continues to apply with full force under the Insurance Act.
Central to the applicants' case was the proposition that registration under the NCA as a credit provider is incompatible with, or sufficient to exclude, registration under the Insurance Act. The court rejected this entirely. Whether registration under either statute is required depends on the facts of each specific arrangement, and registration with one does not preclude the other from applying simultaneously. A single product may attract regulation under both regimes. The NCA and the Insurance Act are not mutually exclusive, and an entity's status as a registered credit provider affords no immunity from the licensing requirements of the Insurance Act where the product it issues meets the definition of a non-life insurance policy.
The court then applied the definition of a "non-life insurance policy" under section 1 of the Insurance Act, which requires four elements: payment of a premium; an undertaking to meet an insurance obligation; indemnification of loss; and the occurrence of an uncertain risk. Each element was assessed against the terms of the Fusion guarantees. On the question of premium, the court found it irrelevant that Fusion described the consideration payable by the contractor as a "fee" rather than a premium. The definition of "premium" in section 1 of the Insurance Act captures any direct or indirect consideration given in return for an undertaking to meet insurance obligations, and the contractor's fee satisfied that definition. On the insurance obligation, the undertaking to pay the employer a sum of money upon the occurrence of a specified event was precisely the kind of undertaking the Act contemplates. On indemnification of loss, the guarantee made clear that Fusion assumed the risk of loss flowing from the contractor's default, indemnifying the employer as a third party against that loss. On uncertain risk, the qualifying event, being contractor default or the grant of a sequestration or liquidation order, is by its nature uncertain at the time the guarantee is issued. All four elements were satisfied.
Two further arguments advanced by the applicants merit attention, as they are likely to recur in comparable disputes. The first was the so-called principle of independence, because a demand under the guarantee can be made without the employer being required to prove actual loss, the guarantee is said to be wholly independent of the underlying construction contract and therefore falls outside the Insurance Act. The court rejected this analysis. The guarantee is, after all, a guarantee of performance by the contractor under the construction contract, and payment is made only upon the employer producing prescribed documents evidencing the amount due by the contractor, which amount represents the loss arising from the contractor's failure.
The second argument concerned the presence of a counter-guarantee, being the contractor's indemnity in favour of Fusion. The applicants argued that the counter-guarantee negated the indemnification element because Fusion was ultimately reimbursed by the contractor. The court dismissed this. A counter-guarantee is a collateral, independent arrangement permitting the guarantor to seek reimbursement from the contractor after it has honoured its obligations to the employer. The employer's loss and Fusion's obligation to indemnify it arise and crystallise entirely independently of any collateral arrangement exists between Fusion and the contractor. The counter-guarantee does not remove the indemnification-of-loss element; the loss indemnified remains the employer's loss, which exists before any counter-guarantee obligation is triggered.
The court declared that the Fusion guarantees constitute non-life insurance as defined in the Insurance Act, that their issuance without a licence constitutes a breach of section 5(1) of the Act, and that construction guarantees answering the description set out in the founding affidavit similarly constitute non-life insurance policies. Fusion was interdicted from issuing the guarantees.
For financial service providers operating in the construction guarantee space, this judgment is a timely reminder that regulatory classification is determined by what a product does, not what it is called. Providers who issue guarantees that indemnify employers against contractor default, and who charge a fee for doing so, should review whether their activities constitute non-life insurance business requiring a licence under the Insurance Act. Reliance on NCA registration alone is insufficient. Those who continue to issue such guarantees without the requisite licence do so at significant legal and regulatory risk.
