In the notable case of Aveng (Africa) (Pty) Ltd and Strabag International GmbH v South African National Roads Agency SOC Ltd and Another (Case no. 577/2019) [2020] ZASCA 146), the Supreme Court of Appeal (SCA) of South Africa addressed a significant dispute regarding a performance guarantee in a major construction project.
The case concerns a joint venture between Aveng (Africa) (Pty) Ltd and Strabag International GmbH (AS-JV), which entered into a FIDIC Red Book (1999 edition) contract with the South African National Roads Agency SOC Ltd (SANRAL) for the construction of the Mtentu River Bridge, part of the N2 Wil Coast Toll Road project.
As is standard practice in construction contracts, AS-JV was required to provide performance and defects rectification guarantees to SANRAL. These guarantees, issued by Lombard Insurance Company Ltd (the Guarantor) in favour of SANRAL, amounted to approximately ZAR 327 million.
Tensions arose between AS-JV and the local community, with AS-JV arguing that external violence and disruptions constituted a force majeure event, making it impossible to continue the work. AS-JV purported to terminate the contract, but SANRAL disputed its right to do so and instead sought to terminate the contract itself after AS-JV failed to return to the site following SANRAL's notice to resume work.
The parties referred the dispute to adjudication, as required under the contract. Pending the outcome of the adjudication, AS-JV demanded that SANRAL assure that it would not call up the performance guarantee. SANRAL refused and notified AS-JV of its intention to call up the performance guarantee, leading to court proceedings in the High Court.
The High Court dismissed AS-JV's application for interdictory relief, holding that:
- The disruptions did not qualify as a force majeure event.
- SANRAL was justified in terminating the contract and calling on the performance guarantee.
- AS-JV had failed to establish a prima facie case that a force majeure occurred.
The question of whether AS-JV could, in law, interdict the beneficiary of a performance guarantee was not decided by the court a quo.
AS-JV appealed to the SCA. While it accepted the independent nature of a guarantee, South African law should recognise an exception where a contract restricts a beneficiary's right to call on the guarantee. In such cases, the contractor should be able to interdict the beneficiary from doing so until that right is unrestricted.
Support for the exception appears to originate from an obiter statement made by the court in Union Carriage and Wagon Co Ltd v Nedcor Bank 1996 CLR 724 (W), where it was suggested that if a beneficiary and contractor agreed not to draw on a letter of credit before a specific event, and the beneficiary sought to do so, this would be tantamount to fraud. However, as there was no such agreement in this case, the question was not considered.
The SCA considered the express wording of the guarantee, which allowed SANRAL to demand payment at its sole discretion if: the contractor failed to complete the services in accordance with the contract. The guarantee also contained an indemnity clause, which required SANRAL to indemnify AS-JV if SANRAL wrongfully called up the guarantee.
The SCA upheld the autonomy principle, holding that:
- Due to the independent nature of performance guarantees, SANRAL's right to call up the guarantee was not constrained by the underlying contract.
- SANRAL only needed to genuinely believe it was entitled to payment under the guarantee.
- The Guarantor had to honour the guarantee strictly according to its terms, as established by Lord Denning, in the English case, Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 All ER 976 (CA).
- This obligation exists regardless of the relationship between SANRAL and AS-JV, or whether AS-JV was in default under the underlying agreement.
- SANRAL was not required to prove that it had lawfully terminated the agreement to be entitled to make a demand under the guarantee.
- The Guarantor was obligated to pay on demand unless SANRAL's claim was fraudulent.
This case underscores the importance of carefully drafting performance guarantees in construction contracts. On-demand guarantees should not include conditions that must be met before a demand can be made, as this undermines their purpose.
The SCA noted that South African law may evolve to allow a contractor to prevent a beneficiary from making a demand on an unconditional performance guarantee if the contractor can show that doing so would breach an underlying contract. The court acknowledged foreign legal principles from England and Australia but cautioned that South African courts should not readily interpret contracts as conferring such rights.
This case reinforces the critical importance of ensuring that the terms and conditions of on-demand performance guarantees in construction contracts are not eroded by imposing conditions on when a demand may be made. It reaffirms the autonomy of such guarantees from the underlying contractual obligations while acknowledging that future legal developments may expand exceptions beyond fraud.
