Jennifer Smit | Director | Head | Construction & Engineering Practice | Werksmans Attorneys | mail me |
The nature of guarantees has once again been dealt with decisively by the Supreme Court of Appeal (SCA) this time in the matter between Bonifacio and another vs Lombard (Bonifacio).
A guarantee is an obligation to make payment upon the occurrence of an event. The court in Bonifacio reiterated the position held in Loomcraft Fabrics CC v Nedbank Ltd and another [1996] 1 All SA 51 (A) and confirmed in Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd [2009] 4 All SA 322 (SCA) that the nature of this obligation is “wholly independent of any underlying contract“. The court dealt with issues of guarantee, indemnity, the dependency of the liability and the effect of fraud.
Facts
In 2009, DBT Technologies (Pty) Ltd (DBT) was subcontracted to perform work at Eskom’s Kusile Power Plant. DBT in turn subcontracted some of this work to Tubular Construction Projects (Pty) Ltd (TCP).
As security for its performance obligations to DBT, TCP provided an on-demand performance guarantee in favour of DBT. This guarantee was issued by Lombard Insurance Company Limited (Lombard), the respondent in the Bonifacio for an amount of R128,375 851.20 and was payable to DBT on written demand in the event of a breach of the subcontract by TCP (the guarantee).
In 2019 the appellants indemnified Lombard for all liability and expenses whatsoever in terms of the guarantee, and in their turn agreed to pay, on demand, any sum of money which Lombard may be called upon to pay under the guarantee.
On 13 January 2020, DBT made demand for payment from Lombard of the full amount then payable under the guarantee. Lombard in turn demanded payment from the appellants for the same amount. When payment was initially withheld by Lombard, DBT brought proceedings against Lombard and TCP in the High Court. Lombard and TCP defended the matter, alleging fraud on the part of DBT in exercising the guarantee. Lombard then joined the appellants amongst others as third parties to the proceedings calling for them to be declared jointly and severally liable for the amounts claimed under the guarantee.
After being joined to the proceedings, the appellants did not file any affidavits or take any further steps. TCP was later liquidated, and Lombard entered into a settlement agreement with DBT whereby the sum claimed by DBT was reduced to R100 million and paid by an order of court dated 1 February 2021.
What remained was the third party proceedings between Lombard and the appellants. The appellants then sought condonation for the late filing of answering affidavits and raised defences of fraud as against DBT, that they had been released from their obligations, that they had lost the right to contest DBT’s claim and a defence of estoppel.
The court a quo held that it was not required to make a finding of fraud, dismissed the remainder of the defences, and declared the appellants jointly and severally liable to Lombard for the settled amount with interest.
On appeal
On appeal the appellants argued that Lombard could not claim indemnity in terms of the third party procedure the appellants were entitled to contest DBT’s claim which was compromised by the settlement. The appellants also contended fraud on the part of DBT in making the call on the guarantee, which was an allegation which in their view remained unresolved.
The SCA found that liability under a guarantee could only be avoided if fraud manifested on the part of the beneficiary. By extension of that same reasoning, liability could only be avoided under the indemnity if there was fraud on the part of both DBT and Lombard. The appellants’ case was that Lombard did not properly investigate the claim under the guarantee. The court however held that it is not the obligation of the guarantor to investigate the underlying contractual position as between DBT and TCP when a valid claim had been made in terms of the guarantee.
The court also held that the high court was correct in not deciding the issue of fraud after the settlement had been made an order of court, as DBT was no longer a party to the proceedings and the decision as to alleged fraud on its behalf could not be made in its absence.
In respect of the procedural defence of its rights being compromised by the settlement, the court held that the appellants were vested with procedural rights when the third party notices were served which included the right to contest the claim of DBT against Lombard. The settlement did not remove those rights, rather the appellants simply failed to exercise them while DBT was still a party to the proceedings and failed to reintroduce them to the proceedings when opposing the claims by Lombard.
During the argument the appellants asserted that their liability to Lombard was first dependant on a court reaching a definitive finding that Lombard was liable to DBT. The court dismissed this argument too, stating that the terms of the indemnity were not dependent on a finding of a court to that effect.
The appeal was accordingly dismissed with costs.
Related FAQs: Performance guarantees
Q: What is a performance guarantee?
A: A performance guarantee is a type of assurance provided by a surety to ensure that a contractor fulfils the obligations outlined in a contract. It serves as a security for the beneficiary of the guarantee in case of non-performance.
Q: What is the difference between a performance bond and a performance guarantee?
A: The main difference between a performance bond and a performance guarantee lies in their structure. A performance bond is a contract involving three parties: the contractor, the beneficiary, and the surety, while a performance guarantee is typically a unilateral promise from the guarantor to the beneficiary, ensuring that the obligations will be met.
Q: What are the four types of contract guarantees?
A: The four types of contract guarantees are performance guarantees, advance payment guarantees, retention money guarantees and bid bonds. Each serves a different purpose in ensuring that contractual obligations are met.
Q: How can I get a performance guarantee?
A: To get a performance guarantee, a contractor usually approaches a surety or financial institution that issues such guarantees. The contractor must provide relevant documentation, including the company’s financial history and may need to pay a fee or premium for the guarantee.
Q: What does a performance guarantee insure?
A: Performance guarantees insure that the contractor will perform the work as stipulated in the contract. If the contractor fails to fulfil their obligations, the beneficiary can demand compensation from the guarantor, ensuring financial protection against non-performance.
Q: What is a performance guarantee called in different contexts?
A: A performance guarantee may also be referred to as a performance security or a contractor’s guarantee, depending on the context. In bidding situations, it may be called a tender guarantee.
Q: What is the role of the guarantor’s liability in a performance guarantee?
A: The guarantor’s liability is the obligation of the guarantor to compensate the beneficiary in the event of the contractor’s non-performance. This liability is typically absolute and unconditional, meaning that the guarantor is required to fulfil their promise regardless of the circumstances.
Q: Can a subcontractor be involved in a performance guarantee?
A: Yes, subcontractors can be involved in a performance guarantee. If a subcontractor is responsible for a portion of the work, the contractor may need to secure a performance guarantee that includes the subcontractor’s performance to ensure the entire project is completed as agreed.
Q: What are demand guarantees and how do they relate to performance guarantees?
A: Demand guarantees are a form of guarantee that allows the beneficiary to make a claim for payment upon demand, without needing to prove non-performance. They are often used alongside performance guarantees to provide additional security in contractual arrangements.
Q: How does the bidding process relate to performance guarantees?
A: In the bidding process, contractors may be required to provide performance guarantees as part of their tender submission. This requirement ensures that the contractor can fulfil the contract if awarded the project, providing reassurance to the project owner.
