Case summary written by Snazo Tuswa and checked by Jordan Dias
26 October 2020
This matter is premised on a performance guarantee, which is a bond issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. It is usually provided by a bank or an insurance company to ensure that a contractor completes designated projects.
On 26 March 2013, the Passenger Rail Agency of South Africa (PRASA) (“the Second Respondent”) and Bombardier Africa Alliance Consortium (“the Appellant”), concluded a concluded a written contract (“the contract”), the contract price being R1 288 772 839.74, in terms of which the Second Respondent appointed the Appellant to design, construct and implement a new railway signalling system and install centralised traffic control at the Rossburgh hub in Durban, Kwa-Zulu Natal. In accordance with clause 4.3.1 of the contract, the Appellant was obliged to obtain (at its’ cost) a performance bond for its proper performance in an amount equal to 10% of the value of the contract. On the aforesaid date, and in compliance with clause 4.3.1, Lombard Insurance Company Limited (“the First Respondent”) issued a performance guarantee (in favour of the Second Respondent) for the amount of R1 288 772 839.74. The guarantee was renewed twice on the same terms and conditions on 28 July 2016 and 2 March 2018.
Clause 2 of the performance guarantee stated that the First Respondent-
2. ‘hereby guarantees the payment to you on your first written demand of up to a maximum aggregate amount of R128 877 284.00 (One Hundred and Twenty-Eight Million Eight Hundred and Seventy-Seven Thousand Two Hundred and Eighty-Four Rand) (the “guarantee amount”) in the event that the Appellant fails to fulfil any of its obligations under the Contract.’
Further clauses 3 to 6 are also relevant, theses clauses provide that: –
‘3. The Guarantor’s liability under this guarantee is principal in nature and is not subject to
any agreement. The Guarantor’s liability shall not be reduced, or in any way be affected
by any alteration of the terms of the Contract or any other arrangements between the
Appellant and yourself, whether oral or in writing.
4. The Guarantor will pay on written demand and will not determine the validity of the
demand or become party to any claim or dispute of any nature which any party may
5. Payment will only be made by the Guarantor against return of the original guarantee by you or your duly authorised agent.
6. This guarantee shall expire at 12:00 at the abovementioned office of the Guarantor on 26 March 2019 (“Expiry“) and any claim and statement received hereunder must be
received at this office before Expiry. After Expiry this guarantee shall become null and
void, whether returned to the Guarantor for cancellation or not and any claim or
statement received after Expiry shall be ineffective.
The Appellant contended that, on 17 October 2018, the Second Respondent repudiated the contract on the basis that the contract had expired by effluxion of time. The Appellant, therefore, accepted the Second Respondent’s repudiation and cancelled the contract. However, the Second Respondent maintained that it was entitled to retain the guarantee and demand payment under it to cover the costs of completing the work. The Appellant contended that the guarantee had to be returned to it by virtue of the Second Respondent’s repudiation of the contract and its consequent cancellation thereof. The reason for seeking the return of the guarantee, as appears from clause 5 thereof, is that the First Respondent will only pay if the demand is accompanied by the original guarantee. Consequently, and without the original guarantee, the Second Respondent would not be able to obtain payment under the guarantee. The dispute was referred to a Dispute Adjudication Board (“DAB”) in terms of clause 20.4. of the contract.
On 26 February 2019, the DAB found that the contract was terminated lawfully by the Appellant when it communicated its acceptance of the Second Respondent’s repudiation to it. The Second Respondent was directed to return the original guarantee to the Appellant. In response to this decision, on 4 March 2019, the Second Respondent delivered its notice of dissatisfaction with the aforementioned decision. The effect thereof is that the dispute had to be settled finally in arbitration proceedings.
On 12 March 2019, the Second Respondent dispatched a written demand to the First Respondent demanding that it pay it R 128 877 284 under the guarantee, and it furnished the original guarantee in support of its written demand. The Appellant proceeded to furnish the First Respondent with the DAB decision and informed it that the Second Respondent’s demand was unlawful, mala fide and fraudulent. In addition, the Appellant requested that the First Respondent undertake that it would not pay the Second Respondent under the guarantee pending an urgent application to court. The Second Respondent denied these allegations and insisted that the First Respondent honour the guarantee.
The Appellant launched an urgent application to the High Court and sought an interim interdict restraining the First Respondent from making payment to the Second Respondent in terms of the written demand dated 12 March 2019.
The above application was dismissed with costs, as the court a quo held that the Appellant had failed to establish prima facie right to succeed in obtaining the interim interdict it sought.
On appeal, the Court held that the allegations made by the Appellant that the demand was fraudulent in nature did not prima facie establish the fraud exception. A party alleging fraud bears the onus of proving it, and the fraud must be a ‘clear fraud’.
The Court found that the Second Respondent did not make the demand fraudulently or in bad faith since it made a proper demand in terms of the guarantee. Therefore, the Court held that the Appellant had not established the elements of the fraud rule or exception.
The Court agreed with the Court a quo in that the Appellant had not established the requisite prima facie right to obtain the interim interdict. It was therefore unnecessary to consider the other requirements for an interim interdict.
The appeal was dismissed.
The Court highlighted that the only exception to the autonomy of demand guarantees is where the fraud rule or exception finds application.