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Aveng JV v Sanral

26 June 2019

Joint Venture between Aveng (Africa) Pty Ltd and Strabag International GmbH v South African National Roads Agency Soc Ltd and Another (8331/19) [2019] ZAGPPHC 97 (22 March 2019)

This case concerned whether a contractor was entitled to challenge the payment of construction guarantees where there were contractual disputes in terms of the underlying contract between the employer and the contractor. 

The generally accepted position in South African law is that absent the allegations of fraud, a contractor is not entitled to challenge the payment of construction guarantees. 

Makhuvele J considered this position and decided that the facts of this matter did not require him to make a pronouncement thereon but if they did he would determine that a contractor is entitled to interfere in the right of the employer to present guarantees for payment based on the underlying contract. 

Factual Background 

South African and German registered companies, Aveng (Africa) Pty Ltd and Strabag International GmbH, as a joint venture (the “ASJV”), were awarded a contract by the South African National Roads Agency Soc Ltd (“Sanral”) for the construction of the Mtentu River Bridge on the N2 Wild Coast Toll Road for a value of over R1.5 billion. The contract entered into was based on the FIDIC Red Book (1999 edition). 

As is usual practice with construction contracts, the ASJV was required to provide Sanral with guarantees for proper performance of the works as well as for rectifying any defects in the works. The ASJV provided such guarantees to a joint value of approximately R327 million. 

During October 2018, the parties agreed to suspend the works due to numerous violent protests and disruptions by a group of individuals calling themselves “Practical Radical Economic Transformation”. This event went on for a substantial period and accordingly, the ASJV delivered a notice of termination during January 2019 for having been prevented from executing the works for a continuous period of 84 days by reason of Force Majeure. The ASJV also requested Sanral to undertake not to make a demand on the guarantees without giving 14 days’ notice thereof as it was the ASJV’s view that Sanral was not entitled to make a claim against the guarantees.  

Sanral disputed the ASJV’s right to terminate the contract as it believed there was no state of Force Majeure. Sanral also disputed that it may not make a lawful demand on the guarantees.  

Accordingly, the ASJV instituted an urgent application to interdict Sanral from making a claim under the guarantees. 

Issues for determination

The ASJV contended that it validly cancelled the contract due to a state of Force Majeure that persisted for 84 days and that Sanral would be committing a breach of the contract if it were allowed to present the guarantees for payment without first following the procedures of the contract, namely the consequences for termination of a contract as a result of Force Majeure. 

The ASJV also contended that Sanral was only entitled to present the guarantees for payment under the circumstances specified in clause 4.2 of the contract, namely:

  • failure by the contractor to extend the validity of the guarantees;
  • failure by the contractor to pay the employer an amount agreed upon or determined by the Engineer in terms of clause 2.5 or 20;
  • failure by the contractor to remedy a default within 42 days of agreement or determination; and 
  • circumstances that entitle the employer to terminate the contract in terms of clause 15.2. 

Sanral contended that the underlying contract dispute is not part of South African law and as such, it was not prohibited from presenting the guarantees for payment whilst the parties are resolving whatever contractual disputes may exist between them. 

Sanral also contended that the only clause of the contract that can potentially prohibit demand of payment of the guarantees is clause 4.2, however, the law is that the guarantees must be paid and the parties can fight about the entitlement at a later stage. 

Law

The generally accepted legal position in South Africa is that in the absence of allegations of fraud, a contractor is not entitled to challenge payment of construction guarantees, even where there are contractual disputes in terms of the underlying contract. 

The ASJV, however, sought to interdict payment on the basis that Sanral must first comply with the terms of the contract before the guarantees could be presented for payment. This is known as the “underlying contractual dispute” argument, which, according to South African courts, is not part of our law. 

In the case of Kwikspace Modular Buildings Ltd v Sabodala Mining Co SARL and Another, Cloete JA considered the law in Australia which is that a building contractor may, without alleging fraud, restrain a person from presenting a performance guarantee, unconditional in its terms and issued pursuant to a building contract, if the contractor can show that the other party to the building contract would breach a term of the building contract by doing so. However, Cloete JA stated that he would refrain from considering whether such a position should be adopted in South Africa. Resultingly, a lacuna was left in our law. 

Application

Our courts are not oblivious to the relevance of the underlying agreement and the effects it may have on the employer should it seek to make a claim against a guarantee. 

Makhuvele J located authorities which seem to suggest that the lacuna left by Cloete JA may no longer pose a difficulty. 

One of the arguments raised as to why the “underlying contract exclusion” is not part of South African law was that a contractor is not part of the agreement between the employer and the insurance company. A contractor, however, has an interest in the manner in which, and the reasons for which, the guarantee is presented. The fact that a party may obtain justice later does not mean that an injustice must be allowed to happen when on the face of the facts it should not. 

Makhuvele J held that the facts of this matter did not require him to make a pronouncement on the issue of the underlying contract but that if he had to determine the issue, he would make a finding that the ASJV had locus standi to interfere in the right of Sanral to present the guarantees for payment and that based on clause 4.2 of the contract, Sanral would have had to meet the jurisdictional factors therein before presenting the guarantees for payment. 

Next, Makhuvele J considered whether there was a state of Force Majeure entitling the ASJV to cancel the contract. A final answer to this question belongs to the dispute resolution forum created under the contract so the ASJV only had to prove a prima facie case. 

Makhuvele J held that based on the correspondence before him, the events giving rise to the unrests could not objectively assessed, be deemed as Force Majeure. He did not give detailed reasoning as to why he made this decision other than to state that Sanral gave undertakings regarding provision of materials and employment opportunities to the local community, such undertakings often lead to dissatisfaction resulting in the nature of the protests the ASJV has described, Sanral repeatedly asked the ASJV to attend community meetings and the ASJV made no effort to attend such meetings, adopting a stance from day one that the events constituted a Force majeure. 

Conclusion

Makhuvele J concluded that Sanral was justified to regard the ASJV’s actions as repudiation and that it will be justified to terminate the contract and amongst other consequences, present the guarantees for payment. The application was dismissed. 

By Kelly Stannard