Bryte Insurance Company (Pty) Ltd / Raubex Construction (Pty) Ltd (Appeal case no. A5067/2016 – 8 December 2017)

The case involved an appeal by Bryte Insurance Company Limited against Raubex Construction (Pty) Limited’s claim for payment under a retention guarantee given in terms of the subcontract.

Raubex entered into a contract with Eskom to carry out construction works. A portion of the works were subcontracted by Raubex to Peakstar 133 (Pty) Ltd t/a Dolphin Construction (Dolphin).

The relevant part of the guarantee reads as follows:

‘2. Each demand by the Main Contractor shall certify:

1. That the signatory is the Main Contractor authorised representative
2. That the Subcontractor is in breach of his obligations under the Subcontract and that the Main Contractor is entitled to be paid amounts for which the Subcontractor is liable under the Subcontract; and
3. That the amount demanded, which amount the certificate shall specify:
   1. Does not exceed the amount of Retention monies which, but for this Guarantee, would have been retained by the Main Contractor as Retention monies in terms of the Subcontract at the date of the certificates, less the aggregate of the amounts, if any, of retention money and other securities actually retained or held by the Main Contractor in terms hereof; and
   2. Does not exceed a good faith estimate of the costs to the Main Contractor of having the breach referred to in paragraph (b) remedied less the aggregate of any amounts withheld by the Main Contractor by reason of the breach referred to, and any amount of Retention money actually held by the Main Contractor save to the extent that same had been deducted from any previous demand in terms hereof’

Raubex sought payment under the guarantee of an amount of R1 409 726.11 and interest. The issue in the case was whether Bryte Insurance Company Limited (“Bryte”) was obliged to make payment to Raubex under the guarantee.

In the estimate provided in the certificate by Raubex, it was clear that many alleged defects which formed the basis of the estimate, were discovered and dealt with before the practical completion envisaged in the subcontract and were thus not costs covered by the guarantee. A very large proportion of the costs claimed are alleged to have been incurred by a third-party electrician remedying defects, but on closer inspection, were revealed to be in relation to costs already incurred in respect of Raubex itself, in the form of past expenses such as salaries, cellphone charges, diesel costs, accommodation and travel costs. Raubex conceded that the estimate could not be said to be a proper estimate of the costs to remedy the alleged breaches.

Bryte’s contention is that when Raubex made the claim against the guarantee it had knowledge that it was not entitled to the payment inter alia because Raubex’s estimation of the costs of having Dolphin’s alleged breaches remedied was not bona fide. Bryte argues that the lack of bona fides constituted fraud and Bryte had no obligation to comply with the demand.

Bryte argued that the demand did not comply with the requirements of clause 2(C )(ii) above requiring a certificate that the amount demanded did not exceed a good faith estimate of the costs of having the breach rectified.

This was denied by Raubex who argued that the lack of veracity in relation to the estimate was irrelevant because the guarantee only requires that the demand be made in the terms specified. They contend that they complied with the requirements of the guarantee and the payment obligation was triggered.

The court held that the parties, by inserting in the guarantee the element of good faith, clearly intended to eliminate and avoid a false or mala fide estimate. It was thus not enough for Raubex to show that there had been a formal certification of good faith: it also had to show that the certification was, in fact, made in the honest belief that it was a correct estimate of what it was entitled to be paid under the guarantee and Raubex failed to do so.

With regard to the fraud element, the court found that there can be no inference other than the claim and certification was made with knowledge that there was no entitlement thereto and none was suggested by on behalf of Raubex.

The appeal was upheld and the decision of the court a quo set aside and substituted with “The application is dismissed with costs”.