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South African National Roads Agency SOC Limited v Fountain Civil Engineering (Pty) Ltd and Another (395/2020) [2021] ZASCA 118 (20 September 2021)

7 December 2021

On 20 September 2021 the SCA handed down judgment in which it upheld an appeal by SANRAL to a judgment by the Gauteng Division of the High Court where the court granted an interdict restraining SANRAL from making a claim under a performance guarantee pending arbitration proceedings.

The facts of the case
On 30 September 2016, the South African National Roads Agency SOC Limited (SANRAL) and Fountain Civil Engineering (Pty) Ltd (FCE) entered into a written agreement for certain improvements to a section of the R23 Freeway near Standerton based on the FIDIC RED BOOK 1999 edition (the “Contract”). The Contract required FCE to obtain performance security to the value of 10% of the contract sum. Lombard Insurance Co Ltd issued the guarantee.
FCE did not complete the works and issued a notice of termination to SANRAL on 15 October 2018 due to community unrest, riot, commotion, lockout and disorder in the area; a misrepresentation of the site conditions; and a failure to assess multiple claims for extensions of time. FCE informed SANRAL that it would cease all work and remove its machines and personnel from the site.

The parties engaged in discussions concerning the resumption of the works following the notice of termination, but to no success. Consequently, FCE confirmed its election to terminate the Contract. In response, SANRAL alleged that it had given FCE a notice of termination on 15 May 2019 in terms of clause 15.2 on the basis that FCE and its subcontractor had, inter alia, abandoned the site and the conditions complained of were caused by FCE’s subcontractor. In addition, SANRAL informed FCE of its intention to claim under the guarantee. In June 2019, FCE applied to the Gauteng Division of the High Court Pretoria (the “High Court”) for an order interdicting SANRAL from making a claim.

The issue
The appeal court had to consider whether the court a quo was correct in granting an interdict restraining the beneficiary (of an unconditional performance guarantee) from making a claim under the guarantee pending arbitration proceedings.

The High Court
In the Court a quo, FCE argued that a claim by SANRAL under the performance guarantee would be unlawful as SANRAL was precluded from claiming any amount under the guarantee except in the circumstances provided for in Clause 4.2 of the Contract. FCE submitted that it had a clear negative right against a claim of security unless the claim complied with the Contract and SANRAL’s claim did not so comply. It alleged that it had established a prima facie right to enforce the dispute resolution provisions of the Contract to resolve pending disputes prior to any claim by SANRAL.

SANRAL opposed the application on the basis that it was entitled to submit a claim under the performance guarantee as contemplated in clause 4.2(b) of the Contract due to FCE’s admission of liability to SANRAL for delay damages prior to its purported termination. It further argued that the indemnification provided in clause 4.2 against all damages, losses and expenses resulting from invalid claims on the performance guarantee was an adequate alternative remedy to an interdict.

The court found that FCE demonstrated a prima facie right to terminate the Contract based on force majeure due to community unrest or at the very least to have the legality of the termination be heard under the dispute resolution mechanisms. In doing so, it decided that “FCE established an irreparable harm and that it was favoured by the balance of convenience”. It ordered that SANRAL was interdicted from making a claim under the guarantee pending the outcome of arbitration proceedings to be instituted by the FCE within 21 days of the order.

The Appeal Court
The appeal court reaffirmed its decision in Joint Venture between Aveng (Africa) Pty Ltd and Strabag International GmbH v SANRAL and Another (“Aveng”), in which it was held that a performance guarantee in the same terms was unconditional and the contractor’s failure to complete the works on account of force majeure did not prevent SANRAL from making a demand on the performance guarantee.

In response to FCE’s contention to amend and grant what it viewed as a ‘lesser’ form of relief to that which was ordered in the high court (that SANRAL was precluded from invoking the guarantee pending a determination by the engineer), the court found that FCE failed to establish a prima facie right and the order sought on appeal was not in conformity with the case that SANRAL was called to meet. It affirmed its position in Aveng that a claim on a guarantee is permissible regardless of any disputes under the Contract and that the Contract does not require that an entitlement to the guarantee be proven before a demand can be made.

The court upheld the appeal with costs and set aside the court a quo’s order ordering the dismissal of the application with costs.

Though not expressly mentioned, it seems that the court agreed with the appellant’s contention that Clause 4.2 provides an alternative remedy to an interdict. This is affirmed by both this judgment and Aveng which highlighted the purpose of the indemnity in the clause. The clause provides a safeguard for the Contractor in the event of resultant damages, losses and expenses if the employer was not entitled to make the claim under the performance guarantee. Contractors have to be aware of the risk that there are very limited instances that an employer can be interdicted from drawing down on a guarantee.