Compass Insurance Company Limited v Hospitality Hotel Developments (Pty) Limited (756) [2011 ZASCA 149] (26 September 2011)
This decision on on-demand bonds/guarantees follows a line of decisions of our courts on on-demand bonds/guarantess over the last three years. The form of the guarantee in question was a standard JBCC 2000 advance payment guarantee.
On-demand bonds/guarantees are unconditional and are payable on presentation provided only that the conditions specified in the document are met. In this instance the Employer argued that strict compliance with the terms of the guarantee was not required.
Hospitality Hotel Developments (Pty) Limited (“the Employer”), a property development company, had been appointed to upgrade a hotel. The Employer engaged the services of a construction company, which in turn engaged a sub-contractor to install a computer network and wireless internet systems in the hotel (“the Sub-Contract”).
The Employer made an advance payment to the Sub-Contractor and Compass Insurance Company Limited (“the Guarantor”) issued an advance payment guarantee to the Employer on behalf of the Sub-Contractor in favour of the Employer. In terms of clause 4 of the Guarantee the Guarantor undertook to pay the Employer the full outstanding balance (of the advance payment) upon receipt of a first written demand from the Employer stating that (amongst other possible alternative demands) :
"4.2 A provisional sequestration or liquidation court order has been granted against the Recipient and that the Advance Payment Guarantee is called up in terms of 4.0. The demand shall enclose a copy of the court order."
In the course of the Sub-Contract, the Sub-Contractor was provisionally wound up and the Employer sent a written demand to the Guarantor calling up the Guarantee. The demand stated that the Sub-Contractor had been provisionally wound up, but the court order was not attached to the demand, as required by clause 4.2 of the Guarantee. A copy of the court order was delivered months later, but also after expiry of Guarantee.
The Guarantor refused to pay on the basis that the demand did not comply with the terms of the Guarantee as a copy of the court order had not been enclosed. The Employer then applied to the High Court compelling the Guarantor to make payment, in terms of the Guarantee. The High Court ordered the Guarantor to make payment, finding that there had been sufficient compliance with the terms of the Guarantee (as the court order had been subsequently furnished).
On appeal to the Supreme Court of Appeal, the Guarantor argued that strict compliance with the terms of the Guarantee was required; that there had not been strict compliance and that in the circumstances the Guarantee was not payable. The Employer argued that there had been sufficient compliance and that strict compliance was not necessary.
The questions before the Supreme Court of Appeal were accordingly whether there had to be strict compliance with the terms of the guarantee, and if not whether there had been sufficient compliance. The Supreme Court of Appeal found that the terms of the guarantee were absolutely clear, and as there had been no compliance with the terms of the guarantee, the guarantee was not payable. In the circumstances, the Supreme Court of Appeal was of the view that it was not necessary to decide whether strict compliance was necessary with the terms of the guarantee.
- It is arguable, ironically, that in finding that there had been no compliance, the Supreme Court of Appeal was in fact endorsing strict compliance, because there had in this instance been partial compliance.
- It must be said that each guarantee must be interpreted in accordance with its own particular wording; the wording of the guarantee will determine whether strict compliance with its terms is required, or whether partial compliance will suffice.
A prior decision of the Supreme Court of Appeal, that of Lombard Insurance Company Limited vs Landmark Holdings (Pty) Limited & Others 2010(2) SA 86 (SCA) (previously reviewed in our ENSight article of June 2010) is commonly understood to be, and is often cited as authority for the principle that on-demand bonds/guarantees are payable provided only that the terms and conditions of the guarantee are strictly complied with. In that case:
- the Court was dealing with an on-demand bond/guarantee in the form of a standard JBCC 2000 variable performance guarantee in terms of which the Guarantor undertook to pay the Contractor, on demand, the full outstanding balance upon the happening of either two eventualities, being either a default on the part of the Contractor resulting in cancellation, or the grant of a liquidation order against the Contractor;
- the question before the Court was not whether strict compliance was required with the terms of the Guarantee, but rather whether the Guarantee should be read together with and interpreted in conjunction with the underlying Construction Contract;
- the Court likened on-demand/bond guarantees to irrevocable letters of credit (with irrevocable letters of credit the bank undertakes to pay provided only that the conditions in the credit are met, i.e. a strict compliance is required); and
- having likened on-demand/bond guarantees to irrevocable letters of credit and having found that the demand in that matter had been properly made, the Court refused to look beyond the guarantee and ordered that the guarantor was obliged to pay.
In the case under review the Employer had contended that:
- whilst strict compliance with irrevocable letters of credit is required, performance guarantees should be treated differently, the argument being that in the case of irrevocable letters of credit, the bank deals with documents themselves, whereas with on-demand bonds/guarantees the guarantor relies on a statement that “a certain event has occurred”. Accordingly, so the Employer argued, there was less need for a doctrine of strict compliance in the case of on-demands bond/guarantees. The Employer cited English authority to this effect; and
- there is no authority to suggest that there must be strict compliance with the terms of a guarantee.
- It should be noted that there is no final word on this issue in the English Law - in fact it would seem that the English Courts have rather applied the same degree of strict compliance to guarantees as to irrevocable letters of credit (and so the Employer’s first contention is not backed by authority).
- While the Court in the Lombard decision did not expressly state that strict compliance was required with the terms of the guarantee, it is impossible to come to any conclusion other than that it endorsed strict compliance (given that the Court identified guarantees with irrevocable letters of credit). That we submit is the status of our Law.