MDA Law
Exxaro Coal Mpumalanga (Pty) Ltd v TDS Projects Construction and Newrak Mining JV and Another (2022) ZASCA 76
On 27 May 2022, the SCA handed down judgment (hereafter “the decision”) in the matter between Exxaro Coal Mpumalanga (Pty) Ltd (hereafter “Exxaro”) acting as the Applicant, TDS Projects Construction and Newrak Mining JV (hereafter “TDS”) acting as the First Respondent and Absa Bank Limited (hereafter “Absa”) acting as the Second Respondent.
The facts
During 2018, Exxaro and TDS entered into a written agreement (hereafter “the contract”) for construction and engineering works on Exxaro’s Matla Coal Mine North West Access Project. TDS procured a performance guarantee for due fulfilment of its obligations under the contract.
The guarantee was issued by ABSA in 2018 and was subject to the following material terms:
- The guaranteed amount would be paid to Exxaro by Absa on receipt of a written demand stating that an amount was due and payable;
- A written demand must be signed by a person who warranted that he/she was duly authorised to do so;
- The guarantee would expire on 19 June 2020;
- After the expiry date the guarantee would lapse and any demand received thereafter would be ineffective.
Exxaro terminated the contract on the basis that TDS had breached its obligations and had failed to remedy such breaches. Exxaro then sent a demand to ABSA claiming that the guaranteed amount had become payable due to TDS’s breach of contract. This demand was not honoured by Absa as it was deemed “unfit for processing”. Exxaro suspended the demand. Exxaro later retracted it’s the suspension of its previous demand and made demand of an amount of R22 165 055.66.
TDS later made an application to the High Court for an order interdicting Absa from making payment of any demand in terms of the guarantee pending the determination of Part B of the application wherein it sought an order declaring the demands by Exxaro invalid and a final order interdicting Absa from making payment of any amount under the guarantee.
In opposition, TDS alleged that the demands were fraudulently made and that it had a clear right to prevent Exxaro from unlawfully benefiting from the guarantee. Further, TDS alleged that the demands were not signed by a person warranting that they had authority to do so, they did not state the amount claimed as due and payable and they did not indicate the respects in which TDS was in breach of the Contract. Accordingly, TDS alleged that Absa was not legally obliged to honour the guarantee since the terms governing the demand had not been complied with.
TDS alleged that it would suffer severe financial prejudice should the demand be honoured by Absa and that its damages were not confined to the amount payable under the guarantee and honouring the guarantee would cripple or alternatively destroy its business.
The High Court Judgment
The judgment states that it is unnecessary to deal with allegations such that the demand guarantee was fraudulently made. The Court, relying on the decision in State Bank of India and Another v Denel SOC Limited and Others (hereafter “State Bank of India”), held that TDS was entitled to raise the issue of non-compliance with the demand on the basis of the banker-client relationship. The Court declared the demands invalid.
SCA Judgment
The SCA had to decide whether TDS was entitled to a final interdict against Exxaro on the basis of a non-compliance by Exxaro with the terms of the guarantee. It was common cause that the performance guarantee constitutes a demand guarantee.
The SCA reiterated the position on demand guarantees, citing Loomcraft Fabrics CC v Nedbank Ltd and Another wherein it was held that a demand guarantee is akin to an irrevocable letter of credit, in which a bank has a contractual obligation to pay the beneficiary on the occurrence of a specified event and is wholly independent of the underlying contractual agreement. The bank will only escape liability upon proof of fraud on the part of the beneficiary and the Court has cautioned against judicial interference restraining a bank from payment of a letter of credit except in the most exceptional of circumstances.
The Court applied the law applicable to obtaining a final interdict and found that TDS had failed to meet the requirements for obtaining a final interdict. The requirements were stated as being: a clear right, an injury actually committed or reasonably apprehended and the absence of another remedy.
The Court held that TDS failed to establish injury which is prejudicial to the applicant’s right. TDS alleged injury on the first fraudulent call on the guarantee which was not established and secondly on the alleged liability in counter-guarantees and default in respect of various facilities however this injury was not pleaded or demonstrated by TDS.
Had ABSA honoured the guarantee when presented with a non-compliant guarantee TDS would have had a complete defence to a claim by Absa for having honoured such. Accordingly, the only basis upon which TDS would be liable would be if Absa was lawfully obliged to honour a guarantee.
The Court held that should a party to a guarantee be in the same position as TDS, they have a complete contractual remedy against the guarantor. The contractual remedy envisioned is an application for specific performance against the guarantor. The Court stated that this was in accordance with the principle set out in State Bank of India that banks must be made to honour their obligations in respect of guarantees except in exceptional cases where fraud is involved.
The decision was such that the appeal was accordingly upheld and the application was dismissed.
Relevance to our current legal position
The long standing position of South African Courts has been the approach that in the absence of fraud, Banks must be made to honour their obligations in terms of honouring guarantees. The decision endorses such approach and further develops such to include that in the absence of fraud, a party is unlikely to obtain an interdict against the beneficiary of a guarantee making a demand as that party has an appropriate contractual remedy against the guarantor should they honour a non-compliant demand.
Recently there has been a decision with an alternative view. In September 2020, the same Court as in the above decision delivered the judgment in Joint Venture between Aveng (Africa) (Pty) Ltd and Strabag International GmbH v South African National Roads Agency Soc Ltd and Another (“the Aveng decision”). Importantly, both the guarantee in the decision and the Aveng decision were similar in nature in that they both held provisions that the guarantee can only be called upon should the guarantee be in breach of the underlying agreement.
The Aveng decision, relying on authority from foreign jurisdictions, found that there is a position in South African law for an exception such that a contractor may be entitled to restrain a beneficiary from making demand on a performance guarantee if the contractor can show the beneficiary would breach a term of the underlying agreement. This would mean that a party who offers a demand or performance guarantee may have two possible remedies available when a beneficiary attempts to call on the guarantee. The first being an interdict against the guarantor should they honour or wish to honour a non-compliant guarantee and the second against the beneficiary should they call on a guarantee when the underlying agreement clearly and expressly restrains the beneficiary from calling on the guarantee.
Importance
The law regarding guarantees is ever changing and includes numerous complexities. Guarantees also form part of the majority of construction and engineering projects. At MDA, we are experienced in drafting, advising on, and dealing with disputes stemming from all forms of guarantees found in a construction, mining and engineering context.
