NEWSLETTER – ISSUE 02

NEWSLETTER
July 2019
Issue 02


FEATURED ARTICLES THIS MONTH
DEVIATION DUE TO CHANGED CIRCUMSTANCES WHEN EXERCISING A REAL RIGHT OF EXTENSION 

BY ALLEN WEST 
The deviation from the section 25(2)(a) and (b) plans when exercising a real right of extension has been a matter that has been deliberated on at length by our Courts and Registrars of Deeds.  Recent case law, in my opinion, has now finally put this thorny issue to rest

Background
In the case of Dolphin Whisper Trading 10 (PTY) LTD v The Registrar of Deeds and another (20645/08) [2009][ZAWCHC] dated 3 March 2009, it was held that if there is not sufficient evidence of changed circumstances, the real right of extension has to be exercised strictly in accordance with the section 25(2)(a) and (b) plans.  This case literally put the cat among the pigeons and developers had to approach the Court when any deviation from the section 25(2) plans occurred.  In the judgement of Roseparkadmin CC and others v Registrar of Deeds (WCHC) Case No 5522 dated 17 May 2011, it was held that section 25(13) of the Act allows the Developer to deviate, in instances of changed circumstances, from the section 25(2) plans and an owner who feels prejudiced may alone apply to court.  It was further held that the Act does not require the developer to first obtain the courts sanction for such deviation.  Two conflicting decisions on which Registrars had to implement a uniform practice

Registrars Ruling
Registrars of Deed at their annual conference in 2011 took cognizance of the Roseparkadmin-case, but felt it prudent to expand on the decision and to usurp the duty to ensure that the exercising of the real right of extension is within the physical boundaries of the reserved right (RCR12 of 2011).
The Chief Registrar furthermore issued a directive providing that proof must be submitted that the real right is exercised within the “foot print” on which the reservation took place, which proof must be in the form of a certificate from a surveyor or architect (see CRC 2 of 2012).

Recent Case Law
In terms of the most recent case in this regard, namely the unreported case of Hartenbos Woonwapark CC v Registrar of Deeds and others, Case No 3273/2017 dated 29 May 2017, the court held as follows:
“I cannot agree that the developer’s failure to divide the sections strictly according the site development plan due to the changed circumstances amounts to non-compliance with the provisions of the Act.  Although the Act requires the sections to be divided according to the site development plan, the Act does envisage that there may be situations where it is not possible to divide the sections strictly according to the site development plan due to “changed circumstances”.  The Act, in those instances, provides remedies to the owners of the units who may be affected by the deviation to approach the court.  I agree with the applicant’s submission that section 25(13) of the Act relates to situations where an owner of a unit in a scheme takes issue with a deviation, and approaches the court for an order obliging the developer to properly comply with the terms of the reservation or any other relief which the court may deem fit, including an award for damages.  It is clear from the reading of section 25(13) of the Act that this section is not concerned with the power of the Registrar of Deeds to refuse to register the transfer nor the court’s approval of the transfer of a unit which is subject”

Conclusion
Where the real right is clearly defined on a diagram, the exercising of the real right may not exceed the boundaries or encroach on other common property in the scheme. However, where no diagram exists, but merely a sketch plan, it is not incumbent on the Registrar of Deeds to police the foot print.


CALCULATION OF INTEREST OF A DEBT  

Carma Prinsloo

BY CARMA PRINSLOO 

The calculation of interest on a debt is governed by the Prescribed Rate of Interest Act 55 of 1975 (hereinafter “the Act”). The Act has been divided into two parts relating to the calculation of interest, being:
(1)  the rate at which interest on debt  is calculated in certain circumstances, and
(2)  interest on a judgment or unliquidated debt.

Interest on debt in certain circumstances
Section 1 of the Act applies in circumstances where the calculation of interest is not governed by any other law, agreement or trade custom.  In these circumstances, the rate of interest shall be calculated by using the repo rate as determined by the South African Reserve Bank, plus 3,5 % per annum.

Interest on a judgment debt
Interest on a judgment debt will become due from the day on which such judgment debt is payable.  As of 1 January 2019, the prescribed rate of interest is 10.25% per annum.

Interest on unliquidated debt
An unliquidated debt shall bear interest as per section 1 of the Act, stating that interest will be calculated by using the repo rate plus 3.5% per annum.

Interest on an unliquidated debt shall run from the date on which payment of the debt is claimed.  Payment of interest may be claimed by the service of a demand or summons.

Should damages claimed include an estimation of a loss (in whole or in part) which will occur in the future, interest on that part of the debt will only commence to run when quantum is determined by judgment or agreement.  Thereafter, the amount will be deemed to be a judgment debt.

The interruption of interest can occur where a debtor offers to settle a debt (whether by tender or making a payment into court).  The interruption will occur from the date of the payment into court or date of the offer made until the date of acceptance of the offer by the creditor.


THE LIABILITY OF THE ARCHITECT IN THE SOUTH AFRICAN LAW

Sumari Benade

BY SUMARI BENADE

McKenzie’s “Law of Building and Engineering Contract and Arbitration 7th Edition, p 129” defines

an architect as “a duly qualified professional person whose function it is to design and supervise the erection of buildings, or in the words of The Shorter Oxford English Dictionary: One whose profession it is to prepare plans of edifices and exercise a general superintendence over their erection.”  A person may only practise as an architect in South Africa if he is registered as such in terms of the Architectural Profession Act 44 of 2000.  Section 27 of this Act stipulates that the South African Council for the Architectural Profession must draw up a code of conduct for registered persons.  All registered persons must comply with the terms as included in this code and failure to do so constitutes improper conduct.

The preamble of the Code of Professional Conduct, issued under BN 154 of 2007, Government Gazette 32731, 27 November 2009, states that “it is an overriding obligation under the rules that, in carrying out professional work, a registered person is expected to act with due skill, competency and integrity”. Once an architect is appointed by the employer, a binding contract will be in existence between the parties.  Usually included in the tacit terms of the agreement is that the architect does in fact possess the required skill and ability to be reasonably proficient in his calling.  It is, however, important to be cognisant of the fact that the architect may be also held liable in respect of a delictual claim in the absence of any contractual agreement between the parties.

It is a well-established fact in the South African Law that a person who does not practice with the due skill and diligence will be regarded as negligent.  In the Supreme Court of Appeal matter, Goliath v MEC for Health, Eastern Cape 2015 (2) SA 97 (SCA), the Court referred to the matter of Van Wyk v Lewis 1924 A.D 438 in which the test for negligence has been defined as “the failure of a professional person to adhere to the general level of skill and diligence possessed and exercised at the same time by the members of the branch of the profession to which he or she belongs would normally constitute negligence.”  In the English matter of Nye Sanders & Partners v Alan E Bristow (1987) 37 BLR 92 (CA) the Court stated the following with reference to the position of an architect: “Where there is a conflict as whether he has discharged that duty [to use reasonable skill and care], the courts approach the matter upon the basis of considering whether there was evidence that at the time a responsible body of architects would have taken the view that the way in which the subject of enquiry had carried out his duties was an appropriate way of carrying out the duty, and would not hold him guilty of professional negligence merely because there was a body of competent professional opinion which held that he was at fault.”

Should it therefore be found that an architect’s conduct falls short of the conduct that would have been reasonably exercised by another person of the same profession, the architect will be held liable in damages to his employer.

In the matter of Bentel Associate International (Pty) Ltd v Loch Logan Waterfront (Pty) Ltd 2015 JDR 0323 (FB) the Court had to decide inter alia whether the defendant’s claim in reconvention, alleging that it has suffered damages as a result of the plaintiff’s failure to perform its obligations in a professional and workmanlike manner and without negligence, should be upheld.  The Court stated that “the architect’s liability is not absolute in the sense of being liable for whatever occurs. The architect is liable for substantial negligence (Dodd v Estate Cloete and Another 1971 (1) SA 376 (ECD)).”  It further referred to the matter of De Wet v Steynsrust Municipality 1925 OPD 151 in which it was held that “an architect must exercise the general level of skill and diligence exercised by other persons exercising the same profession, being skilled and experienced persons.”  The Court referred with approval to the position in international law pertaining to the liability of the architect and quoted John R. Heisse from his article “The Measure of Malpractice” Journal of the American College of Construction Lawyers Vol 5, Nr 2, 2011: “Noting that architects and engineers deal in somewhat inexact sciences and are continually called upon to exercise their skilled judgment in order to anticipate and provide for random factors which are incapable of precise measurement the courts have reasoned that the indeterminate nature of these factors makes it impossible for professional service people to gauge them with complete accuracy in every instance.”

The benchmark regarding the standard of care that should be applied by an architect in the law of the United States has been defined in the Maine Supreme Court matter of Coombs v Beede 89 Me. 187 A 104 (1896).  The Court held that the responsibility of the architect is the same as a doctor to patient or lawyer to his client, which is that the architect possess “some skill and ability in some special employment and offers his services to the public on account of his fitness to act in the line of business for which he may be employed.”  The Court further held that the undertaking of the architect implies that he consequently possesses the “skill and ability, including taste, sufficient to enable him to perform the required services at least ordinarily and reasonably well; and that he will exercise and apply, in the given case, his skill, ability, judgment and taste, reasonably and without neglect.”  The Court then attempted to define the exclusions from the architect’s duty of care, submitting that “the undertaking does not imply or warrant a satisfactory result.  It will be enough that any failure shall not be the fault of the architect.  There is no implied promise that miscalculations may not occur.  An error in judgment is not necessarily evidence of want of skill or care, for mistakes and miscalculations are incidents to all business of life.”  Negligence should therefore be evident from the conduct of the architect and it will not suffice to simply state that a mistake was made by the architect.

When the architect enters into an agreement, it is implied that he is able to perform the work with reasonable skill and diligence.  It does however not warrant that the result will be without fault and the architect therefore will not be held liable for the fault arising from defects in the plans because he does not imply or warrant a satisfactory result.


LATEST DEVELOPMENTS IN CASE LAW
NATIONAL HOME BUILDERS’ REGISTRATION COUNCIL & ANOTHER V XANTHA PROPERTIES 18 (PTY) LTD (780/2018 and 784/2018) [2019] ZASCA 96 (21 June 2019)

The respondent, Xantha Properties 18 (Pty) Ltd embarked upon the construction of a property development in Cape Town

consisting of a number of shops and 223 residential apartments.  It averred that it had no intention of selling these apartments or developing them under a sectional title scheme but with the sole intention to rent them to tenants. Although registered as a ‘home builder’ as defined in the Housing Consumers Protection Measures Act 95 of

1998, it disputed being  obliged to enroll this development project with the NHBRC or to
pay the prescribed enrolment fee under section 14(1) of that Act, arguing that the section did not require a home builder to
enroll houses being constructed solely for the purposes of being let.

The NHBRC and the Minister of Human Settlements, contended otherwise and insisted upon the respondent’s development being enrolled and that it pay the necessary enrolment fee, a sum in excess of R1.5 million. The respondent paid that sum under protest but proceeded to seek a declaratory order in the High Court, Cape Town to the effect that it was obliged neither to enroll its development nor to pay such fee. The respondent’s application succeeded but with the leave of the court a quo, the two appellants appealed against the decision.

The Supreme Court of Appeal allowed the appeal. In doing so it held that the fundamental underlying premise of the Act is to guard against builders constructing sub-standard homes.
Moreover the definition of a home builder’s business was amended specifically to include building homes for purposes of being let or rented out, and there was no reason why the legislature would have decided that homes build for leasing purposes should be treated differently from those constructed for resale. It held that the court a quo had incorrectly reached the conclusion that section 14 did not apply to homes being built for lease and rental purposes. The Supreme Court of Appeal therefore allowed the appeal and granted an order dismissing the respondent’s application with costs.


PUZZLES AND PUNS

If you can’t convince them, confuse them

-Harry Truman


NEWSLETTER MAY 2019 – EXCITING NEW DEVELOPMENTS AT MARKRAM INC

NEWSLETTER
May 2019
Issue 01
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EXCITING NEW DEVELOPMENTS AT MARKRAM INC

We are excited to announce that as of March 2019, Johan Loots joined our team at Markram Inc. as director. Johan, a Pretoria born attorney, specializes in Commercial, Civil and General Litigation, especially in Insolvency Law and Rehabilitations. Johan was appointed in 2000 as moderator and specialist examiner of the Attorney’s Admissions Exam for the Legal Practice Council.

We herewith extend our heartfelt congratulations to our two Professional Assistants, Anjo Rheeders and Sumari Benade, on their admissions as both Conveyancer and Notary Public of the High Court of South Africa respectively during March 2019. We are proud to share this remarkable achievement with them.

Sumari Benade   Anjo Rheeders

FEATURE ARTICLES THIS MONTH
THE LEGAL APPROACH TOWARD TIME BARRING CLAUSES IN INSURANCE CONTRACTS

BY CLAIRE ROUX       Claire Wolmarans

The Constitutional Court, in the case of Barkhuizen v Napier 2007 (5) SA 323 (CC), dealt with the issue of “time-barring clauses” in contracts entered into between private persons.

The salient facts of the case are as follows:

The applicant claimed the insured sum from the respondent upon being in an accident with his insured vehicle. The respondent subsequently rejected the claim.

Two years later, the applicant instituted legal proceedings against the respondent claiming payment of the insured sum together with interest thereon. The respondent responded claiming that they were released from liability due to the applicant’s failure to adhere to the time-limitation clause which formed part of the contract. The relevant clause read as follows: “if we reject liability for any claim made under this policy we will be released from liability unless summons is served… within 90 days of repudiation”. In essence the applicant was time barred from instituting proceedings to pursue his claim.

The applicant argued that the time-limitation clause was unconstitutional as it was contrary to public policy and thus invalid. The basis of the Applicant’s contentions in this regard was that the clause sought to prescribe an unreasonably short period of time within which to institute legal proceedings and as a result it infringed on the right to seek redress from the Court and the right to access the Court.

The Court considered whether public policy tolerates time-limitation clauses. The Court held that it did, subject to the considerations of reasonableness and fairness. Furthermore, the Court reiterated that the Constitution recognises that the right to seek legal redress may be limited in certain instances. The Court also formulated a test for fairness viz, firstly, whether the clause itself is unreasonable and secondly, if the clause is reasonable whether it should be enforced in the circumstances. The Court found that clauses of this type are reasonable and thus operational within our law.

The Court ultimately found that the clause should be enforced in this matter because the applicant failed to show why he had did not act in accordance with the provisions of the time-bar clause. The Court explained that had the applicant been unaware of the time limitation clause or the consequences thereof, or failed to act in accordance with same due to factors outside of his control then the clause would operate unfairly and the Court would not enforce same. However, the applicant seemed to be fully aware of the clause and the effect of same.

This decision opened the door for the Courts to refuse enforcement of certain unfair clauses in contracts between private persons and laid the foundation of the grounds on which to do so.

The Policyholder Protection Rules
On 01 January 2018, the amended policyholder protection rules came into force. Various Rules have been in place regarding time barring since 2011, which the new Rules amplify. The rules build on the position laid down by the Court in Barkhuizen v Napier.

The Rules, firstly, provide that insurers must accept, reject or dispute a claim or the quantum thereof within a reasonable period of time. Thereafter, insurers must give written notice of their decision to the claimant within 10 days of making same.

In the event that an insurance claim is rejected or disputed by the insurer, the Rules provide for a rather stringent set of disclosure obligations which the insurer must fulfil. This ensures that claimants are equipped with the necessary information to properly pursue claims which they feel have been wrongly rejected.

It is also clear that mere notification of the clauses and processes is insufficient. Insurers must also ensure that claimants are made aware of the relevant details and implications thereof in order for them to be well equipped to deal with such clauses and/or to pursue such processes successfully.

The Rules confirm the Court’s power to condone non-compliance with time-limitations should they operate unfairly, as well as in circumstances where the policyholder can show their failure to institute legal proceedings timeously was due to a good cause. It is submitted that the test for fair operation of such a clause remains as decided by the Court in Barkhuizen. It must also be noted that the above requirements must be fulfilled in conjunction with one another.

Insurers are also precluded from imposing unreasonably short time-limitations, as the Rules state that any time-limitation imposed in a policy entered into after 2011, may not be shorter than six months.

The Rules now require insurers to ensure that the policyholder is well aware of the existence of the time-limitation clause, as well as the implications thereof. This protects policyholders from being prejudiced by clauses which they previously would not have been made aware of, or fully understood. It also provides the policyholder with ample opportunity to dispute repudiated claims and follow the correct processes in order to have their claims reconsidered.

Should an insurer fail to act in accordance with the Rules, a policyholder may lay a formal complaint against the insurer. As a result, the Rules have created a more onerous position for the insurer and this should ensure that they act in accordance therewith.

The Rules provide some welcome redress to the unequal power that insurance companies hold over policyholders. Furthermore, the new amendments to the Rules obligate insurers to inform policyholders of the protection in place which makes it more accessible to the policyholder and easier to follow.

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DEFECTIVE WORKS AND SUCCEEDING CONTRACTOR’S LIABILITY

BY ANJO RHEEDERS     Anjo Rheeders

When a contractor is replaced by a new contractor it is of the utmost importance that the succeeding (new) contractor must understand the provisions of his/her appointment agreement, as well as the liabilities imposed in terms of the agreement. Depending on the intention of the parties to the contract, the contractor’s liability regarding defective works could be exempted.

In the recent unreported case of Trencon Construction (Pty) Ltd v South African Airways (Pty) Ltd 2015 JDR 0090 (GJ) the court had to determine whether the replacement contractor was liable for the defective works caused by the former contractor on the project.

In this case, Trencon Construction (“Trencon”) was appointed as the contractor for the construction of a departure lounge at OR Tambo International Airport, subsequent to the liquidation of the initial contractor. The parties concluded a written agreement and the general conditions applicable were the Joint Building Contract Committee: Principal Building Agreement (“JBCC”). When Trencon issued an invoice to South African Airways (“SAA”) for work done in terms of the appointment, the principal agent contended that there was defective works which had to be remedied before a certificate of final completion could be issued. It should be noted that when the Applicant was appointed as contractor the design, manufacture and installation of the shop fronts, which were alleged to be defective by the principal agent and SAA, was done by the previous contractor.

SAA and the project manager relied on clause 8.2 of the JBCC which provides that: “The contractor shall make good any physical loss and repair damage to the works, including clearing away and removing from site, all debris resulting therefrom, which occurs after the date on which the possession of the site is given and up to date of issue of the deemed certificate of final completion…” [own emphasis]

The court held that clause 8.2 implies that the contractor shall make good the physical loss and repair and damage to works which occurs after the date on which possession of the site is given. It is common cause that the loss or damage occurred after the date on which possession was given to Trencon, and accordingly they were therefore not obliged to make good the loss or repair the damage.

Furthermore, the principal agent never issued a defects list, despite Trencon’s notification that same was outstanding. Accordingly in terms of clause 26.4 of the JBCC, the certificate of final completion is deemed to be issued, and as a result final completion is deemed to have been achieved.

The court also referred to clause 8.5 of the JBCC which provides that: “The contractor shall not be liable for the cost of making good any physical loss or repairing any damage of works where this resulted from the following circumstances: …8.5.9. design of the works where the contractor is not responsible in terms of clause 4.0…”

It was common cause that Trencon was not responsible for the design of the works which the principal agent and SAA contends to be defective. This is therefore another reason why Trencon cannot be held liable for the loss or damages.

To conclude, due to the provisions of the JBCC and due to the fact that the loss or damage did not occur after the date of possession of the site, Trencon was not responsible for the loss or damaged works that occurred. Should an employer therefore require the succeeding contractor to take responsibility for remedying defects or damages caused by the preceding contractor, the employer must expressly state its intention and ensure that it is included in the agreement.

It should be noted that the JBCC applicable in the Trencon case was the JBCC published in 2007, and in the latest edition of the JBCC published in 2014, clause 8.2 is amended. In terms of the 2014 JBCC version, clause 8.2 states that: “The contractor shall make good physical loss and repair damage to the works caused by or arising from:
8.2.1. any cause before the date of practical completion;
8.2.2. any act or omission of the contractor, in the course of any work carried out in pursuance of the contractor’s obligations after the date of practical completion.”

It is clear that the words “which occurs after the date on which the possession of the site is given” has been omitted and accordingly this could have an influence on the liability of the contractor. Clause 8.5 of the 2014 JBCC, however, still excludes the contractor’s liability for the loss or repair of damages caused by the design works for which the contractor is not responsible, and this could ultimately still be a defence for the contractor, should the preceding contractor’s works include design.

In light of the aforementioned it is therefore evident that depending on the type of JBCC edition applicable, the contractor will have a valid defence in these circumstances. However, every situation will have to be determined on its own merits and facts.

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WHO IS REGARDED A NON-RESIDENT FOR PURPOSE OF SECTION 35A OF THE INCOME TAX ACT 58 OF 1962?
BY ALLEN WEST    

Under South African Law there are different types of residents, for example a resident defined by the Income Tax Act, 1962 in terms of the so-called physical presence test and an ordinary resident defined in terms of South African common law.

Any individual, who is ordinary resident (common law concept) in South Africa during the year of assessment or, failing which, meets all three requirements of the physical presence test, will be regarded as a resident for tax purposes.

An individual will be considered to be ordinary resident in South Africa, if South Africa is the country to which that individual will naturally and as matter of course return after his or her wanderings. It could be described as that individual’s usual or principal residence, or his or her real home. If an individual is not ordinarily resident in South Africa, he or she may still meet the requirements of the physical presence test and will be deemed to be a resident for tax purposes.

To meet the requirements of the physical presence test that individual must be physically present in South Africa for periods exceeding-
• 91 days in total during the year of assessment under consideration;
• 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
• 915 days in total during those five preceding years of assessment.

An individual who fails to meet any one of these three requirements will not satisfy the physical presence test.

If the individual is neither ordinary resident, nor meets the requirements of the physical presence test, that individual will be regarded as a non-resident for tax purposes. This means that individual will be subject to tax only on income that has its source in South Africa. A non-resident will, however, be subject to the withholding of tax on the sale of immovable property, as provided for in Section 35A of the Income Tax Act 1962.

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LATEST DEVELOPMENTS IN CASE LAW

National Home Builders Registration Council v Michiel Wessel Adendorff & others (406/2018) [2019] ZASCA 20

In this matter, the Supreme Court of Appeal had to determine whether a trust is a “home builder” in terms of sections 1 and 10(1) of the Housing Consumer Protection Measures Act 95 of 1998 (“the Act”).
The salient facts of the matter are as follow: During 2013 an NHBRC inspector, whilst

conducting a routine inspection, discovered that the trustees of the Mike’s Trust were constructing a sectional title housing development on the property for the benefit of the Trust. It is common cause that initially the Trust registered as a ‘home builder’ in terms of section 10 of the Act, for a period of one year, but failed to renew its registration. The Trust continued with the construction of new homes on the property, whilst not registered as a home builder. It was served with notices of non-compliance by the NHBRC, but refused to comply. Consequently, the NHBRC launched the application against the trustees.

The Trust submitted that it is not regarded as a person and therefore it is not required to register as a home builder in terms of the Act. The Court considered the relevant provisions of the Act and confirmed that “the Act is consumer-protection legislation, having as its object the protection of consumers against home builders who construct homes with structural defects, to provide consumers with information about competent builders, and to give effect to the rights of consumers.” The Act therefore requires registration of home builders and the enrolment of houses being built to ensure that the aims and objects of the Act are optimally achieved.

It was evidently confirmed by the Court that there can be no cogent reason for the legislature to exclude a trust that owns property, and is building a home, from the provisions of the Act, where the manifest purpose of the Act is the protection of the housing consumer, and maintaining the minimum standards required of home builders. Trusts are therefore deemed to be home builders as envisaged in the Housing Consumers Protection Measures Act 95 of 1998 and should register as such.

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PUZZLES AND PUNS

What’s wrong with lawyer jokes?
Lawyers don’t think they’re funny and
other people don’t think they’re jokes.

The Interpretation of “Pay in Full” in terms of the Medical Schemes Act

In the recent matter of Board of Healthcare Funders of Southern Africa v Council For Medical Schemes 2011 JDR 1471 (GNP), the first and second applicants approached the Court with a request to issue a declaratory order regarding the interpretation of the words “pay in full” in regulation 8(1) of the General Regulations made pursuant to the Medical Schemes Act, 131 of 1998.

The applicants contended that the Court had to decide three issues, namely:
1.    The first applicant’s entitlement to institute proceedings for declaratory relief;
2.    The interest and locus standi of the intervening respondents in opposing the relief sought by the applicants; and
3.    The meaning of the words “pay in full” in regulation 8(1) of the General Regulations which were promulgated in terms of section 67 of the Act.

Regulation 8 has been in force since 1 January 2000. According to the applicants, the current problem came into existence on 11 November 2008 when the Appeal Board decided two cases on appeal which was referred by the Appeal Committee in terms of section 50 of the Act. The Appeal Committee and the Appeal Board had, pursuant to these two decisions, interpreted the words “pay in full” in regulation 8 to mean that the medical scheme must make full payment of a service providers’ invoice in respect of the costs of providing health care services for Prescribed Minimum Benefits without taking the rules of the medical scheme into consideration in dealing with any complaints.

It was the applicants’ contention that “pay in full” means payment according to the rules of the Medical Scheme, while according to the respondents, the decisions by the Appeal Board have not been challenged as yet and presently medical aid schemes are bound to this authority and have to pay service providers’ invoices in full.
The main complaint by the respondents was that the first applicant had no direct and substantial interest in the application as the judgment would not have an impact on it. Although the first applicant contended that it represented 75 registered medical aid schemes and therefore had locus standi, the Court found this not to be the case. This was due to the fact that the first applicant saw fit to have the second applicant, who is a registered medical aid scheme, joined. Furthermore, only 15 registered medical schemes, in the founding and supplementary founding affidavits, confirmed that a declaratory order should be sought.

The Court held that had the first applicant been so sure that it represented all 75 medical aid schemes it would not have been necessary to join the second applicant or to obtain affidavits and signatures of 15 members of the first applicant. The Court concluded from this that the first applicant did not in fact represent 75 members, but only the 15 members mentioned in the papers.

The non-joinder of all the medical schemes rendered the application fatally defective as the Court could not find that the first applicant, as a general representative of the medical schemes, would be prejudicially affected by a judgment, but found that its members may all be prejudicially affected and accordingly, all the members should have jointly instituted the application for a declaratory order.

The Court found that the first applicant did not have locus standi for the following reasons:
1.    The matter was one that could be classified as a representative matter, but not all the medical schemes had been joined and it had not been launched as a representative matter due to the fact that the first applicant did not have any mandate to litigate on behalf of all 75 of its members;

2.    In order to institute action in terms of Section 38 of the Constitution, a litigant needs to show that a right enshrined in the Bill of Rights has been encroached upon as well as sufficient interest in the relief sought. The first applicant did not explicitly aver any such infringement and the Court found that the First Plaintiff would not be directly influenced by the judgment and did not have a sufficient interest in the relief sought.

With regard to the second applicant the court held that it could not succeed in the application on its own, as none of the other medical aid schemes or administrators had been joined.

As a result the court dismissed the application without deciding the meaning of the words “pay in full”.

Construction Guarantees: On Demand or Surety?

Construction guarantees (also called ‘performance guarantees’ or ‘performance bonds’) are frequently issued in Construction agreements to ensure that the employer is safeguarded in the event that the contractor causes a delay, or a disruption, in the completion of the works. The JBCC series contract has a standard form of Construction Guarantee- and this can be a part of the agreement. The parties are free however to deviate from the JBCC series contract and construct their own construction guarantee agreement. Case law has shown that construction guarantees may be interpreted as ‘on call’, or ‘on demand’ guarantees, or as a suretyship guarantee, also known as a ‘conditional bond’. It is important to know the difference in interpretation between the two types of construction guarantees, as they are substantially different from one another.

Where a construction guarantee is in place, it presupposes the existence of three separate relationships, that between;

•  The employer and the contractor – governed by the building contract;

•  The employer and the financial institution – which the employer tasked the contractor with approaching for the provision of a construction guarantee, and which will in turn, if the requirement of the guarantee are fulfilled, make payment of the amount as contained in the construction guarantee.

•  The contractor and the financial institution for the provision of a construction guarantee.

I will now discuss relevant case law in which the different interpretations of construction guarantees were considered.

ACCESSORY AGREEMENT

In the matter of Basil Read v Beta Hotels 2001 (2) SA 760 a building contract was entered into between the applicant, Basil Read, as the contractor, and the 1st Respondent, Beta Hotels, as a hotel owner. The 3rd Respondent is the financial institution who provided Basil Read with a construction guarantee. The building contract, and the construction guarantee itself, was based on the 1991 JBCC series contract. The construction guarantee determined that payment would be effected upon the receipt of a written demand from the employer ‘in respect of expenses or loss incurred or to be incurred by virtue of non-performance or breach of the terms of the contract’.

A dispute arose due to the fact that the principal agent, namely the appointed architect (the 3rd Respondent), refused to extend the practical completion date to such a date as was requested by Basil Read. This dispute was referred to arbitration. Upon the interpretation of the construction guarantee the court decided that the arbitration proceedings did not relieve Basil Read of its liability for the ‘due and timeous performance’ of its obligations. The court found that the construction guarantee gave rise to liability on the part of Basil Read on the basis of suretyship. This conclusion was reached due to the fact that upon reading the guarantee it was clear that it intended to ‘indemnify the first Respondent ( Beta Hotels) against such ‘expenses and loss’ – caused by the payment of penalties, etc. The construction guarantee in this matter was in the nature of a suretyship agreement, this being so any obligation of the financial institute to Beta Hotels is accessory to the liability of Basil Read to Beta Hotels.

In the recent Supreme Court of Appeal matter of Minister of Transport and Public Works, Western Cape, and Another v Zanbuild Construction 2011 (5) SA 528 the court also found on interpretation of the construction guarantees that same was construed in the form of a suretyship agreement. The facts of the matter are as follows:

Pursuant to two, but similar, building contracts having been entered into between the contractor, Zanbuild Construction, and the Minister of Transport and Public Works, the employer, Zanbuild approached Absa Bank to secure construction guarantees in favour of the employer. The construction guarantees were not the standard JBCC guarantees, but same was accepted by the employer nonetheless.

The wording of the guarantees provided that Absa reserved the right to withdraw the guarantees after the employer had been given 30 days notice of its intent to do so. In event of this coming to pass the employer reserved the right to recover the amounts outstanding and due to it by Zanbuild as on the date of the expiry of the guarantees.

Absa notified the employer of its intent to withdraw the construction guarantees, and the employer gave notice within the 30 day period of its intent to recover the full amounts of both guarantees. The employer alleged that Zanbuild was in default, but had not yet taken steps to cancel the building agreements between it and Zanbuild. Both the building agreements were indeed cancelled afterwards.

The employer contended that although it had no monetary claims against Zanbuild, the construction guarantees were of such a nature that they stood apart from the principal agreement, and were thus akin to irrevocable letters of credit. This being so, Absa must make immediate payment of the construction guarantees upon a valid claim being submitted.

According to the express wording of a guarantee, it is either a ‘conditional bond’ or an ‘on demand bond’. The difference between the two is that with a conditional bond it is required that liability be established on the part of the contractor, whilst with an ‘on demand bond’ no allegation of liability on the part of the contractor is required. All that is required is a valid demand on the part of the employer to the financial institution.

The court concluded that the wording of the construction guarantees gave rise to liability on the part of Absa akin to suretyship. The indications for this conclusion was that the guarantees themselves stated that ‘security be provided for the compliance of the contractor’s performance of obligations in accordance with the contract’, and the wording indicated that separate claims under the guarantees could be made, which clearly indicated the construction guarantees were referring to a claim in terms of the principal agreement. Lastly, the fact that the guarantees contained the provisions which allowed Absa to withdraw expressly limited the liability of the bank, in accordance with the nature of a suretyship agreement.

What is understood about a suretyship agreement is that it is accessory to a principal agreement, there can be no obligation when the principal obligation it refers to is not valid or effective. A surety agreement needs three relationships in order to be in place, in construction contracts this will be between the contractor and the employer, between the employer and the financial institute, and lastly the relationship between the contractor and the financial institution.

‘ON DEMAND’ CONSTRUCTION GUARANTEE

Two Supreme Court of Appeal matters immediately spring to mind when one considers ‘on demand’ construction guarantees, these being Dormell v Renasa and Lombard v Landmark Holdings.

The matter of Lombard Insurance Co Ltd v Landmark Holdings 2010 (2) SA 96 an insurer, namely Lombard, issued a construction guarantee to the employer,on instruction of the contractor. The guarantee determined that the full amount of the guarantee, or the amount outstanding at the time of the demand, would be payable to the employer on default of the construction company or in the case of its liquidation. The employer found out at some point in time that the contractor had been liquidated, and thus made a claim under the guarantee, which Lombard paid out. Prior to this however Landmark Holdings indemnified Lombard Insurance for any claims under the construction guarantee. The 2nd and 3rd Respondents also indemnified Lombard for any claims arising from the construction guarantee. After the guarantee had been paid out Lombard had reason to suspect that fraud was involved, and approached the court.

The court a quo in this matter interpreted the guarantee in conjunction with the principal agreement and held that Lombard was only obliged to pay a claim under the agreement if the claim was within the terms of the principal agreement. Since the claim did not fall within the contract, Lombard was not obliged to effect payment of the construction guarantee, and could thus not claim indemnity from the Respondents.

The Supreme Court of Appeal however found that the court a quo had erred in its conclusion concerning the construction guarantee and the indemnity agreements. Upon inspection of the construction guarantee the court found that the guarantee created an obligation to pay upon the happening of an event, a trigger. The guarantee provided that any reference to the principal agreement was only for convenience sake, and expressly stated that there is no intent to create an accessory obligation or suretyship.

The guarantee by Lombard is not unlike irrevocable letters of credit issued by banks and used in international trade, the essential feature of which is the establishment of contractual obligation on the part of the bank to pay the beneficiary. This obligation is wholly independent of the underlying contract of sale and assures the seller of payment of the purchase price before he parts with the goods being sold. The bank’s liability to the seller is to honour the credit. The bank undertakes to pay provided only that the conditions specified in the credit are met. The only basis upon which the bank can escape liability is proof of fraud on the part of the beneficiary.

Lombard had undertaken to pay the construction guarantee upon the contractor being put into liquidation, this being the trigger event. This indeed came to pass, and the employer made a valid demand. The same principle applied to the Respondents’ indemnity agreements in favour of Lombard.

The matter of Dormell Properties v Renasa Insurance Company [2010] ZASCA 137 is quite a lengthy one, and the Supreme Court of Appeal had to determine on issues of time, rectification and the validity of a construction guarantee. I will only focus on the court’s discussion with regard to construction guarantees.

Dormell Properties, the employer, concluded a building agreement with Synthesis, the Contractor. Synthesis obtained a construction guarantee from Renasa at the behest of Dormell. The construction guarantee was couched on the standard form of construction guarantee as in the JBCC 2000 contract. This guarantee set out certain requirements to be met in order for the guarantee to be paid out, these being that a proper claim be made by the employer on the grounds that the building contract had been cancelled due to a default of the contractor.

The court a quo had found that the construction guarantee had expired prior to a claim being made, but consented that Dormell may take the matter on appeal.

Prior to the Supreme Court of Appeal hearing the matter the parties to the agreement referred the dispute to arbitration, where the arbitrator made the award that Dormell had repudiated the building contract, thus Synthesis had validly cancelled same.

The majority of the judges of the Supreme Court of Appeal found that due to the fact that Dormell had in effect caused the cancellation of the agreement it would be an academic exercise to enforce the construction guarantee. This despite the fact that they had acknowledged that as an ‘on call’ construction guarantee, the guarantee had to have been honoured as soon as the employer made a proper claim in the happening a specified event. And Dormell had made a proper claim. The majority placed heavy reliance on the award of the arbitrator in making its final decision; Dormell’s repudiation of the building agreement had been unlawful and as a consequence it lost its right to enforce the guarantee.

The minority judgement of Cloete JA was however that the Arbitrator’s award was irrelevant. In terms of the construction guarantee, which was a ‘on demand’ or ‘on call’ guarantee, it was unnecessary for Dormell to allege it had validly cancelled the building agreement due to Synthesis’s default. Dormell had made a valid demand, bona fide, with no question of fraud, thus the construction guarantee should have been paid out within 7 days. The fact that Dormell had unlawfully cancelled the contract affected only Synthesis, and not Renasa at all.

In another Supreme Court of Appeal matter, Compass Insurance Company Ltd v Hospitality Hotel [2011] ZASCA, the court had to make a decision whether the employer had fulfilled the requirements of a ‘performance guarantee’. Compass had issued a performance guarantee in favour of Hospitality for the performance of work undertaken by a subcontractor. The construction guarantee would be payable upon the liquidation of the subcontractor, and in order to make a valid claim the court order of liquidation had to be attached to the claim.

Hospitality made a claim under the construction guarantee, but failed to provide Compass with the court order of liquidation. Hospitality only placed Compass in possession of the court order a while after the performance guarantee had expired. Hospitality argued that the courts do not favour strict compliance with the wording of a performance guarantee, as they do with suretyship agreements, and the court a quo decided in its favour.

The Supreme Court of Appeal however did not agree, as the requirements for the payment of the construction guarantee were absolutely clear, and Hospitality did not comply with them at all.

“There may be cases where what is referred to as a guarantee constitutes no more than an accessory obligation. However, it is the terms of the guarantee itself that will determine its nature. The guarantee in this case is an independent contract that must be fulfilled on its terms. There is no justification for departure and indeed allowing the furnishing of the copy of the court order months after the guarantee had expired would have defeated its very purpose.”

BEWARE THE READER!

After reading the above matters, it should be noted that any person, be it an employer, contractor or a financial institution, must be careful and aware of the agreements they are putting in place. Make sure that you understand the nature of the agreement, and that it is indeed what you wish for. Construction guarantees are strictly interpreted by our courts, thus it is prudent that a party desirous of making a claim thereunder follows the requirements to the very word.