Construction Law – Calling up Guarantees…or are they Suretyships?

Insurers, guarantors, contractors and employers should take note of two recent judgments from the Supreme Court of Appeal developing the law governing Construction Guarantees.

The first, Dormell Properties 282 Cc V Renasa Insurance Co Ltd And Others is a matter where the employer made a claim on the guarantee against the guarantor, following upon the employer’s cancellation of the building contract on the grounds of the contractor’s alleged breach of contract.

The guarantor refused to pay the guaranteed amount and the employer instituted action in a High Court against both the guarantor and the contractor for payment of the guaranteed amount. The court found against the employer.

In an appeal to the Supreme Court of Appeal by the employer it was held that the employer had properly demanded payment of the guaranteed amount and that payment should, in terms of the guarantee, have been effected within seven days of demand.

It appeared, however, that subsequent to the judgment in the High Court, the dispute between the employer and the contractor had been the subject of an arbitration in which it had been found that the appellant had not been entitled to cancel the building contract.

New evidence during appeal regarding the arbitration and its outcome was allowed which also convinced the Court that in the circumstances it would amount to an academic exercise without practical effect if the employer were to be granted the order it sought. The employer would immediately have to repay the full amount to the guarantor or the contractor. Such an order would, at best, cause additional cost and inconvenience to the parties, without any practical effect. It was held further that in terms of the Supreme Court Act 59 of 1959, the court should exercise its discretion against the employer. The Appeal was dismissed.

The second case is Minister of Transport and Public Works, Western Cape v Zanbuild Construction. In this matter the Department of Transport and Public Works contracted with Zanbuild to construct two pathology laboratories. Following certain issues with the work, the department supposedly cancelled the construction contracts. Zanbuild accepted the cancellation as a repudiation by the department and the contracts came to an end before the projects could be completed. The department then demanded payment from the bank that had issued two construction guarantees at the behest of Zanbuild.

The department did not allege or contend that it had an recognizable monetary claim against Zanbuild, but maintained that the guarantees stood independent from the construction contracts, in a manner comparable to irreversible letters of credit. The department thus merely had to claim on the basis of the event specified in the wording of the guarantee.

Zanbuild however contended that the guarantees were intimately linked to the construction contract in a manner akin to a suretyship agreement, in which case the bank’s liability would extend only as far as the department could demonstrate a claim against Zanbuild under the construction contracts.

The Court found that the language of the guarantees in this particular case was similar to language normally associated with suretyships, and that, construing the guarantees as a whole, they gave rise to liability on the part of the bank of the same kind as suretyships.

The Court also found that the guarantees contained a provision that reserved the right to the bank to withdraw from the guarantees after 30 days’ notice. The provision expressly limited the liability of the bank to the amount owing by the contractor under the construction contract. The bank’s liability in terms of this provision was clearly similar to that of a surety.

The Court also found that the 30 days’ notice provision was one typically found in suretyships for an indefinite period. The surety’s liability for amounts owing by the principal debtor before expiry of the period remained unaffected. The bank remained liable, as it always was during the currency of the guarantee, for the amounts due to the employer by the contractor under the construction contracts. Since the department had established no amount due to it by Zanbuild during the currency of the guarantees, it was not entitled to demand payment under the guarantees from the bank

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.

Construction Law – Final Certification and Defences thereto

The issuing of a final certificate in terms of a building contract carries with it certain legal consequences for Employers and Principle Agents (normally Architects, Quantity Surveyors or Engineers). In the case of Ocean Diners (Pty) Ltd V Golden Hill Construction the Court clarified the legal position.

These consequences depend in the first instance on the proper interpretation of the applicable contractual terms. Where a building agreement provides that a final certificate shall constitute conclusive evidence as to the sufficiency of the works and materials, as well as of the value thereof, it is determinative of the respective rights and obligations of the parties in relation to matters covered by the certificate. The certificate therefore constitutes (in the absence of a valid defence) conclusive evidence of the value of the works and the amount due to the contractor.

STATUS OF THE FINAL CERTIFICATE

The Court found that the certificate embodies a binding obligation on the part of the employer to pay that amount and gives rise to a new cause of action (subject to the terms of the contract). The failure of the employer to make payment as contractually stipulated entitles the contractor to sue on the certificate.

If the effect of a building contract is to confer finality upon a certificate validly issued, it cannot be withdrawn or cancelled by an architect in order to correct mistakes of fact or value in it, unless the contract provides for it, alternatively such an arrangement is agreed to by the parties.

Therefore, once the architect has issued the final certificate, he is functus officio insofar as the certificate and matters pertaining thereto are concerned. That being so, the architect cannot withdraw or cancel the final certificate.

A final certificate is not even open to attack because it was produced on erroneous reports of the agent of the employer or the negligence of the employer’s architect. The failure of the employer’s professional team to properly scrutinise the claims put forward by the contractor and to rectify any errors, or their possible negligence in failing to satisfy themselves as to the correctness of the claims and valuations before issuing the certificate, will accordingly not provide a defence to an action on the certificate. It can also not provide a basis for the cancellation or withdrawal of the certificate by the architect.

PUBLIC POLICY

An undertaking by an employer in a building contract that a final certificate shall be conclusive evidence of the employer’s indebtedness is not in the least offensive to public policy. A party may also contractually agree to abandon his ordinary right to prove that an admission was wrongly made (on his behalf by his principle agent). Such a contractual term is not in itself against public policy.

The purpose of such a clause is to bring about finality in the respective rights and obligations of the parties. It also obviates the need for litigation over what are likely to be minor issues. To ensure this, the parties contractually bind themselves to accept as final and conclusive the certificate of a professional person they are entitled to expect will act fairly and impartially. Its provisions cannot therefore be said to be contrary to public considerations.

POSSIBLE DEFENCES TO THE CERTIFICATE

The certificate is, however, not indefensible. It is subject to all defences that may be raised in an action based on a final certificate. Any defence available to the employer, or on which the employer seeks to rely, ought to be pleaded.

All authorities indicate that negligent or innocent misrepresentation (relating to an architect’s certificate) would not be a valid defence to a claim on a final certificate. Possible defences to the certificate would be limited to considerations offensive to public policy, such as fraud.

EMPLOYER’S RIGHTS

When it is known that the final certificate is not entirely accurate in relation to either the valuation reflected therein or the amount due to the contractor, it would not be contrary to public policy to enforce it. Public policy is largely concerned with the potential for manifest unfairness or injustice within a given situation.

Where the employer has suffered damage through a negligent failure on the part of either his quantity surveyor or architect to act in his best interests, he would (subject to prescription) have an action for damages against the specific member of the professional team. The situation where the certificate is known to be inaccurate is therefore not one inherently fraught with unfairness or injustice as far as the employer is concerned.

Construction Law – Contractor’s Lien and the Bona Fide Possessor

A lien can be described as the common law right of retention of property to secure payment for its improvement.  In a construction dispute, it is often available to the contractor to secure payment for work executed on a building site where the employer fails to make payment for building work executed.

This general principle was discussed and clarified in the recent case of Builder’s Depot cc v Damian. The matter was heard in the High Court on appeal from the Magistrates Court and, importantly, clarifies the legal position where property is transferred to a bona fide third party whilst the contractor is in possession and exercising its lien.

Background

Builder’s Depot alleged that it had performed building works for one Yan Bin Wu, the owner of a property, who failed to make payment therefore. The Builder’s Depot accordingly exercised its builder’s lien by taking possession of the property, locking it and proceeding to institute action against Wu.

In due course, a warrant of execution was obtained and the Sheriff was instructed by Builder’s Depot to sell the property in execution. The property was attached by the Sheriff during February 2010.

A bond was registered over the property in favour of ABSA Bank Limited, who also obtained a judgment against Wu. A second warrant of execution was issued instructing the same Sheriff to sell the property on ABSA’s behalf. The property was again attached during August 2010. Builder’s Depot was not aware of the second warrant of execution against Wu.

The Sheriff issued a notice which referred to the case number of the matter where ABSA obtained judgment against Wu. The Sheriff, who intended to sell the property on behalf and for the benefit of both Builder’s Depot and ABSA, sold the property in execution to Damian on 28 October 2010. Builder’s Depot gained knowledge of the sale on the same day.

Builder’s Depot’s attorney subsequently advised the Sheriff that Builder’s Depot was in possession of the property and that it intended to retain possession until the full amount of its judgment debt had been paid.

After the sale in execution the locks were changed and Damian gained access to the property. This caused Builder’s Depot to believe that its peaceful and undisturbed possession of the property had been lost and that it was entitled to a Spoliation order against Damian. Builder’s Depot claimed that the spoliator was Damian, and not the Sheriff.

The Conditions of the Sale in Execution contained a clause which read as follows:

“The property may be taken possession of immediately after payment of the initial deposit, and shall after payment be at risk and profit of the purchaser.”

The Sheriff accordingly advised Damian that possession of the property could be taken immediately after the necessary payments had been made.

The Court found that there was no evidence that Builder’s Depot was in possession of the property at the time when Damian took possession of the property. Prior to the letter received by the Sherrif from Builder’s Depot’s Attorney, nothing indicated that it had possession of the property and that it had obtained the judgment whilst exercising a builder’s lien. Builder’s Depot also did not allege that Damian was aware of its possession of the property. Builder’s Depot accepted that Damian obtained possession in a bona fide manner which it derived from the Sheriff’s actions following the sale in execution.

In terms of the Rules of Court it is not a requirement that the Sheriff must take immovable property into his possession. The property is attached by notice as prescribed by the Rules and, as such, does not dispossess the possessor.  The Conditions of the Sale in Execution required and obliged the Sheriff to give possession of the property to Damian once all payments had been received.

The Court determined that Builder’s Depot had lost its possession on the day the Sheriff sold the property in execution (28 October 2010) by accepting payment from Damian and by authorising the latter to take possession of the property by changing the locks. The Court also ruled that the Sheriff was not taking the law into his own hands and that he was bona fide when he gave possession of the property to Damian. Thus possession of the property passed onto a bona fide possessor. The Sheriff also acted on ABSA’s instructions to sell the property in execution and, knowing of Builder’s Depot’s claim, had the intention that it would also benefit from the sale.

If the Sheriff had dispossessed Builder’s Depot in a mala fide manner, the question arises whether a Spoliation Order could be granted against him. The current position seems to be that a Spoliation Order cannot be granted where possession has passed to a bona fide third party.

The Court ordered that a Spoliation Order cannot be granted against a spoliator who has given possession to a bona fide possessor.  It also ruled that Builder’s Depot cannot seek the return of the property from the bona fide third party. Damian did not take the law into his own hands, was entitled to remain in possession and did not perform an act of spoliation.  The Appeal was dismissed with costs in favour of Damien.

 

Insurance Law – Removal or Weakening of Support, Collapse or Cracking of Structures

In the case of Hypercheck (Pty) Ltd v Mutual And Federal Insurance Company Ltd the Court assessed the liability of an insurer under a property protection policy to indemnify against accidental, physical loss resulting from “any cause” but not for loss resulting from settlement, bedding down, or cracking

It was specifically provided that the policy covered:

“the buildings (constructed of brick, stone, concrete or metal on metal framework …) including landlords’ fixtures and fittings therein and thereon, plant equipment, structures and other improvements of a permanent nature, walls (except dam walls) … all the property of the insured, and if so stated in the schedule, tenants’ fixtures and fittings.”

The insured property expressly included “structures and other improvements of a permanent nature“.

The policy further that specified perils covered by the policy extended to:

“Accidental physical loss or damage to the property insured by any cause not excluded by exceptions 1 to 9 appearing below…”

The accidental damage extension in terms of the policy therefore excluded indemnification for damages arising from contingencies specified in 9 clauses. One such clause (clause 6), excluded protection in terms of the policy for loss or damage to property arising from:

“Settlement or bedding down, ground heave, collapse or cracking of structures or the removal or weakening of support to any property insured”

The experts agreed that cutting away metal fins or hangers by tenants to attach signage to the property resulted in the removal and weakening of the support structure of the awning. In these circumstances, the experts also agreed that cutting away the steel plates increased the risk of the awning collapsing, which in turn caused the collapse of the awning.

M&F repudiated liability for Hypercheck’s claim in this respect on the basis of the provisions of exception 6 of the policy.

THE ISSUE

The Court was required to assess and determine whether, in these particular circumstances the loss fell under exclusion and therefore not covered. The Court interpreted exclusion clause as follows:

LEGAL FRAMEWORK

The general principles and rules relating to the interpretation of contracts can be summarised as follows:

  1. 1.  If the language is clear, the court must give effect to the language which the parties    have themselves used in the insurance contract. The words must be given their plain,     ordinary, popular and grammatical meaning, unless this would result in absurdity, or it is   evident from the context that the parties intended the words in question to bear a    different meaning. There is no room for a more reasonable interpretation than the plain     meaning of the words themselves convey, particularly so if there is no ambiguity.
  2. 2.  In order to establish the intention of the parties, the court must look at the insurance    contract as a whole rather than at isolated expressions, bearing in mind the language of    the policy.
  3. 3.  If the meaning of a word or clause in an insurance contract is not clear, or the word or   clause is ambiguous, the contra proferentem rule is applicable. This rule requires a written document to be construed against the person who drafted it. This approach was also    followed in the case of Allianz Insurance Ltd v RHI Refractories Africa (Pty) Ltd where the    court stated that “…an exception clause is restrictively interpreted against the insurer,    because it purports to limit what would otherwise be a clear obligation to indemnify”.
  4. 4.  In addition to the contra proferentem rule, Schreiner JA pointed out in the case of Kliptown Clothing that there is also the further related rule that if a warranty is ambiguous in an insurance contract, a court should incline towards upholding a policy against forfeiture on the part of the insured.
  5. 5.  Insurance policies should also be construed in such a way as to allow for business efficacy, and in accordance with sound commercial principles.
  6. 6.  Another rule of restrictive interpretation is premised upon the principle of eiusdem generis, which holds that where it appears that the language indicates a species, words or phrases should be restrictively interpreted to mean the same species as the associated words or phrases.

HYPERCHECK’S LOSS

The policy provided that M&F was not obliged to indemnify Hypercheck against any accidental loss or damage caused by settlement or bedding down, ground heave, the collapse or cracking of structures or the removal or weakening of support to any property insured.

On the basis of a literal interpretation of the stated contingencies in exception 6, the Court was of the view that the plain and ordinary meaning of unambiguous words and phrases such as “collapse“, or “cracking of structures“, or the “removal of support“, or the “weakening of support” in relation to the awning leaves no room for a more reasonable interpretation than the words themselves convey.

The Court found that, in the absence of a distinct species or class of causes or an identifiable link of general application between the stated causes, the eiusdem generis principle cannot apply. Even though the eiusdem generis principle is a useful instrument in certain cases where a clear class or species is identified, this principle must not be utilised as a means to substitute an artificial intention for the real intention of the parties, as evidenced by the plain language used.

CONCLUSION

In these circumstances, the accidental loss and damages sustained by Hypercheck fall within the provisions of exception 6 and was therefore not indemnified.

Sandra Bester – Associate

 012 346 1278 

 sandra@markraminc.co.za
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Sandra was admitted as an attorney in May 2011. She obtained her LLB degree cum laude and qualified for the Dean’s List of Merit for each year of her studies.  During her articles of clerkship she gained experience in general and commercial litigation.  She is now focussing on medical law.

Amanda Strauss – Professional Assistant

 012 346 1278 

 amanda@markraminc.co.za
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Amanda was admitted as an attorney in September 2011.  She shows a special interest in the JBCC suite of agreements and is often commended for her proficiency in document management skills in major matters.  She was involved recently in the successful conclusion of a major JBCC contract arbitration (with a value of R30 million).  

Alternative Dispute Resolution – Extinctive Prescription in Arbitration

Arbitration plays a major role in the construction industry as alternative dispute mechanism. Section 13(1)(f) of the Act states that the completion of prescription will be delayed if the debt is the object of a dispute subjected to arbitration.

What is a Reference to Arbitration?

In Murray & Roberts Construction (Cape) (Pty) Ltd v Upington Municipality 1982 3 SA 385 (NC) it was held that the referral to an engineer (in terms of a written agreement between the plaintiff and the defendant) was also “a dispute subjected to arbitration” for purposes of Section 13(1)(f) of the Act. This decision was upheld in the Appellant Division. It therefore follows that the completion of prescription was delayed until one year after the arbitration proceedings came to an end.

Proceeding with the Arbitration

It should also be noted that the mere existence of an agreement between parties for disputes between them to be referred to and decided by arbitration does not suffice for the purposes of delaying the running of prescription and that the words “subjected to arbitration” means that the parties are required to refer disputes to arbitration and to actually proceed with the arbitration proceedings.

Judgement Debt

In Primavera Construction SA v Government of Northwest Province & another 2003 (3) SA 579 (BPD) the settlement agreement and the resultant Court Order provided, inter alia, that the award by the arbitrator would operate as an Order of Court.

The arbitrator’s award therefore acquired the status of a judgment debt for purposes of Section 11(a)(2) of the Prescription Act, which meant that a 30 year prescriptive period would be applicable to the award.

 

Construction Law – Time-Barring Clauses…What is Reasonable and Fair?

In the construction and engineering industry time-barring provisions are often included as part of the standard terms in construction agreements. These provisions often require “strict” compliance with time periods and hold significant sanction which may impact adversely on claims or other entitlements under such agreements.  Contracting parties often query the fairness and reasonableness of such provisions once they face the consequences of being time-barred.

Our Courts have clarified the legal position in respect of clauses of this nature in the case of Barkhuizen v Napier. The brief facts of the case are:

1. Two years after Napier rejected Barkhuizen’s insurance claim, Barkhuizen issued a summons for payment in respect of what he regarded as “an insured event”;

2. Napier stated in its defence that it was not liable as Barkhuizen had failed to issue the summons timeously. Napier argued that the contract contained a specific provision that required Barkhuizen to issue a summons within 90 days from the date on which Napier rejected Barkhuizen’s insurance claim and that his failure to do so effectively time-barred him from enforcing any perceived entitlements;

3. Barkhuizen’s counter argument was that the time-barring clause was unconstitutional and unenforceable because it violated his right under the Constitution of the Republic of South Africa to have the matter determined by a Court.

Initial Ruling

The High Court initially upheld Barkhuizen’s contention and declared the time-limitation clause to be inconsistent with the Constitution and dismissed the Napier’s defence.

Court of Appeal

However, the Supreme Court of Appeal ruled that Section 34 of the Constitution did not prevent time-limitation provisions in contracts that were entered into freely. Although it found that, on the evidence, it could not determine whether the clause under consideration had been entered into freely and voluntarily, the Court nevertheless upheld Napier’s argument and excused the insurer from all liability.

Constitutional Court

Barkhuizen then approached the Constitutional Court for leave to appeal against the decision of the Supreme Court of Appeal. In response, Napier’s arguments included that the provisions of Section 34 of the Constitution could not be applied to constitutional challenges launched against agreed contractual terms.

The Constitutional Court held that public policy considerations should be evaluated to decide whether or not a contractual term which violates the Constitution and, as such, is contrary to public policy and thus unenforceable.  The Court held that the correct approach to constitutional challenges of this nature was to determine whether the term itself was contrary to public policy and South Africa’s constitutional values, in particular, those found in the Bill of Rights.  The Court held that Section 34 not only reflected the basic values that underlie the constitutional order, but that it also constituted a manifestation of public policy. The proper approach to the present matter was therefore to determine whether the time-limitation clause violated Section 34 of the Constitution and was thus contrary to public policy.

The Court held that, as a matter of public policy (subject to considerations of reasonableness and fairness) time-limitation clauses in contracts are indeed constitutionally allowable. The Court held further that the right to seek judicial redress (as guaranteed by Section 34) may be limited in circumstances where:

1. It is allowable by a law of general application; and

2. Such a limitation would be reasonable and justifiable.

Reasonableness

The test for reasonableness, the Court found, was whether or not the clause afforded the claimant an adequate and fair opportunity to seek judicial redress. If a contractual term provides, for instance, for an impossibly short time for a dispute to be referred to forum where it may be resolved, it may be contrary to public policy and unenforceable.

Fairness

The Court set out a two-pronged test to be applied in order to evaluate such provisions in respect of fairness.  The first was whether the clause itself was unreasonable. This entails a weighing-up of the principle of pacta sunt servanda and the right of all persons to seek judicial redress. If the clause was found not to be unreasonable, then the further requirement is evaluated.

The second requirement was whether or not the circumstances that prevented compliance provided the defaulting party with a justified excuse for its non-compliance with the time-barring provision. Satisfaction of this requirement requires proof by the defaulting party that it has good reason for its failure to observe the requirements of the time-limitation clause. In that regard, the relative equality or inequality of the bargaining positions of the parties is a relevant consideration.

In Barkhuizen’s case, the Court found that the ninety-day time limitation was not manifestly unreasonable. It was also held not to be manifestly unfair. There was no evidence that the contract had not been concluded freely between parties in equal bargaining positions. There was also no evidence that the clause had not been drawn to the applicant’s attention. In the circumstances, enforcement of the clause would not be contrary to public policy.

One of the specific requirements that Barkhuizen failed to address (which the Court regarded as inexcusable) was his failure to explain and motivate his non-compliance with the requirements of the time-limitation clause. His failure to do so placed the Court in a position where it could not evaluate whether or not the application of the clause would be unfair and, consequently contrary to public policy.

While the Constitutional Court, in this specific instance, found that the time-limiting clause was not in conflict with public policy considerations and that it was necessary to recognise the doctrine of pacta sunt servanda, the Court acknowledged that it may decline the enforcement of a time-limitation clause if its implementation would result in unfairness or would be unreasonable for being contrary to public policy.

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Construction Law – Reservation of Ownership Clause – JBCC Lump Sum Building Contract

In the Judgment of A D Pellow NO & S Williams NO vs Club Refrigeration CC the Supreme Court of Appeal had to consider the effect of a reservation of ownership clause in a contract between a building contractor and an employer that became insolvent prior to the works being completed.

The contractor submitted a tender that was accepted by the employer, of which certain clauses relevant to this article read as follows:

PRICES

Fixed price for all items as specified R10 991 000.00

PAYMENT TERMS

Interim progress payments during the site work schedule to up to 90% of the contract price, 10% on completion and before commercial use.

ACCEPTANCE

The price is fixed for a period of 28 days from the date of quotation.  All items of equipment remain the property of Club Refrigeration CC until they are paid for in full.

CONTRACT TERMS

As per JBCC principle building agreement, code 2101, July 2000

The employer was liquidated before the final outstanding amount due to Club was paid and Club submitted a claim consisting of movable goods.  Club’s claim was based on it’s ownership of the goods and not for payment in terms of the contract.

Afgri Operations Limited purchased the goods after the liquidators, Club and a third party who laid claim to the goods signed an agreement whereby they agreed that the proceeds of the sale will be held by the liquidators until a Court determined who was entitled thereto.

The liquidators (the Appellants) opposed the claim on inter alia the following grounds:-

  1. The contract between the employer and Club contained no reservation of ownership clause and that the JBCC agreement alone governed the contract between them, referring to clause 1.8 of the JBCC which stipulates that “This agreement is the entire contract between the parties…”, thus arguing that Club’s tender document did not form part of the agreement between Club and the employer;
  2. That since the contract was a lump sum contract, there was no mechanism whereby it could be determined which portion of the contract price pertained to which movable assets;
  3. That the value of the goods was not specified in a payment certificate and therefore Club was not entitled to payment in terms of the JBCC agreement.

On the first argument the Court found that Club’s tender was incorporated into the JBCC agreement.  Following Club’s tender submission it received a document entitled “Order” from the employer confirming acceptance of the tender, with various requirements. The order document defined “Agreement” to include the JBCC agreement and other contract documents; the definition of “Contract documents” included the lump sum document and other documents identified in the schedule.  The Court found that the tender document was attached to the employer’s order where it was referred to as a “lump sum document” in the schedule and the definition of “lump sum document” in the order document referred to the document that reflected the contract sum.

The second argument was also found to be inaccurate since the JBCC agreement provides in clause 31.4 that a reasonable estimate of the value of the work executed and value of materials and goods be separately specified in an interim payment certificate.  Further, in terms of clause 31.7 (which corresponds with the Acceptance clause above in the tender) the contractor remains the owner of goods until paid for and clause 31.9 provides that the employer becomes the owner once the goods are paid for.

The Court also rejected the third argument since Club did not rely on the JBCC agreement but on the agreement which it signed with the liquidators and a third party prior to the application being brought when the goods were sold to Afgri Operations Limited.

In its judgment the Court recognised that Club’s claim was based on its ownership of the goods and that it was therefore entitled to payment of the proceeds of the sale held by the liquidators since the goods never formed part of the employer’s assets in the first place.

Although the agreement between the employer and Club was a lump sum agreement, the order of the employer specifically required that payments be made in terms of the JBCC agreement and therefore it was possible to determine the value of the goods Club was not paid for.

The Court accordingly found in the contractor’s favour dismissed the appeal.

By specifying in its tender that unpaid items of equipment remained its property and incorporating the JBCC agreement into the contract with the employer, Club reserved ownership of the movable goods the employer failed to pay for due to it being liquidated.

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Insurance Law – Rejection of Claims…The Design Standard

Construction claims, the formulation of Insurance claims and the rejection thereof by Insurers have become one of the oldest battles in the Engineering and Construction industry.  This conflict has, to some extent, been the result of the difference between the risks being insured against in terms of Insurance contracts on the one hand, and the actual risks in Construction on the other.  What may be expected by Engineers and Contractors from Insurers when a claim is made and to what extent should the duties under the Construction contract be taken into consideration by their Insurers?

These issues were recently addressed by the Supreme Court of Appeal in the case of Mutual & Federal Limited vs. Rumdel Construction (Pty) Ltd.  The Court delivered a unanimous full bench decision in matter.

BACKGROUND

The background facts of the case are briefly as follows:

  • During the week of 21 to 28 February 1997 tropical cyclone Lizette struck in the Nampula Province in Mozambique.  The cyclone severely damaged various roads that Rumdel Construction had constructed and was about to hand over to its employer, the Mozambique Directorate of National Roads and Bridges.
  • Damage caused by the storm led to an insurance claim by the contractor which Mutual & Federal rejected.
  • The Insurer was unsuccessful in the High Court and was ordered to pay R2,500,000 in addition to what ever value added tax might have been paid by the contractor.
  • The Insurer then turned to the Supreme Court of Appeal and filed an appeal against this judgment.

THE CONTRACTOR’s ARGUMENT

The Contractor claimed under the Insurance policy for the repair cost of 101,88 kilometres of road that had sustained storm damage.  It argued that Insurers were obliged to indemnify both the contractor and the employer in respect of fortuitous physical destruction of or damage to the works that had to be undertaken by the contractor.  The Policy wording stated, inter alia, that:

“The company hereby agrees … that if … any part of the property Insured shall be lost destroyed or damaged as referred to in Part 1 hereof … the company will indemnify the Insured as provided herein after.”

Part 1 describes the indemnity:

“The company will … indemnify the Insured in respect of fortuitous physical loss or destruction of the property insured … whilst at the situation of the contract.”

The property insured was described in the schedule to the Insurance contract as:

“… opening of rural gravel roads and rehabilitation and construction of bridges in Nampula Province”.

THE INSURER’s ARGUMENT

The Insurer based its defence on two arguments, the first of which relates to a contractual interpretation.  The second argument was that the word “design” was used in the policy to indicate that the roads had to be fit for their intended purpose.

To further this rationale, the Insurer’s expert on road construction testified that various aspects of the design and construction of the road were “not fit for purpose”.  It was explained that various engineering principles were not incorporated into the design.  Flood returns had for instance to be calculated and incorporated into the design.  It was argued that, only if the design had incorporated the fundamental engineering principles, would the design not have been defective.

The evidence was presented on the basis that the Insurer’s obligation to indemnify the contractor was subject to the special exceptions contained in the insurance policy:

“The indemnity expressed in this part shall not apply or include:

4.  Loss destruction or damage to:-

…acts of the Insured or his competent or authorized agent or representative which are contrary to the recognized rules of engineering or to any legislation or regulations issued by an authority…

5. …defective design.”

THE COURT’s APPROACH

As the Insurer’s argument focussed on the suitability of the roads for their intended purpose, the court assessed the intended purpose of the roads as defined in the Construction contract.

It was clear that the employer required completion of the project for the emergency opening of roads in the particular Province.  It was intended that, what remained of the road links in the Province after the Civil War, should be rehabilitated.

The court also found that it was agreed between the parties that the essential characteristics of the roads were low cost, high risk, high maintenance, low volume and all weather roads.  The main purpose of the roads was “to get the people out of the mud”.  The roads were accordingly built to a design philosophy of “as low as you can go for a public road”.  The roads were also meant to be degraded by the weather and repaired and maintained on a regular basis.

Having established the purpose of the roads, the court re-visited the Insurer’s argument in relation to the design of the roads.  It was found that, in effect, the Insurer’s argument before the court was that, if the contractor hoped to be entitled to an indemnity under the policy, it was not good enough for it to construct, the works to the requirements and satisfaction of the employer.  It had to construct the works to the satisfaction of the Insurer.  There was no acceptable evidence before the court that the roads were in fact poorly designed.

There was also no suggestion that the Insurer did not know the nature of the unsophisticated contract works it was insuring.

The court would not allow the Insurer to, ex post facto and as a prerequisite to accepting liability, demand that the roads should have been of ‘n higher quality than the employer was prepared to pay for.  The contention by the Insurer that the design of the contract works was defective accordingly failed.  The Insurer was ordered to pay the Contractor’s claim.

CONCLUSION

Engineers and Contractors must ensure that their Insurers are made aware of the nature of the Construction contract (including the standard of design required in terms thereof) for which insurance is required.  Insurers must be placed in a position where it can assess the nature of the works and risks it is insuring.

Insurers should similarly have due regard to the standard of design required in terms of the particular Construction contract.  Insurers should also take these aspects into consideration when assessing claims under the Insurance contract.

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Amelia Markram – Director


 +27 12 346 1278


 082 410 7369

 amelia@markraminc.co.za 
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Amelia joined Markram Inc in 2010 after practising as partner in a property practice in Johannesburg for 9 years.  She holds three degrees, including a masters degree in Law of Contract. 

She is a conveyancer with experience in a wide range of property work.  Amelia heads up the firm’s property practice and has a strong focus on Contract and Property Development advice.

Contract Law – Suspensive Conditions – Fulfillment or Waiver?

In the recent matter of Aeterno Investments 216 (Pty) Ltd v Ramashala 2011 JDR 0657 (GNP), the applicant succeeded with an application for an order declaring an agreement of sale of immovable property to be valid and binding in circumstances where the respondent alleged that the agreement had lapsed.    A discussion of the judgement follows.

Ramashala (“the respondent”) sold a property for R 4 000 000,00 on 17 June 2007.  The signatory to the agreement (on behalf of the purchaser) signed “as trustee for a company to be formed or nominated” and subsequently nominated Aeterno Investments 216 (Pty) Ltd (“the applicant”) to take transfer of the property. 

The agreement was subject to the condition that the applicant “shall succeed in raising a loan” for the full purchase price within 30 days from 17 June 2007, failing which the agreement shall lapse.

The applicant showed that Standard Bank advised it in writing on 11 July 2007 that its application for a loan of R 2 800 000,00 had been approved. 

The directors of the applicant then passed a resolution accepting the nomination, authorising the signatory to act as its representative and waiving the benefit of the suspensive condition.

One of the directors of the applicant (“Pelser”), agreed to advance the shortfall of R 1 200 000,00 plus the costs of transfer to the applicant.   A letter was issued by Standard Bank on 25 October 2007 (well after any relevant date) confirming Pelser’s affordability to honour the loan to the applicant.

On 16 June 2007, one day before the date on which the suspensive condition had to be fulfilled, the applicant’s attorney (“Uys”) telephoned the respondent and they discussed the matter in some detail (it was, however, unclear whether Uys advised the respondent in clear terms that the applicant had waived the benefit of the suspensive condition).

Two days later the applicant’s attorney wrote a letter to the respondent recording that –

  • a loan of R 2 800 000,00 had been granted, that the applicant had waived the benefit of the suspensive condition and that the applicant was ready to proceed with the agreement, issue guarantees for the full purchase price and pay the costs 
  • the respondent advised Uys telephonically of his intention not to proceed with the sale and that the applicant regarded his statement as a repudiation which the applicant did not accept. 

In response to certain aspects raised by the respondent in his answering affidavit, Preller J commented as follows:

  • regard should be had to the fact that the wording of the suspensive condition did not require the loan to be granted by a bank – all that was required was that the applicant “should succeed in raising a loan”;
  • the applicant did not communicate its waiver or the fact that he had secured an additional loan to the respondent in writing,  but that this failure was of no import.  The agreement required any notice “referred to in this agreement” to be in writing, but neither of the two  absent notices were required contractually;
  • the fact that the letter confirming Pelser’s affordability was well out of time was, again, of no relevance.  The letter merely purported to confirm Pelser’s financial standing and had nothing to do with the fulfilment of the suspensive condition.

Preller J identified two issues on which the dispute turned:

  1. Whether the suspensive condition in the contract had been fulfilled; and if not,
  2. Whether the purchaser had waived the benefit thereof and whether it was entitled to do so.

In considering the first question, Preller J relied on the  rule of interpretation  that, when a suspensive condition with a time limit is included in a contract, the time limit is usually intended to be for the benefit of the seller, while a condition requiring a loan to be obtained is usually for the benefit of the purchaser.  He quoted Marais J in Van Jaarsveld v Coetzee, 1973 (3) SA 241 (A) as saying “… it seems to me that the respondents had no interest in from what source or against what security the money was obtained”.

In response to the second question, Preller J referred to the principle as spelled out by Innes CJ in Mutual Life Insurance of New York v Ingle, 1919 TPD 540 at 55, which, as far as he could tell, was still the current accepted position:  “When the intention to renounce is expressly communicated to the person affected he is entitled to act upon it, and the right is gone.  When the renunciation, though not communicated, is evidenced by conduct inconsistent with the enforcement of the right, or clearly showing an intention to surrender it, then also the intention may be acted upon, and the right perishes”.  The legal position was thus clearly that the applicant was entitled to waive the rights afforded to it unilaterally provided that it communicated its waiver (either expressly or by its conduct) prior to the expiry of the fulfilment period.

In casu it was common cause that:

  • The full purchase price had been secured by loans (one from Standard Bank and one from Pelser);
  • The respondent was advised verbally, and before the expiry of the fulfilment period, that a loan had been granted, that the purchase price and costs were available and that the required guarantees could be issued.

These facts all constituted conduct clearly indicating a surrender of the right to walk away from the agreement and the respondent was aware thereof.

The respondent was ordered to furnish such information and documents  and to sign all necessary documents required to effect transfer of the property to the applicant and was ordered to pay the costs of the application.

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Alternative Dispute Resolution

Construction and Engineering disputes are often complex. The complexity arises not only from intricate contractual terms and relationships, but also sophisticated technical facts, all of which must be understood and analysed.

These matters often involve large volumes of documentation to be assessed in order to develop a comprehensive and accurate factual matrix for evaluation.

Disputes in the Construction and Engineering fields may be handled through the conventional litigation processes, but are often the subject of arbitration agreements. Parties to construction agreements usually anticipate that disputes arising from a construction contract would be significant and therefore provide for the use of alternative dispute resolution procedures such as arbitration, mediation or adjudication. This allows a party to state its case to a presiding officer with suitable technical expertise.

We are uniquely placed to provide clients with professional service in this regard.

Our recent exposure includes:

    • Acting for a prominent property developer in a payment dispute against a JSE listed contractor concerning a high end apartment development in Sandton, Johannesburg (claim value of R 30 million).

Engineering Law

Engineering law includes product and design failures.  The assessment of the root cause of failures is, in most cases, a critical aspect of our work. Our specific expertise allow us to assist clients with innovative and often unique solutions to these challenges.  We also work closely with highly skilled local and international technical experts.

The impact of the new Consumer Protection Act is now also part of the legal considerations to be taken into account in matters of this nature. 

Some of our recent engineering law exposure includes: 

  • The successful resolution of a claim concerning the collapse of a tubular space-frame structure in the Saldanha harbour on behalf of a major International (German) manufacturer and its insurer (claim value of R 210 million);
  • The successful resolution of a claim against a fire engineering consultant and its insurer concerning the total destruction of a building (claim value of R 170 million);
  • Acting for a chemical manufacturer and supplier and its insurer in defence of a claim related to the alleged failure of a six hectare concrete warehouse floor (claim value of R 17 million);
  • Acting for a chemical manufacturer and supplier in defence of a claim concerning alleged product deficiencies incorporated into catalyst products used in the motoring industry (claim value of R 18 million); and
  • The successful resolution of a claim against a major International Authorised Inspection and Certification Agent concerning the alleged failure of pressure vessel equipment used by a global brewery in Morocco, Benin and Burkina Faso (claim value of R 12 million).

Hendrik Markram – Director

 +27 12 346 1278


+27 83 675 3458

 hendrik@markraminc.co.za 
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Hendrik is a qualified Civil Engineer who completed his legal studies while working as Engineer.  He completed his articles at one of the largest law firms in the country and practised at the same firm for four years as a construction lawyer.  He soon recognised that specialist legal services offer significant benefit to clients and, with this in mind, founded Markram Inc in 2005. 

He is a Construction and Engineering Law specialist. He is involved in the formulation of significant delay and disruption claims.  He also has a strong focus on all aspects of both product liability and construction insurance aspects related to his main field of practice.

Hendrik is a member of The Arbitration Federation of Southern Africa, The Chartered Institute of Arbitrators and serves on the current committee of its South African branch. He has also been appointed as a member of the Construction Industry Development Board’s panel of adjudicators for construction contracts.

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Applicants who wish to become expert attorneys and play a role in the development of our firm are welcome to submit applications online.