Be wary when calling up a construction guarantee

March 1st, 2023
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Millenium Aluminium and Glass Services CC and Others v Group Five Construction (Pty) Ltd and Another (SCA) (unreported case no 693/2021, 14-12-2022) (Zondi JA (Mothle JA and Nhlangulela, Salie-Hlophe and Siwendu AJJA concurring))

 

On 14 December 2022, the Supreme Court of Appeal (SCA) in Millenium Aluminium and Glass Services CC, handed down a judgment, which underpins the approach to be followed when considering whether the requirements of a construction guarantee have been followed.

Facts

Group Five Construction (Pty) Ltd (Group Five Construction) was appointed as a contractor to execute construction works in a project in Umhlanga, KwaZulu-Natal (KZN).

A portion of the works included the design, supply and installation of residential windows and shopfronts. An entity by the name of Millenium Aluminium and Glass Services CC (Millenium) was appointed as a sub-contractor by Group Five Construction through its agents Group Five Coastal (Pty) Ltd (Group Five Coastal) to execute this portion of works.

Millenium was obliged in terms of the sub-contract agreement to provide Group Five Construction with security in the form of a construction guarantee. A construction guarantee was thus issued by Constantia Insurance Company Limited (Constantia) in favour of Group Five Construction.

The construction guarantee stipulated the grounds on which Group Five Construction would be entitled to call it up, as follows:

‘4.1 A copy of a first written demand issued by the Contractor to the Subcontractor stating that payment of a sum certified by the Contractor in a payment advice has not been made in terms of the Agreement and failing such payment within seven (7) calendar days, the Contractor intends to call upon the Guarantor to make payment in terms of clause 4.2.

4.2 A first written demand issued by the Contractor to the Guarantor at the Guarantor’s domicilium citandi et executandi with a copy to the Subcontractor stating that a period of seven (7) calendar days has elapsed since the first written demand in terms of clause 4.1 and the sum certified has still not been paid; therefore the Contractor calls up this N/S Construction Guarantee and demands payment of the sum certified from the Guarantor.

4.3 A copy of the said payment advice which entitles the Contractor to receive payment in terms of the Agreement of the sum certified in clause 4.’

On 18 May 2018, Group Five Coastal acting on behalf of Group Five Construction sent a letter of demand to Millenium calling on it to make payment of the certified amount of R 12 239 967,24 within seven calendar days. The letter of demand was accompanied by a payment certificate and reconciliation statement issued by Group Five Coastal under its new trading name, Group Five KZN (Pty) Ltd (Group Five KZN).

On 28 May 2018, with no payment forthcoming from Millenium, Group Five Coastal made a payment demand to Constantia in respect of Millenium’s indebtedness. Constantia refused to make payment and subsequently Group Five Construction approached the High Court for a claim in terms of the construction guarantee.

The High Court

Group Five Construction instituted an application against Constantia and Millenium for an order directing the payment of the claimed amount in terms of the construction guarantee. The application was only opposed by Millenium on the grounds that –

  • there was no proper demand made by Group Five Construction to Constantia in accordance with the construction guarantee; and
  • the payment advice relied on did not entitle Group Five Construction to receive the payment sought on the basis that the payment certificate concerning the claimed certified amount was issued by Group Five KZN, which is not a party to the construction contract or guarantee.

The High Court rejected Millenium’s argument. The High Court took the view that Group Five KZN was the same company as Group Five Coastal as the registration number remained unchanged. The High Court held that Millenium was aware of the change of name and could not plead confusion as to the identity and source on which the demand emanated from.

In the premises, it was held that Group Five Construction had properly issued the demand to Constantia and sufficiently complied with the requirements of the construction guarantee.

Consequently, judgment was granted in favour of Group Five Construction with Millenium and its co-debtors ordered to pay or indemnify Constantia in respect of the demand made on the construction guarantee.

The SCA

The judgment of the High Court was appealed against in the SCA by Millenium.

In challenging the High Court’s decision, Millenium argued that strict compliance is the acceptable standard, which should be adhered to in respect of construction guarantee demands as is the case with a letter of credit. Millenium relied on OK Bazaars (1929) Ltd v Standard Bank of South Africa Ltd 2002 (3) SA 688 (SCA) and Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd and Others 2010 (2) SA 86 (SCA). In these cases, the SCA underscored the need for strict compliance with the requirements of demand guarantees.

Millenium’s main contention remained that the absence of the name of a party to the construction guarantee on the payment certificate and reconciliation statement rendered the demand process followed by Group Five Construction as defective and non-compliant with the requirements for calling up the construction guarantee.

The SCA had to consider the interpretation of the demand guarantee and whether there had been compliance with the requirements and in circumstances where a party, which made the demand was distinct to that which issued a payment certificate and reconciliation statement.

The SCA in a taking a standpoint on the necessity of strict compliance relied on recent judgments of the SCA wherein an approach was adopted which considered the interpretation of a particular guarantee. The approach encourages an assessment into whether compliance has been achieved notwithstanding prevailing circumstances. This approach seems to deviate from the narrow and unbending principle of strict compliance and looks to determine whether the necessary steps have been followed without giving much attention to trivial technicalities.

The SCA in making its decision confirmed the High Court’s view that Group Five KZN remained the same company as Group Five Coastal. Group Five Coastal was listed as a party acting on behalf of Group Five Construction in the construction guarantee. The identity of Group Five Construction acting through its agents Group Five Coastal/Group Five KZN was clear to Constantia and Millenium. The content and nature of the demand made for payment made it clear as to who the source of the demand is, the relevant role players in the contract and what the demand related to.

The SCA thus held that Group Five Construction had properly issued the demand to Constantia in terms of the construction guarantee, notwithstanding the issues concerning the name change. The SCA further held that all the requirements of the guarantee had been fulfilled.

Conclusion

This SCA judgment underpins the approach followed in relation to a dispute concerning compliance with the terms of a construction guarantee. This judgment arguably imposes an additional duty on guarantors to assess compliance subject to the interpretation of that particular construction guarantee – which may be tricky. This requires guarantors in circumstances where a demand may be found wanting, to consider whether the defect is such that it cannot be reconciled with the requirements of the guarantee or is simply a minor technicality, which does not render the demand process defective and ultimately non-compliant.

That said, to err on the side of caution, contractors need to be wary of how they formulate their written demands and ensure that the demands comply with the terms of the construction guarantee as far as possible. Where the content of the letter is attacked for lack of conformity and compliance, that demand may be prone to rejection due to non-compliance.

Sechaba Mchunu LLB (UKZN) is a legal practitioner and member of the Johannesburg Society of Advocates in Johannesburg.

This article was first published in De Rebus in 2023 (March) DR 24.

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