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HIGH COURT OF SOUTH AFRICA

(GAUTENG DIVISION, PRETORIA)

(1)     REPORTABLE: Yes.

(2)     OF INTEREST TO OTHER JUDGES: Yes.

(3)     REVISED.

 

Case no: A222/2019

In the matter between:

BOMBARDIER AFRICA ALLIANCE CONSORTIUM                                   Appellant

and

LOMBARD INSURANCE COMPANY LIMITED                                           First Respondent

PASSENGER RAIL AGENCY OF SOUTH AFRICA                                      Second Respondent

 

Case Summary:  Performance Guarantee – Interim interdict - restraining financial institution from making payment in terms of a demand guarantee pending the final determination of an action to be instituted for an order setting aside the demand for payment in terms of the guarantee – Whether prima facie right, although open to some doubt, to have the demand for payment in terms of the guarantee set aside on the grounds that the demand did not comply with the terms of the guarantee and that the fraud rule or exception finds application.     

                    

JUDGMENT

MEYER J (FOURIE and BASSON JJ concurring)

[1]        The dispute in this appeal relates to a ‘Performance Guarantee’ (the guarantee) issued by the first respondent, Lombard Insurance Company Limited (Lombard), in favour of the second respondent, Passenger Rail Agency of South Africa (PRASA), pursuant to a construction contract concluded between PRASA and the appellant, Bombardier Africa Alliance Consortium (Bombardier).  When PRASA called upon Lombard to make payment in terms of the guarantee, Bombardier unsuccessfully, by way of urgency, applied to the High Court, Gauteng Division, Pretoria (Davis J) for an interim interdict restraining Lombard from making payment to PRASA in terms of the guarantee pending the final determination of an action to be instituted by Bombardier against Lombard and PRASA for an order setting aside the demand for payment in terms of the guarantee.  The appeal to the full court is with leave of the court a quo.

[2]        On 26 March 2013, PRASA and Bombardier concluded a written contract, which was based on the standard form construction contract used internationally, in terms whereof PRASA appointed Bombardier to design, construct and implement a new railway signalling system and install centralised traffic control at the Rossburgh hub in Durban, Kwa-Zulu Natal for a contract price of R1 288 772 839.74 (the contract).  Bombardier is an unincorporated joint venture consisting of six members, namely Bombardier Transportation South Africa (Pty) Ltd, Basil Read (Pty) Ltd, ERB Technologies (Pty) Ltd, Stimela Infrastructure Management Services (Pty) Ltd, Tension Overhead Electrification (Pty) Ltd and R&H Railway Consultants (Pty) Ltd.

[3]        Clause 1.6.1 of the contract provides that it shall be valid from the signature date and shall endure for a period of five years (contract period) whereafter it shall automatically terminate, provided that the employer (PRASA) may, on notice given to the contractor (Bombardier) not less than three months prior to the expiry date of the contract period, extend the contract for a period determined by the employer, during which period the employer may terminate the contract on 90 days’ notice.  Clause 4.2.2 provides that the project will be implemented in phases within five years, wherein some of the phases may run parallel.  Bombardier was obliged to obtain (at its cost) a performance bond for its proper performance in an amount equal to 10% of the value of the contract (clause 4.3.1).  The performance bond had to be issued by an insurance company or bank registered in South Africa (clause 4.3.2). 

[4]        If a dispute (of any kind whatsoever) arose between the parties in connection with, or arising out of the contract or the execution of the works, either party could refer the dispute in writing to a Dispute Adjudication Board (DAB) as provided for in the contract for its decision (clause (20.4.1).   The DAB ‘shall be deemed not to be acting as arbitrator(s)’ (clause 20.4.3).  Its ‘decision shall be binding on both Parties, who shall promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award’ (clause 20.4.4).  ‘If either Party is dissatisfied with the DAB’s decision, then either Party may . . . give notice to the other Party of its dissatisfaction’ (clause 20.4.5).  ‘If the DAB has given its decision as to a matter in dispute to both Parties, and no notice of dissatisfaction has been given by either Party within 28 days after it received the DAB’s decision, then the decision shall become final and binding upon both Parties’ (clause 20.4.7).  ‘Unless settled amicably, any dispute in respect of which the DAB’s decision . . . has not become final and binding shall be finally settled by international arbitration’ (clause 20.6.1).  In the event ‘that neither Party has given notice of dissatisfaction . . . , the DAB’s related decision (if any) has become final and binding, and . . . a Party fails to comply with this decision, then the other Party may without prejudice to any other rights it may have, refer the failure itself to arbitration under Sub-Clause 20.6 [Arbitration].  Sub-clause 20.4 [Obtaining Dispute Adjudication Board’s Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply to this reference’ (clause 20.7).

[5]        On 26 March 2013, and in compliance with clause 4.3.1 of the contract, Lombard, at the behest of Bombardier, issued a performance guarantee in favour of PRASA for the amount of R128 8777 284.00.  That guarantee was replaced on the same terms and conditions on 28 July 2016, and again on 2 March 2018.  It is the last-mentioned guarantee, issued with number C2012/45213, which is the subject-matter of the present dispute between Bombardier and PRASA. 

[6]        In clause 2 of the performance guarantee it is stated that Lombard-

‘. . . hereby guarantees the payment to you on your first written demand of up to a maximum aggregate amount of R128 877 284.00 (One Hundred and Twenty Eight Million Eight Hundred and Seventy Seven Thousand Two Hundred and Eighty Four Rand) (the “Guarantee Amount”) in the event that the Applicant fails to fulfil any of its obligations under the Contract.’

Clauses 3 to 6 are also relevant and read thus:

‘3  The Guarantor’s liability under this guarantee is principal in nature and is not subject to any agreement.  The Guarantor’s liability shall not be reduced, or in any way be affected by any alteration of the terms of the Contract or any other arrangements between the Applicant and yourself, whether oral or in writing.

 4   The Guarantor will pay on written demand and will not determine the validity of the demand or become party to any claim or dispute of any nature which any party may allege.

5    Payment will only be made by the Guarantor against return of the original guarantee by you or your duly authorised agent.

6    This guarantee shall expire at 12:00 at the abovementioned office of the Guarantor on 26 March 2019 (“Expiry”) and any claim and statement received hereunder must be received at this office before Expiry.  After Expiry this guarantee shall become null and void, whether returned to the Guarantor for cancellation or not and any claim or statement received after Expiry shall be ineffective.’  

[7]        During the course of performing the work several disputes arose between PRASA and Bombardier.  The dispute presently relevant is one concerning the termination of the contract and whether PRASA could retain the guarantee.  PRASA contended that the contract had expired by effluxion of time.  That contention was regarded by Bombardier as a repudiation of the contract, which it then accepted and cancelled the contract.  PRASA maintained that it was entitled to retain the guarantee and demand payment under it to cover the costs of completing the work.  Bombardier, on the other hand, contended that the guarantee had to be returned to it by virtue of PRASA’s repudiation of the contract and its consequent cancellation thereof.  The reason for seeking the return of the guarantee, as appears from clause 5 thereof, is that Lombard will only pay if the demand is accompanied by the original guarantee.  Consequently, without the original guarantee PRASA would not be able to obtain payment under the guarantee.  The dispute was referred to a DAB in terms of the contract, consisting of a professional engineer and two senior counsel.

[8]        The ruling that was sought by Bombardier was that it lawfully terminated the contract on 17 October 2018, when it communicated its acceptance of PRASA’s repudiation to it and that PRASA be directed forthwith to return the original guarantee to it.  After receiving written and verbal submissions from both parties, the DAB handed down its decision on 26 February 2019, finding that Bombardier was entitled to the relief it sought (the DAB decision).  On 4 March 2019, PRASA delivered its notice of dissatisfaction with the DAB decision.  The effect thereof is that the dispute that served before the DAB had to be settled finally in arbitration proceedings, which process had not yet commenced at the time when Bombardier instituted the present application and the parties exchanged their affidavits.  We were informed by PRASA’s counsel that the DAB decision has since been set aside in the arbitration.  However, nothing turns on that fact in light of the view I take of the matter.

[9]        On 12 March 2019, PRASA demanded from Lombard that it be paid the full amount of R128 877 284 under the guarantee (the demand) and it furnished the original guarantee in support of its written demand.  The demand reads thus:

‘RE:  PRASA FIRST WRITTEN DEMAND AGAINST GUARANTEE NUMBER C/2012/45213

We hereby issue our first written demand, to the Guarantor, on Guarantee Number C/2012/45213 (“the Guarantee”), which is duly attached as Annexure A to this Letter, in accordance with our rights afforded to us under the Guarantee.

Our demand is for the amount of R128,877,284.00 (One Hundred and Twenty Eight Million Eight Hundred and Seventy Seven Thousand Two Hundred and Eighty Four Rand) which shall be paid into the following bank account: . . .

We confirm that the attached Annexure A to this Letter is the original Guarantee as required in terms of Clause 5 of the Guarantee.’

[10]      Bombardier furnished Lombard with the DAB decision and informed it that PRASA’s demand was ‘unlawful, mala fide and fraudulent’ and requested Lombard to undertake that it would not pay PRASA under the guarantee pending an urgent application to court.  PRASA, on the other hand, denied that its demand was unlawful, mala fide or fraudulent, and insisted that Lombard honour the guarantee.  It, however, undertook to Bombardier ‘not to utilise any of the funds released by Lombard Insurance Company pending the final outcome of the dispute between the parties’.  Ultimately, Lombard’s attorney advised Bombardier in writing on 20 March 2019 as follows:

‘Our instructions are to give notice, as previously undertaken, that our client will process the claim for payment and will make the payment within 2 days from the date of this letter.’

[11]      Hence the urgent application to the high court in which Bombardier inter alia sought an interim interdict restraining Lombard from making payment to PRASA in terms of the written demand dated 12 March 2019 furnished to it under the guarantee pending the final determination of an action to be instituted by Bombardier against Lombard and PRASA for an order setting aside the demand.  It contended that it had established the requite prima facie right for being granted such interim interdict on two grounds:  First, it argued that the demand is invalid since a plain reading of the demand shows that it did not comply with the terms of the guarantee, which, so it contended, requires the demand to state that Bombardier failed to fulfil its obligations under the contract.  Second, it contended that the demand was fraudulently made since PRASA knew of the DAB decision for it to forthwith hand over the original guarantee to Bombardier, that the decision was contractually binding on it, and had to be given effect to unless and until it was revised in an arbitral award.  Although PRASA knew, when it made the demand, so Bombardier contended, that it was not entitled to payment under the guarantee, it misrepresented to Lombard that it was entitled to payment under the guarantee, which misrepresentation, according to Bombardier, ‘is clear evidence of fraud’.  PRASA took issue with Bombardier’s interpretation of the guarantee, its interpretation of particularly clauses 20.4.4 and 20.7 of the contract, and its allegations that it acted fraudulently in making the demand.

[12]      In dismissing the application with costs, including those of two counsel, the court a quo applied the test for a prima facie right within the context of an interim interdict as re-affirmed by the Supreme Court of Appeal in Simon NO v Air Operations of Europe AB and others [1998] ZASCA 79; 1999 (1) SA 217 (SCA) at 228.  There it was held that-

‘[t]he accepted test for a prima facie right in the context of an interim interdict is to take the facts averred by the applicant, together with such facts set out by the respondent that are not or cannot be disputed, and to consider whether having regard to the inherent probabilities the applicant should on those facts obtain final relief at the trial.  The facts set up in contradiction by the respondent should then be considered, and if serious doubt is thrown upon the case of the applicant he cannot succeed.’

[13]      The court a quo concluded that Bombardier has failed to establish the requisite prima facie right to succeed in obtaining the interim interdict it sought:  First, so the court a quo held, the guarantee does not require that the ‘trigger event’ of non-performance or failure by Bombardier to fulfil its obligations in terms of the contract need to be stipulated in the demand nor does it require confirmation of the ‘trigger event’.  Second, after having referred to the judgment in Bombardier Africa Alliance Consortium v Passenger Rail Agency South Africa (65099/2017) [2018] ZAGPPHC 414 (18 May 2018), which was an application between the same parties to give effect to a decision of a DAB in a previous dispute between them relating to the same contract in question, wherein Nochumsohn AJ (para 27) found that ‘the mere fact that the decision is escalated to an arbitration, cannot and does not serve to suspend the operation and implementation of the decision in the face of a clear contractual term to the contrary [clause 20.4.4]’, and on which Bombardier placed much reliance, the court a quo said this (para 10.3):

‘I need not decide whether this was correct or not.  I need to decide whether a prima facie case had been made out that the failure to follow the judgment or the failure to comply with the DAB decision whilst it is the subject of an arbitration, amounted to either fraud or a mere disagreement therewith and/or a breach of the contractual terms between [Bombardier] and PRASA (as opposed to the relationship between [PRASA] and Lombard).’            

The court a quo then held (para 10.7) that-

‘. . . taking into account the autonomous nature of the guarantee and the fact that the allegations of fraud in question have not sufficiently been dealt with by [Bombardier] as set out in the Raubex Construction matter [Raubex Construction (Pty) Ltd v Bryte Insurance Company Ltd [2019] 2 All SA 322 (SCA) para 8], the presentation of the demand in this case does not fall within the “narrow compass of fraud” referred to in the Lombard Insurance Company v Landmark Holdings case [Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd and Others 2010 (2) SA 86 (SCA)] . . .’

[14]      The first requisite for an interim interdict is a prima facie right, namely prima facie proof of facts that establish the existence of a right in terms of the substantive law. (See LAWSA Vol 11 First Reissue para 317.)  In order to have succeeded in obtaining an interim order restraining Lombard to pay PRASA in terms of the guarantee, Bombardier was required to establish a prima facie right, although open to some doubt, to have the demand for payment in terms of the guarantee set aside on the grounds that the demand did not comply with the terms of the guarantee and that the fraud rule or exception finds application.   

[15]      As was said by Lewis JA in Compass Insurance Co Ltd v Hospitality Hotel Developments (Pty) Ltd 2012 (2) SA 537 (SCA) para 15-

‘. . . 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.’ 

The terms of the guarantee need to be interpreted in accordance with the established approach to the interpretation of written instruments set out in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) para 18, and approved by the Constitutional Court in Airports Company of South Africa v Big Five Duty Free (Pty) Ltd and Others 2019 (5) SA 1 (CC) para 29.  It is, as was recently concisely summarised by Wallis JA in C:SARS v United Manganese of Kalahari (Pty) Ltd (264/2019) [2020] ZASCA 16 (25 March 2020) para 8-

‘. . . an objective unitary process where consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production.  . . .  The inevitable point of departure is the language used in the provision under consideration.’

[16]      It is not disputed that the guarantee in casu is an ‘on demand’ or ‘call’ guarantee.  Lombard’s liability under the guarantee is principal in nature and is not subject to any agreement.  It will pay on written demand and will not determine the validity of the demand or become party to any claim or dispute of any nature which any party may allege.  Payment will only be made by Lombard against return of the original guarantee by PRASA or its duly authorised agent.

[17]      In a minority judgment in Dormell Properties 282 CC v Renasa Insurance Co Ltd & others NNO 2011 (1) SA 70 (SCA), Cloete JA said the following:

‘[61]  It is important to bear in mind that in cases such as the present there are three separate legal relationships:

(a)          one between the employer and the contractor, usually termed a building contract, pursuant to which the contractor undertakes to perform building works for the employer;

(b)          one between the employer and a financial institution which the employer requires the contractor to procure to protect the employer against possible default by the contractor under the building contract, which is variously called a performance guarantee, a performance bond or a construction guarantee, and in terms of which the financial institution undertakes to the employer that it will make payment to the employer on the happening of a specified event; and

(c)           one between the contractor and the financial institution for the provision by the latter of a guarantee to the employer.

The construction guarantee which the employer seeks to enforce in the present appeal is an example of the second type of contract.

[62]  In terms of clause 5 of the guarantee, the first respondent undertook to pay to the appellant the guaranteed sum “upon receipt of a first written demand” from the appellant to the first respondent at the latter’s physical address “calling on this Construction Guarantee stating that . . . The Agreement [between the appellant and the second respondent] has been cancelled due to the Contractor’s default and that the Construction Guarantee is called up in terms of 5”.  The clause further provided that “The demand shall enclose a copy of the notice of cancellation”.

[63]  The appellant complied with the provisions of clause 5.  It was not necessary for the appellant to allege that it had validly cancelled the building contract due to the second respondent’s default.  Whatever disputes there were or might have been between the appellant and the second respondent were irrelevant to the first respondent’s obligation to perform in terms of the construction guarantee.  That is clear from the passage quoted by my learned colleague in para 38 of his judgment from Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd [2010 (2) SA 86 (SCA) para 20] and Loomcraft Fabrics CC v Nedbank [1995] ZASCA 127; [1996 (1) SA 812 (A) at 815G-J], and also from the following passage in the judgment of Lord Denning MR in Edward Owen v Barclays Bank International [[1978] 1 All ER 976 (CA) at 983b-d]:

“A bank which gives a performance guarantee must honour that guarantee according to its terms.  It is not concerned in the least with the relations between the supplier and the customer; not with the question whether the supplier is in default or not.  The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions.  The only exception is where there is a clear fraud of which the bank has notice.”

[64]  Once the appellant had complied with clause 5 of the guarantee, the first respondent had no defence to a claim under the guarantee.  It still has no defence.  The fact that an arbitrator has determined that the appellant was not entitled to cancel the contract, binds the appellant – but only vis-à-vis the second respondent.  It is res inter alios acta so far as the respondent is concerned.  As the cases to which I have referred above make abundantly clear, the appellant did not have to prove that it was entitled to cancel the building contract with the second respondent as a precondition to enforcement of the guarantee given to it by the first respondent.  Nor does it have to do so now.

[65]  For these reasons, it is not in my view bad faith for an employer, who has made a proper demand in terms of a construction guarantee, to continue to insist on payment of the proceeds of the guarantee, when the basis upon which the guarantee was called up has subsequently been found in arbitration proceedings between the building owner and the contractor to have been unjustified.  I would add that the fact that the arbitrator’s award is final as between the appellant and the second respondent does not mean that it is correct, or that the appellant would have to set it aside before calling up the guarantee, much less that the appellant is acting in bad faith in seeking to enforce payment under the guarantee against the first respondent.’    

[18]      The minority decision of Cloete JA in Dormell has since been repeatedly endorsed by the Supreme Court of Appeal, inter alia in First Rand Bank Ltd v Brera Investments CC 2013 (5) SA 556 (SCA), Corface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association 2014 (2) SA 382 (SCA) and Guardrisk Insurance Company Ltd and Others v Kentz (Pty) Ltd [2014] All SA 307 (SCA).  In Brera para 26 the Supreme Court of Appeal declined to follow the majority decision in Dormell and described the minority decision as the better approach.  Malan JA expressly quoted with approval paras 64-65 of the judgment of Cloete JA.  In Corface para 25 the Supreme Court of Appeal held that the majority decision in Dormell was ‘clearly wrong’ and instead favoured the view of the minority.  And in Guardrisk the majority judgment was said to be ‘flawed’.

[19]      In Brera, Malan JA said this:

‘[2] . . . A guarantee of this nature must be paid according to its terms and liability under it is not affected by the relationship between other parties to the transactions that gave rise to its issue, particularly not with the question whether the sub-contractor performed in terms of his contract with the contractor (see Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd & others 2010 (2) SA 86 (SCA) para 38 and Minister of Transport and Public Works, Western Cape & another v Zanbuild Construction (Pty) Ltd & another 2011 (5) SA 528 (SCA) paras 11-15).  The words of the guarantee under consideration make it clear that it is not a suretyship but an independent, and not accessory, agreement that must be performed according to its terms (see also Compass Insurance Co Ltd v Hospitality Hotel Developments (Pty) Ltd 2012 (2) SA 537 (SCA) para 15).

. . .

[20]  The autonomy of letters of credit, demand guarantees, performance bonds and similar documents is well recognised (see Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd & others 2010 (2) SA 86 (SCA) paras 19 and 20).  It is only where fraud is involved that the issuing institution may decline liability.  In Sztejn v J Henry Schroder Banking Corporation (1941) 31 NYS 2d 631, a judgment concerning an irrevocable letter of credit, Shientag J formulated the ‘established fraud rule’ as follows:

“No hardship will be caused by permitting the bank to refuse payment where fraud is claimed, where the merchandise is not merely inferior in quality but consists of worthless rubbish, where the draft and the accompanying documents are in the hands of one who stands in the same position as the fraudulent seller, where the bank has been given notice of the fraud before being presented with the drafts and documents for payment, and where the bank itself does not wish to pay pending an application of the rights and obligations of the other parties.”

See also Phillips & another v Standard Bank of South Africa Ltd & others 1985 (3) SA 301 (W) at 301A-J and Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 All ER 976 (CA) at 983b-d.  No question of fraud arises in this matter.' 

[20]      In Schoeman and Others v Lombard Insurance Company Limited 2019 (5) SA 557 (SCA) para 24, Plasket AJA said that although the demand guarantee in that case-

‘. . . was part of a greater complex of rights and obligations embodied in the facility, the counter-indemnity and the suretyships, its purpose was to create “an independent, autonomous contract” between Lombard Insurance and Sasol within which the “contractual arrangements with the beneficiary and other parties are of no consequence to the guarantor”.’  

[21]      A financial institution which issues a guarantee of the kind under consideration must thus honour that guarantee according to its terms.  The financial institution is not concerned in the least with the relations between the employer and contractor; nor with the question whether the employer is in default or not.  The principle of autonomy protects the rights of the employer by separating the underlying contract from the guarantee and by requiring payment to be made in terms of the guarantee first, and for the contractor to argue later in case of any problems in the fulfilment of the underlying contract.  (See Hamed Alavi Autonomy Principle and Fraud Exception in Documentary Letters of Credit, a Comparative Study between United States and England ICLR, 2015, Vol 15, No. 2, 47 at 65.)

[22]      The only exception to the autonomy of demand guarantees is where the fraud rule or exception finds application.  But the fraud must be ‘a clear fraud’ (Dormell para 63).  In Lombard Insurance Company Ltd v Landmark Holdings (Pty) Ltd 2010 (2) SA 86 (SCA) para 20, it was held that-

‘[t]his exception falls within a narrow compass and applies where the seller, for the purpose of drawing on the credit, fraudulently presents to the bank documents that to the seller’s knowledge misrepresent the material facts’. 

In Guardrisk para 18, Theron J said this:

‘Insofar as the fraud exception is concerned, the party alleging and relying on such exception bears the onus of proving it.  That onus is an ordinary civil one which has to be discharged on a balance of probabilities, but will not lightly be inferred. In Loomcroft Fabrics CC v Nedbank Ltd and another [1995] ZASCA 127; [1996 (1) SA 812 (A)] it was pointed out that in order to succeed in respect of the fraud exception, a party had to prove that the beneficiary presented the bills (documents) to the bank knowing that they contained material misrepresentations of fact upon which the bank would rely and which they knew were untrue.  Mere error, misunderstanding or oversight, however unreasonable, would not amount to fraud.  Nor was it enough to show that the beneficiary’s contentions were incorrect.  A party had to go further and show that the beneficiary knew it to be incorrect and that the contention was advanced in bad faith.’

(Footnotes omitted.  Also see Casey and Another v Firstrand Bank Ltd 2014 (2) SA 374 (SCA) para 16; Raubex Construction v Bryte Insurance Company (337/2018) [2019] ZASCA 14 (20 March 2019) para 24.)

[23]      To my mind Bombardier’s construction of the guarantee that it requires an express allegation in the demand for payment that a breach of the contract by Bombardier has occurred, is artificial.  The event on which liability depends is set out in clause 4, that is that Lombard will pay on written demand.  Cause 4 is clear and unambiguous and makes it plain that Lombard ‘will pay on written demand and will not determine the validity of the demand or become party to any claim or dispute of any nature which any party may allege’.  Clause 5 stipulates that the payment will only be made against return of the original guarantee by PRASA or its duly authorised agent.  The obligation to pay arises the moment the provisions of clauses 4 and 5 are met.  All that is required for payment in terms of the guarantee, therefore, is a written demand for payment by PRASA and the return of the original guarantee by it or its duly authorised agent.  The guarantee does not require a statement that the contractor, Bombardier, has failed to fulfil its obligations in terms of the contract. (Cf. Dormell para 5;  Zanbuild para 18;  Compass para 4;  Brera paras 5-6;  Corface para 2; Guardrisk para 11; Schoeman and Others v Lombard Insurance Co Ltd 2019 (5) SA 557 (SCA) para 5.)           

[24]      Bombardier alleges that the demand in terms of the guarantee was fraudulent, because the officials of PRASA knew that the DAB had found that Bombardier had validly terminated the contract and had directed PRASA forthwith to return the original guarantee to Bombardier.  PRASA, it alleges, was contractually bound to give effect to that decision unless and until it was revised in arbitration proceedings.  Notwithstanding this knowledge at the time the demand was made, PRASA misrepresented to Lombard that it was entitled to be paid the amount of R128 877 284.00 in terms of the guarantee.  These allegations, in my view, do not prima facie establish the fraud exception. 

[25]      Bombardier’s allegations in support of its reliance on the ‘fraud rule’ conflate the separate legal relationships between the employer, PRASA, and the contractor, Bombardier, on the one hand, and between the guarantor, Lombard, and the employer, PRASA, on the other.  PRASA complied with the provisions of clauses 4 and 5 of the guarantee.  It was not necessary for it to allege that Bombardier had failed to fulfil its obligations in terms of the contract.  Whatever contractual disputes there were between Bombardier and PRASA as to whether the contract had been terminated by effluxion of time or in consequence of PRASA’s alleged repudiation thereof, were irrelevant to Lombard’s obligation to perform in terms of the guarantee.  PRASA did not have to prove that the contract had expired by effluxion of time and that it demanded payment in terms of the guarantee to cover the costs of completing the work as a precondition to enforcement of the guarantee given to it by Lombard.

[26]      The DAB’s interim decision binds PRASA, but only vis-à-vis Bombardier.  Non-compliance with the ruling (which was the subject of arbitration proceedings) might have amounted to a breach of contract on the part of PRASA, but such breach and PRASA’s demand for payment in terms of the guarantee despite the interim ruling, do not fall under the ‘narrow compass of fraud’ that is required for the application of the fraud rule.  That ruling and any final arbitral award are res inter alios acta between Bombardier and PRASA.  Lombard must honour the guarantee according to its terms.  It is not concerned in the least with the relations between the employer, PRASA, and the contractor, Bombardier; nor with the question whether PRASA was acting in breach of the contract in not furnishing the original guarantee to Bombardier pursuant to the DAB decision and pending the arbitration proceedings. 

[27]      As was said by Van der Linde J in Group Five Power International (Pty) Limited v Cenpower Generation Company Limited and Others (2008/41068) [2018] ZAGPJHC 663 (16 November 2018),

‘[92]  That underlying dispute is required to be resolved in the manner provided for in the contract between them; and its determination may even come to a conclusion wholly different from that which the owner asserted to the banks.  Moreover, as happened in Dormell, such a wholly different conclusion, even if it is reached before the bonds are called, affords no defence at all to the calling of the bonds.

[93]  The point is that the arbitration process binds those two parties to it only; and it is a different process, dehors the process involved in the calling up of the bonds.  Self-evidently, ultimately there has to be, as between the owner and the contractor, a final determination of their respective rights and obligations and pursuant thereto, a squaring of accounts.  And in that process the owner will not be permitted to cling to a credit following payment by the banks under performance bonds, should the final dispute resolution between the owner and the contractor reflect that the owner owes the contractor money and not vice versa.

[94]  But in the meantime, the contractually required bond is there to be called up, excepting only where in the clearest of cases of fraud is illustrated.  To my mind, that implies that there is, generally, little if any scope to refer the determination of the question of fraud to the very arbitration which is the place for merits determination between the owner and the contractor.’     

[28]      For these reasons, it is not in my view fraudulent or bad faith for PRASA, who has made a proper demand in terms of the guarantee, to insist on payment of the proceeds of the guarantee despite the DAB decision, which was not final and subject to review in arbitration proceedings, even if the basis upon which the guarantee was called up has subsequently been found in arbitration proceedings between PRASA and Bombardier to have been unjustified.  As was said by Cloete JA in Dormell, ‘the fact that the arbitrator’s award is final as between [Bombardier] and [PRASA] does not mean that it is correct, or that [PRASA] would have to set it aside before calling up the guarantee, much less that [PRASA] is acting in bad faith in seeking to enforce payment under the guarantee against [Lombard].’  Bombardier, therefore, has not prima facie established the elements of the fraud rule. 

[29]      I therefore agree with the court a quo that Bombardier has not established the requisite prima facie right to obtain the interim interdict it sought.  This finding renders it unnecessary to consider the other requisites for an interim interdict.        

[30]      In the result the following order is made:

The appeal is dismissed with costs, including those of two counsel.                                               

 

 

P.A.  MEYER

JUDGE OF THE HIGH COURT

 

 

 

 

 

 

 

 

 

 

Heard:                                    02 September 2020

Judgment:                              7 October 2020

Appellant’s counsel:              Adv C McAslin SC (assisted by Adv C Humphries)

Instructed by:                         Edward Nathan Sonnenbergs, Sandton, Johannesburg

                                               C/o Friedland Hart Solomon & Nicolson, Monument Park, Pretoria 

2^nd Respondent’s counsel:     Adv K Pillay SC (assisted by Adv B Lekokotla)

Instructed by:                         Dlamini Attorneys, Sandton

                                               C/o Noko Ramaboya Mason Attorneys, Pretoria          

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