In the construction industry, employers require contractors to provide guarantees for the performance of their contractual obligations. Contractors, in turn, require their subcontractors to provide guarantees for their obligations. A legal question that arises is how guarantees are to be interpreted and whether guarantees are “on demand” guarantees or “conditional guarantees”. KNS argued that the guarantee was an on-demand guarantee and therefore became payable on demand. Aqua, on the other hand, argued that the guarantee was a conditional guarantee linked to the performance of the contract and that the condition for obtaining the guarantee was not fulfilled. An “unlimited guarantee” makes the guarantor liable for any debt owed now or contracted later between the lender and the borrower. A guarantor`s liability may be limited to a specific debt or a dollar amount owed by the borrower, creating a “limited collateral.” We recommend careful and careful review and advice before agreeing to have an unconditional bank guarantee or bank guarantee provided on your behalf. SCA concluded that KNS could not and did not fulfil its obligations under the main agreement and that aqua therefore had not breached its obligations under the subcontracting agreement by not starting the work; Mutual & Federal did not have to pay under the guarantee because it was a conditional guarantee and the condition was not met. The SCA also examined the Western Cape Minister of Transport and Public Works and another against Zanbuild Construction (Pty) Ltd and another, where the court found that the guarantee entailed a liability similar to that of a guarantee. In this judgment, the SCA stated: An unconditional bank guarantee is defined as an unconditional and unilateral promise made and issued by a bank or financial institution to pay a certain amount when certain events occur. For example, if a tenant violates an obligation under the lease.
It`s like cash in the bank – it`s very common in the construction and commercial leasing/transaction industry for one party to ask for an unconditional bank guarantee and for the other party to provide an unconditional bank guarantee to ensure compliance with contractual obligations. Ultimately, the SCA concluded that the language used in the mutual and federal guarantee was similar to that used in Zanbuild, and noted that the real intention of the parties was to have a conditional guarantee to ensure aqua`s proper performance of contractual obligations. In other words, Mutual & Federal did not assume a primary and independent payment obligation under the guarantee, but only a conditional payment obligation in the event of a breach by Aqua. The SCA also pointed out that, although the claim under the guarantee is at KNS`s discretion, this did not alter the nature and form of the guarantee, since KNS`s discretion must always be exercised arbitrio bono viri, that is to say, in good faith. KNS ran into financial difficulties, which led to the voluntary liquidation of the company in December 2011. As a result, KNS was unable to execute the main order, which is why SANRAL terminated the contract and submitted a new bid. One day after the liquidation, KNS terminated the subcontract with Aqua and granted Aqua 14 days to correct its performance and start the work or claim the warranty. To avoid this, Aqua asked the South Gauteng High Court, Mutual & Federal to prohibit payment under the guarantee, and the dispute over the true meaning of the guarantee eventually ended up before the Supreme Court of Appeal in the Bloemfontein case. In order to clarify this issue, the CSA reviewed the wording of the guarantee and relied on the accepted rules of interpretation, one of which is to determine the intention of the parties from the express wording of the document.
In addition, the SCA has reviewed previous court decisions on safeguards. In Lombard Insurance Co Ltd v. Landmark Holdings (Pty) Ltd & Others, the SCA was required to interpret a guarantee. The court noted that the guarantee issued by Lombard reads as follows: A bank guarantee is an unconditional obligation of the bank on behalf of the customer to pay the amount of the guarantee to the beneficiary of the guarantee upon written request. It can also be defined as an alternative to providing a deposit directly to the supplier or seller. A bank guarantee may have an expiry date after which the guarantee ends automatically. What does this mean for the construction industry? In any case, when a guarantee is provided, the wording must be verified and, if necessary, discussed with the guarantor – the parties must understand whether they contractually agree on an on-demand guarantee as the principal obligation of a guarantor or whether the guarantee is similar to a guarantee dependent on the underlying performance. The distinction between conditional bank guarantees and unconditional bank guarantees can sometimes be blurred due to ambiguous wording or confusion of verbal discussions between the parties. In general, conditional bank guarantees can be defined in terms of wording that makes payment under the guarantee conditional on proof of breach of the underlying contract or the existence of termination provisions being cited as a precondition for any use of the bank guarantee. .