Construction Guarantees – when does the contractor have the right to interfere with the employer’s claim?

Testamentary TrustsIt is a common occurrence for contractors to insure the performance of large construction projects. In fact in large projects this is a requirement.

 

In many instances these projects do not run as anticipated and as a result these policies are invoked. For a long time the rights of the contractor (who effectively is. Not a party to the insurance contract between the employer and the insurer) were uncertain.

 

Some clarity?

 

In Joint Venture Between Aveng (Africa) Pty Ltd and Strabag International GmbH v South African National Roads Agency Soc Ltd and Another,[1] (hereafter the “SANRAL” case), works were delayed and the agreement subsequently cancelled as a result of unrests that the Applicant maintained made the contract impossible to perform. The Applicant contended that the circumstances leading up to the delays and termination were a Force Majeure event.

 

In Granbuild (Pty) Ltd v Minister of Transport and Public Works, Western Cape and Another),[2] the applicant sought to interdict the insurer from making payment to the employer in terms of a construction guarantee. The application was based on three grounds, being;

 

“(a) that there was a pending leave to appeal an earlier judgment between the parties with regard to a disputed cancellation of the contract. This was rejected.

(b) the interpretation of a clause that dealt with the employer’s ‘right of recovery’ of money against the contractor. This relates to payment certificates prepared by the Principal Agent (Engineer in this case). The amount due is certified, whereafter if the contractor does not pay, the employer is entitled to claim from the insurer. The ground was upheld.

 

(c) that the applicant had locus standi to seek the interdict. The court found that the applicant had an interest that was worth protecting because of the counter-guarantees that it would be called upon to satisfy in the event of a successful claim being made by the employer.”

 

With that being said, one of the arguments raised to support the reasoning that the so-called ‘underlying contract exclusion ‘is not part of South African law is that the contractor is not part of the agreement between the employer and the insurance company. As it can be seen from the judgment of Rogers J, a contractor has an interest in the manner in which and reasons for which a guarantee is presented. I may add that this is in line with the settled principles of natural justice.

 

In the matter of Sultzer Pumps (South Africa) (Proprietary) Limited v Covec-MC Joint Venture,[3] Jansen J   dealt with similar questions: “it is my view that there is a need for the Higher Courts to pronounce on the so-called lacuna that has been left by Cloete JA because two of the fundamental objections (legal standing of the contractor and  autonomy principle) appear to be no longer relevant. For the moment, the views expressed by the High Courts represent South African law.”

 

In the SANRAL case, the court held that:

 

“The facts of the matter before me do not require a pronouncement on the issue, save to state that if this was the only issue for decision, I would make a finding that the applicant has locus standi to interfere with the right of the first respondent to present the guarantees for payment. And furthermore, based on Clause 4.2 of the Contract, the first respondent would have to meet the jurisdictional factors therein before presenting the guarantees for payment. This, in my view would entitle the applicant to interdictory relief as prayed for.”

 

Conclusion

 

It would therefore seem that our higher courts are taking the stance that the contractor does have locus standi. The matter has however not been finally determined in our legal system and matters should therefore be considered on a case by case basis. Contact SchoemanLaw for any construction needs.

 

[1] (8331/19) [2019] ZAGPPHC 97; [2019] 3 All SA 186 (GP) (22 March 2019)

[2] (5021/2015) [2015] ZAWCHC 83 (5 June 2015

[3] (1672/2013) [2014] ZAGPPHC 695 (2 September 2014)

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