THE JBCC GUARANTEE IS A TRUE DEMAND GUARANTEE

The Eastern Cape High Court in Grahamstown recently added its voice in support of KZN High Court judgments which have upheld the demand nature of the JBCC construction guarantee.

The Facts

AB Construction concluded a standard JBCC building contract in connection with the construction of a residential development known as Furstenburg Grand at the Nahoon Mouth in East London.

In compliance with its obligations in terms of clause 14 of the JBCC agreement, AB Construction arranged for Constantia Insurance Company to provide the requisite construction guarantee in favour of Toasty Trading, the employer under the agreement.

During the course of the contract various disputes arose between AB Construction and Toasty Trading which resulted in Toasty Trading, after issuing an appropriate breach notice, cancelling the agreement.

AB Construction countered by saying that the cancellation by Toasty Trading of the agreement was invalid because Toasty Trading itself had been in breach of the contract pursuant to which AB Construction had issued its own breach notice to Toasty Trading.

In the relevant clauses of the JBCC agreement it is specified that neither the employer nor the contractor can cancel the agreement if at the time of cancellation the party wishing to cancel is itself in material breach of the agreement.

Foreseeing the probability that Toasty Trading would try and make a claim under the construction guarantee, AB Construction requested Constantia Insurance Company not to accede to any demand under the guarantee.  Constantia explained that it was bound to honour the guarantee unless AB Construction was able to obtain a court interdict prohibiting payment under the guarantee.

AB Construction took up this invitation and applied to the High Court in Grahamstown for a court order interdicting Toasty Trading from making a claim under the guarantee pending the outcome of an arbitration which had been instituted to resolve the disputes between the parties.

The Guarantee

The JBCC construction guarantee constitutes a contract between the guarantor, in this case Constantia Insurance Company, and the employer, Toasty Trading.

The guarantee wording expressly states that it is not a suretyship and nor is it to be construed as an accessory obligation.  In other words, liability to make payment under the guarantee is not dependent on the establishing of a liability on the part of the contractor.

The operative part of the guarantee in the case read as follows:

“…the Guarantor undertakes to pay the Employer the Guaranteed Sum … upon receipt of a first written demand from the Employer to the Guarantor at the Guarantor’s physical address calling up this construction guarantee stating that:

1.    The Agreement has been cancelled due to the Contractor’s default and that the construction guarantee is called up in terms of 5.0.  The demand shall enclose a copy of the notice of cancellation…”

The Decision

The court agreed with the submissions made by Toasty Trading’s counsel that the construction guarantee is analogous to a letter of credit.  Letters of credit are well known for recognising that if the formalities stipulated in the letter of credit are met, then there can be no stopping the bank from paying out under the letter of credit in the absence of fraud.

The court held that the disputes between AB Construction and Toasty Trading had nothing to do with the obligation of Constantia Insurance Company to honour the guarantee vis-á-vis the formalities set out in the guarantee for a claim having been compiled with.  The fact that Toasty Trading’s cancellation was disputed by AB Construction and whether or not Toasty Trading was in material breach at the time of its purported cancellation were considered to be wholly irrelevant to the guarantor’s liability to pay.

In the result the court found that Toasty Trading having complied with the requirements of the guarantee and there being no evidence of any fraud, Constantia Insurance Company was obliged to make payments in terms of the guarantee.

The above article was supplied by Alastair Hay of Cox Yeats Attorneys.

Bruce Lyle | Membership Services Manager