WHEN IS A GUARANTEE NOT A GUARANTEE?
 The current shortage of skills in the construction industry often results in a sharing of the work by different parties. Joint ventures can mitigate risk, and are often required for BBBEE purposes.
It is important therefore, that the wording of any construction guarantee effected for the benefit of the Employer, is appropriate. Such wording should take into account all parties whose work is intended to be guaranteed. When a change occurs in the contractual obligations (by mutual consent) it is vital that the original applicant and the beneficiary of the guarantee (the Employer) apply to the Insurer for an amendment of the guarantee wording.
In the decided case of Lombard Insurance v City of Cape Town (2007), a Supreme Court of Appeal case, the facts were that the contractor had obtained a performance guarantee, and had subsequently entered into a JV with another contractor whose job it was to complete an agreed portion of the total work. This arrangement was sanctioned by the City. When the joint venture partners failed to complete the contract, the City called up the guarantee for the work which both JV partners had failed to complete. The Court held that the guarantee covered only the work of the original contractor, not that of its JV partner.
Our courts often take guidance from analogous cases overseas. In the English case of Wittman v Willdav Engineering (2007), the supplier of machinery required a payment guarantee from the purchaser. The purchaser duly obliged. The guarantee issued by the insurer was based on a written supply contract, which contained clauses allowing it to be altered by mutual consent of supplier and purchaser. The seller and purchaser then made changes to the supply contract, which effectively cancelled it while creating a new contract.
When the purchaser defaulted and the Employer claimed on the payment guarantee, the insurer repudiated on the grounds that the original obligation had been discharged. The Court of Appeal, however, ruled that the wording of the guarantee was wide enough to apply to the new obligation, and ordered the insurer to pay.
The legal expertise of Master Builders KZN is available to members who effect construction guarantees and insurance through its subsidiary MasterSure. Tailormaking the wording of construction guarantees and insurance policies to meet your specific requirements is the type of service your Association can offer you.
Clive Hill | Financial Services Manager
MasterSure Risk & Guarantee |
