Civil Engineering January-February 2022 | Vol 30 No 1

Civil Engineering January/February 2022 37 The SCA held: “Where a client law- fully terminates a construction contract, as is the case here, the contractor’s claim for retention monies and unpaid invoices are not self-standing claims, separate and independent from the remainder of the contract. And, upon such termination, the interim certificates ceased to be of any force and effect. They cannot sustain a basis for payment where there can be, in view of the cancellation, no further expec- tation of a completion of the works”. COMMENT AND ANALYSIS The decision is based on the principle, well described by the SCA, in the 2016 decision of Nurcha Finance Company (Pty) Limited v Oudtshoorn Municipality , in the following terms: “… that payment ultimately depends on the delivery of a finished product of work” such that, “Cancellation of the contract strikes at the very foundation of the claim and therefore debars a claim based upon the interim payment certificate”. The principle will apply in all in- stances, subject to any contrary provision in the underlying construction contract between the employer and the contractor. For instance, a clause to the effect that an interim certificate will remain of force and effect, notwithstanding a cancella- tion of the contract. In this matter, the contract was based on the standard form General Conditions of Contract wording, which does not serve to preserve the enforceability of an interim payment certificate beyond a cancellation of the underlying construction contract. The position is the same in relation to the standard form JBCC contract. This principle and the consequence of a cancellation of an underlying construc- tion contract in relation to the validity and enforceability of an interim payment certificate, is often forgotten. However, it has important consequences for con- tractors following the cancellation of a construction contract. This principle means that, following a cancellation of a construction contract, a contractor is not able to sue the employer based on the interim certificate, and the contractor’s only available remedy is to sue the employer for contractual damages. IMPLICATIONS FOR GUARANTEES This principle also has implications for insurers in relation to demands for payment in terms of on-demand insur- ance construction guarantees, as such demands very often follow a cancellation of an underlying construction agreement. By virtue of the operation of this principle, a guarantor, faced with a demand from the employer in terms of a performance guarantee, is unable to take cession of a contractor’s claims for payment under interim payment certificates, in order to defend the claim on a performance guarantee on the basis of set-off. An interesting question arises in this context in relation to on-demand payment guarantees (as opposed to performance guarantees). In terms of a payment guar- antee, the guarantor undertakes to pay the contractor the sum certified as payable in terms of a payment certificate issued to the contractor pursuant to an underlying agreement. What then is the guarantor’s obligation to the contractor following a demand for payment by the contractor, when the employer cancels the underlying construction agreement? The South African law, as it currently stands relative to on-demand guarantees, is that the obligation established in a guarantee is wholly independent of the underlying contract (known as the autonomy principle), and it is only where fraud is involved that the guarantor may decline liability. Accordingly, a court would be likely to disregard the cancella- tion of the underlying construction agree- ment, and to order payment in terms of the payment guarantee, notwithstanding this established principle. This scenario also brings to the fore the following broader and contentious issues (which coincidentally have become relevant considerations in recent matters): The continued validity of a performance guarantee – no expiry date The continued validity of a performance guarantee having no expiry date (as is very often the case), in circumstances where the underlying construction contract is completed such that the parties have, in terms of that contract, no further rights and obligations relative to performance. In some instances, demands for payment are being made a number of years after the completion of a contract. The implica- tion for guarantee insurers is that they are then compelled to reopen reserves in order to provide for such claims long after the completion of projects. This in the context of some guarantee insurers and reinsurers having discontinued the product, which has reduced the capacity of the insurance market to supply the guarantee product. The validity of a guarantee – the underlying construction contract The validity of a guarantee in circum- stances in which it becomes apparent that the underlying construction contract was subject to an initial impossibility of performance, and as such is void or unen- forceable. This question arose in a recent 2019 decision of the South Gauteng High Court in Transnet SOC Limited v ABSA Insurance Company Limited and Others . After emphasising the principle that a per- formance guarantee is wholly independent of the underlying contract, the court ruled that “Whether or not the underlying con- tract exists in an enforceable form or not and whether or not a beneficiary is actually entitled to be paid under the underlying construction contract has no bearing on the matter”. In the court’s view, “the only concern … is to determine whether or not in terms of the demand document, the allegations required by the performance guarantee are contained in the document”. Serious consideration ought to be given to whether these circumstances should not serve, as is the case with the fraud defence, as exceptions to the autonomy principle. The question is, more specifically, whether it is reasonable and in conformance with public policy that in these instances the autonomous nature of on-demand guarantee should continue to trump commercial reality. There is, in this regard, authority that may be drawn on not only in the English law in relation to letters of credit, but also in the South African law in relation to negotiable instruments, such instruments not being unlike on-demand guarantees. In our view, this is an issue that needs to be carefully considered and decided upon by the SCA.  A breakdown of the remaining four topics will be published in future issues of Civil Engineering . To access the full publication visit: https://www. ensafrica.com/uploads/newsarti- cles/0_ensafrica%20insurance%20 newsletter%20final.pdf .