Joint Venture between Aveng (Africa) (Pty) Ltd and Strabag International GmbH v South African National Roads Agency Soc Ltd and Another

The Joint Venture concluded a construction contract with SANRAL in August 2017 for the construction of the Mtentu River Bridge on the N2 Wild Coast Toll Road in the Eastern Cape. The Joint Venture provided a performance guarantee issued by Lombard Insurance for R245,120,849.40. From 22 October 2018, the works were disrupted by local community members demanding employment and local procurement. No works were performed from this date. SANRAL's Engineer suspended works between 31 October 2018 and 13 January 2019. On 30 January 2019, the Joint Venture purported to terminate the contract on the basis of force majeure, claiming civil unrest had prevented performance for 84 continuous days. SANRAL denied the existence of force majeure and on 5 February 2019 itself purported to terminate the contract. The Joint Venture sought an interlocutory interdict restraining SANRAL from calling on the performance guarantee pending arbitration proceedings. The High Court dismissed the application, finding the Joint Venture had failed to make out a prima facie case of force majeure.

• Whether SANRAL's right to call on the performance guarantee was limited by the provisions of the underlying contract
• Whether South African law should recognize an exception to the autonomy principle where the underlying contract restricts a beneficiary's right to call up a guarantee
• Whether sub-clause 4.2 of the contract required SANRAL to establish a factual entitlement before making a demand on the performance guarantee
• Whether clause 2.5 required SANRAL to follow specified procedures before calling on the guarantee

The appeal was dismissed with costs, including the costs of two counsel.

The binding legal principles established are: (1) The autonomy principle governing performance guarantees remains firmly entrenched in South African law - a bank giving a performance guarantee must honour it according to its terms, irrespective of disputes under the underlying contract, with fraud being the established exception; (2) Where a performance guarantee is unconditional on its face, the beneficiary's right to call on the guarantee is not restricted by provisions in the underlying contract requiring notice or determination procedures, unless those provisions clearly and expressly prohibit the call; (3) Indemnity provisions in the underlying contract that contemplate potential liability for unjustified demands on guarantees confirm that beneficiaries need not establish actual entitlement before making a demand, but may do so at their own risk; (4) The obligation to pay under a performance guarantee arises from the terms of the guarantee itself, not from the conditions of the underlying contract to which the guarantor is not a party; (5) Notice and determination requirements in contract clauses (such as clause 2.5) do not apply to demands made under separate performance guarantees unless specifically incorporated into those guarantees.

The court made important obiter observations: (1) While assuming (without deciding) that South African law might recognize an exception to the autonomy principle where the underlying contract clearly and expressly prevents a beneficiary from making a demand, the court emphasized the caveat from Kwikspace that 'the terms of the building contract should not readily be interpreted as conferring such a right'; (2) Given the significance of performance guarantees and letters of credit in international trade and commerce, claims relating to restrictions in underlying contracts should be approached with caution; (3) When interpreting provisions of guarantees, courts should identify the commercial purposes for which the guarantee was furnished, namely to provide security and to allocate risk as to who shall be out of pocket pending resolution of a dispute; (4) The court noted with approval the Australian and English authorities recognizing limited exceptions to the autonomy principle, including Potton Homes, Simon Carves, Fletcher Construction, Sugar Australia, and recent Victorian authorities, suggesting these may provide persuasive guidance for South African law.

This case is significant in South African contract and commercial law for: (1) Reaffirming the autonomy principle governing performance guarantees and letters of credit, following the established line of authority from Loomcraft Fabrics and subsequent cases; (2) Recognizing (obiter) the potential for an exception to the autonomy principle where the underlying contract clearly and expressly restricts the beneficiary's right to call on the guarantee, following Australian and English law, but emphasizing such terms should not readily be construed as creating such restrictions; (3) Clarifying that indemnity provisions in underlying contracts contemplating potential unjustified demands confirm that beneficiaries need not prove entitlement before making a call on a guarantee; (4) Providing guidance on the interpretation of FIDIC contract conditions, particularly clauses 2.5, 3.5 and 4.2, in relation to performance guarantees; (5) Emphasizing the commercial importance of performance guarantees as security and risk allocation devices in construction and international trade.