Minister of Transport and Public Works, Western Cape v Zanbuild Construction (Pty) Ltd

The Western Cape Department of Transport and Public Works (the department) entered into two identical construction contracts with Zanbuild Construction (Pty) Ltd in January 2007 for the construction of pathology laboratories at two hospitals in Worcester and Paarl. ABSA Bank issued two identical guarantees at Zanbuild's behest, each for 10% of the contract value. The construction contracts incorporated JBCC standard terms, but the guarantees issued differed substantially from the department's standard guarantee form. On 28 August 2008, ABSA notified the department of its intention to withdraw from the guarantees after 30 days. On 26 September 2008, two days before the expiry date, the department demanded immediate payment of the full amounts of both guarantees, alleging Zanbuild was in default. The department subsequently purported to cancel the construction contracts on 9 October 2008, which Zanbuild disputed and accepted as repudiation. At the time of the demand, the department had no identifiable monetary claim against Zanbuild under the construction contracts. Zanbuild obtained an interdict in the Western Cape High Court preventing the department from seeking payment under the guarantees.

• Whether the construction guarantees were 'on demand bonds' (payable on demand) or 'conditional bonds' (akin to suretyship requiring proof of contractor's liability)
• Whether ABSA's liability under the guarantees was limited to amounts owing by Zanbuild under the construction contracts or extended to the full guaranteed amount upon demand
• What the effect of the 30-day notice provision was on the nature and extent of the bank's liability under the guarantees
• Whether the department was entitled to payment under the guarantees without establishing any monetary claim against Zanbuild under the construction contracts

The appeal was dismissed with costs. The High Court's order granting the interdict preventing the department from seeking payment under the guarantees and preventing ABSA from making payment was upheld.

The binding legal principle established is that the interpretation of construction guarantees as either 'on demand bonds' or 'conditional bonds' (akin to suretyship) depends on the specific terms of each guarantee. Where a guarantee uses language indicating it secures 'due and faithful performance' of obligations under the underlying contract, contemplates multiple claims with pro rata reduction of liability, and contains a notice provision expressly limiting the guarantor's liability to amounts owing by the contractor under the construction contract, it creates liability akin to suretyship rather than an on-demand payment obligation. Consequently, the beneficiary of such a guarantee cannot demand payment of the full guaranteed amount without establishing that amounts are actually owing by the contractor under the underlying construction contract. A provision allowing the guarantor to withdraw on notice that limits liability to amounts then owing by the contractor reflects the nature of the guarantee throughout its currency, not just after the notice period.

The court acknowledged counsel's concession that interpretation of guarantees of this kind is often bedeviled by loose language, accepting this for the sake of argument. The court also noted that prior cases such as Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd and Dormell Properties 282 CC v Renasa Insurance Co Ltd & others, which dealt with guarantees interpreted as 'on demand bonds', were distinguishable because those cases involved guarantees with substantially different terms - specifically, guarantees using the department's standard form which differed materially from the ABSA guarantees under consideration. The court observed that statements in those earlier judgments about the nature of on-demand guarantees being akin to irrevocable letters of credit must be confined to the specific terms of the guarantees considered in those cases. The court also provided an illustrative example of how the notice provision in suretyships for indefinite periods typically operates, drawing an analogy to the provision in the guarantees at issue.

This case is significant in South African construction and banking law as it provides important guidance on distinguishing between 'on demand bonds' (also called 'call bonds') and 'conditional bonds' in the context of construction guarantees. The judgment emphasizes that the classification depends on interpreting the specific terms of each guarantee rather than applying standard formulations. The case demonstrates that even where a guarantee is described as such, it may create liability akin to suretyship if the terms indicate the guarantor's liability is linked to the contractor's liability under the underlying construction contract. The judgment clarifies that provisions allowing for withdrawal on notice that limit liability to amounts owing by the contractor are indicative of suretyship-like obligations rather than on-demand payment obligations. The case also illustrates the principle that loose language in guarantee documents should be interpreted holistically, considering all provisions together. It serves as a caution to employers and banks to carefully draft guarantee terms to clearly reflect the intended nature of the obligation.