South African National Roads Agency SOC Limited v Fountain Civil Engineering (Pty) Ltd and Another

SANRAL and FCE entered into a building and engineering contract on 30 September 2016 for road improvements to the R23 Freeway near Standerton for approximately R352 million, based on the FIDIC Red Book (1999 edition). The contract required FCE to obtain a performance guarantee of 10% of the contract sum (R35,287,830.98), which Lombard Insurance issued. FCE did not complete the works and on 15 October 2018 gave notice of termination citing force majeure due to community unrest, misrepresentation of site conditions, and SANRAL's failure to assess extension of time claims. After unsuccessful negotiations, FCE confirmed termination on 6 November 2018. SANRAL gave its own notice of termination on 15 May 2019 under clause 15.2, alleging FCE had abandoned the site, and indicated it would claim on the performance guarantee. The performance guarantee was unconditional and permitted SANRAL to demand payment at its sole discretion if FCE failed to perform. Clause 4.2 of the contract specified circumstances when SANRAL could claim under the performance guarantee and included an indemnity for claims SANRAL was not entitled to make.

• Whether an interdict should be granted restraining the beneficiary of an unconditional performance guarantee from making a claim under the guarantee pending dispute resolution
• Whether clause 4.2 of the contract precluded SANRAL from claiming under the unconditional performance guarantee
• Whether FCE established a prima facie right to an interdict
• Whether the court could order arbitration when the contract provided for mediation and litigation as dispute resolution mechanisms
• Whether the unconditional nature of the performance guarantee permitted SANRAL to demand payment regardless of disputes under the underlying contract

The appeal was upheld with costs. The order of the high court was set aside and replaced with an order dismissing the application with costs.

The binding legal principles established are: (1) An unconditional performance guarantee permits the beneficiary to demand payment at its sole discretion for any reason, and a contractor cannot obtain an interdict to prevent a claim under such a guarantee merely because disputes exist under the underlying contract. (2) Contractual provisions specifying circumstances when a party may claim under a performance guarantee do not convert an unconditional guarantee into a conditional one, particularly where the contract contains an indemnity for claims to which the beneficiary was not entitled. (3) The purpose of an unconditional performance guarantee is to secure the employer's position in the event of disputes and pending their resolution - it is not dependent on proof of entitlement under the underlying contract. (4) A court has no power to compel parties to submit to arbitration when their contract provides for different dispute resolution mechanisms such as mediation and litigation. (5) To obtain an interdict restraining a claim under an unconditional performance guarantee, the applicant must establish a prima facie right, which cannot be established where the guarantee is payable on demand at the beneficiary's discretion.

The Court commented that the high court's order referring disputes to arbitration had the effect of amending the contract between the parties. Schippers JA noted that it was unnecessary to decide whether the high court's order was interim in nature (and thus not appealable) or final in effect, given that the order could not withstand scrutiny in any event. The Court also observed that even if the matter were approached as the high court did, FCE had not established the first requirement for an interim interdict, namely a prima facie right. The judgment noted that the interests of justice require that an order which cannot withstand scrutiny should be set aside. The Court also commented on the alternative relief sought on appeal, noting it was unsustainable on the founding papers and based on an entirely new case, as FCE's original case was that SANRAL's termination was invalid and bizarre, whereas the alternative relief proceeded on the premise that the termination was valid.

This case reinforces the principle that unconditional performance guarantees in construction contracts are payable on demand at the beneficiary's sole discretion, regardless of disputes under the underlying contract. It confirms that courts will uphold the commercial purpose of such guarantees as providing immediate security to employers pending dispute resolution. The case also establishes that courts cannot compel parties to arbitration when their contract provides for different dispute resolution mechanisms (mediation and litigation). The judgment emphasizes the importance of honoring the autonomy of the parties' contractual arrangements and the independence of performance guarantees from the underlying contract. This decision is particularly important in the construction industry where unconditional performance guarantees are standard practice and serve a vital commercial function in protecting employers against contractor default.