First Rand Bank Limited v Brera Investments CC

Brera Investments CC (respondent) entered into a Joint Building Contracts Committee N/S Subcontract Agreement with Spirit of Africa Developments (Pty) Ltd (the contractor) on 1 November 2007 for the supply of materials and installation of electrical reticulation at Windmill Park Extension 12 development in Boksburg. First Rand Bank Limited (appellant) issued a payment guarantee to the respondent on 3 October 2007 for R12,997,972.36 including VAT. The guarantee was independent and not a suretyship. The subcontract provided for interim payments upon issue of payment certificates by the principal agent. On 17 March 2011, the respondent demanded issuance of a payment certificate for R1,065,864.29 from the contractor. When no certificate was issued within seven days, the respondent made a written demand to First Rand on 15 April 2011 under clause 3.2 of the guarantee. The contractor subsequently issued a payment certificate on 25 August 2011 for only R60,909.79, disputing the remaining amounts. The respondent launched an application in the high court on 14 July 2011 for payment under the guarantee.

• Whether a payment guarantee issued by a bank creates an independent obligation or an accessory obligation of suretyship
• Whether liability under a payment guarantee is triggered upon fulfillment of specified conditions regardless of subsequent events
• Whether the subsequent issuance of a payment certificate after the seven-day demand period affects the guarantor's liability under the payment guarantee
• The proper interpretation of clause 3 of the payment guarantee, particularly the meaning of the word 'still' in clause 3.2
• Whether events occurring after demand for payment can be relied upon to defeat a claim under a payment guarantee

The appeal was dismissed with costs. The order of Nicholls J in the South Gauteng High Court requiring First Rand Bank Limited to pay the demanded sum to Brera Investments CC under the payment guarantee was upheld.

The binding legal principles established are: (1) A payment guarantee that expressly disclaims creation of an accessory obligation or suretyship constitutes an independent obligation that must be performed according to its terms; (2) Liability under a payment guarantee arises upon fulfillment of the specified trigger conditions set out in the guarantee and is not affected by events occurring after those conditions are met; (3) Events occurring after proper demand under a payment guarantee (such as subsequent issuance of a payment certificate) cannot be relied upon to defeat or extinguish the guarantor's liability that has already crystallized; (4) The liability of a guarantor under a payment guarantee is not affected by the relationship between other parties to the transactions that gave rise to its issue, including disputes about performance under the underlying contract; (5) Payment guarantees must be paid according to their terms strictly construed, and only fraud provides a defense to a claim under such a guarantee.

The court made non-binding observations regarding the Dormell Properties case, with Malan JA expressing preference for the approach of Cloete JA (with whom Mpati P concurred) over that of the majority (Bertelsmann AJA). The court stated that the better view is that once a beneficiary has complied with the terms of a guarantee, the guarantor has no defense to a claim, and arbitration findings between other parties are res inter alios acta as far as the guarantor is concerned. The court noted it is not bad faith for an employer to continue insisting on payment under a properly called guarantee even when the basis for calling it has subsequently been found unjustified in arbitration proceedings between other parties. The court also reiterated the 'established fraud rule' from Sztejn v J Henry Schroder Banking Corporation, noting that fraud is the only exception to the obligation to pay under such guarantees.

This case is significant in South African law for clarifying the autonomous nature of payment guarantees in construction contracts. It establishes that payment guarantees must be honored strictly according to their terms once the specified trigger events occur, regardless of subsequent events or disputes in the underlying contractual relationships. The judgment reinforces the principle that liability under performance guarantees, payment bonds, and similar instruments is determined by compliance with the terms of the guarantee itself, not by the merits of disputes between other parties to the transaction. This provides certainty and reliability to the system of payment guarantees in the construction industry. The case also provides guidance on the interpretation of payment guarantee clauses and limits the circumstances in which a guarantor can avoid payment (essentially only fraud). It contributes to the body of law on construction guarantees following important cases like Lombard Insurance, Loomcraft Fabrics, and Dormell Properties.