Housing Corporation of Zimbabwe (Private) Limited v Zimnat Lion Insurance Company (Private) Limited and National Social Security Authority

The applicant (Housing Corporation of Zimbabwe) entered into a written housing off-take agreement with the second respondent (NSSA) on 14 July 2017 whereby the applicant was to acquire land and construct 8000 housing units which NSSA would purchase. NSSA paid a US$16 million deposit to the applicant. As a condition of the agreement, the applicant procured a performance bond of US$16 million from the first respondent (Zimnat Lion Insurance Company) guaranteeing satisfactory completion of the project. The housing development project commenced in 2017. On 25 July 2018, NSSA wrote to Zimnat demanding payment of US$16 million under the performance bond, alleging that the applicant had failed to deliver any completed housing units in breach of the agreement. The applicant disputed this, stating it had delivered 53 completed housing units on 15 March 2018 and that various disputes had been referred to arbitration. When Zimnat refused to provide an undertaking not to pay, the applicant filed an urgent application seeking a prohibitory interdict to prevent payment under the bond pending arbitration. There was a serious dispute between the parties regarding breach of the off-take agreement, with each party alleging breach by the other, including disagreement over the commencement date of the contract and when delivery of the first batch of housing units was due.

• Whether the application complied with Rule 241(1) of the High Court Rules 1971 regarding the proper form for chamber applications to be served on interested parties
• Whether the matter was urgent
• Whether the draft order sought was defective on the basis that no arbitration proceedings were pending
• Whether the applicant adopted the wrong procedure by approaching the court instead of arbitration
• Whether the court should grant a prohibitory interdict restraining payment under a performance bond where there is a dispute as to breach of the underlying contract
• Whether a performance bond is payable on demand irrespective of disputes between the parties
• Whether fraud was established to justify refusing payment under the performance bond

The court granted an interim order pending determination of the matter on the return date: (1) interdicting and restraining the first respondent (Zimnat) from making any payment to the second respondent (NSSA) under the Performance Bond pursuant to NSSA's letter of demand; (2) interdicting and restraining NSSA from seeking to execute on its letter of demand in relation to the Performance Bond or receiving any payment from Zimnat pursuant to the letter of demand; (3) interdicting and restraining NSSA from presenting to Zimnat any further letter of demand in relation to the Performance Bond. The issue of costs was deferred to the return date.

A performance bond is accessory to the principal agreement and is subservient to that principal agreement. Where there are issues centered on breach of the principal agreement, those issues should be resolved before payment on the performance bond can be made. The demand made by a beneficiary under a performance bond is subject to there being no dispute on the issue of breach of the contract. Allowing payment on a performance bond irrespective of a genuine dispute regarding breach would prejudice the party disputing breach without affording an opportunity to be heard, in contravention of the constitutional right to a fair hearing under s 69 of the Constitution of Zimbabwe Amendment (No. 20) Act 2013. Where a performance bond specifically provides for court jurisdiction and involves a third-party guarantor who is not party to an arbitration agreement between the principal parties, a party is entitled to approach the court for interim relief even where the underlying contract contains an arbitration clause. Such interim relief is also permitted under the arbitration agreement itself and the Model Law.

The court expressed strong disapproval of unnecessarily lengthy, voluminous and repetitive affidavits that fail to set out facts succinctly and instead contain argumentative and irrelevant matters. Following Africa Resources Limited v Gwaradzimba, the court noted that legal practitioners have a duty to ensure affidavits comply with the rules and should not simply reproduce client statements as affidavits, warning that persistence with such pleading may lead to costs de bonis propriis against offending legal practitioners. The court also criticized the practice of raising multiple unmeritorious points in limine that have no prospect of success and do not dispose of the matter, noting that such abuse of process may warrant costs de bonis propriis against the offending legal practitioners, citing Telecel Zimbabwe v Potraz. The court observed that preliminary points should only be taken where they have merit and are likely to dispose of the matter. In this case, while critical of both sets of legal practitioners, the court declined to award costs de bonis propriis because the applicant's counsel did not seek such an order.

This case is significant in Zimbabwean contract and construction law for establishing that: (1) performance bonds, while providing security for performance, are accessory to the principal agreement and payment under them should not be made when there is a genuine dispute regarding breach of the underlying contract; (2) the principle that beneficiaries cannot simply demand payment under performance bonds without the contractor having an opportunity to contest allegations of breach, as this would violate constitutional rights to a fair hearing under s 69 of the Constitution; (3) parties to contracts containing arbitration clauses retain the right to approach the High Court for interim relief pending arbitration, particularly where third parties (like guarantors) who are not party to the arbitration agreement are involved; (4) the proper procedure for chamber applications that must be served on interested parties requires a hybrid of Form 29 and Form 29B under Rule 241(1). The judgment reinforces the importance of maintaining the status quo when serious disputes exist regarding the underlying contractual obligations that trigger payment under security instruments. It also reflects judicial concern about unnecessarily lengthy and argumentative pleadings and unmeritorious preliminary points.