Jorge Alexandre Da Costa Bonifacio and Another v Lombard Insurance Company Limited

The respondent, Lombard Insurance Company Limited, issued a performance guarantee in favour of DBT Technologies (Pty) Ltd on 8 September 2009 for R128 375 851.20 in respect of Tubular Construction Projects (Pty) Ltd's (TCP) subcontract obligations. On 7 June 2019, the appellants (Jorge and Sergio Bonifacio) executed a Deed of Suretyship and Indemnity in favour of the respondent, indemnifying it against any claims arising from guarantees issued by the respondent. On 13 January 2020, DBT made a written demand on the respondent for the full guaranteed amount. The respondent demanded payment from the appellants on 15 January 2020. DBT launched an application in the high court claiming payment. The respondent and TCP opposed the application, alleging the demand was fraudulent. The respondent served third party notices on ten third parties including the appellants, claiming indemnification. TCP was subsequently liquidated. The respondent then settled with DBT for R100 million, which was made an order of court on 1 February 2021. The appellants, who had not previously filed answering affidavits to the third party notices, then applied for condonation and opposed the claims against them on several grounds including fraud, loss of procedural advantage, release and estoppel.

• What is the legal nature of a performance guarantee and when can liability under such a guarantee be avoided?
• Whether guarantors who indemnified an insurer are liable when the insurer settles a claim under a performance guarantee rather than proceeding to a court determination?
• Whether third parties (indemnifiers) lose their right to an indemnity when settlement deprives them of an alleged procedural advantage to contest the underlying claim?
• Whether allegations of fraud by the beneficiary of a performance guarantee could properly be adjudicated in third party proceedings after the beneficiary was no longer a party to the litigation?
• Whether the indemnity claim was conditional upon a court finding of liability before the guarantor could claim against the indemnifiers?

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

The binding legal principles established are: (1) A performance guarantee creates an autonomous obligation to pay upon demand when specified conditions are met, independent of disputes in the underlying contract. Liability can only be avoided if fraud by the beneficiary is established. (2) An indemnifier who executes an indemnity in favour of a guarantor is bound by the terms of that indemnity, including express provisions permitting the guarantor to settle claims and make arrangements without reference to the indemnifier. (3) Third parties served with third party notices under Rule 13 acquire procedural rights from the time of service, including the right to contest the principal claim. If they fail to invoke these rights timeously, they cannot later complain of being deprived of procedural advantages when circumstances change. (4) Once a settlement is incorporated into a court order and the original claimant is no longer a party to proceedings, fraud allegations against that claimant cannot be adjudicated in their absence. There must be a lis between the parties for such issues to be determined. (5) Where an indemnity agreement provides for liability upon demand after payment by the guarantor, the indemnifier's liability is not conditional upon a prior court determination of the guarantor's liability, but arises from the contractual terms and the fact of settlement.

The Court made several non-binding observations: (1) The law favours compromise (transactio) to achieve finality - interest rei publicae ut sit finis litium (it is in the public interest that there be an end to litigation). (2) Self-autonomy, or the ability to regulate one's own affairs, even to one's own detriment, is the very essence of freedom and a vital part of dignity, which underpins the right of parties to settle disputes. (3) Joinder is often simply a form of consolidation and consolidation a form of joinder - these procedures are available to avoid multiplicity of actions but must be invoked by the parties seeking to rely on them. (4) As a general rule, fraud which induces a contract has no effect on the contract unless it proceeds from one of the parties to the contract - fraud by a third person alone will not affect the contract. (5) It is not expected of a guarantor, faced with a valid demand in respect of a performance guarantee, to investigate the contractual position between the beneficiary and the debtor. (6) The purpose of Rule 13 is in broad terms similar to consolidation under Rule 11: to have substantially similar issues tried at a single hearing to avoid disadvantages of multiple trials.

This judgment clarifies important principles regarding performance guarantees and indemnities in South African construction law. It affirms that: (1) Performance guarantees are autonomous instruments creating independent payment obligations upon the occurrence of specified events, separate from underlying contractual disputes. (2) The only defence to liability under a performance guarantee is fraud by the beneficiary (not fraud by third parties or lack of investigation). (3) Guarantors have an inalienable right to settle claims under performance guarantees, and such settlements are favoured by law to achieve finality in litigation. (4) Indemnifiers who fail to timeously invoke procedural rights available to them under Rule 13 cannot later complain of being deprived of such rights when circumstances change. (5) Fraud allegations against a party cannot be adjudicated in that party's absence - proper joinder procedures must be followed. The case demonstrates the courts' approach to balancing commercial certainty in guarantee instruments with procedural fairness, emphasizing that parties must actively exercise their procedural rights rather than relying on passive benefits from other parties' litigation conduct.