Kwikspace Modular Buildings Limited v Sabodala Mining Company SARL and Nedbank Limited

On or about 30 December 2006, Kwikspace Modular Buildings Ltd (the Contractor/appellant), a South African company, entered into a written contract with Sabodala Mining Company SARL (the Principal/first respondent), a Senegalese company, for the supply and installation of an accommodation village at the Sabodala Gold Project Site in Senegal. The contract incorporated Australian Standard General Conditions of Contract AS 2124-1992, with the law of Western Australia applying. The contract required the Contractor to provide performance guarantees. Two performance guarantees, each for R2,651,254, were issued by Nedbank Ltd (second respondent). The guarantees were unconditional and required the Bank to pay on the Principal's first written demand that the Contractor had committed a breach or defaulted. General Condition 5.5 of the contract required that before converting security into money, a party must have become entitled to exercise a right under the contract in respect of the security, and must give two days' notice. Disputes arose during performance. On 24 October 2008, the Principal gave notice of its intention to convert the security. The Contractor sought an interdict to prevent presentation of the guarantees.

• Can a building contractor rely on a term of the building contract to interdict the other contracting party from presenting unconditional performance guarantees to the issuing bank?
• Does the underlying building contract qualify the Principal's right to present the guarantees despite their unconditional wording?
• Does General Condition 5.5 require that the Principal have an actual enforceable right before presenting the guarantees, or is a bona fide belief sufficient?
• Is there a tacit term in GC 5.5 requiring the Principal to set out the grounds for the demand in the notice to the Contractor?
• What is the proper approach to interpreting building contracts containing performance guarantee provisions under Australian law?

Appeal dismissed with costs. The Contractor's application for a final interdict preventing the Principal from presenting the performance guarantees to Nedbank was refused.

The binding legal principle is that while an underlying building contract can contain express terms that qualify or limit a beneficiary's right to present an unconditional performance guarantee to the issuing bank, such terms will not be readily implied or expanded beyond their express language. Where a contract requires a party to have 'become entitled to exercise a right under the contract' before presenting a guarantee, this requires only a bona fide claim to such a right, not an adjudicated or undisputed right. The existence of a dispute does not prevent a party from exercising rights under certificates issued pursuant to the contract, particularly where the contract expressly provides that parties must continue to perform despite disputes. Tacit terms will only be implied into such contracts where necessary to give business efficacy and so obvious that both parties would have agreed - terms that are merely convenient or adverse to one party's interests will not be implied.

The Court expressly refrained from deciding whether South African law would follow Australian law on these issues, noting the decision in Loomcraft Fabrics CC v Nedbank Ltd and English authorities on letters of credit and performance guarantees. The Court noted that fraud (lack of good faith) is a recognized exception to the rule against enjoining payment under performance guarantees in Australia and other jurisdictions, but found it unnecessary to explore the full scope of this or other exceptions in the South African context. The Court observed that even without an implied term requiring the Principal to state grounds in its notice, procedural fairness could be achieved through the usual interlocutory processes - a contractor unaware of the basis for presentation could obtain an interim interdict pending determination, with the principal's case then disclosed in answering papers.

This case is significant in South African law for establishing the principles governing the relationship between building contracts and unconditional performance guarantees. It confirms that: (1) terms in an underlying building contract can, in principle, limit a beneficiary's right to present an unconditional performance guarantee; (2) such limitations must be expressly provided for and will not readily be implied; (3) the autonomous nature of performance guarantees (similar to letters of credit) is respected, with interference only permitted where the underlying contract expressly restricts the right to call on the guarantee; (4) a party entitled to present a guarantee need only have a bona fide claim to an enforceable right, not an adjudicated right; (5) tacit terms will only be implied where necessary for business efficacy and so obvious that both parties would have agreed. The case demonstrates the tension between the commercial need for performance guarantees to be 'as good as cash' and contractual provisions that may limit when they can be called. It provides important guidance on the construction of building contracts incorporating standard conditions and performance guarantee provisions.