Nurcha Finance Company (Pty) Ltd v Oudtshoorn Municipality

In 2007, Oudtshoorn Municipality awarded a tender for construction of 663 houses to Silver Buckle Trade (Pty) Ltd t/a Yethu Projects (Yethu). Yethu obtained bridging finance from Nurcha Finance Company and ceded to Nurcha all payments payable by the municipality in respect of the project. The municipality gave a written undertaking to Nurcha irrevocably and unconditionally undertaking to pay all moneys due and payable to Yethu into a nominated project account exclusively. The municipality appointed Arcus Gibb as project managers who, together with the municipality's building control officer, would certify completed work through payment certificates. Nurcha relied on these certificates in allowing further loan advances to Yethu. During October 2007 to August 2009, Arcus Gibb certified 39 payment certificates. The municipality paid 36 certificates into the project account but failed to pay three certificates (numbers 7, 8 and 20) into the project account, instead paying them into a different account held by Yethu. The amounts not paid into the project account were R1,493,638.90, R2,086,204.10 and R635,076.49. Yethu subsequently failed to complete the project and the municipality cancelled the building contract with Yethu. Yethu was placed under final liquidation on 14 April 2010. The municipality appointed another contractor to complete the project.

• Whether Nurcha was entitled to rely on the non-payment of payment certificates 7, 8 and 20 into the project account as a basis for its claim for damages against the municipality
• Whether the subsequent cancellation of the building contract between the municipality and Yethu precluded Nurcha's claim based on the municipality's undertaking to pay amounts into the project account
• Whether it was open to the municipality to dispute its liability for payment of those payment certificates on the basis that they were not validly issued

The appeal was upheld with costs, including the costs consequent upon the employment of two counsel. The order of the court below was set aside and substituted with an order that: (a) The defendant (municipality) is ordered to pay the plaintiff (Nurcha) the sum of R2,692,467.43, together with interest thereon at the rate of 15.5 per cent per annum calculated from date of service of the application to date of final payment; (b) The defendant is ordered to pay the plaintiff's costs of suit, including all reserved costs save for those occasioned by the postponement of the matter on 12 March 2012 which are to be paid by the plaintiff, such costs, where applicable, to include the costs of two counsel. A subsequent correction order was issued on 22 July 2016 to correct the date from which interest was to be calculated (from 'service of summons' to 'service of the application').

Where a third party (such as a financier) enters into an independent agreement with a party to a building contract (such as a municipality) in terms of which that party undertakes to pay all moneys due and payable under the building contract into a specific account for the benefit of the third party, that undertaking creates a separate contractual obligation. A breach of that undertaking by failing to make payments as agreed gives rise to a claim for damages by the third party based on breach of contract. This claim is independent of and not affected by the subsequent cancellation of the underlying building contract. The third party's cause of action arises from the breach of the undertaking (the failure to pay into the specified account) and not from the payment certificates or the building contract itself. Once amounts are certified as due and payable and the party makes payment (albeit into the wrong account), the obligation to pay into the specified account has been breached regardless of whether the underlying building contract is subsequently cancelled. Any claims between the parties to the building contract are res inter alios acta as regards the third party's claim for damages arising from breach of the independent undertaking.

The court noted that, strictly speaking, the second question posed (whether it was open to the municipality to dispute validity of the payment certificates) was not a question of law and, in view of the absence of a proper factual basis in the stated case, could not be answered in favour of the municipality. The court also commented that the trial judge's first ground (that parties had not agreed that payment certificates would be proof of what was due and payable) had no merit, noting that it is trite that interim payment certificates of the kind in question provide a self-standing and distinct cause of action which can be enforced without any need to go beyond the certificates or to rely on the underlying building contract. The court distinguished Thomas Construction (Pty) Ltd (in liquidation) v Grafton Furniture Manufacturers (Pty) Ltd, noting that the facts in that case (which dealt with whether a claim under a payment certificate survived cancellation of the building contract) differed markedly from the instant case.

This case is significant in South African contract law for establishing important principles regarding independent contractual undertakings in the context of building contracts and financing arrangements. It clarifies that a third-party undertaking to make payments in a specific manner creates a separate and independent contractual obligation that is not affected by the subsequent cancellation of an underlying building contract. The case demonstrates that where a municipality or other party gives a contractual undertaking to a financier to pay moneys in a specific way, breach of that undertaking gives rise to a claim for damages that survives cancellation of the underlying contract. The judgment provides important guidance on the distinction between claims by contractors under building contracts (which may be affected by cancellation) and claims by third-party financiers based on independent contractual undertakings. It also reinforces the principle that matters between other parties (res inter alios acta) do not affect independent contractual obligations.