A REVIEW OF THE DECISION OF THE SUPREME COURT OF APPEAL Coface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association 2014 (2) SA 382 (SCA)

Abstract

Conventionally in construction projects, the construction contractor (principal debtor) appointed by the developer (employer) to construct the project works, will be required to procure security in favour of the developer for the proper performance of its obligations under the (underlying) construction contract. The security so procured is inter alia in the form of a construction guarantee issued by a financial institution (usually a bank or an insurance company) in favour of the developer, at the behest of the construction contractor. Generally, the guarantee can either be what is called “a conditional guarantee”, also known as a “suretyship guarantee”, in which case the guarantee will constitute an accessory obligation to the underlying construction contract – wherein the developer would be required to at least allege and, depending on the terms of the guarantee, sometimes also establish liability on the part of the contractor. Alternatively, the guarantee could be what is called an “ondemand” guarantee, in which case the guarantee will constitute a primary (independent) obligation, wherein no allegation of liability on the part of the contractor under the construction contract is required. Where a guarantee constitutes an on-demand guarantee all that is required for payment is a (written) demand by the claimant, stated to be on the basis of the event specified in the guarantee. The nature of this type of guarantee is such that it is not concerned with disputes arising out of the underlying contract and it is only in cases where there is clear fraud on the part of the beneficiary, where the demand will not be honoured. This is as a result of the principle of autonomyoriginally developed in the context of documentary letters of credit but later applied to other types of payment undertakings such as demand guarantees. The autonomy of demand guarantees (and letters of credit), which hasbeen said to be their essential characteristic, has long been accepted and has long been affirmed in a plethora of cases both locally and abroad. In Coface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association (2014 (2) SA 382 (SCA)), the South African Supreme Court of Appeal overturned its previous decision in Dormell Properties 282 CC v Renasa Insurance Co Ltd (NNO 2011 (1) SA 70 (SCA)) and restated the independence of demand guarantees from underlying contracts. Dormell indicated a divergence from the established autonomy principle. In Dormell Bertelsmann AJA, writing for the majority, seemingly reaffirming the autonomy of the demand guarantee in question, then had regard to an arbitration award and held that the beneficiary (Dormell) had lost the right to enforce the guarantee. In Coface the SCA held that the decision of the majority in Dormell was clearly wrong and should not be followed. This paper considers the unanimous SCA decision and submits that the decision cannot be faulted and should be welcomed. The case is divided into seven sections. Section 2 provides an overview of the facts of the case, section three discusses the application before the High Court, section four discusses the second application before the High Court, section five considers the Dormell decision, section six discusses the case before the SCA. Section seven evaluates the SCA’s (unanimous) decision. The conclusion submits that the unanimous decision is arguably the SCA’s most important in the subject since its landmark decision in Lombard Insurance Insurance Co Ltd v Landmark Holdings (Pty) Ltd and should be welcomed.