CHARACTERISTICS OF ‘ON DEMAND GUARANTEES’

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Author: Stoffel Ackermann
Director STBB | Smith Tabata Buchanan Boyes

Eskom Holdings Soc Ltd v Hitachi Power Africa (Pty) Ltd and Another (139/2013) [2013] ZASCA (12 September 2013)  

In commercial activity, significantly so in the construction environment, it matters greatly what leverage parties have in hand to hold others to performance promises.  Construction guarantees, being such leverage tools, have been the subject of a number of decisions of our courts –  and what the judgments show is that it is crucial to have a very clear picture of the nature of the guarantee involved in any transaction.

In Minister of Transport and Public Works, Western Cape, & another v Zanbuild Construction (Pty) Ltd & another our Supreme Court of Appeal (‘SCA’) noted that South African construction law is familiar with two types of guarantees, the ‘conditional guarantee’ and the ‘on demand guarantee’ (referred to in English law as ‘conditional bonds’ and ‘on demand bonds’ respectively). The two differ: a claimant under a ‘conditional guarantee’ is required, not only to allege but sometimes also to establish liability on the part of the contractor for the amount claimed.  An ‘on demand guarantee’ requires no allegation of liability on the part of the contractor under the construction contracts.  All that is required for payment is to set off the trigger requirement, usually just a demand containing the claimant’s compliance with the terms of the guarantee.

The SCA judgment in Eskom Holdings Soc Ltd v Hitachi Power Africa (Pty) Ltd and Another (139/2013) [2013] ZASCA, handed down on 12 September 2013, dealt with this distinction and the judgment highlights the value of drafting agreements with this distinction clearly acknowledged.
The facts

Mizhuo Corporate Bank Limited of Japan (the Bank) issued guarantees in favour of Eskom to secure performance by Hitachi under a construction contract it concluded with Eskom. The construction contract pertained to the construction of certain of the works at the Medupi Power Station in the Limpopo Province. In terms of the construction contract, Hitachi provided six guarantees drawn on the Bank. Three of these guarantees were in the sums of R300 384 946.13, £21 273 236.13 and US$445 838.25 amounting to a total South African Rand value of over R600 million.

Eskom presented the latter 3 guarantees to the Bank for payment, following a number of disputes that had arisen between the parties concerning Hitachi’s performance of its obligations under the construction contract. Eskom alleged that Hitachi had been guilty of material and ongoing breaches of the construction contract and that Hitachi had failed to perform their contractual obligations timeously. Eskom also claimed that, in view of the said material breaches, it was entitled to demand payment under the guarantees. Hitachi then launched an urgent application seeking, amongst other things, a final order interdicting Eskom until a certain date from demanding payment of the guarantees.
Finding

The SCA made no finding or interpretation on the law relating to guarantees but examined the specific provisions contained in the guarantee in question. It came to the conclusion that the agreement before it required that, for a claim to be made under the guarantee, a signature, indication of the amount demanded and an assertion that the demand amount is payable as set out in the agreement, was required. No entitlement to make a call upon a guarantee need  be proven at the time the demand is made.  These indicators, the Court noted, allow for no conclusion other than that the guarantee in question in these proceedings is an ‘on demand’ or ‘call guarantee’.