SUITABLE GURANTEES IN CONSTRUCTION PROJECTS

Generally, a construction guarantee is required by the Employer from the contractor to provide the Employer with security in the event of default or non-performance by the contractor.

The nature of construction guarantees can either be conditional or unconditional. The latter is referred to as an on-demand guarantee which is independent from the underlying construction agreement. This means that the employer (the beneficiary) in whose favour the construction guarantee is payable may invoke the payment in terms of the guarantee at any time during the construction period provided that the demand complies with the terms of the guarantee. The guarantor is legally obliged to honour the demand unless there are exceptional circumstances which a guarantor may wish to raise in objecting the payment thereof, such as fraud. The employer calling up this type of a guarantee does not have to allege the occurrence of any event relating to the construction agreement unless that is a requirement in terms of the guarantee.

Conditional guarantee on the other hand is a guarantee which can only be called up by the employer if certain event(s) relating to the construction agreement have occurred. In his demand the employer must allege the occurrence of an event(s) as recorded in the guarantee. This event, i.e. default or non-performance, is a condition that must occur first before a guarantee can be called up and become payable on demand. The guarantor can use non-occurrence of the event to resist payment.

Construction guarantees have recently received attention of our courts for their proper interpretation. The more recent case is Mutual & Federal v KNS Construction (208/15) [2016] ZASCA 87 (31 May 2016). The court in this matter held that construction guarantee was a conditional guarantee the payment of which depended on non-performance or default by the contractor in terms of the underlying construction agreement. When interpreting the guarantee the court had proper regard to the language used in the document to ascertain the true intention of the parties and came to the conclusion that their intention was that the guarantee would only become payable on demand if the contractor had committed a default in terms of the construction agreement.

This guarantee was held to be akin to suretyship.

Important Note:

It is very important for all parties in construction projects to make sure of the following:

• Be clear about the type and nature of risk to guard against;

• Be clear about the nature and type of default that will expose you to the risk;

• These perceived defaults and risks must be discussed and clearly understood by all the parties involved;

• Be clear about nature and purpose of the appropriate guarantee;

• Negotiate and agree on the terms of the construction guarantee, and make sure that these terms suit the needs of all involved; and

• Make sure that the language used in the guarantee reflects the intention for which the guarantee is sought.

In our view, this will contribute in alleviation of construction disputes between the parties as they would know precisely the kind of performance guarantee and implications thereof.

In light of the case law in respect of the performance construction guarantees, it is important for parties to discuss, negotiate and agree on the nature and purpose of the appropriate performance guarantee for the construction projects.

Prepared by Agrippa Mpungose – (Director) Head of Public Law Department (PMB)
Assisted by Sikhumbuzo Hlope – Candidate Attorney in Public Law department
Tel: 033-341 9107
Email: agrippam@tmj.co.za

This information is published for general information purposes and is not intended to constitute legal advice. Specialist legal advice should always be sought inrelation to any particular situation. Tomlinson Mnguni James will accept no responsibility for any actions taken or not taken on the basis of this publication.