When is non-compliance compliance?

When is non-compliance compliance?

The practice of construction contractors providing employers or clients with performance security has become common in the construction industry, which is typically an unconditional, on-demand guarantee bond, provided by a bank or insurer (guarantor) who undertakes to pay the employer a specified amount of money if the contractor fails to perform its contractual obligations.

It has long been established that a bond exists independently of the underlying construction contract. The essence of a bond is described by legal commentators as being derived from the express wording of the document which triggers the contractor’s liability upon a call on the bond by the employer, provided that the call is expressed in accordance with the requirements inferred from the wording of the bond.[1]

For this reason, the degree of compliance will often be disputed in order to avoid making payment in terms of the bond.  It is established in the Gauteng Local Division that the doctrine of strict compliance is not always strictly applied in the case of bonds. The judgment of Lombard Insurance Company v Schoeman and others [2018] 1 All SA 554 (GJ) has confirmed this principle.

In Lombard Insurance v Schoeman, the Gauteng Local Division recently had to determine whether there was compliance with the terms of the bond under circumstances where the employer’s demands for payment were made to the guarantor at its address, rather than at the address of the employer as stipulated in the bond.[2]

In terms of this case, the applicant instituted three claims against the respondents for the payment of amounts owed to the applicant by, the now liquidated, Golden Sun. The third claim is not relevant for the purpose of this article.

In respect of claims 1 and 2, Lombard Insurance claimed payment of the amounts which it paid to Sasol (the employer) pursuant to two separate demands in terms of the bond. According to Lombard Insurance, the employer’s failure to comply with the terms of the bond resulted in an invalid claim. Lombard Insurance noted that the employer did not comply with the terms of the bond on the basis that it received the demands at its business address and not the address noted in the bond. As such, Lombard Insurance alleged that it had no legal liability to have made payment to the employer.

The court noted that when considering the peculiar factual matrix within which the issue of a proper construction of the Sasol bond must be considered, Lombard’s receipt of Sasol’s demand which contained the required statement, was the event on which liability depended. The court echoed the  contractual interpretation principles held in Natal Joint Municipal Pension Fund v Endumeni Municipality[3], which noted that a sensible meaning is to be preferred to one that leads to insensible or unbusiness – like results or undermines the apparent purpose of the document.[4]

Accordingly, the court agreed that the demand had to conform with the requirements of the guarantee, the provisions of which were negotiated and agreed between Lombard and Sasol, absent any input or mandate from the client.[5] In interpreting the wording of the bond, the contract favoured a practical and business- like interpretation and held that “as long as proper demand was made and received, the place at which it was received did not affect or compromise the rights and interests of the client beyond the parameters of the commitments acceded to in the bond”.[6]

Despite previous judgements of the same nature (Kristabel Developments (Pty) Ltd v Credit Guarantee Insurance Corporation of Africa Limited [7] and University of the Western Cape v Absa Insurance Company Ltd [8]), legal commentators have questioned the court’s decision regarding the degree of compliance required if only substantial compliance is acceptable.

Where is the line drawn? is the question which comes to mind. It is suggested that the words “strict compliance with the terms of this on-demand bond is a requirement” should be added to the standard form guarantee contracts.

However, the law is clear: insurers and contractors should refrain from circumventing the consequences of a guarantee bond, where the employer has complied with the necessary hurdles in calling a bond. The courts have, and continue to ascribe, a meaning to the language used in bonds that avoids an absurd result.

In a nutshell, under South African law, non-compliance is acceptable is it constitutes substantial compliance.

 

Authors:

Nikita Lalla, Chief Executive, LNP Attorneys
Zama Ngcobo, Director, LNP Attorneys
Thandeka Nene, Associate

 

[1] Ibid 1318.

[2] [2018] 1 All SA 554 (GJ) para 34.

[3] 2012 (4) SA 593 (SCA) para 18.

[4] 2012 (4) SA 593 (SCA) para 18.

[5] [2018] 1 All SA 554 (GJ) para 50.

[6] Ibid para 51.

[7] (23125/2014) [2015] ZAGPJHC 264 (20 October 2015).

[8] (100/2015) [2015] ZAGPJHC 303 (28 October 2015).