Hollard Insurance has secured a High Court order for the payment of more than R2.7 million in judgment that upholds the enforceability of guarantees in the face of external disruptions to construction projects.
The case arose from a guarantee of R2 770 029.30 issued by Hollard to Sasol Mining (Pty) Ltd on behalf of Lynco Projects (Pty) Ltd, a civil engineering company based in Secunda.
Sasol awarded Lynco a contract to construct a water pipeline in the Charl Cilliers settlement in Mpumalanga.
When Lynco failed to complete the project because of community unrest and intimidation, Sasol made a claim on the guarantee, which Hollard paid in January 2022. The respondents, who had signed suretyships, failed to reimburse Hollard despite demands.
Hollard initiated proceedings against Lynco (the first respondent) and six other respondents, including representatives of Lynco and individuals who had entered suretyship agreements.
Hollard obtained judgments against the second, third, and fourth respondents, because they did not oppose the application. The application that came before the High Court in Mbombela was contested by the first, fifth, sixth, and seventh respondents.
The substantive defence raised by the remaining respondents was that performance of their contractual obligations had become impossible because of external factors.
The respondents said members of the Charl Cilliers community disrupted the project because they were unhappy that the contract had been awarded to Lynco and because the company did not employ members of the community.
When Lynco did not meet the community’s demands, its employees were intimidated, its equipment was stolen or hijacked, and the installed pipelines were vandalised. Efforts to resolve the situation, including negotiations led by Sasol’s project manager and the deployment of security officers, proved ineffective. Although the police were informed of the situation, they were unable to resolve it.
The respondents argued that because of the community’s interference and the inability to secure protection, it became impossible for Lynco to continue the project. Consequently, Lynco terminated the contract with Sasol in October 2021.
The judgment addressed two key legal issues.
First, the respondents’ defence of supervening impossibility. They argued it was impossible for Lynco to continue with the project because of the community’s interference. This external factor should absolve them of liability under the guarantee.
Second, the nature of the guarantee issued by Hollard. The court assessed whether the guarantee was independent of the underlying contract and whether Hollard’s liability was affected by the impossibility of performance argument raised by the respondents.
Guarantees are independent
In a judgment handed down in December last year, Judge Takalani Ratshibvumo dismissed the respondents’ defence of supervening impossibility, focusing on the independence of the guarantee issued by Hollard.
The court emphasised that the purpose of the guarantee was to secure performance by the Lynco in case of default, and this purpose was not contingent on the performance of Lynco’s primary contract with Sasol. In this sense, Hollard’s obligation to pay was triggered by Lynco’s failure to perform its duties, not by the intervening circumstances or challenges it faced.
Judge Ratshibvumo referred to the case of Lombard Insurance Company Ltd v Landmark Holdings (Pty) Ltd, where the Supreme Court of Appeal described the nature of guarantees like the one in question:
“The guarantee by Lombard is not unlike irrevocable letters of credit issued by banks and used in international trade, the essential feature of which is the establishment of a contractual obligation on the part of a bank to pay the beneficiary (seller). This obligation is wholly independent of the underlying contract of sale and assures the seller of payment of the purchase price before he or she parts with the goods being sold. Whatever disputes may subsequently arise between buyer and seller is of no moment insofar as the bank’s obligation is concerned.”
The citation underlines that the guarantee was independent of the underlying contract between Lynco and Sasol. Hollard’s obligation, similar to a bank’s obligation in the context of irrevocable letters of credit, is simply to honour the guarantee, provided the conditions are met, irrespective of disputes between the primary contracting parties.
Judge Ratshibvumo further clarified that the only exception where Hollard could be absolved from liability is in the case of fraud by the beneficiary, but no such allegation was made by the respondents.
There was also no suggestion that Hollard obstructed Lynco from performing its contractual obligations. In addition, the respondents did not contest the validity of the contract between them and Hollard.
Judge Ratshibvumo said the critical elements that triggered the respondents’ obligation were:
- Confirmation that Hollard issued the guarantees in favour of the beneficiary, Sasol.
- Confirmation that Sasol made a claim under the guarantee.
- Confirmation that Lynco failed to perform the insured task.
He emphasised that once these conditions were met, as they were in this case, the respondents’ obligation to pay under the guarantee must be upheld.
Judge Ratshibvumo ordered the respondents to pay Hollard R2 770 029.30 plus interest of 2% calculated from 22 August 2019 to the date of payment. They were also ordered to pay costs on the attorney and client scale.
The judgment reinforces the principle that guarantees are independent instruments, and the liability of the guarantor is not affected by the performance or non-performance of the underlying contract.
The court’s decision also highlights the strong enforceability of guarantees in commercial contracts. Even if external circumstances make it impossible for one party to perform its obligations, the guarantor remains liable unless there is fraud.
