The recent Supreme Court of Appeal (SCA) case of Bonifacio and Another v Lombard Insurance Company Ltd (247/2023) [2024] ZASCA 86 (4 June 2024) centred on the issue of performance guarantees. Specifically, the case examined whether third parties who indemnified a guarantor against payment are liable to the guarantor where the guarantor had made payment based on a settlement and whether settlements deprive third parties of procedural advantages that might excuse them from liability.

The salient facts

DBT Technologies (Pty) Ltd (DBT) was appointed as a subcontractor for the fabrication, painting and erection of six ACC units at the Kusile Power Plant. DBT further subcontracted its works to TCP, which procured an on-demand guarantee in favour of DBT. Lombard Insurance Company Limited (the insurer) issued the guarantee in favour of DBT for an amount of R128,375,851.20. The guarantee provided that the insurer held this amount at the disposal of DBT and undertook to pay it on a written demand for payment, signed on behalf of DBT by an executive director, stating that the amount demanded was payable in terms of the subcontract with TCP and the circumstances of TCP’s breach under the subcontract.

On 7 June 2019, the first and second appellants executed a deed of suretyship and indemnity in favour of the insurer. The appellants indemnified the insurer:

“[A]gainst any claims, losses, demands, liabilities, costs and expenses of whatsoever nature, and legal costs as between attorney and client, which the insurer may at any time sustain as a result of having executed any guarantee on behalf of TCP.”

The appellants were to pay any sum which the insurer may be called upon to pay on demand. The indemnity further permitted the insurer to enter into compromises and/or accept settlements.

A written demand for the full guarantee amount was submitted by DBT to the insurer on 13 January 2020. The insurer, in compliance with the indemnity, demanded payment of the amount from the appellants on 15 January 2020. Following the insurer’s failure to pay in terms of the demand, DBT launched an application against the insurer for an order inter alia directing compliance with the guarantee.

The High Court

TCP and the insurer opposed the relief sought by DBT. The parties alleged that the demand was fraudulent as the guarantee amount covered work already completed and in respect of which taking-over certificates should have been issued which in turn ought to have reduced the guaranteed amount. The insurer served third-party notices on 10 third parties, including the appellants. The parties were advised that they were required to give notice of their intention to oppose the insurer’s claim to an indemnification or DBT’s claim against the insurer. The appellants did not give such notice or take any steps in advancing their defences on the basis that TCP and the insurer were opposing the claim.

Later, TCP was liquidated, and the appellants’ broker informed them that the insurer was reluctant to continue opposing the main application in TCP’s absence, as it had misgivings advancing a fraud defence of which it had no personal knowledge. Consequently, the insurer concluded a settlement agreement with DBT for payment in the amount of R100 million (the settlement). The settlement was made an order of court by the High Court.

Pursuant to the order, the appellants delivered a counterapplication in which they applied for condonation, filed answering affidavits opposing the third-party relief claimed by the insurer, asked that the dispute between them and the insurer be referred for trial, and claimed rectification of the indemnity. In the answering affidavits, the appellants opposed the claims against them on the basis that the calling up of the guarantee had been fraudulent.

The appellants contended that they had been released from their obligations prior to being joined as third parties and that the settlement deprived them of a procedural advance to present their defences to the claim of the insurer and DBT. Lastly, they contended that the insurer was stopped from claiming from them. The insurer denied the defences raised by the appellants and the rectification claim. It contended that it had not colluded in any alleged fraud by DBT and accordingly the issue of fraud had to be resolved as between DBT and the appellants.

The court a quo concluded that it did not have to make a finding regarding: the alleged fraud; that the insurer sought indemnity based on a change in factual circumstances instead of an adverse finding against it by the court; that the matter did not need to be referred to trial where DBT, which allegedly acted fraudulently, was no longer a party in the main application; and that the appellants were liable to indemnify the respondent.

The appeal

The SCA had to consider whether it was competent for the High Court to enquire into the issue of any fraud on the part of DBT on the affidavits/pleadings after the settlement between the insurer and DBT was made an order of court. The appellants contended that the High Court ought to have found that the settlement did not entitle the insurer to obtain an indemnity in terms of the third-party procedure as that procedure entitled the appellants to contest the claim by DBT against the insurer, but the appellants’ right had been affected by the settlement to their prejudice.

The SCA referred to Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd [2009] 4 All SA 322 (SCA) where the court affirmed that the obligations arising out of a guarantee are not affected by any disputes that arise between the parties during the execution of the underlying contract. The insurer’s obligation remains to honour the guarantee and pay where the conditions of the guarantee are met. The appeal court found that the liability of the insurer arose as a consequence of a written demand for payment by DBT to the insurer as contemplated by the guarantee on 13 January 2020. This liability was unaffected by any disputes between the parties.

The court held that the only basis upon which the insurer could avoid liability under the guarantee would be where there was fraud on the part of DBT. TCP would have had to demonstrate that DBT knowingly presented a written demand that misrepresented the true facts. For the appellants to avoid a claim for an indemnity based on fraud, they would have to demonstrate fraud on the part of the insurer; that the written demand by DBT was fraudulent; and that the insurer paid a claim which it knew was not due and thereby colluded in the fraud of DBT.

The SCA found that the appellants had not alleged any fraud on the part of the insurer and accordingly held that the High Court was correct that it did not have to consider the question of fraud. In respect of any allegations of fraud against DBT, the court stated that DBT would be an essential party to any proceeding which sought to enquire on whether it acted fraudulently when calling up the guarantee. A finding of fraud could not be made in DBT’s absence.

On the question of whether the settlement denied the appellants a right in Rule 13(6) to file an affidavit to contest the claim of DBT against the insurer, the court stated that the appellants were aware, at the latest, by November 2020, if not October, that the insurer had decided to settle with DBT. At that stage they had the opportunity to take steps to establish any procedural rights they might have had for the fraud allegations to be ventilated fully, including filing an affidavit to contest the claim of DBT (in terms of Rule 13(6)).

However, the appellants did not take any steps. The court accordingly found that they were to blame for losing their opportunity to file the affidavit when the settlement was made an order of court on 1 February 2021.

The SCA found that the appellants still retained other procedural rights following the settlement. However, the appellants had also failed to exercise these procedural rights. It stated that the appellants could have opposed the claim by the insurer, pursued a joinder of DBT in terms of the provisions of Rule 24, or even issued a third-party notice against DBT to ensure that DBT became party to the proceedings. However, the appellants did not take any of these steps. This meant that there were no proceedings between DBT and the appellants where the issue of fraud could be addressed by the court.

In the circumstances, the SCA held that the issue of any fraud on the part of DBT was not an issue which properly arose for determination by the High Court and the High Court was correct to not consider it as it was not competent to do so on the pleadings. The appeal was accordingly dismissed with costs.

Conclusion

The case affirms the trite law that performance guarantees are enforceable, except where there is fraud on the part of the party that seeks to enforce the guarantee. However, as the case demonstrates, the party that raises the defence of fraud must have personal knowledge of these facts. In the absence of a valid defence, the guarantor is required to honour its obligations under a guarantee.

The case further confirms that the conclusion of a settlement agreement for the purposes of complying with a demand for payment under a performance guarantee does not in itself impede the procedural rights of a third party to raise any valid defences against the claim by the indemnified party.