THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT

Case no: 756/10
In the matter between:

COMPASS INSURANCE COMPANY LTD

Appellant

and

HOSPITALITY HOTEL DEVELOPMENTS (PTY) LTD
Respondent

Neutral citation:
Compass Insurance v Hospitality Hotel (756/10) [2011
ZASCA 149 (26 September 2011)

Coram:

Lewis, Van Heerden, Cachalia, Malan and Leach JJA

Heard:

09  September 2011

Delivered

26 September 2011
Summary:
Where construction guarantee requires that court order of
liquidation of contractor be attached to demand for payment, in absence of
order, demand non-compliant and guarantor not liable to pay.

______________________________________________________________
ORDER
______________________________________________________________
On appeal from: South Gauteng High Court, Johannesburg (Willis J sitting as
court of first instance):
The appeal is upheld with costs. The order of the court below is replaced with:
‘The application is dismissed with costs.’
______________________________________________________________
JUDGMENT
______________________________________________________________

LEWIS JA (VAN HEERDEN, CACHALIA, MALAN AND LEACH JJA
concurring)
[1] The sole question in this appeal is whether the respondent, Hospitality
Hotel Developments (Pty) Ltd (Hospitality Hotel), complied with the
requirements of a performance guarantee given by the appellant, Compass
Insurance Company Ltd (Compass Insurance), in making demand for
payment.

[2] Hospitality Hotel is a property development company that had been
engaged to carry out an upgrade of a hotel. It engaged the services of a
construction company for this purpose, and that in turn engaged a
subcontractor to install a computer network, wireless and internet system in
the hotel. Compass Insurance is a short term insurer which issues
construction (performance) guarantees to employers or owners. On 4
February 2008 it issued a construction guarantee to Hospitality Hotel for the
performance of the work undertaken by the subcontractor. The sum

guaranteed was R1 444 428.51 and the guarantee expiry date was 30 April
2008.

[3] The subcontractor breached the contract, and was issued a breach
notice. It was provisionally wound up in the Western Cape High Court on 23
April 2008. On 25 April Hospitality Hotel sent a letter to Compass Insurance
demanding payment of the sum guaranteed. The latter refused to pay on the
basis that the demand did not comply with the terms of the guarantee in that it
was not accompanied by a copy of the court order of provisional sequestration
of the subcontractor. Hospitality Hotel accordingly applied to the South
Gauteng High Court, Johannesburg, for an order compelling payment. Willis J
granted the order on the basis that, because the order had been furnished
subsequently, there had been sufficient compliance with the terms of the
guarantee. The appeal to this court against that order is with its leave.

[4] Clause 4 of the construction guarantee provided that, subject to the
guarantor’s maximum liability, Compass Insurance undertook to pay
Hospitality Hotel the full outstanding balance ‘upon receipt of a first written
demand from the Employer [Hospitality Hotel]’. The sub-clauses that follow
are the subject of the dispute. For they provide that the written demand must
state:
‘4.1 The agreement has been cancelled due to the Recipient’s [the subcontractor’s]
default and that the Advance Payment Guarantee is called up in terms of 4.0. The
demand shall enclose a copy of the notice of cancellation;
OR
4.2 A provisional sequestration or liquidation court order has been granted against
the Recipient and that the Advance Payment Guarantee is called up in terms of 4.0.
The demand shall enclose a copy of the court order.’ (My emphasis.)

[5] It is common cause that there had in fact been no cancellation at the
time the letter of demand was sent, though the letter did state that there was,
and that the subcontractor was provisionally liquidated prior to the issue of the
demand. But it is further common cause that the court order was not attached
to the letter of demand, as required by clause 4.2 of the guarantee. The copy

of the court order was delivered only months later, on 26 November 2008,
long after the expiry of the guarantee on 30 April 2008.

[6] The high court, referring to cases dealing with contractual
interpretation, held that on a reading of the guarantee it was ‘perfectly
obvious’ that it was not the intention of the parties that a failure to furnish the
copy of the court order with the demand would be ‘fatal’ to it. The sentence
relating to the furnishing of the copy of the court order was ‘divisible’ from the
aspects entitling the beneficiary to payment. The copy could thus be provided
after the expiry of the guarantee date. Compass Insurance was thus liable to
pay the sum claimed.

[7] Hospitality Hotel’s argument in opposing the appeal is that all
concerned knew that the subcontractor had in fact been liquidated; there was
some difficulty in obtaining the order, however, and that once there was
knowledge of the existence of the order that was sufficient for demand to be
made. The demand was not defective, it contended, despite the failure to
attach the order to it. Strict compliance with the terms of the guarantee was
not required.

[8] Hospitality Hotel argued that while strict compliance with letters of
credit has been required by South African courts, performance guarantees
should be treated differently. Although this court said in Lombard Insurance
Co Ltd v Landmark Holdings (Pty) Ltd1 that the performance guarantee in
question was not unlike an irrevocable letter of credit, Hospitality Hotel
contended that there is no authority to suggest that there must be strict
compliance with the terms of the guarantee.

[9] The reason for requiring strict compliance with a letter of credit is that it
is an instrument that compels a bank to pay on demand irrespective of the

1 Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd 2010 (2) SA 86 (SCA) para 20.

status of the underlying debt.  Nugent JA put it thus in OK Bazaars (1929) Ltd
v Standard Bank of South Africa Ltd:2
‘[The bank’s] interest is confined to ensuring that the documents that are presented
conform with its client’s instructions (as reflected in the letter of credit) in which event
the issuing bank is obliged to pay the beneficiary. If the presented documents do not
conform with the terms of the letter of credit the issuing bank is neither obliged nor
entitled to pay the beneficiary without its customer’s consent. The obligation of the
issuing bank was expressed as follows in Midland Bank Ltd v Seymour [1955] 2
Lloyd’s Rep 147 at 151:

“There is, of course, no doubt that the bank has to comply strictly with the
instructions that it is given by its customer. It is not for the bank to reason why. It is
not for it to say: ‘This, that or the other does not seem to us very much to matter.’ It is
not for it to say: ‘What is on the bill of lading is just as good as what is in the letter of
credit and means substantially the same thing.’ All that is well established by
authority. The bank must conform strictly to the instructions which it receives.”’

[10] Some years after the decision in Midland Bank Lord Denning, then MR,
said in Edward Owen Engineering Ltd v Barclays Bank International Ltd3 that
performance bonds stand ‘on a similar footing’ to letters of credit. ‘A bank
which gives a performance guarantee must honour that guarantee according
to its terms.’ (My emphasis.)

[11] However, Hospitality Hotels argued that performance bonds should be
treated differently and that strict compliance with the terms of the bond was
unnecessary. It contended that there is English authority for this proposition. It
cited Siporex Trade SA v Banque Indosuez4 in which Hirst J said that a
contrast between a letter of credit and a performance guarantee was ‘sound’,
since with the former the bank deals with the documents themselves, whereas
with the latter the guarantor can rely on a statement that a ‘certain event has
occurred’. This statement was approved by the Court of Appeal in IE

2 OK Bazaars (1929) Ltd v Standard Bank of South Africa Ltd 2002 (3) SA 688 (SCA) para
25.
3  Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 (CA) at
171A-B. The case was cited and approved in Loomcraft Fabrics CC v Nedbank Ltd 1996 (1)
SA 812 (A) at 816G-H and in the judgment of Cloete JA in Dormell Properties 282 CC v
Renasa Insurance Co Ltd & others NNO 2011 (1) SA 70 (SCA) para 63.
4 Siporex Trade SA v Banque Indosuez [1986] 2 Lloyd’s Rep 146 at 159.

Contractors Ltd v Lloyds Bank plc and Rafidain Bank5 where Staughton LJ
said that there is less need for a doctrine of strict compliance in the case of
performance bonds. But he said also that ‘it is a question of construction of
the bond’.

[12] Dr Michelle Kelly-Louw in her LLD thesis Selective Legal Aspects of
Bank Demand Guarantees6 suggests that English courts have in fact started
to apply the same degree of ‘strict compliance’ to demand guarantees as to
letters of credit, citing in support Frans Maas (UK) Ltd v Habib Bank AG
Zurich.7 She states that courts in South Africa will also apply to demand or
performance guarantees the same ‘standard of strict documentary
compliance’ as they do to letters of credit.8 However, that case turned, like
most, on the interpretation of the guarantee itself, and while observing that
strict compliance might not be necessary for performance bonds (citing
Siporex and IE Contractors), the court held that the demand in question did
not comply with the terms of the guarantee.

[13] In my view it is not necessary to decide whether ‘strict compliance’ is
necessary for performance guarantees, since in this case the requirements to
be met by Hospitality Hotel in making demand were absolutely clear, and
there was in fact no compliance let alone strict compliance. The guarantee
expressly required that the order of liquidation be attached to the demand. It
was not.

[14] It should not be incumbent on the guarantor to ascertain the truth of the
assertion made by the beneficiary that the subcontractor had been placed
under provisional liquidation. That is why Compass Insurance required a copy
of the order itself. Similarly, the guarantor should not have to establish
whether a contract has in fact been cancelled. That is why a copy of the
notice of cancellation, if there has in fact been cancellation, is required to be

5 IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496 (CA) at
501.
6 University of South Africa (2008) at 68-69.
7 Frans Maas (UK) Ltd v Habib Bank AG Zurich [2001] Lloyd’s Rep Bank 14 paras 57-60.
8 Op cit at 332-333.

attached to the demand (clause 4.1). The very purpose of a performance
bond is that the guarantor has an independent, autonomous contract with the
beneficiary and that the contractual arrangements with the beneficiary and
other parties are of no consequence to the guarantor.

[15] There may be cases where what is referred to as a guarantee
constitutes no more than an accessory obligation.9 However, it is the terms of
the guarantee itself that will determine its nature. The guarantee in this case is
an independent contract that must be fulfilled on its terms. There is no
justification for departure and indeed allowing the furnishing of the copy of the
court order months after the guarantee had expired would have defeated its
very purpose.

[16] Accordingly the appeal is upheld with costs. The order of the court
below is replaced with:
‘The application is dismissed with costs.’

_____________
C H Lewis
Judge of Appeal

9 As in Minister of Transport and Public Works, Western Cape v Zanbuild Construction (Pty)
Ltd  (68/2010) [2011] ZASCA 10.

APPEARANCES:

APPELLANT:

C J McAslin

Instructed by

Frese, Moll & Partners, Roosevelt Park

Webbers, Bloemfontein

RESPONDENT:

T Dalrymple
Instructed by

Mkhabela Huntley Adekeye Inc, Waverley

McIntyre & Van Der Post, Bloemfontein.