Exxaro Coal Mpumalanga (Pty) Ltd v ABSA Bank Ltd and Another (2023/028000) [2024] ZAGPJHC 540 (6 June 2024)

Practice: Demand guarantees and the requisites for an application to intervene.

Author

Ross Shepstone
June 20, 2024

Exxaro and TDS concluded a construction contract in July 2018. As required by the contract, TDS procured a performance guarantee from ABSA in the amount of R32,082,012.90, underwritten by Hollard Insurance.

In June 2020, Exxaro terminated the contract alleging breaches by TDS. Exxaro made two demands on the guarantee the first for the full amount and the second for a reduced amount of R22,165,055.66.  TDS applied to court to interdict payment under the guarantee, alleging the demands were fraudulent and non-compliant. Exxaro opposed this and counter-applied to compel TDS to provide a new guarantee.

In this intervention application, TDS seeks to join the main application between Exxaro and ABSA regarding the guarantee. TDS claims it has an interest allowing joinder based on 1) its financial interest under a deed of indemnity and deposit with Hollard, and 2) to raise fraud/unconscionable conduct by Exxaro. The court must decide if TDS has the requisite direct and substantial legal interest in the main application to be joined as a party to it.

"The device of the guarantee is neat: provided the demand is made on the terms provided in the guarantee instrument, the bank that has issued the instrument must pay in accordance with its tenor. There is no resort had by the bank to any dispute under the contract it secures. Indeed, the very purpose of the guarantee is to avoid embroilment in these contractual disputes which have the potential leave an employer under a construction contract with no redress."

Justice Fisher

Based on the judgment, the key ratio decidendi is:

TDS does not have the necessary legal interest to intervene in the main application between Exxaro and ABSA regarding the demand guarantee. The only basis on which TDS could intervene would be if there was clear evidence of fraud by Exxaro in making the demand on the guarantee. However, the allegations made by TDS do not meet the threshold of establishing even a prima facie case of fraud that would allow TDS to raise the fraud exception to the autonomy of the guarantee.

The mere fact that TDS has certain financial arrangements with Hollard related to the guarantee, or that it alleges unconscionable conduct by Exxaro falling short of fraud, is insufficient to give TDS a direct and substantial legal interest in the outcome of the main application that would justify its intervention. The autonomy of the demand guarantee means TDS has no legal interest in whether ABSA pays Exxaro under the guarantee, and TDS retains its ordinary contractual remedies against ABSA if the guarantee is paid contrary to its terms.

The key cases relied on by the court in its reasoning are:

1. Gordon v Department of Health, Kwazulu-Natal 2009 (6) SA 522 (SCA) at para 9 sets out the test for intervention, i.e. whether a party has a legal interest in the subject-matter which may be affected prejudicially by the judgment.

2. Lebea v Menye and Another [2022] ZACC 40 at para 30 clarifies that the interest must be a legal interest in the order or outcome of the litigation, not just any interest in the dispute.

3. Loomcraft Fabrics CC v Nedbank Ltd and Another [1996] 1 All SA 51 (A); 1996 (1) SA 812 (A) at 815G-J establishes the principle that a demand guarantee is independent of the underlying contract and a bank's obligation to pay arises simply on the occurrence of the specified event in the guarantee. The court will only restrain payment in the most exceptional cases.

4. Lombard Insurance Co Ltd v Landmark Holdings (Pty) Ltd and Others 2010 (2) SA 86 (SCA) para 20 and Coface South Africa Insurance Co Ltd v East London Own Haven t/a Own Haven Housing Association 2014 (2) SA 382 (SCA) paras 10-13 affirm the Loomcraft principle on the nature of demand guarantees.