In February this year, an urgent application in respect of three performance guarantees of more than R600-million was brought jointly by boiler contractors Hitachi Power Africa and Hitachi Power of Europe (Hitachi) to the South Gauteng High Court against State-owned power utility Eskom in respect of the Medupi power station, in Limpopo.

“The application was launched by Hitachi, the contractor in a construction contract between the two companies for certain construction works to be carried out at the Medupi coal-fired power station,” says law firm Cliffe Dekker Hofmeyr (CDH) construction and engineering group associate Bianca Pollastrini.

She says it is established law in South Africa that no defences can be raised against a demand made under an on-demand performance guarantee, except when fraud has been committed.

Pollastrini explains that a performance guarantee is an undertaking issued by a financial institution, usually a bank, at the request of an entity, usually a contractor, who is required to provide such a performance guarantee in terms of a construction contract. The undertaking guarantees the obligations of the contractor and if the contractor does not comply with its obligations, the employer under the contract can demand that the financial institution pay out the value of the performance guarantee to it, as compensation for the damages it suffers as a result of the contractor’s failure.

She says in reality, a hold is placed on the funds owned by the contractor in the account held by the financial institution, until the performance guarantee is called on or until successful completion of the project. A contractor may, in lieu of funds, also put up security to the satisfaction of the financial institution, i.e. by mortgaging land or equipment to the value of the bond.

According to the Supreme Court of Appeal (SCA) judgment in Eskom Holdings SOC Limited v Hitachi Power Africa (Pty) Limited and Hitachi Power of Europe GMBH, correspondence placed before the South Gauteng High Court revealed that since September 2012, there had been ongoing discussions between the parties, aimed at averting the calling up of the guarantees by Eskom.

“The appeal by Eskom against this judgment was upheld by the SCA on September 12, where the SCA held that, regardless of whether a demand on a performance guarantee is disputed, the performance guarantee, being an on-demand guarantee, could be called on by the employer, without prior notice having been given to the contractor,” Pollastrini explains.
“The SCA specifically noted that a bank, which provides a performance guarantee, is not required to ‘traverse areas which fall outside the scope of its authority’, but merely has to satisfy itself that the requirements contained in the wording of the performance guarantee, if any exist, are met when a demand is made on the performance guarantee,” she adds.

This, she believes, is a welcome affirmation of the law’s position on on-demand performance guarantees.

New Construction and Engineering Law Division
In August, CDH established a specialist construction and engineering law group to cater for the increasing global demand for legal expertise in this sector, especially with regard to construction-specific dispute resolution skills and the negotiating and drafting of construction contracts, explains CDH market- ing head Andrea Collocott.
CDH director Jurg van Dyk explains that the group offers particular expertise relating to all types of claims that arise from construction contracts and dispute resolution, including mediation, arbitration and litigation.

Further, he says the law group can advise on critical aspects of construction and engineering law, such as bonds and guarantees, risk mitigation, insurance and the impact of environmental legislation, as well as on the drafting and negotiating of all forms of contractual documents, whether bespoke contracts or customising the International Federation of Consulting Engineers suite of contracts, New Engineering Contract 3 and Joint Building Contracts Committee contracts.

Regulations

CDH director Joe Whittle notes that regulations recently published by the Construction Industry Development Board will have a marked effect on the construction and engineering sector.

The amended regulations came into effect on August 1 and are designed to improve the Register of Contractors as a risk management tool, taking into account the state of develop- ment of the emerging sector, and to better align registration requirements with the business and operating environment in the construction industry.

“Construction and engineering legal work is a highly specialised field. It is, therefore, imperative that legal advisers in this sector are the specialists in their field, hence, the formation of our highly specialised construction and engineering law group,” concludes Whittle.