Good faith requirement in a guarantee

Patrick Bracher, Norton Rose Fulbright

Where a retention guarantee was provided to a construction company for an amount to be demanded but not exceeding ‘a good faith estimate of the costs’ claimed, the contractor had to show that the demand was made in the honest belief that it was a correct estimate of what it was entitled to be paid under the guarantee. The contractor failed to do so and its claim under the guarantee was unsuccessful.

Because 90% of the estimated amount claimed pertained to costs which did not relate to the guaranteed amount for work to be performed to remedy defects, there was no inference other than that a claim and certification of the claim was made with the knowledge that there was no entitlement to the amount claimed.

In the absence of any explanation from the construction company how they reached the figure, the inference of fraud was drawn.

The claim therefore failed both because there was not a good faith certification of the amount and because there was no explanation for the apparent fraudulent demand.

The good faith certification contemplated was not to be a mere rote estimate but one which required a substantive specification or statement in the demand to enable an objective assessment to be made whether the demand for the guaranteed amount was on a proper basis of future expenses and costs to remedy defects in the contracts works.

[The case is Bryte Insurance Company Limited v Raubex Construction (Pty) Ltd]

First published by: Financial Institutions Legal Snapshot