Supreme Court ruling “Guaranteed” to be of interest - City of Cape Town v Lombard

The insurance industry and local authorities waited with bated breath for almost two years for closure on the case of City of Cape Town v Lombard Insurance Company Limited.

Lombard Insurance Company issued a guarantee to the Cape Metropolitan Council on behalf of Labor Construction Company (Pty) Ltd who had contracted with the Council to perform certain public works.

What is certain to be of interest is that the Supreme Court of Appeal has overturned the lower court judgment, finding that the insurance company undertook to guarantee the obligations of the contractor as defined in the guarantee and not those of a joint venture unknown to it.

The facts

• The contract successfully tendered for was titled “WW38/99” and specifically defined the obligations of the contractor.
• The tender was awarded to a joint venture comprising Labor Construction and SA Focus.
• The guarantee that was provided cited the contract number and defined Labor Construction as “the contractor” and would pay out in the event of the contractor being provisionally sequestrated.
• No misrepresentation or non-disclosure was made to the insurer regarding which parties were to perform the contracted work in terms of the tender. The application for the guarantee submitted to the insurer was accompanied by relevant documents disclosing the fact that the tender had been awarded to a joint venture, which the insurer failed to notice.
• The insurer, due to this oversight, therefore issued the guarantee calculated on the basis of the risk profile which it had maintained on Labor Construction only, as opposed to the joint venture’s risk profile.
• When Labor Construction was provisionally liquidated shortly after commencing work on the tendered contract, the Council instituted action against the insurer, who denied liability on the basis that it had intended to cover only the obligations of the contractor as defined in the guarantee and not those of the joint venture.
• The Council contended that the guarantee covered the possible occurrence of Labor Construction being provisionally sequestrated, and as this suspensive condition had been fulfilled, the insurer was liable to pay out in terms of the guarantee contract.

Trial court’s reasoning:

The lower court found in favour of the Council on the basis that the wording of the contract was ‘capable of a construction to the effect that the intention of such agreement was to indemnify the obligations of Labor’.

Appeal court’s approach:

The SCA found that the main issue revolved around the correct interpretation of the guarantee. Its reasoning was:

• On the grammatical and ordinary meaning of the language of the guarantee, it is clear that Lombard Insurance guaranteed the due performance of works by the defined contractor, Labor Construction, in respect of a specific agreement concluded with the Council.
• Therefore, as the Council tender was awarded to the joint venture and not Labor Construction, the guarantee provider could not be held liable.
• As concisely stated by Mhlantla AJ, ‘It is accordingly evident that the appellant did not undertake to secure the obligations of the joint venture or of Labor Construction as a partner in a joint venture. The guarantee covered Labor Construction as a sole entity.’

Analysis of the judgement

This ruling has an impact on the insurance industry and the interpretation of contracts of guarantee.

The Appeal court, some may feel, has erred in its finding and placed too much emphasis on the parties’ expressed intention. It can be argued that it failed to take cognisance of the fact that Labor Construction expressly, and as conceded by the insurance company, disclosed to the insurer that the contract was awarded to a joint venture and that Lombard Insurance, when issuing the guarantee, ought to have been aware of the existence of the joint venture and raised the issue.

However, the Court of Appeal has set the tone for the interpretation of such contracts. The correct decision has been made in that:

• the language of the guarantee was unambiguous and the intention of the parties had therefore to be determined from this document;
• the guarantee covered Labor Construction as a sole entity, and not the obligations of a joint venture.

What readers and the public should take away from this ruling is the importance of correctly defining the contracting parties and the responsibilities of both such parties to ensure that they are entirely satisfied with the terms and definitions contained in the contract. It is further highlighted that the court is even prepared to overlook attempts by one of the contracting parties to notify the counterparty of the circumstances relating to the contract and the requisite terms. Once again, the importance of the age old maxim of caveat subscriptor (beware what one signs) has been emphasised.

By Jason van Dijk, Candidate Attorney, Deneys Reitz Inc.