“Loose” language can determine outcome of contracts

Current South African case law indicates that courts will be inclined to find that an on-demand bond only exists where it is clearly – on the basis of interpretation of the documents before the court – intended that the liability of the grantor exists separately from the liability of the contractor.

On-demand bonds entitle the beneficiary to the full amount of the bond on demand and do not require an allegation of liability.

Steel and Engineering Industries Federation of Southern Africa (Seifsa) legal executive Bridgette Mphuthi notes that failure to carefully use the words ‘on demand’, or giving the document such a title, does not mean that a bond can be called upon on demand.

In comparison, construction bonds are largely issued by banks or insurance companies, she says, adding that, under such bonds, there is an obligation to pay a specific amount.

The guaranteed amount a beneficiary is entitled to claim from the grantor is a pertinent issue, which arises when there is ambiguity regarding the type of bond the beneficiary is holding and when the language in which the bond is written proves to be decisive, says Mphuthi.

In the case of Minister of Public Transport and Public Works, Western Cape, versus Zanbuild Construction (2011), the courts clarified the position with regard to the two types of construction bonds – conditional bonds and on-demand bonds – that are frequently found in construction contracts.

“This case dealt with the interpretation of two bonds issued by ABSA Bank in favour of the Western Cape Department of Transport,” notes Mphuthi.

“The question was whether the department was entitled to demand the full amount of the bond or whether ABSA’s liability was limited to the amount of the contractor’s liability under the principle contract,” she explains.

Further, she highlights that, when the bonds were called up, the department failed to contend that it had an identifiable monetary claim under the construction contracts against the contractor for the amount of each bond.

This highlighted the fundamental issue in the matter – the distinction between a conditional and an on-demand bond, Mphuthi points out.

The Supreme Court of Appeal stated in 2011 that the question of whether a bond was a conditional bond or an on-demand bond depended on the interpretation of terms of that particular guarantee.

The court also compared the terms of the guarantee in the bonds with previously decided case law and inferred a substantial difference between the bonds, says Mphuthi.

Conditional Bonds
Conditional bonds often contain the language of a suretyship and provide security for the compliance of the contractor’s performance of obligations in accordance with the contract, explains Mphuthi.

They require the beneficiary to at least allege and, if possible, establish liability on the part of the contractor for the amount claimed, she explains, adding that recovering the amounts due is inevitably a long and drawn-out process compared with an on-demand bond.

On-Demand Bonds
A simple demand made on the specified terms of the bond is all that is needed to secure payment, says Mphuthi, adding that the condition requires that the beneficiary be entitled to call on the guarantor, should the beneficiary state that the contractor defaulted on his or her obligations under the construction contract.

With regard to the terms of the bonds, the court was guided by the wording of the bonds and it held that such existed to provide security for the compliance of the contractor’s performance of obligations, in accordance with the contract, and the due and faithful performance by the contractor, she explains.

The bond provided a scenario where the beneficiary would be entitled to make multiple claims. The court reasoned that there was no rational basis upon which a party would lay claim to less than the total amount such a party was entitled to if a specified event had occurred.

Therefore, the court concluded that the wording gave rise to a liability akin to a suretyship. The court held that the bonds did not constitute on-demand bonds as submitted by the department, but rather that they were conditional upon the liability of the contractor, says Mphuthi.

The beneficiary, therefore, has an obligation to scrutinise the wording of the bond to ensure it is what it purports to be and does what it is intended to do. Failure to do so may result in falling prey to “loose” language and being prevented from enforcing the bond in a court of law, she concludes.