High Court rejects insurer’s ‘narrow interpretation’ of construction guarantee

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A variable construction guarantee that ambiguously contained two incompatible expiry dates should be interpreted against the insurer, the High Court in Johannesburg has held.

In March 2015, the applicant, SMBT, concluded a building agreement with Cape Island Construction (CIC) to build a dwelling on its property in Cape Town for R42 795 598. In conjunction with this agreement, SMBT was issued a variable construction guarantee in its favour by Hollard Insurance to pay if CIC defaulted.

In terms of the agreement, SMBT’s principal agent, SBDS Quantity Surveyors, shall issue a final completion certificate once the works reach completion. Within 90 working days of the date of practical completion, SBDS shall issue the final account to CIC. Provided that no objections were made to this account within 45 working days of its receipt, SBDS shall issue a final payment certificate within seven calendar days thereof. If the final payment certificate reflected an amount in favour of SMBT, CIC must make payment of the certified amount within 21 calendar days.

On 6 May 2022, SBDS issued the final payment certificate (a day after issuing the final completion certificate), which certified that CIC owed R2 130 687 to SMBT. CIC failed to make payment despite a written demand on 1 June.

On 9 June, SMBT demanded payment of R855 911 from Hollard under the guarantee. On 14 June, Hollard repudiated SMBT’s demand on the basis that the guarantee had expired. SMBT disputed this, contending that the guarantee had not expired by the time the demand was made.

SMBT applied to the High Court for an order declaring that the guarantee had not expired and for judgment in its favour against Hollard for payment of R855 911, together with interest and costs.

The Court was called upon to consider whether by the time SMBT made demand in terms of the guarantee, it had expired. It was common cause that the dispute between SMBT and Hollard turned solely on the proper interpretation of the guarantee.

Principles of interpretation

The proper interpretation of the guarantee must be performed by applying the established principles articulated in Natal Joint Municipal Pension Fund v Endumeni Municipality and Capitec Bank Holdings Ltd and Another v Coral Lagoon Investments 194 (Pty) Ltd based on the “triad of text, context, and purpose”, Judge Leicester Adams said. In this regard, although the guarantee established a primary obligation on Hollard that was autonomous from (not accessory to) the distinct primary obligations imposed by the building agreement on CIC, the agreement remained part of the relevant context in the interpretation of the guarantee.

Clause 1.1.4 of the guarantee stated that Hollard’s liability for the guaranteed sum served for the period “from and including the day after the date of the applicable final completion certificate and up to and including the date of the final payment certificate” – namely, after 5 May 2022. The guarantee also stated: “Where the final payment certificate reflects payment due to the employer, this construction guarantee shall expire upon payment of the full amount certified.”

Clause 1.2 stated that Hollard’s liability limits set out in clause 1.1.1 to 1.1.4 “shall apply in respect of any claim received by the guarantor during the period in question”. This was from 6 May 2022 until payment of the certified amount.

Judge Adams said these provisions clearly meant the guarantee expired only upon payment of the full certified amount. This was because the final payment certificate certified that CIC owed SMBT the certified amount. It expressly follows that “the construction guarantee shall expire upon payment of the full amount certified”.

Moreover, SMBT demanded payment from Hollard under the guarantee on 9 June 2022. Thus, in accordance with clause 1.2, SMBT’s claim was received by Hollard “during the period” contemplated by clause 1.1.4, which was the period starting on 6 May 2022 (“the day after the date of the applicable final completion certificate”) and ending “upon payment of the full amount certified” (which had yet to occur).

‘Patent contradiction’

The Court examined Hollard’s defence, which relied on its interpretation of the “guarantee expiry date” definition – that is, on the issuing of the final completion certificate – and clause 11, which provided that the guarantee “shall expire in terms of either 1.1.4 or 2.1, or payment in full of the guaranteed sum or on the guarantee expiry date, whichever is the earlier”.

Hollard contended that the guarantee expired on 5 May 2022, which was the date on which the final completion certificate was issued.

Judge Adams concluded that Hollard’s interpretation of the guarantee was untenable. It amounted to “narrow literalism” and entailed “a patent contradiction” between the definition of “guarantee expiry date” and clause 11, on the one hand, and clause 1.1.4, on the other hand.

The former provisions, on Hollard’s “literalist interpretation”, indicate that the guarantee necessarily expired when the final completion certificate was issued on 5 May 2022. Clause 1.1.4, by contrast, explicitly confers a guarantee of R855 911 in relation to the period “from and including the day after the date of the applicable final completion certificate” – after 5 May 2022.

Judge Adams found that Hollard’s literalist interpretation of the guarantee would result in “an absurd and unbusinesslike outcome”: Hollard could never be held liable to make payment because “payment of the full amount certified” necessarily only occurs after the issuance of the final completion certificate.

The judge held that because the “guarantee expiry date” definition amounted to a “general provision”, whereas clause 1.1.4 amounted to a “special provision”, greater weight should be attributed to the special provision.

Further, in accordance with the contra proferentem rule, in cases of ambiguity, a document’s terms should be construed against the party by whom it was formulated. Moreover, a provision in an insurance agreement that purports to limit an express obligation should be restrictively interpreted. Finally, the Court noted that Hollard’s interpretation defeated the primary purpose of the guarantee, which was to protect SMBT if CIC defaults.

Judge Adams held that the guarantee issued by Hollard had not expired. He ordered Hollard to pay SMBT R855 911, plus interest of 7.75% a year from 9 June 2022 to the date of final payment, as well as costs.

Click here to download the judgment.

1 thought on “High Court rejects insurer’s ‘narrow interpretation’ of construction guarantee

  1. Judge Adams in a Race to get into the Constitutional Court as a Judge.

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