Basil Read (Pty) Ltd v Beta Hotels (Pty) Ltd and Others

• Jurisdiction: South Africa
• Judgment Date: 15 December 1999
• Citation: 2001 (2) SA 760 (C)

Basil Read (Pty) Ltd v Beta Hotels (Pty) Ltd and Others
2001 (2) SA 760 (C)

2001 (2) SA p760

Citation	2001 (2) SA 760 (C)
Case No	12232/99
Court	Cape Provincial Division
Judge	Van Reenen J
Heard	November 30, 1999
Judgment	December 15, 1999
Counsel	D R Mitchell SC for the applicant.; W R E Duminy SC for the first respondent.; No appearance for the second and third respondents.

Flynote : Sleutelwoorde H

Engineering and construction law — Building contract — Penalties — Penalty for late completion of work — Penalty I provided for in standard form building contract recommended by Joint Building Contracts Committee, June 1991 edition — Contract providing that contractor liable for penalties in event that works completed after practical completion date set by architect — Clear from provisions of contract that intention not that contractor's obligation to pay penalties should be suspended pending conclusion of dispute resolution proceedings such as arbitration. J

2001 (2) SA p761

Engineering and construction law — Building contract — Construction A guarantee — Construction guarantee provided for in standard form building contract recommended by Joint Building Contracts Committee, June 1991 edition — Such in nature of suretyship agreement — Accordingly, obligation of guarantor to employer accessory to that of contractor and guarantor liable to employer only if and to extent that contractor contractually liable to employer. B

Principal and surety — Suretyship — What constitutes — Construction guarantee — Construction guarantee provided for in standard form building contract recommended by Joint Building Contracts Committee, June 1991 edition — Such in nature of suretyship agreement — Accordingly, obligation of guarantor to employer accessory to that of contractor and guarantor liable to employer only if and to extent that contractor contractually liable to employer.

Headnote : Kopnota

The applicant, a building contractor, and the first respondent had on 8 December 1997 concluded a standard form building contract as recommended by the Joint Building Contracts Committee (June 1991 edition) in terms of which the applicant undertook to execute works consisting of alterations and additions to a hotel owned by the first respondent. In terms of clause 14 of the contract the applicant was C obliged to furnish a construction guarantee in terms of which the third respondent, a bank, undertook to pay the first respondent on written demand an agreed sum 'in respect of expenses or loss incurred or to be incurred' by it as a result of 'non-performance or breach' of the contract. The guarantee was in the form laid down by the JBCC and was annexed to the contract. The contract specified that the works D had to be brought to a state of practical completion (viz substantially complete in the opinion of the architect (after 2 July 1999, the second respondent) and capable of effective use for the intended purpose) by 3 August 1998 (clause 24 read with clause 1.1.26), and that the applicant was obliged to pay a penalty of R5 000 per day in the event of late completion (clause 27 read with clause 38.3.2). The E applicant was, however, entitled to seek an extension of the construction period during which time these penalties would not be payable (clause 23). After the appointment of the second respondent as architects the applicant applied for an extension of the date of practical completion to 13 August 1999, but the second respondent was only willing to adjust the completion date to F 26 February 1999. The applicant disagreed with the second respondent's decision and declared a dispute, which was referred to arbitration. It was common cause that the second respondent had certified that the applicant was obliged to pay penalties in respect of the period 27 February 1999 to 13 August 1999; that the first respondent became entitled to invoke the provisions of clause 31 for their recovery (clause 27.4); that in terms of clause 31.4 any G expense or loss resulting from penalties payable in terms of clause 27 was recoverable by the first respondent from moneys due to the applicant under the next interim payment certificate and any balance from (i) any or all subsequent payment certificates, (ii) the construction guarantee or (iii) the applicant; that the first respondent was entitled to recover penalties amounting to R840 000 H from the applicant but had invoked set-off against an amount of R317 864,23 payable by it to the applicant under the last interim payment certificate; that the applicant had failed to pay the balance of R522 135,77; that the first respondent had notified the second respondent in writing that it intended recovering the said amount from the performance guarantee (clause 36.1); and that the second respondent had notified the applicant and the third respondent I that the first respondent had decided to recover the balance from the construction guarantee. In terms of clause 31.6 the next step was for the employer (the first respondent) to issue a demand in writing to the guarantor (the third respondent) 'calling up the construction guarantee in such amount'. It was this step the applicant wished to interdict. Another relevant provision was clause 37.7, which stipulated that reference to mediation or arbitration J

2001 (2) SA p762

would not 'relieve either party from any liability for the due and timeous A performance of his obligations in terms of the contract'.

Held, that if the contract and contract guarantee were read in conjunction (as they had to be) the conclusion was inescapable that the third respondent intended to indemnify the first respondent against 'expenses or loss incurred' as a result of the 'non-performance or breach of the terms' of the contract by the B applicant. Because the payment of penalties fell within the ambit of the concept of 'expense or loss' (clause 27 read with clause 31.1.5), the contract guarantee was in the nature of a suretyship agreement rather than a guarantee and accordingly any obligation of the third respondent to the first respondent was accessory to that of the applicant. This meant that in terms of the contract guarantee the third respondent was liable to the first respondent only if and to C the extent that the applicant was liable to the first respondent in terms of the contract. (At 766D - G.)

Held, further, that the crisp issue was accordingly whether, on a proper construction of the contract, the applicant was liable to the first respondent for the payment of penalties despite the fact that the dispute regarding the date determined by the second respondent as the intended date of practical completion had not D been resolved and was the subject of arbitration proceedings. (At 766H/I - I/J.)

Held, further, that there were strong indications that the parties did not intend that the applicant's obligation to pay penalties in terms of clause 27 of the contract had to be suspended pending the conclusion of the arbitration proceedings. This was E apparent, inter alia, from clause 37.7 (see above); from the fact that the clearly delineated construction...