THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

JUDGMENT

CASE NO: 441/06
Reportable

In the matter between:

LOMBARD INSURANCE COMPANY LIMITED
APPELLANT

and

CITY OF CAPE TOWN
RESPONDENT
____________________________________________________________________________
CORAM:
HOWIE P, MTHIYANE, CLOETE, COMBRINCK JJA et
MHLANTLA AJA
HEARD:
15 AUGUST 2007
DELIVERED:
21 SEPTEMBER 2007
SUMMARY:
Interpretation of a guarantee.

NEUTRAL CITATION:
This judgment may be referred to as Lombard Insurance v
City of Cape Town [2007] SCA 112 (RSA)
____________________________________________________________________________

MHLANTLA AJA

MHLANTLA AJA

[1] This is an appeal, with the leave of this court, against the judgment and
order of the Cape High Court, in which Davis J ordered the appellant to pay to
the respondent the sum of R297 806.16 together with interest thereon at a rate
of 15,5 per cent per annum as well as the respondent’s costs.

[2] During December 1999, the respondent’s predecessor in title, the Cape
Metropolitan Council (‘CMC’), issued a tender for civil engineering
construction works for the control of odours and upgrading of the primary
sludge removal system and associated civil works for the Cape Flats Waste
Water Treatment Works defined as contract no WW38/99. On 13 January
2000 a joint venture between Labor Construction Company (Pty) Ltd
(‘Labor’) and South African Focus Projects (‘SA Focus’) submitted a tender
to perform the works.

[3] On 9 February 2000, Gibbs Africa Consulting Civil Engineers (‘Gibbs
Africa’), acting on behalf of CMC, notified the Labor/SA Focus joint venture
in writing of the award of the tender as well as the conditions attaching
thereto. These included the submission by the joint venture of an institutional
guarantee as well as proof of insurance.

[4] The appellant, Lombard Insurance Company Limited, had previously
issued a guarantee on behalf of Labor in respect of a contract between Labor
and CMC and had maintained a risk profile on Labor. On 10 February 2000
Labor submitted an application to the appellant for the issue of an institutional
guarantee in respect of the tender.

[5] On 17 February 2000, the appellant issued an institutional guarantee in
favour of CMC. The guarantee recorded that Labor, referred to in the
guarantee as ‘the contractor’, had entered or was about to enter into a contract
with CMC for the contract no WW38/99. The appellant undertook to pay the
sum of R297 806.16 in the event of Labor, inter alia, failing to proceed with
and complete the works or being placed under provisional or final liquidation
or judicial management. It is this guarantee that is in issue.

[6] On 26 May 2000, a written joint venture agreement was concluded
between Labor and SA Focus to undertake the works under contract no
WW38/99. Clause 5 of the agreement provided that Labor would provide the
financial resources for the execution of the work, including the institutional
guarantee as required in terms of the contract, and that SA Focus would
provide the management team and labour resources required on site.

[7] On 9 June 2000, CMC and the joint venture concluded a written civil
engineering contract, whereafter the works commenced. On 22 June 2001
Labor was placed under provisional liquidation. CMC thereafter demanded
payment of the guaranteed amount from the appellant, which in turn denied
liability, stating the following in a letter dated 28 August 2001:
‘At all relevant times, we were under the impression that the contract was to be concluded
with Labor Construction Company (Pty) Ltd and we were not aware of the fact that the
contract was in fact to be concluded with the joint venture. This is borne out by the fact
that our guarantee refers only to Labor Construction Company (Pty) Ltd. In view of the
fact that the contract was not awarded to Labor Construction Company (Pty) Ltd but rather
to a joint venture, it is our contention that we are not liable in terms of the guarantee.’

[8] The plaintiff (now respondent) thereafter instituted an action claiming
payment of the guaranteed sum. The appellant pleaded that contract no
WW38/99 was not entered into between Labor and CMC but rather between

CMC and a joint venture. It further pleaded that it had issued a guarantee to
cover Labor’s performance only and that accordingly, it was not indebted to
the respondent.

[9] During the trial the respondent did not adduce any oral evidence,
merely placing documents before the trial court upon which it relied. The
appellant called Ms Catharina Belcher, its general manager, who outlined the
policies and procedures adopted by it when considering applications for the
issue of guarantees.

[10] At the conclusion of the trial, Davis J made a finding in favour of the
respondent. He held as follows:
‘In my view, the wording of the contract for an institutional guarantee concluded between
Labor and the defendant is more than capable of a construction to the effect that the
intention of such an agreement was to indemnify the obligations of Labor. No legal
principle was raised by the defendant which would run counter to this conclusion. One of
the express purposes of the guarantee was to protect CMC in the event that Labor was
liquidated or placed into judicial management. Given that this interpretation of the contract
is both plausible and indeed reasonable, it is my view, that plaintiff was entitled to
payment in terms of the guarantee.’

[11] The main issue on appeal is the proper interpretation of the guarantee.
Simply put, what was the guarantee?

[12] Counsel for the appellant submitted that the guarantee was issued to
cover the due performance of Labor in respect of the contract in the event that
Labor concluded the contract with CMC. The contract was, however,
concluded between CMC and a joint venture. Counsel contended that the
appellant was not liable as the condition governing the guarantee had not been
fulfilled; furthermore that the joint venture had not yet been formed when the

guarantee was issued. Counsel argued in the alternative that the guarantee was
void ab initio as there was no consensus between the parties.

[13] Counsel representing the respondent conceded that it would have been
preferable to obtain a guarantee covering the joint venture. He submitted,
however, that the respondent was entitled to rely on the guarantee even
though the contract contemplated in the guarantee was not concluded between
CMC and Labor as sole contractor, but between CMC and a joint venture of
which Labor was a partner.

[14] I turn now to consider the proper construction to be placed on the
guarantee and, in particular, to the question whether the guarantee is capable
of being extended to cover a contract entered into by the respondent and a
joint venture in which Labor was a partner.

[15] In my view, the grammatical and ordinary meaning of the language of
the guarantee is clear and unambiguous. It is evident therefrom that the
appellant guaranteed due performance by Labor, in the event of Labor being
the contractor in a contract it concluded with CMC.  Theoretically it would
have been possible, as the court a quo pointed out, for the appellant to have
guaranteed the obligations of Labor in terms of the joint venture. But I am
quite unable to give the guarantee that meaning. What the appellant
guaranteed was the performance of the contractor’s obligations. The
contractor was defined as Labor. The guarantee envisages that ‘the contractor’
ie Labor, and (by implication) only Labor, would complete ‘the works’
defined as contract no WW38/99 – not that the works would be completed by
another unnamed person. There can be no doubt that, on a proper
interpretation, the guarantee covered Labor and not the joint venture.

[16] It is accordingly clear that the cause of action is based on a guarantee
being claimable in the event that Labor concluded a contract with the
respondent. The guarantee covered various eventualities provided the contract
was between Labor and CMC. The contract was however concluded between
CMC and the joint venture of which Labor was a partner.

[17] It was submitted on behalf of the respondent that the only material
requirement for the appellant to be liable in terms of the guarantee is that
Labor must have entered into a contract with CMC and that the capacity in
which Labor contracted with CMC is not relevant.

[18] This submission is, in my view, without merit. The appellant undertook
to guarantee the obligations of ‘the contractor’ as defined, and not the
obligations of a contracting party (whomsoever that might be) on whose
behalf Labor would enter into the contract. It has to be borne in mind that the
obligations of a partnership and those of the individual partners in their
personal capacities are not, in the absence of an agreement, interchangeable.
See Standard Bank of S.A. Ltd v Lewis.1

[19] In my view, the learned judge erred when he held that, because Labor
was a partner in the joint venture, it was therefore a party to the contract. I
consider that the court a quo should as a starting point, have attempted to
determine the intention of the parties to the guarantee. It was never the
intention of Labor and the appellant to extend the guarantee to cover Labor’s
performance as a partner in a joint venture. That would be going beyond the
language of the guarantee.

1 1922 TPD 285 at 289, 293 and 295.

[20] Even if it be accepted that the guarantee was ambiguous, in that it could
as a matter of linguistic construction be interpreted to cover either Labor’s
obligations as a sole contractor or Labor’s obligations even if it was not the
sole contractor, the background circumstances show that this latter meaning
could never have been intended by the parties: not by Labor, because its
obligations to CMC and to SA Focus were to obtain a guarantee for the
obligations of both partners to the joint venture; not by the appellant, because
the appellant was unaware of the existence of SA Focus; and not by CMC
because it required a guarantee covering the obligations of the joint venture,
not one of the partners in the joint venture.

[21] It is accordingly evident that the appellant did not undertake to secure
the obligations of the joint venture or of Labor as a partner in a joint venture.
The guarantee covered Labor as a sole entity. It follows therefore that the
appellant cannot be held liable for the obligations of the joint venture.

[22] This conclusion renders it unnecessary to decide the defence of mutual
mistake raised by the appellant.

[23] As regards the question of costs, counsel for the respondent contended
that the matter did not warrant the employment of two counsel. I do not agree.
In my view this matter is of importance not only to the insurance industry but
to local authorities as well. It raises issues on how to deal with guarantees of
this kind in future and there are public policy considerations to be borne in
mind. I am satisfied that the matter warranted the employment of two counsel.

[24] In the result, the following order is made:
24.1 The appeal is upheld with costs, such costs to include the costs
consequent upon the employment of two counsel.
24.2 The order of the court a quo is set aside and substituted with the
following order: ‘The action is dismissed with costs’.

__________________
N Z MHLANTLA
ACTING JUDGE OF APPEAL

CONCUR:
HOWIE P)
MTHIYANE JA)
CLOETE JA)
COMBRINCK JA)
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

LOMBARD INSURANCE COMPANY LIMITED v CITY OF CAPE TOWN
From:
The Registrar, Supreme Court of Appeal
Date:
21 September 2007
Status:
Immediate

Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal.
* * *
On 21 September 2007 the Supreme Court of Appeal handed down judgment in Lombard
Insurance Company Ltd v City of Cape Town. The appellant’s appeal against a judgment of the
Cape High Court, in terms of which the appellant was ordered to pay the respondent the sum of
R297 806.16, was upheld with costs.

The appellant had issued an institutional guarantee in favour of the respondent. The guarantee
covered various eventualities provided the contract was concluded between the respondent and
Labor (‘the contractor’). The respondent, however, concluded a contract with a joint venture of
which Labor was a partner.

Labor was placed under provisional liquidation whereafter the respondent instituted an action
against the appellant claiming payment of the guaranteed sum. The Cape High Court found in
favour of the respondent stating that the wording of the guarantee was more than capable of a
construction to the effect that the intention of such an agreement was to indemnify the obligations
of Labor and consequently the guarantee was to be construed in respect of the obligations of the
joint venture.

This court in upholding the appeal disagreed with that conclusion and held that the guarantee
covered Labor as a sole entity, and that the cause of action was based on a guarantee being
claimable in the event that Labor concluded a contract with the respondent. The Court accordingly
held that the appellant cannot be liable for the obligations of a joint venture and thus allowed the
appeal.