THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

JUDGMENT

Case no: 343/08

LOMBARD INSURANCE COMPANY LIMITED

Appellant

and

LANDMARK HOLDINGS (PTY) LTD                                      First Respondent
HAY TREVOR BRUCE                                                      Second Respondent
THE TRUSTEES FOR THE TIME BEING OF THE               Third Respondent
PRINGLE BAY TRUST

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Neutral citation:
Lombard v Landmark & others (343/08) [2009] ZASCA 71
(1 June 2009)

CORAM:

Navsa, Nugent, Lewis, Jafta et Ponnan JJA

HEARD:

21 May 2009
DELIVERED:
1 June 2009
CORRECTED:

SUMMARY:
Construction guarantee and indemnities ─ construed
independently of construction contract ─ undertaking to pay upon the
happening of an event ─ obligation to honour undertaking.

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ORDER
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On appeal from:
High Court, Cape Town (Potgieter AJ sitting as court of
first instance).
1.
The appeal is upheld with costs, including the costs occasioned by the
employment of two counsel.
2.
The order of the court below is set aside and substituted as follows:
‘Judgment is granted against the first, second, and third respondents, jointly
and severally, the one paying the others to be absolved in accordance with
prayer 1 of the notice of motion.’
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JUDGMENT
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NAVSA JA (Nugent, Lewis, Jafta and Ponnan JJA concurring):

[1] This appeal, with the leave of the court below, turns on the
interpretation and application of certain documents. The background is set out
hereafter.

[2] The appellant company (Lombard) is registered as a short-term
insurance company in terms of the Short Term Insurance Act 53 of 1998 and
is thus entitled to issue guarantee policies as defined in that Act.1 During 2002
the appellant issued a construction guarantee on behalf of Landmark
Construction (Pty) Ltd (Landmark), a construction company, in favour of the
South African Maritime Training Academy (the Academy). The basis for the
guarantee was a construction contract2 concluded between Landmark and the
Academy, with the latter being the employer and the former the contractor.
The building work undertaken was a two-storey training centre for the

1 In terms of s 1 of the Act ‘guarantee policy’ means ‘a contract in terms of which a person,
other than a bank, in return for a premium, undertakes to provide policy benefits if an event,
contemplated in the policy as a risk relating to the failure of a person to discharge an
obligation, occurs.’
2 The agreement was a JBCC series 2000 contract.

Academy. In terms of the construction contract the principal agent was
Herbert Penny (Pty) Ltd (HP).

[3] The construction contract records that the Academy shall have the right
to select security for the fulfilment of the contractor’s obligations. Clause 14.5
of the contract records that the security ‘shall be for the due fulfilment of the
contractor’s liability in terms of the agreement’. The guarantee referred to in
para 2 above was the security selected by the Academy. It is in the form of a
variable construction guarantee in terms of which the maximum liability is
limited to the diminishing amounts of the guaranteed sum in relation to
certificates of completion, as provided for in the guarantee itself.

[4] Subject to the maximum liability provided for, Lombard bound itself as
principal debtor in favour of the Academy. It undertook to pay the Academy,
on demand, the guaranteed sum or the full outstanding balance upon the
happening of one of two eventualities, namely, default by Landmark resulting
in cancellation, or a liquidation order being granted against Landmark.

[5] The following clause in the guarantee is of importance:
‘3.
The Guarantor hereby acknowledges that:

3.1
Any reference in this Guarantee to the Agreement is made for the purpose of

convenience and shall not be construed as any intention whatsoever to

create an accessory obligation or any intention whatsoever to create a

suretyship

3.2
Its obligation under this Guarantee is restricted to the payment of money

3.3
Reference to a practical completion certificate or to a final completion

certificate shall mean such certificate as issued by the Principal Agent.’

[6] On 14 October 2003, HP issued a certificate of practical completion,
but prior to that Landmark was placed in liquidation.

[7] On 17 March 2004 the Academy called up the guarantee, recording in
its demand that Landmark had been placed in liquidation, that a final
completion certificate had not been issued and that consequently an amount

of R241 429.77 was due to it by Lombard, purportedly the value of work done
post the issue of the practical completion certificate.

[8] Prior to all of this, during April 1999, the first respondent, Landmark
Holdings (Pty) Ltd (LH), executed a document entitled ‘RECIPROCAL
INDEMNITY AND SURETYSHIP’ in favour of Lombard, in terms of which LH
undertook to ‘indemnify and keep indemnified [Lombard] and hold it harmless
from and against all and any claims, losses, demands, liabilities, costs or any
other expenses of whatsoever nature, including legal costs as between
attorney and client, which [Lombard] may at any time sustain or incur by
reason or in consequence of having executed or hereafter executing any
guarantees...’. Further, LH undertook and agreed to pay Lombard on demand
any sum which the latter may have been called upon to pay under any
guarantee, whether or not the contractor on whose behalf Lombard furnished
the guarantee admitted the validity of the claim.

[9] During April 1999, Hay and the third respondent, the trustees for the
time being of the Pringle Bay Trust (the trust), executed two written
documents in similar terms in favour of Lombard. Although both documents
bear the title ‘DEED OF SURETYSHIP’ they have the following identical
feature. In both, Hay and the trust undertook as principals, to ‘indemnify’
Lombard against ‘any claims of whatsoever nature’ which Lombard may incur
by reason of it having executed or in the future executing any guarantee.

[10] On 25 March 2004, subsequent to the demand referred to in para 7
above, Lombard paid the Academy the amount of R241 429.77.

[11] On 5 April 2004 Lombard addressed a demand to LH, Hay and the
trust, in terms of the Reciprocal Indemnity and Suretyship documents referred
to in paras 8 and 9 above.

[12] They all refused to pay, resulting in an application to the Cape High
Court in terms of which Lombard claimed against them, jointly and severally,

the one paying the other to be absolved, payment in the sum of R241 429.77
with interest, and costs on the scale as between attorney and client.

[13] The application was opposed on a number of grounds. The only one
with which we need be concerned and on which this appeal turns is that the
claim in respect of which Lombard paid was invalid due to a fraud perpetrated
by HP with the consequence, so it was alleged, that neither Lombard nor the
respondents were liable to pay. The details of the fraud are set out in the
following two paragraphs.

[14] Although Landmark was responsible for performing remedial work it did
not have an obligation, in terms of the construction contract, to do work in
relation to a change in design specifications. This would be work beyond the
terms of the construction contract. It was uncontested that the work in respect
of which the claim was made upon Lombard related to the replacement of
glass and other materials in an atrium within the Academy training centre. The
glass and materials that were replaced were within the design specifications
of the construction contract. The problem was that, after the atrium was
completed, it proved unsuitable in that it was too hot and required further
ventilation. It required glass that was substantially thicker and other materials
in order to overcome the original design flaws in the construction contract. A
further significant design change was that horizontal sliders were to replace
vertical sliders, apparently to facilitate ventilation.

[15] The redesigning of the atrium, with the concomitant change in
constituent materials, was beyond the terms of the construction contract and
Landmark’s responsibility. HP, in order to overcome the problem, appears to
have perpetrated a fraud in order to obtain the benefits of the construction
guarantee. HP framed the claim as one relating to remedial work, which it
clearly was not.

[16] The court below, in dealing with the application, referred one issue to
oral evidence, namely, whether Lombard had colluded in the fraud

perpetrated by HP. Evidence was led and, upon its conclusion, the parties
accepted that collusion had not been proved.

[17] Before Potgieter AJ, it was contended on behalf of Lombard, that the
documents executed by Lombard and the respondents were self-contained
and created obligations distinct and separate from those created by the
construction contract. In terms of the guarantee Lombard undertook to pay
upon the occurrence of an event that materialised, namely, the liquidation of
Landmark. It was submitted that Lombard was obliged to pay when called
upon to do so by the Academy and the three respondents were in turn obliged
to pay Lombard.

[18] The court below decided the matter on the basis that the guarantee
must be interpreted in conjunction with the construction contract. With
reference to clause 14.5 referred to in para 3 above, the court below held that
Lombard was only obliged to pay a claim under the guarantee if the claim was
within the terms of the construction contract. It reasoned that, because the
claim did not fall within that purview, Lombard was not obliged to pay and,
consequently, neither was any one of the respondents.

[19] In my view the court below misconstrued the nature of the guarantee
and the indemnities provided by the three respondents. The terms of the
guarantee by Lombard referred to in paras 2, 3 and 4 above are clear. The
guarantee creates an obligation to pay upon the happening of an event. The
guarantee itself records that reference to the construction contract is solely for
the purpose of convenience and that there is no intention to create an
accessory obligation or suretyship. Clause 14.5 of the construction contract
merely records that security exists in respect of the contractor’s obligations.
The guarantee was to protect the Academy in the event of default by
Landmark and it is to the guarantee that one should look to determine the
rights and obligations of the Academy and Lombard.

[20] The guarantee by Lombard is not unlike irrevocable letters of credit
issued by banks and used in international trade, the essential feature of which

is the establishment of a contractual obligation on the part of a bank to pay
the beneficiary (seller). This obligation is wholly independent of the underlying
contract of sale and assures the seller of payment of the purchase price
before he or she parts with the goods being sold. Whatever disputes may
subsequently arise between buyer and seller is of no moment insofar as the
bank’s obligation is concerned. The bank’s liability to the seller is to honour
the credit. The bank undertakes to pay provided only that the conditions
specified in the credit are met. The only basis upon which the bank can
escape liability is proof of fraud on the part of the beneficiary. This exception
falls within a narrow compass and applies where the seller, for the purpose of
drawing on the credit, fraudulently presents to the bank documents that to the
seller’s knowledge misrepresents the material facts.3

[21] In the present case Lombard undertook to pay the Academy upon
Landmark being placed in liquidation. Lombard, it is accepted, did not collude
in the fraud. There was no obligation on it to investigate the propriety of the
claim. The trigger event in respect of which it granted the guarantee had
occurred and demand was properly made.

[22] The same applies to the undertaking by the three respondents. They
undertook to indemnify Lombard in the event that it paid a claim based on the
guarantee provided by it. That event occurred and the respondents were thus
likewise liable.

[23] In light of the reasoning set out above there is no need to address the
constitutionality of the wording of the indemnities provided by the three
respondents. It was contended that the wording was such as to render the
clauses in question unconscionable, unduly harsh and prejudicial, against
public policy, contra bonos mores and offensive to the respondents’
constitutional rights. This submission was based on a mistaken view of the
basis of the indemnity. Nothing further need be said on this issue.

3 Loomcraft Fabrics CC v Nedbank Ltd & another 1996 (1) SA 812 (A) at 815G-816G.

[24] There is one final aspect in respect of costs to be considered. It was
contended on behalf of the appellant that the decision in the court below
materially affected the manner in which it did business, that it impacted on the
industry as a whole and that it was consequently necessary to employ two
counsel. I agree.

[25] In the result the appeal should succeed. The following order is made:
1.
The appeal is upheld with costs, including the costs occasioned by the
employment of two counsel.
2.
The order of the court below is set aside and substituted as follows:
‘Judgment is granted against the first, second, and third respondents, jointly
and severally, the one paying the others to be absolved in accordance with
prayer 1 of the notice of motion.’

_________________
M S NAVSA
JUDGE OF APPEAL

APPEARANCES:

For Appellant:
Panayiotis Stais SC

C J McAslin

Instructed by

Frese, Moll & Partners c/o Butler Blankenberg Cape Town

Webbers Attorneys Bloemfontein

For Respondent:
Peter J Berthold SC

Instructed by

DLA Cliffe Dekker Hofmeyer Cape Town

McIntyre & Van der Post Bloemfontein