In the recent case of SMBT v Hollard Insurance and Others, the Gauteng division of the High Court dealt with the proper interpretation of a guarantee, namely; whether a guarantee issued by the guarantor to make payment in the event of default by the principal debtor had expired, by the time a demand under the guarantee was delivered.


On 20 March 2015, SMBT concluded a written building agreement ("the Agreement") with Cape Island Construction ("CIC") to build a new dwelling on its registered immoveable property situated in Kloof Road, Clifton, Cape Town for the contract price of ZAR42 795 598. In conjunction with this Agreement, SMBT was issued a 'variable construction guarantee' ("the Guarantee") in its favour by Hollard Insurance Company to pay if CIC defaulted.

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

On 6 May 2022, the principal agent issued the final payment certificate (a day after issuing the final completion certificate) which certified that CIC owed ZAR2 130 687 49 to SMBT. CIC failed to make payment despite a written demand made on 1 June 2022. Consequently, SMBT looked to Hollard on 9 June 2022 for payment under the guarantee for the amount of ZAR855 911 74 (being the 'guaranteed sum'). On 14 June 2022, Hollard repudiated SMBT's claim because the guarantee had expired.

The court's findings

The court held that, in accordance with the principles outlined in Natal Joint Municipal Pension Fund v Endumeni Municipality and Capitec Bank Holdings v Coral Lagoon Investments, the proper interpretation of the guarantee must be based on the 'triad of text, context, and purpose'. In this regard, although clause 3 of the guarantee imposed a primary obligation (rather than accessory) on Hollard which is autonomous from the underlying Agreement, the proper interpretation of the guarantee must be determined with reference to its wording and purpose within the broader context of the Agreement itself.

The court examined clause 1.1.4 of the guarantee which provided that Hollard's liability for the guaranteed sum serves 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..' The guarantee also recorded that "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 further provided that Hollard's liability should apply 'in respect of any claim received by the guarantor during the period in question', which in this case, was from 6 May 2022 up until payment of the certified amount (yet to occur). Based on these provisions, the court noted that since the final payment certificate reflected that CIC owed SMBT the certified amount, as well as the fact that SMBT demanded payment from Hollard on 9 June 2022, it clearly followed that the guarantee was to expire only upon payment of the full amount certified.

The court thereafter examined Hollard's defence which relied on its interpretation of the 'guarantee expiry date' definition – being 'on the issue of final completion certificate – as well as 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...'. Accordingly, Hollard contended that the guarantee expired on 5 May 2022 (the date of issue of the final completion certificate).

The court rejected Hollard's interpretation, adding that it amounts to untenable 'narrow literalism' since it creates a direct contradiction between clause 11 (read with the definition of 'guarantee expiry date') and clause 1.1.4 – the effect of which renders the latter clause entirely meaningless. The court found that this literalist interpretation resulted in an absurd and unbusinesslike outcome because Hollard could never be held liable to make payment since 'payment of the full amount certified' necessarily only occurs after the issuance of the final completion certificate.

Given the inherent contradiction of these provisions, the court held that since the 'guarantee expiry date' definition amounted to a 'general provision', whilst clause 1.1.4 amounted to a 'special provision', greater weight ought to be attributed to the special provision. Further, in accordance with the contra proferentem rule, in cases of ambiguity, a document's terms ought to be construed against the party by whom it was formulated. Moreover, a provision in an insurance agreement which purports to limit an express obligation ought to be restrictively interpreted. Finally, the court noted that Hollard's interpretation defeated the primary purpose of the guarantee itself, which was to protect SMBT if CIC defaults.


Consequently, the court held that the guarantee issued by Hollard had not expired and granted judgment in favour of SMBT.

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