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Guarantee insurance
Saturday, March 1, 2008
Are you really covered?

The respondent, originally the Cape Metropolitan Council (CMC)**, issued a tender for civil engineering construction works. Labor Construction Company (Pty) Ltd together with South African Focus Projects entered into a joint venture agreement and were subsequently awarded the tender by CMC. Thereafter, CMC, Labor Construction and SA Focus entered into a Civil engineering contract, whereby SA Focus would be responsible for labour resources and team management, and Labor Construction was to assist SA Focus with financial backing.

One of the conditions in securing this tender was that the successful applicant had to furnish CMC with an institutional guarantee from an insurer. Thus Labor Construction applied for this guarantee from Lombard Insurance Company Limited in respect of the tender. The guarantee recorded Labor Construction as the contractor, which had entered into a contract with CMC. No mention was made in the guarantee of SA Focus, or the joint venture. Lombard Insurance undertook to pay the required amount to CMC in the event that the contractor failed to proceed with and complete the works or was placed under provisional or final liquidation or judicial management. Subsequently Labor Construction experienced financial difficulties and failed to honour the contract.
On appeal, the Supreme Court of Appeal looked at the intention of the contracting parties. The court found that the proper interpretation to be given to the guarantee was that Lombard Insurance intended to insure Labor Construction as a sole entity, and not as a joint venturer. In order to fulfil its contractual obligations to the City, Labor Construction transacted with SA Focus as part of a joint venture, and not just as Labor Construction. This finding was also supported by the grammatical and ordinary meaning of the language utilised in the guarantee, which insured Labor Construction as a sole entity and not as part of a joint venture. It would go beyond the language of the guarantee to interpret that it cover Labour Construction as part of the joint venture.
It was held that Lombard Insurance was not liable to honour the guarantee in favour of the City of Cape Town. The underlying principle highlighted here is that in an insurance contract, or any other contract, for that matter, the parties ought to be clearly identified. By Cwayita Kosi, Candidate Attorney Deneys Reitz Inc.
** The City of Cape Town’s predecessor

Copyright © Insurance Times and Investments® Vol:21.2 1st March, 2008
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