In the commercial world, certainty is essential – and that certainty is often underpinned by contracts such as performance guarantees and suretyships. The recent case of Hollard Insurance Company Limited v Lynco Projects (Pty) Ltd and Others offers a timely reminder of the weight these agreements carry and the risks they pose to businesses and individuals alike.
Lynco Projects, a construction firm, secured a contract with Sasol Mining to construct a water pipeline. To support this, Hollard issued a performance guarantee which is a financial promise to Sasol that if Lynco failed to deliver, Hollard would step in and pay Sasol. In exchange, Lynco and several of its directors signed indemnity and suretyship agreements, committing to reimburse Hollard should the guarantee be called upon. At the time, this may have seemed like a routine formality. However, unforeseen events occurred, putting the commitment to test.
The project site became subject to community unrest. Local community members, dissatisfied with Lynco’s employment decisions, disrupted operations. Lynco’s staff were threatened, equipment was stolen, and the site was vandalised. Despite efforts to restore order, the situation deteriorated, and Lynco ultimately terminated the project. Sasol, upon not receiving the completed project work, called upon the guarantee. Hollard obliged and paid Sasol R2.77 million and then sought reimbursement from Lynco and the individual guarantors.
Lynco argued that the project’s failure was due to circumstances beyond their control – community unrest that made performance impossible. They contended it was unfair to be held liable for payment under such circumstances.
However, the court ruled in Hollard’s favour. The judge emphasised that the guarantee agreement was independent of the construction contract. The reasons for Lynco’s failure were irrelevant to Hollard’s right to recover the funds. Once Hollard paid Sasol, Lynco’s obligation to reimburse was triggered, regardless of the underlying circumstances. The court ordered Lynco and the guarantors to repay the full amount, with interest dating back to 2019, and to pay for Hollard’s legal costs.
This case highlights several critical lessons for anyone involved in commercial agreements:
- Performance guarantees are enforceable: If your company defaults, the guarantor pays, and you remain liable to reimburse them under the terms of the agreement.
- Suretyships are binding: Signing as a surety means you are personally and legally responsible for the debt, even if the company faces unforeseen challenges. In an instance of joint and several liability, multiple parties can be liable for a debt, and the full amount owing can be pursued from any one of them.
- External disruptions don’t negate financial obligations: Even if a project fails due to factors beyond your control, your contractual commitments may still stand.
- Conduct thorough risk assessments before entering into any document, especially something like suretyships, guarantees and indemnities.
Before signing any guarantee or suretyship, one must consider whether one can afford to pay if things go wrong, and that includes interest and legal costs which can be substantial. In the eyes of the law, such an obligation needs to be honoured. By managing guarantees and indemnities with these lessons in mind, businesses can better protect themselves from unexpected liabilities and ensure more effective risk management.
This article was prepared by Boitumelo Monnakgotla and Wildu du Plessis.