Contractor’s bid to halt Santam payout on biomass power project fails a second time

Tags

---

19-04-2023
Read : 462 times
Moneyweb
Source

Ngodwana Energy plans to call up R222m from South Korean company that built the power plant.

South Korea-based KC Cottrell has failed to obtain leave to appeal an unsuccessful high court application for an urgent interim interdict to stop Santam from paying out a R222.36 million guarantee to Ngodwana Energy on a contract for the construction of a 25MW biomass power project in Mpumalanga.

The project was awarded under the fourth bid round of the government’s Renewable Energy Independent Power Producer Procurement Programme (Reipppp), but is defective.

It emerged last month when the main application was heard that the plant is operational but with allegedly significant defects in the construction work that require rectification because it is not running optimally.

Sappi and Patrice Motsepe’s African Rainbow Energy and Power (AREP) are major shareholders in Ngodwana Energy.

KC Cottrell, a global green technology leader, was the engineering, procurement, and construction (EPC) and operations and maintenance contractor for the project.

The guarantee provided by Santam on behalf of Ngodwana Energy is meant to operate as security for the performance of KC Cottrell’s obligations in the construction contract.

‘No basis’

In a judgment handed down in the High Court in Johannesburg on Monday, Judge Stuart Wilson said there is “no basis on which to detain an appellate court with a reconsideration of my judgment”.

The other applicants were ELB Engineering Services, which is in liquidation, and the ELB Educational Trust For Black South Africans.

KC Cottrell’s application for leave to appeal was based on three arguments against the correctness of Wilson’s judgment.

These were that:

There is a reasonable prospect that a court of appeal will differ with the conclusion Wilson drew against KC Cottrell;

• The call on the guarantee would be unlawful because it would rest on the fraudulent assertion that KC Cottrell is entitled to reverse the various payment milestones it had previously certified under the construction contract; and
• The law applicable to construction guarantees should be developed to allow a contractor to restrain unconscionable, rather than merely fraudulent, calls on demand guarantees.
• KC Cottrell said the construction contract provides for defects found in the work to be dealt with by engaging a special procedure designed for that purpose and not by decertifying payments that Ngodwana Energy had previously certified.

It argued that in choosing to reverse the payment milestones, rather than following the procedure specifically intended for the rectification of defects, Ngodwana Energy allegedly perpetrated fraud that tainted any call on the guarantee Ngodwana Energy chose to make based on it.

KC Cottrell further argued that even if Ngodwana Energy’s call on the guarantee might not have been fraudulent, it would certainly have been unconscionable.

Entitled to call up guarantees

Wilson said that in his view these arguments stand no prospect of success on appeal.

He said there is no basis on which the text of a clause of the guarantee is capable of meaning anything other than that Ngodwana Energy is entitled to call up any amount up to the limit of the guaranteed sum on the honest allegation of a breach of contract.

Wilson said in this clause, Santam undertakes, on receipt of a “demand” that states that there is such a breach, to pay, up to the limit of the guarantee, such sum as Ngodwana Energy “may in that demand require”, less any sums previously called up.

Wilson said such an interpretation is untenable, adding that the guarantee was written to provide Ngodwana Energy with security for its losses in, among other eventualities, precisely the situation that has now arisen – the construction of a defective power station.

“The effect of the guarantee is to allow Ngodwana to draw down a sum up to the limit stated in it without having to sue on the contract. That does not mean, of course, that Ngodwana gets to keep the guaranteed sum if it is later established that Ngodwana was not after all entitled to it.

“The right to draw on the guarantee means only that, by binding itself to Santam for the value of the guarantee, KC Cottrell must pay out the guaranteed sum now, and complain about it later. To read into the guarantee, conditions and requirements that have little or no textual foundation is to undermine the very purpose of the instrument, and the arrangements made between the parties.”

‘Perhaps unconscionable’

Regarding the fraud argument, Wilson said a further settled principle evident from cases is that the right to call up the guarantee, and the obligation to pay out in response to such a call, are entirely separate from the rights and obligations between the parties to the underlying contract.

Wilson said it follows that whatever may be said of the propriety of Ngodwana Energy’s conduct in reversing the payment milestones it previously certified is a question arising on the contract, not the guarantee.

“The clear legal separation evident in the cases between disputes on the contract and the employer’s right to make a call on the guarantee is necessary to give guarantees of this nature their efficacy. I cannot see any basis on which a court of appeal would be inclined to interfere with this principle,” Wilson said.

He added that, as made clear in his judgment on the main application, it seems that Ngodwana Energy’s decision to reverse the payment milestones it had previously certified, rather than follow the procedure specifically intended for the rectification of defects, was oppressive and “perhaps it was unconscionable”.

Wilson said in his judgment on the main application that the construction contract provides for KC Cottrell to be paid in instalments once the employer, Ngodwana Energy, has certified that certain payment “milestones” have been reached.

He said that as the construction work went on, Ngodwana Energy certified that a number of these milestones had been reached and paid out substantial sums of money to KC Cottrell in respect of the construction work.

However, he said Ngodwana Energy has now taken the view that the defects it has identified in the construction work are so serious as to justify the reversal of the payment milestones it previously certified had been reached, and the reclamation of much of the money it paid over under those certificates.

Ngodwana Energy has certified that KC Cottrell is now liable to it in the sum of R222.36 million and intends to call on that amount on the guarantee.

This in turn will result in Santam claiming the full amount from KC Cottrell.