In January 2024 the High Court held that an insurer’s guarantee that ambiguously contained two incompatible expiry dates, namely the date of issue of the final completion certificate under the construction contract and the date on which the contractor had to pay under the consequent final payment certificate, should be interpreted in a businesslike fashion against the insurer. The insurance guarantee had not expired because the payment had not yet been made under the final payment certificate when performance was demanded from the insurer.
The insurer issued a variable construction guarantee creating a primary obligation on the insurer’s behalf to pay money to the employer in the event of default by the contractor in the construction of a new dwelling. It was a true guarantee separate and independent from the construction contract. The guarantee had three possible expiry dates, namely the date of payment of the full amount under the final payment certificate, the date of payment in full of the guaranteed sum, and the date on which the final completion certificate was issued.
The final completion certificate was issued on 5 May 2020. A day later the final payment certificate was issued and the contractor defaulted and failed to make payment. On 9 June 2022 the employer demanded payment from the insurer under the guarantee which the insurer alleged had expired on the date of the issue of the final payment certificate. There was a clear conflict between the provision that the guarantee expired on the date of final completion certificate and the date on which the contractor defaulted under the final payment certificate.
The court relied on a number of principles of interpretation of contracts, namely the ordinary meaning of the words, the fact that provisions in a contract will not be seen as superfluous, greater weight is given to special conditions than general provisions, the contra proferentem rule, and the rule that policy limitations are interpretated restrictively and against the insurer.
On the insurer’s interpretation, the insurer could never be called upon to pay because the completion certificate would be issued before the contractor was in default of payment under the payment certificate. This narrow peer at words ignored the relevant context within which the guarantee was provided under the construction contract. Such an unbusinesslike result could not be the intention of the guarantee. The court referred to a clause in the contract which provided that “this construction 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, where after no claims will be considered by the guarantor …”. The insurer contended that the issue of the final completion certificate as the earliest of those three dates applied. The court held that the first comma after “or 2.1” and no comma after the next word “or” meant that the phrase “whichever is the earlier” only referred to expiry on payment in full under the guarantee or an issue of a final completion certificate. Expiry after payment in full of the amount certified under the final payment certificate was a separate ground for termination of the guarantee. The presence of the comma after ‘or 2.1’ was important to give meaning to the guarantee and the insurer’s obligations. It meant that the unacceptable outcome that the insurer could never be called upon to pay was avoided. The guarantee had not expired and payment was ordered.