Aveng : pre-emptive interdict against bond call

In its 4 February 2019 SENS Announcement the company noted that:
• the Aveng-Strabag Joint Venture ('ASJV'), which is a joint venture between Aveng and Strabag International GmbH ('Strabag'), had terminated its contract ('Mtentu Contract') with the South African National Roads Agency SOC Limited ('SANRAL') for the construction of the Mtentu Bridge Project ('Project') due to Force Majeure;
• the ASJV had provided 2 bonds ('Contract Securities') to SANRAL in connection with the Mtentu Contract being:-
o a performance guarantee ('Performance Security') in the amount of approximately R245 million; and
o a retention money guarantee ('Retention Money Guarantee') in the amount of approximately R82 million.
• although the Contract Securities are described by SANRAL as 'on-demand' bonds, SANRAL's rights to make a call against the Contract Securities are strictly regulated and limited in terms of the Mtentu Contract itself; and
• the ASJV was taking steps to protect the position of Aveng and Strabag in connection with the Contract Securities.

To this end, the ASJV launched a pre-emptive urgent application in the North Gauteng High Court for an order preventing SANRAL from making a call on the Contract Securities until the dispute between the ASJV and SANRAL regarding the termination of the Mtentu Contract has been finally determined.

An interim undertaking to the effect that SANRAL would not make a demand on the Contract Securities pending judgment in respect of the application was agreed and made an order of the High Court on 12 February 2019. SANRAL furthermore conceded that any potential call on the Retention Money Guarantee is limited to a maximum of approximately R22.5 million (thereby protecting a potential maximum call of approximately R82 million).

The matter was argued in the High Court on 20 February 2019 before Judge Makhubela and judgment was reserved.

On 22 March 2019 Judge Makhubela dismissed the application with costs. No reasons were provided by Judge Makhubela when the order was made, noting that the reasoned judgment would be made available by the end of the day.

The ASJV has provisionally noted its intention to appeal the order which will be supplemented when the reasoned judgement is made available.

The ASJV maintains that its right to terminate arose after being prevented from executing works on the Project site by community unrest, protest action and threats of violence against its personnel, related to community demands made against SANRAL and the ASJV remains confident that its entitlement and decision to terminate will be vindicated by the facts. Today's order does not change or affect that and we do not expect the judgment to include any finding on the ASJV's right to terminate the Mtentu Contract or, for that matter, express any view on the substance of the dispute between ASJV and SANRAL.

Although successful interdicts on bond calls are very rare, the ASJV nevertheless considered it prudent to launch the pre-emptive urgent application with a view to obtaining certainty as soon as possible regarding the protection of its rights in respect of the Contract Securities given that the ASJV considers a call against the Contract Securities by SANRAL to be likely, albeit not inevitable.

Neither the ASJV nor the issuer, consider the Performance Security to be an 'on-demand' bond but rather of the nature of a surety or accessory obligation, and made their respective positions clear and reserved their positions in the current application. To this end:
• if a demand is made by SANRAL, the ASJV:
o expects the issuer of the Performance Security to (i) not make payment and (ii) defend any demand may be made by SANRAL pending the underlying liability (if any) of the ASJV actually being established; and
o will, if required, participate or institute further proceedings to interdict payment on the bonds by the guarantor based on the terms of the Contract Securities, and
• Aveng has engaged with and has satisfied its financiers regarding the consequences of a call being made.

In respect of the Retention Money Guarantee:
• SANRAL's concession that any potential call is limited to a maximum of approximately R22.5 million (thereby eliminating the risk of a call to its full face of approximately R82 million) remains valid; and
• the ASJV considers that the Retention Money Guarantee is in any event specifically linked to work defects and not for other matters SANRAL may consider give rise to an entitlement.

In anticipation of the order being received and in order to have its dispute with SANRAL resolved as soon as possible, the ASJV has already commenced formal dispute proceedings against SANRAL. The Mtentu Contract requires the dispute to be referred to adjudication followed by High Court proceedings if the matter is not finally determined at adjudication stage.

If SANRAL makes a claim under the Performance Security in the interim, the ASJV is expressly and comprehensively indemnified for all losses resulting from any claim which SANRAL is not actually entitled to make under the Mtentu Contract. In terms of the indemnity the ASJV is entitled to recover not only any amount incorrectly claimed by SANRAL under the Performance Security but also all resultant damages, losses and expenses (including legal fees and expenses) resulting therefrom. The ASJV intends to hold SANRAL to this indemnity.