When a guarantee expires: Key takeaways from Engie-Pele Sannaspos Solar v DMRE

On 6 February 2024, the Department of Mineral Resources and Energy issued a written demand under a R15 million preferred bidder guarantee that had, on the applicants’ case, already expired more than two months earlier. The guarantee had been issued by Absa in November 2021.

The implementation agreement to which it was tied lapsed on 30 November 2023 when the final extended commercial close deadline passed and the consortium’s suspensive conditions remained unfulfilled.

The Department’s position was that the guarantee remained extant because the bid validity period to which the guarantee was expressly linked continued until the suspensive conditions were actually satisfied, not until the deadline for satisfying them had passed. The Gauteng High Court in Pretoria disagreed, in terms that will be of practical significance to any party operating under the REIPPPP.

The structure: Guarantee, bid validity period, and implementation agreement

The Engie-Pele Sannaspos Solar PV Consortium was appointed as a preferred bidder under REIPPPP’s fifth bid submission round in October 2021. In accordance with the RFP, it provided a preferred bidder guarantee of R15 million issued by Absa in favour of the Director General. The guarantee would remain valid, in the terms of clause 4, until the earlier of (a) the expiry of the bid validity period (as extended in terms of the RFP) and (b) certain post-financial close milestones. The bid validity period was defined in the RFP as one year from bid submission, automatically extended upon appointment as preferred bidder until commercial close.

Commercial close, in turn, was defined in the RFP as the effective date as defined in the implementation agreement. The consortium signed a revised implementation agreement in December 2022. That agreement which its own clause 25.6 confirmed superseded all prior arrangements and constituted the entire agreement between the parties introduced a defined commercial close period of 120 days from the signature date, a set of suspensive conditions to be fulfilled within that period, and a clause providing that if those conditions were not fulfilled by the expiry of the commercial close period the agreement would lapse, with no claims arising on either side.

Extensions were granted, and the final extended commercial close deadline was set at 30 November 2023. The suspensive conditions were not met by that date. The implementation agreement lapsed. The question was whether the guarantee lapsed with it.

The Department’s argument: The guarantee survives the lapse

The Department advanced a two-part case. First, it argued that the bid validity period in the RFP had been amended by briefing notes to provide that it ran until fulfilment of the suspensive conditions, not until the deadline for fulfilment. On that reading, the guarantee was open-ended: it would continue to be available until the consortium actually achieved commercial close, regardless of whether the implementation agreement that defined commercial close had lapsed. Second, it argued that upon the lapse of the implementation agreement the RFP provisions revived to regulate the relationship, and that on those provisions the bid validity period remained extant.

Both limbs of this argument were rejected. The court found that the RFP could not be amended by briefing note after a preferred bidder had been appointed. Clause 36.1.18 of the RFP specifically reserves the Department’s right to amend the relevant agreements prior to their execution, and only prior to execution. Once the consortium was appointed as preferred bidder and the implementation agreement signed, that window had closed. The signed implementation agreement was the effective agreement, not the template appended to the RFP, and its whole-agreement clause settled any question about which document governed.

An open-ended guarantee is not a guarantee

The court’s treatment of the Department’s interpretation as commercially untenable is the most practically useful part of the judgment. Applying the interpretation principles confirmed by the Constitutional Court in the Fidelity Security matter – themselves a restatement of the Endumeni approach – the court construed the relevant documents by reference to language, context, and the purpose a reasonable commercial person would ascribe to them.

The purpose of a preferred bidder guarantee is to provide the state with protection against counterparty risk – specifically the risk of performance failure during the period the consortium is obliged to meet its preferred bidder obligations. Once the implementation agreement lapses, those obligations cease to exist. There is no remaining performance risk to secure. A guarantee that remains callable after the underlying obligations have ended serves no legitimate protective purpose; it functions instead as a forfeiture mechanism untethered from anything the parties agreed to secure.

The court also adopted the consortium’s observation that banks will not issue open-ended on-demand guarantees without defined expiry dates. A construction that leaves a guarantee’s duration indefinitely contingent on an event (fulfilment of suspensive conditions) that may never occur, and that the parties had already agreed would not occur within the contractually defined period, is unbusinesslike. It is not a construction a reasonable commercial person would place on the documents, and it was not the construction the court adopted.

Reading the relevant definitions in the implementation agreement together with the RFP, the court traced the chain: the bid validity period runs until commercial close; commercial close is defined as the effective date as defined in the implementation agreement; the effective date can only be reached before or on the expiry of the commercial close period; and the commercial close period expired on 30 November 2023. The bid validity period accordingly expired on that date and the guarantee lapsed with it.

Declaratory and interdictory relief

The court was satisfied that the consortium met the requirements for declaratory relief. The consortium had a direct financial interest in the question: it had provided a counter-indemnity to Absa, meaning that any payment by Absa under the guarantee would ultimately fall on the consortium. Its commercial reputation in the government procurement market was also at stake. The legal uncertainty was real and needed resolution.

For final interdictory relief, the consortium established a clear right (to the return of an expired guarantee and to be free from demands under it), reasonably apprehended harm (the demand had already been issued; Absa had received a handwritten call-up), and the absence of an adequate alternative remedy. The Department had refused to provide any undertaking to hold off pending the finalisation of separate review proceedings. Faced with the imminent prospect of enforcement, the consortium had no other avenue. The interdict was granted and the Department ordered to return the guarantee.

What this means for you

For any organisation operating as a preferred bidder under REIPPPP or a comparable programme, this judgment provides clear authority that a preferred bidder guarantee does not survive the lapse of the implementation agreement that defines it. Once the implementation agreement lapses whether by effluxion of the commercial close period, non-fulfilment of suspensive conditions, or any other cause the bid validity period expires with it and the guarantee follows. The Department cannot extend the life of the guarantee by administrative note or verbal extension of the deadline beyond what the implementation agreement permits.

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