Eskom's Medupi woes grow

Bloemfontein - Eskom is entitled to the guarantees held by a bank for Hitachi Power Africa, in relation to a Medupi power station contract, the Supreme Court of Appeal (SCA) held on Thursday.

The SCA upheld an appeal by Eskom against an order in the South Gauteng High Court in Johannesburg refusing to allow Eskom to demand payment of certain guarantees.

The matter relates to Mizhuo Corporate Bank of Japan, which issued guarantees in favour of Eskom to secure performance by Hitachi Power Africa under a construction contract at the Medupi Power Station in Limpopo.

In terms of the contract, Hitachi provided six guarantees, drawn on the bank.

Three of these guarantees, amounting to R600m, were the focus of the case.

Before the presentation of the guarantees, a number of disputes had arisen between Eskom and Hitachi, concerning Hitachi’s work.

Eskom alleged that Hitachi had been guilty of ongoing breaches of the construction contract, and that it had failed to timeously perform its obligations.

Eskom also claimed that in view of these breaches, it was entitled to demand payment under the guarantees.

Eskom then presented the three guarantees to the bank for payment.

Hitachi launched an urgent legal application to stop Eskom.

The issue on appeal was whether the demand guarantees issued in favour of Eskom were, on a proper interpretation of its terms, on demand guarantees or conditional guarantees.

On Thursday, the court held that, on a plain meaning, the demand guarantees had all the characteristics of an 'on demand' or 'call guarantee', which was independent of the construction contract.

This entailed that the bank's guarantee to pay the beneficiary was an independent obligation, and whatever disputes arose did not affect the bank's obligation.

The SCA found Eskom was entitled to demand payment of the guarantee issued by the bank at the instance of Hitachi.

On Wednesday, Eskom told a parliamentary committee that construction delays at the power station would delay the bringing online of the first unit at Medupi

It was supposed to have gone online by the end of this year, but would now probably go online only in the second half of 2014.

The contract awarded to Hitachi Power Africa was controversial even before construction began, as the company is 25% owned by the African National Congress's investment arm, Chancellor House.