Summarized by Prof. M Kelly-Louw*

Topics: Interpretation; Independence (Autonomy Principle); Exceptions; Fraud; Independent (Bank) Guarantee; Duration of Guarantee; Partial Demands, Multiple Demands; Original Instrument

Note: On 7 May 2009, Procprops 60 (Pty) Ltd concluded a written lease agreement with Top CD (Menlyn) (Pty) Ltd in terms of which Top CD would lease premises in a shopping centre for a period of ten years and seven months commencing 1 July 2009. The lease required Top CD to secure a bank guarantee in favour of Procprops (beneficiary) for the rental. Top CD arranged for Nedbank Ltd (guarantor) to issue the bank guarantee, subject to the South African law and silent as to any governing ICC rules. The guarantee provided as follow in clauses 3 and 4:

"3. At the instance of the lessee we . . . hold at the landlord's disposal and undertake to pay to the landlord an amount not exceeding R313 845,53 . . . subject to the terms and conditions stated below.

4. Payment shall be made upon receipt by the bank . . . of the landlord's first written demand, which written demand shall be accompanied by this original guarantee and which will state that the lessee had failed to comply with its obligations in respect of the lease and that, accordingly, the amount of R313 845,53 . . . or any lesser portion thereof, is now due and payable."

The rental was payable monthly in advance. Top CD (principal) paid rental in terms of the lease up to 1 December 2010 but vacated the premises during December 2010 and made no further payment of rental. There were various disputes concerning the valid cancellation of the lease agreement (underlying contract) and the parties to the lease were involved with separate litigation concerning that issue. Nonetheless Procprops (beneficiary) demanded payment of the amount of ZAR 72,693.66 from the guarantor (Nedbank) in terms of the guarantee. In the beneficiary's letter of demand it was stated that Top CD (principal) had failed to comply with the lease and that accordingly the said amount was due and payable. This claimed amount represented only the rental that was payable on 1 January 2011. The demand letter, accompanied by the original guarantee, stated that Top CD had failed to comply with its obligation in respect of the lease and that said amount was due and payable and concluded as follows:

"Could you also please consider the fact that this letter calls upon you to perform only partially in terms of the guarantee and accordingly our client's rights in respect thereof are not extinguished. Could you please in view thereof return the original guarantee to enable [us] . . . to call on the guarantee should it become necessary in future."

On 21 January 2011, the guarantor duly paid the amount demanded, but did not respond to the request to return the original guarantee. The beneficiary also sent a further letter of demand to the guarantor. In this letter (similar to the first letter), payment in terms of the guarantee of a further amount of ZAR 72,693.66 was demanded. This letter was not accompanied by the original guarantee. Without having received any response from the guarantor, the beneficiary demanded payment of yet further amounts. The guarantor then responded that it had duly performed under the guarantee, accepted the return of the original guarantee and that the guarantee had been cancelled as a result. To this the beneficiary stated that it demanded ZAR 241,151 representing the difference between the amount mentioned in the guarantee, ZAR 313,845.53, and the amount of the payment made of ZAR 72,693.66.

The beneficiary instituted action in the North Gauteng High Court, Pretoria, against the Guarantor for payment. The guarantor's plea to this claim was essentially that when it made payment to the beneficiary on the first demand, its obligation in terms of the guarantee had been discharged. The guarantor also joined Top CD (principal) as a third party to the action, relying on the aforesaid indemnification. Top CD in turn admitted that it was liable to indemnify the guarantor for any amount that the guarantor might be ordered to pay to the beneficiary and agreed with the guarantor's interpretation of the guarantee. The matter was heard by Ledwaba, J. At the end of the trial, he gave judgment for the beneficiary against the guarantor in the amount claimed as well as interest thereon. However, he granted leave to both the guarantor and Top CD to appeal to the Supreme Court of Appeal.

The Supreme Court of Appeal found that the guarantee in this case was wholly independent of the underlying contract (lease). Therefore, disputes arising between the parties to the underlying contract did not detract from the guarantor's obligation to make payment to the beneficiary provided only that the conditions for payment specified in the guarantee were met. These conditions were the receipt by the guarantor of a written demand with the contents set out in clause 4 of the guarantee (quoted above) and the original guarantee. In the event of these documents being so presented, the guarantor could escape liability only upon proof of fraud on the part of the beneficiary.

The court said that the main issue was whether on a proper interpretation of the guarantee it provided for more than one payment by the guarantor. It held that the provision that the demand had to be accompanied by the original guarantee strongly indicated that only one payment was envisaged. Furthermore, the purpose of this provision could not have been to provide the guarantor with an original guarantee or to have a record of its terms. It said (para 10):

"[i]n all likelihood, it already had one of its own. The purpose of the provision must therefore have been for Procprops [beneficiary] to give up the security of the guarantee to ensure that it could not be presented for payment again. In addition, a meaning must be ascribed to the phrase 'first demand'. In my view the phrase excludes further demands. In context it therefore means that there could be no second or subsequent demand in terms of the guarantee. In my judgment the guarantee is unambiguous and clear. Nedbank was only entitled and obliged to make payment of the amount of R313 845.53 or any lesser portion thereof upon receipt at its prescribed branch of Procprops' first written demand and the original guarantee. It follows that Nedbank's obligation in terms of the guarantee was discharged when it made payment of a lesser amount of R72 693.66 on 21 January 2011 pursuant to demand and the return of the guarantee."

As a result the appeal succeeded and the beneficiary was ordered to pay the costs of the appeal of the guarantor and Top CD.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.