Article

Note: This was an application for edictal citation and substituted service heard by the High Court of South Africa, Gauteng Local Division, Johannesburg. The Applicant, Kuehne & Nagel (Pty) Ltd (Beneficiary of two Parent Company Guarantees) contrary to the normal practice, gave notice to the Respondent, Moncada Energy Group SRL (Guarantor of two Parent Company Guarantees), of the application. The Respondent opposed the application. It also applied in reconvention for the converse of the relief sought in convention.

The Applicant’s (Beneficiary’s) intended claim was for payment under two Parent Company Guarantees (demand guarantees). The Respondent was a peregrinus of this South African court and South Africa, but the Applicant, who had not secured any attachment of the Respondent’s local assets, relied on the consent to jurisdiction to this court that was contained in the demand guarantees. The Respondent disputed that this consent to jurisdiction provided the court with the necessary jurisdiction.

In addition, the Respondent argued that the Applicant’s claims were “maritime claims” for the purposes of the South African Admiralty Jurisdiction Regulation Act 105 of 1983, and therefore the High Court of South Africa, Gauteng Local Division, Johannesburg had no jurisdiction in any event. The Applicant disagreed. In the alternative, the Applicant submitted that if the court were to hold that it did not have jurisdiction, the Applicant applied from the Bar under section 27 of the South African Superior Courts Act 10 of 2013, for a removal of the application to the Western Cape Division of the High Court of South Africa. The Respondent resisted this, contending that a substantive application was required for that relief.

It was thus vital for the court to determine whether or not the Applicant’s (Beneficiary’s) claims under the two guarantees constituted “maritime claims”. If they did, then the court hearing matter had no jurisdiction, since its area of jurisdiction was not adjacent to the territorial waters of the Republic of South Africa as envisaged in section 3(3) of the South African Admiralty Jurisdiction Regulation Act. However, if they were not maritime claims, then the court had to decide whether or not they had jurisdiction by virtue of the consent to jurisdiction contained in the demand guarantees.

Section 3(1) of the South African Admiralty Jurisdiction Regulation Act provides that any “maritime claim” may be enforced by means of an action in personam. A comprehensive definition of “maritime claim” is set out in section 1(1) of the Admiralty Jurisdiction Regulation Act. However, for purposes of this matter, only the following portion was material: “‘maritime claim’ means any claim…arising out of or relating to–(p) the remuneration of… any person… who acted… (i) as an…a… forwarding… agent…”.

In this matter the Respondent’s subsidiary, a local company known as Construczioni Moncada South Africa (Pty) Ltd (“CMSA” or “the subsidiary”), had concluded two Forwarding Services Agreements with the Applicant. The Applicant accepted that claims in terms of either of those agreements would qualify as “maritime claims” for purposes of the abovementioned definition. In Milan, Italy, the Respondent, who was the subsidiary’s parent, issued two written documents that were both called “Parent Company Guarantees”, in each instance expressly guaranteeing as principal obligator “the due and the correct and punctual performance by CMSA (the subsidiary) of all its payment obligations to K&N [ie, the Beneficiary/Applicant in the case].”

The Parent Company Guarantees contained the following clauses (paras 9 and 10 (emphasis added)):

“Should CMSA be in default of any of the Fees Payment under the Agreement, the undersigned undertakes to perform within 7 (seven) days as of relevant written demand delivered either by fax or registered mail to the address stipulated below (stating that CMSA has failed to comply with its payment obligations) perform (sic) such obligations and the undersigned will not determine the validity of the demand or the correctness of the amount demanded or become party to any claim or dispute of any nature which any party may allege. . . .

This Parent Company Guarantee is governed by the South African Laws. . . .

Any dispute hereunder shall be submitted exclusively to the Court of South Africa. . . .

Any payment made hereunder shall be made free and clear of, and without deduction for, any taxes, levies, import fees or other charges whatsoever and by whomsoever imposed.”

The Applicant’s main argument was that the Parent Company Guarantees involved constituted demand guarantees in the strict (accepted) sense – they were independent (autonomous) in nature. Therefore, the preconditions for the Respondent’s response obligation were merely formal in nature. A simple failure on the part of the Subsidiary to pay the fees on due date, and a written demand delivered to the Respondent’s appropriate address in Milan, Italy stating that the Subsidiary had failed to comply with its payment obligations would trigger the payment obligation of the Respondent. Accordingly, the Respondent was not entitled to challenge the Applicant’s underlying claim against the Subsidiary or raise any of the subsidiary’s defences to the underlying claim, as defences against the Applicant’s claim against the Respondent under the Parent Company Guarantees.

The Applicant contended, that a claim under the Parent Company Guarantees could not be characterised as maritime claims, even accepting that the Applicant’s claims against the subsidiary was indeed such. The Applicant argued that its claim under the guarantee was not a claim that arose “out of or relating to the remuneration of a forwarding agent” (para 14). “Rather, it was the applicant’s underlying claim against the subsidiary that arose out of or related to the remuneration of a forwarding agent; the applicant’s claim against the respondent under the guarantee arose out of or related to the Parent Company Guarantee” (para 14).

The Respondent disagreed and argued that on an application of the ordinary meaning of the words of the definition of “maritime claim” quoted above, the Applicant’s claim under the Parent Company Guarantees arose out of or related to the remuneration of a forwarding agent. It argued that both the Applicant’s claim against the Respondent under the guarantee, and the Applicant’s claim against the subsidiary under the forwarding services agreement, constituted maritime claims, because both arose out of or related to the remuneration of a forwarding agent (para 16). According to the Respondent this conclusion was in line with the interpretation of the South African Admiralty Jurisdiction Regulation Act. It was, therefore, irrelevant whether the demand guarantees were ones in the strict sense as contended for by the Applicant, or whether the terms of the demand guarantees actually permitted the Respondent to raise against the Applicant the defences that were available to the Subsidiary.

The court pointed out that the two parties’ submissions were rather on the opposing ends of the ostensibly elastic “relating to” used in the definition of “maritime claim” in the Admiralty Jurisdiction Regulation Act. The court said that context was crucial, and one had to accept that the ordinary grammatical meaning of a word in an enactment, such as “relating to”, could have different applications if its milieu shifts. It added (para 19; footnotes omitted):

“The milieu into which the applicant’s claim here fits is the guarantee and its meaning. It is at least uncontroversial that South African law applies to it. According to our [South African] law, the interpretative function of written agreements includes not only the ordinary grammatical meaning, but also context, which in turn includes reference to that which was probably to the minds of the parties when the agreement was entered into. The document itself is a good source of what was probably within the parties’ contemplation.”

The court considered the wording and various clauses in the underlying written Forwarding Services Agreement (underlying agreement) and the Parent Company Guarantees. It also compared the ordinary grammatical meaning of the words, “any claim relating to the remuneration of a forwarding agent”, set out in the definition of a “maritime claim”, to the claim intended to be made in this case – being a claim against the Respondent whose guarantee was issued pursuant to the subsidiary’s undertaking to do so, as a warranty for the payment of the forwarding agent’s (the Applicant’s) fees. As language remained the starting point of interpretation of statutes in South Africa, the court said it had to determine whether the word “relate”, in accordance with the ordinary grammatical meaning of that word, referred to the remuneration of a forwarding agent. In the court’s view the claim intended to be made in the case before it, did relate to the remuneration of a forwarding agent. The court said that the statutory enumeration of what was included in a “maritime claim” was comprehensive. Therefore (para 27),

“matched with the wideness of ‘relating to’, it seems evident that the legislature was intent on casting the proverbial net wide. . . .[T]he reason for this and so the purpose for which the language was so cast, is that the legislature acknowledged that admiralty jurisdiction imports a specialised field of the law, and so as a matter of policy all issues that are connected with an admiralty issue should be decided by those courts that are seized with admiralty jurisdiction.”

The court pointed out that even if it accepted in the Applicant’s favour that this was a demand guarantee in the strict sense – that no defences arising from the underlying agreement were permitted – then still it would still not be possible to immunise the claim under the demand guarantee from the underlying agreement and a claim for fees under it. To illustrate why the court expressed this view, it referred to and dealt with paragraph 37.4 of the Respondent’s answering affidavit (para 33) which provided as follows:

“Furthermore, I am advised that (irrespective of the terms of the guarantee) where a beneficiary who makes a call on a guarantee does so with knowledge that it is not entitled to payment, our courts will step in to protect the guarantor and decline enforcement of the guarantee in question.”

In dealing with this paragraph, the court said (paras 34 and 35):

“No-one has suggested in this matter that the respondent has by this paragraph already alleged fraud on the part of the applicant. But the possibility of fraud being alleged and, if it is alleged, its consequence, is relevant, because it illustrates that the claim made by the applicant against the respondent under the demand guarantee is not so remote from the underlying agreement as to render the underlying agreement legally irrelevant to the claim under the demand guarantee. Depending on the defences yet to be raised, note not the claim, the claim under the demand guarantee and the underlying agreement may therefore potentially stand in a direct legally relevant relationship. . . .

. . . [T]he commercial viability of demand guarantees is dependent on them being able to be enforced speedily, and not to permit of underlying defences, spurious or not, derailing their traction. But that consideration does not go to the issue of jurisdiction; it goes to the issue of the nature of the defences raised against a demand guarantee. The High Court, sitting in the exercise of its admiralty jurisdiction, will deal as swiftly with defences that are irrelevant to the claim based on a demand guarantee as will the High Court applying its ordinary jurisdiction.”

The court concluded that the claims based on the demand guarantees, accepting in the Applicant’s favour that they permitted of no defences that arose from the underlying agreement, except fraud, were nonetheless “maritime claims” as envisaged in the South African Admiralty Jurisdiction Regulation Act. Therefore, this court had no jurisdiction to try them (para 43).

The court also came to the conclusion that by virtue of section 3(3) of the Admiralty Jurisdiction Regulation Act, a maritime action enforced by means of an action in personam could not be instituted in a court of which the area of jurisdiction is not adjacent to the territorial waters of the Republic of South Africa. That also applied to the court hearing the matter, and its admiralty jurisdiction was thus statutorily precluded. That meant that even if the consent to jurisdiction were to this division of the High Court, it would be legally incompetent. The consent to jurisdiction in the Parent Company Guarantees was thus a consent to the jurisdiction of the South African court that would, according to the laws of South Africa, have jurisdiction in the matter. The court did not believe that it would be appropriate to accede to the Applicant’s request that the application be removed to the Western Cape division of the High Court. It was in any event not convinced that that court was the court of appropriate jurisdiction. If anything, the court believed that the KwaZulu-Natal Division of the High Court of South Africa might have jurisdiction, although it did express no firm view on this.

The court dismissed the application in convention with costs and made no order on the application in reconvention.

Comments:

The correctness of this judgment is doubted. It seems that the court in reality ignored the independent nature of the two demand guarantees that were involved in this case. The court should not have relied on the underlying contract in this case. It is submitted that the claims involved, in this case, were demands made in terms of the demand guarantees (Parent Company Guarantees) and not maritime claims at all. It could only have been maritime claims if the Applicant had claimed in terms of the underlying contract.

* Professor of Law, Department of Mercantile Law, School of Law, University of South Africa.

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.