Article

Note:

On 15 August 2012 Karibib Construction CC (Applicant in case and Beneficiary of the demand guarantee) issued a quotation to BPO Logistics CC (third Respondent in case and Applicant of the demand guarantee) to construct a roadbed in Walvis Bay, Namibia. In terms of the quotation Karibib Construction indicated that it required a 50% deposit of the construction costs prior to it commencing with construction work with the balance of the construction costs to be paid on the completion of the construction project. Karibib Construction then commenced work even before the deposit was paid, because BPO Logistics undertook to pay the deposit as soon as they received financing from Standard Bank Namibia Ltd. On 14 December 2012 Standard Bank (First Respondent) acting on the instructions of BPO Logistics issued a signed letter, to First National Bank, Usakos Branch (Second Respondent), advising First National Bank that it (ie, Standard Bank) undertook to pay the sum of N$ 1 293 750, being 50% deposit, to Karibib Construction CC for work to be performed as per quotation dated 15 August 2012. The letter in material terms reads as follows:

“Acting under instructions received from BPO Logistics CC we advise that we undertake to pay the sum of N$ 1 293 750.00 . . . being 50% deposit to KARIBIB CONSTRUCTION SERVICES CC for work to be performed as per quotation dated 15 August 2012.

This amount will be paid to your account with First National Bank, Usakos upon advice in writing from DF MALHERBE AND PARTNERS that the following transaction has been registered in the Deeds Office, Windhoek:

Registration of a covering Mortgage Bond in favour of Standard Bank Namibia Limited over the lease No 1 and No 3 on Portion 196, Walvis Bay Town and Townlands registered in the name of the Municipality of Walvis Bay.

Should any circumstances arise to prevent or unduly delay registration of the abovementioned transaction we reserve the right to withdraw here from by giving you written notice to that effect, whereupon the said sum will no longer be held at your disposal…”

On the strength of the above quoted letter First National Bank during December 2012 advanced an amount of N$ 600 000 to Karibib Construction. From the evidence placed before the court it appeared that Karibib Construction stopped the work on the project during early December 2012. Between 15 December 2012 and 18 April 2013 no activity occurred between Karibib Construction and BPO Logistics. On 18 April 2013 BPO Logistics addressed a letter to Karibib Construction informing them that BPO Logistics had now secured the required deposit and that it (BPO Logistics) was now ready to proceed with the project. It also enclosed in that letter a draft agreement which it requested Karibib Construction to peruse and if satisfied sign so that the project could continue (para 9). Karibib Construction did not respond to this letter, but instead addressed a letter of demand to BPO Logistics in which letter it indicated that it had entered into a written agreement with BPO Logistics and demanded that it be compensated for the work that it had already performed and that it be issued with a guarantee to complete the remainder of the work in respect of the project. After this letter the parties exchanged correspondences culminating in a letter dated 24 May 2013 authored by BPO Logistics legal practitioners terminating the construction agreement.

On 26 April 2013 the covering mortgage bond in favour of Standard Bank over the lease No 1 and No 3 on Portion 196, Walvis Bay Town and Townlands registered in the name of the Municipality of Walvis Bay was registered in the Deeds Registration Office at Windhoek.

Karibib Construction accordingly proceeded to make a demand on Standard Bank. On 31 May 2013 Standard Bank advised Karibib Construction that it was instructed by BPO Logistics not to honour the obligations stipulated in its letter of 14 December 2012 because according to BPO Logistics Karibib Construction was not entitled to call upon the guarantee because the underlying construction agreement upon which the guarantee was reliant had not been concluded. Standard Bank also added that, in their view, the guarantee only became due and payable once the construction agreement, particularly in respect of the quotation referred to in the guarantee, was in place between the parties. Therefore Karibib Construction was prohibited from making a demand upon the guarantee (para 11).

The nature and effect of Standard Bank’s letter dated 14 December 2012 (quoted above) was at the centre of the dispute between the parties in this case. Karibib Construction argued that the letter of undertaking issued by Standard Bank to First National Bank for its (ie, Karibib Construction’s) benefit constituted a demand guarantee which became irrevocable when the condition to which it was subjected to (ie, registration of the covering bond), was met and fulfilled (para 12).Karibib Construction inter alia requested the High Court of Namibia Main Division, Windhoek to declare that the letter issued by Standard Bank was a guarantee that was independent of the underlying (construction) agreement and that Standard Bank had to honour its payment under the guarantee (para 12).

In contrast, Standard Bank inter alia contended that, Standard Bank’s letter dated 14 December 2012 was not a guarantee despite that term being used widely and freely in the letter. It further argued that the letter was never intended to be a demand guarantee but simply a letter of undertaking (para 23).

The judge (per Ueitele J) indicated that the matter turned on the interpretation and application of Standard Bank’s letter dated 14 December 2012. He confirmed that it was well-established, that the first step in construing any written instrument was to determine the ordinary grammatical meaning of the words used by the parties (para 32). He added (para 33):

“It is undisputable that very few words, however, bear a single meaning, and the ‘ordinary’ meaning of words appearing in a written instrument will necessarily depend upon the context in which they are used, their interrelation, and the nature of the transaction as it appears from the entire written instrument. It may, for example, be quite plain from reading the written instrument as a whole that a certain word or words are not used in their popular everyday meaning, but are employed in a somewhat exceptional or even technical sense. The meaning of a written instrument is, therefore, not necessarily determined by merely taking each individual word and applying to it one of its ordinary meanings.”

As Namibian Law is similar to South African law, the judge referred to and relied on various South African case law and writings to reach his decision. He confirmed the general principles governing demand guarantees, namely their independence/autonomy of the underlying agreement/contract and their documentary nature (paras 34–44). Applying the principles to Standard Bank’s letter, the judge concluded that terms of the letter were clear and unambiguous. Therefore, the words used by the parties had to be given their ordinary meaning (para 47).

According to the judge it was clear from the letter that Standard Bank undertook or promised, to pay First National Bank once it was informed in writing by DF Malherbe and Partners that the stipulated covering mortgage bond in favour of Standard Bank had been registered in the Deeds Office in Windhoek (para 48).There was no suggestion that the payment was dependent on anything else happening. The liability of Standard Bank to the beneficiary to honour the undertaking arose upon written confirmation to it by DF Malherbe and Partners that the conditions set out in the letter (ie, the registration of the covering bond) had been complied with (para 49). The judge concluded that the letter constituted a demand guarantee and not a suretyship (para 50).

The judge rejected the argument raised by Standard Bank and BPO Logistics to the effect that they were not liable because the underlying construction agreement upon which the guarantee was reliant had not been concluded. This was so, because the authorities, particularly the South African authorities, he had relied on pointed to the fact that the undertaking to pay in no way depended on the conclusion of an underlying agreement (para 56).

The court confirmed that it was settled law that if a compliant demand is made the guarantor does not have to pay if it is clearly established that a fraudulent demand is being made. The court, however, found that in this case before it, Standard Bank had not established the fraud exception (paras 51–55).

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

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