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Note: A presentation by Malik Trust (Beneficiary) on a demand guarantee had been honoured by Compass Insurance Company Ltd. (Guarantor). Guarantor brought the main application to be refunded by Cobus Smit Projekbestuur CC (Applicant) of the guarantee for its payment in terms of the guarantee as Applicant had refused to refund Guarantor. Applicant, instead requested a rectification of the guarantee. Applicant of the demand guarantee and its brokers, HW Brokers (Pty) Ltd (Brokers), acting on its behalf, applied for an amendment of their plea in the case in terms of their Notice of Amendment. Guarantor, objected to the proposed amendment. The objection was limited to the amendment contemplated by certain paragraphs in the Notice of Amendment, in which the Applicant and Broker sought to advance a case for the rectification of the guarantee issued by Guarantor.

Guarantor objected to the Notice of Objection on the merits. It, among others, argued that the Applicant of the Guarantee was not a party to the guarantee contract sought to be rectified, as it was a contract solely between Guarantor and Beneficiary. Applicant in contrast contended that such an allegation was untenable as it was settled that the disputed guarantee was issued on behalf of Applicant, in reality on the instruction of Broker. Applicant added that it even had to comply with certain requirements (e.g., giving of collateral security) set by Guarantor before Guarantor issued the guarantee. Guarantor, however, denied that Applicant was a party to the guarantee and thus could not request a rectification of the guarantee.

In essence, Applicant argued that the guarantee did not reflect the common intention of Guarantor, Beneficiary or Applicant, and thus had to be rectified.

The court upheld the independent nature of the demand guarantee and while Applicant agreed with this principle, it added that the issue according to Applicant was rather “that the contract, although autonomous, is founded on the common intention of the insurer, the beneficiary and the contractor” (para 20). The court agreed that the guarantee came about because of the underlying contract concluded between Beneficiary and Applicant. Therefore, the court found:

The common intention of [Beneficiary] and [Applicant], was for the guarantee contract to guarantee the contractor’s performance and the document was drafted in accordance with the instructions of [Brokers]. It cannot but be so, as a matter of fact, in these circumstances, that the guarantee contract reflects the common intention of all three parties. Thus the guarantee contract, although autonomous, reflects the common intention of [Beneficiary], [Guarantor] and [Applicant], albeit the latter is not a signatory to the agreement. (para 24)

The court held that Applicant’s interest in the guarantee contract, and its part in the arrangements leading thereto, was, in all of the circumstances, evident. What Applicant sought to rectify in the amendment application pertains to the specific terms of payment by Guarantor to Beneficiary, in the guarantee agreement. It was Applicant’s view that there was a miscommunication between itself and Guarantor regarding the amount that had to be paid out to Beneficiary in terms of the guarantee and that the paid amount did not reflect the common intention of the parties. Such amount was now sought to be recovered by Guarantor from Applicant and for this reason the rectification of the guarantee was being sought. The content of the guarantee contract emanated from an arrangement between Guarantor, Applicant and Beneficiary, and therefore, Applicant could not be barred from seeking to rectify the guarantee contract to reflect what it had alleged to have been the common intention of all three parties (para 26).

The court thus concluded that the amendment raised a triable issue and it had to be allowed, to enable a “proper ventilation and determination of that issue” (para 26). The court ordered that the plea be amended in the manner set out in the Notice of Amendment. It ordered Applicant and Brokers to pay the costs of the Application, whilst Guarantor was ordered to pay the costs of opposing the application.

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

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