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Note: New Reclamation Group (Pty) Limited (Applicant/Principal of the performance guarantee) obtained two interim injunctions (interdicts as they are known under South African law). The first was for preventing First Respondent, Transnet SOC Limited (Beneficiary of the performance guarantee) from making a demand on the performance guarantee issued by Second Respondent, Nedbank Limited (Guarantor of the performance guarantee). The second was for preventing Guarantor from paying in terms of the performance guarantee.

The performance guarantee (hereinafter “the guarantee”) issued was subjected to South African law and contained the following important clauses (para 6):

1. We … Nedbank Limited … do hereby bind the said bank as Guarantor to Transnet SOC Limited … for the due payment of every sum of money which may now or at any time hereafter be or become owing by The New Reclamation Group (Pty) Ltd … (hereinafter referred to as ‘the Debtor’) to Transnet arising out of a credit agreement for Transnet Freight Rail (hereinafter referred to as ‘the Contract’) entered into between the Debtor and Transnet and to which this guarantee … shall not exceed the sum of R400,000.00 … .

2. The Guarantor hereby renounces the benefits of the legal exceptions of excussion and division which might be pleaded against the validity of this guarantee and hereby acknowledge that the full force and effect of these renunciations are fully known to the Guarantor.

3. This guarantee shall establish a continuing covering liability and shall remain of full force and effect notwithstanding any fluctuation in the indebtedness of the Debtor to Transnet or even the temporary extinction thereof.

…

7. The Guarantor will make payment [i]n terms of this guarantee upon receipt and its domicilium address, … of a written demand from Transnet. Such demand must contain a statement setting out the facts that constitute the default. It will not be incumbent on the Guarantor to determine the accuracy of such facts or the authority or Identification of the signature that may appear thereon.

…

9. Notwithstanding anything to the contrary herein contained, the Guarantor’s obligations hereunder shall be construed as principal and not as accessory to that of the Debtor and shall not be delayed or discharged by the fact that a dispute exists between the Debtor and Transnet. [Emphasis added.]

During the application for the interim injunctions, Applicant of the performance guarantee had argued that there was a dispute regarding the underlying contract between itself and Beneficiary, and therefore, Guarantor should not pay in terms of the guarantee (para 2). Applicant also claimed that Beneficiary had on a previous occasion already demanded payment in terms of the guarantee (i.e., first call made on the guarantee). However, Guarantor, refused to pay in terms of that demand on the basis that a demand was non-compliant. It appears that Beneficiary had failed to comply with the formal requirements set out in the guarantee at the time. In particular, the demand made by Beneficiary did not contain a “statement setting out the facts that constitute the default”, as was required in terms of the guarantee. Applicant of the guarantee had also referred the court to the pending litigation between Applicant and Beneficiary in terms of the underlying contract to demonstrate that there was a dispute relating to Applicant’s liability to Beneficiary. Applicant further indicated that there were certain discrepancies in the demand made by Beneficiary (para 2).

Later Beneficiary made a second demand on the guarantee for the amount of ZAR 400,000 (approximately USD 28,383.20). Guarantor indicated it would honour this second demand as, in its view, a compliant demand was made. It was in relation to this undertaking given by Guarantor, that Applicant of the guarantee approached the court to grant the two interim injunctions (referred to above). As mentioned above, both injunctions were granted in favour of Applicant preventing payment on the guarantee (paras 3 and 7). Beneficiary subsequently brought an urgent application to request the court to reconsider the granting of the interim injunctions.

The court hearing the urgent application for setting aside the interim injunctions stressed that the central issue was therefore whether Applicant of the guarantee had the right to prevent Guarantor, who was satisfied that it was obliged to pay on the guarantee, from paying in terms of the guarantee. The court basically asked whether or not a person who was not a party to the guarantee itself could interfere in that contractual arrangement on the basis that the reason for the existence of the guarantee had, for instance, fallen away (paras 5 and 7).

The court referred to relevant case law dealing with the independence principle of demand guarantees. It upheld the independence of the guarantee involved in the matter before it. It added that by issuing the guarantee, Guarantor had shifted the risk from Beneficiary and at the same time incentivised the Applicant of the guarantee against defaulting in its performance under the underlying contract. It was accordingly a form of security (para 13). In short, this meant that Applicant, who was not a party to the guarantee, could not prevent payment of the guarantee amount by Guarantor when all the requirements of the guarantee had been met, except for instances of fraud (para 13). Thus the court stated (paras 14 and 15):

It is not for the applicant [of the guarantee], who is not a party to guarantee, to stop payment on the guarantee on the basis that a fraud has been committed. That is the prerogative of the bank, who in casu is quite happy to pay out on the guarantee.

… [O]n the basis of the aforegoing authorities and legal principles, the applicant does not have a prima facie right, which entitled it to the interim interdict I granted in its favour … .

Accordingly, the court upheld the urgent application by Beneficiary and set aside the two interim injunctions. It also ordered Applicant to pay Beneficiary’s cost of the urgent application, including the cost consequent upon the employment of two Counsel (paras 20–21).

Comment: The court correctly upheld the independence principle of the performance guarantee by holding that only fraud would constitute a valid exception to the independence principle. This is consistent with current South African case law.

The court, however, makes an ambiguous (and incorrect) statement that an applicant (principal) of a guarantee generally does not have the locus standi to try and prevent a guarantor from making payment on a demand guarantee even where fraud is involved, because an applicant is not a party to the guarantee itself (para 14 quoted above). Confusingly, it states that it is the prerogative of the bank to refuse to pay in the event of fraud. However, these confusing statements are irrelevant to the outcome of this specific case and would not have made a difference. This is so as it is clear there was no fraud in this case and seemingly a compliant demand was made which obliged the guarantor to pay.

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

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