Legal Case Summaries

Article

Note: To fulfill sales to its customers, Golden Sun Retailers (Pty) Ltd. (Buyer/Applicant) purchased oil from Sasol Oil (Pty) Ltd. (Seller/Beneficiary) on credit. As Seller/Beneficiary required assurance of repayment, Buyer/Applicant applied for and obtained a General and Commercial Guarantee Facility from Lombard Insurance Company Inc. (Guarantor). Under the terms of the facility, Buyer/Applicant provided Guarantor with a Counter-Indemnity obligating Buyer/Applicant to reimburse Guarantor, on demand, any sum that it may have been called upon to pay under the guarantee, “whether or not [Buyer/Applicant] admitted the validity of such claims against the [Guarantor]”. Moreover, Schoeman (Sureties), a group of individuals, “bound themselves as sureties and co-principal debtors jointly and severally” to be liable for Buyer/Applicant’s obligations under the Counter Indemnity. Guarantor subsequently issued a ZAR 60,500,000 demand guarantee in favor of Seller/Beneficiary on the account of Buyer/Applicant.

Conducting business on a 30-day credit account, Seller/Beneficiary would render a detailed account at the end of each month and send it Buyer/Applicant who would in turn send the same to Guarantor. Buyer/Applicant deposited funds into a “redemption account” and Guarantor would pay Seller/Beneficiary pursuant to the detailed accounting on Buyer/Applicant’s behalf. At some point, Guarantor discovered that Buyer/Applicant had been sending “altered, doctored and/or forged [Seller/Beneficiary] customer account statements” which significantly underrepresented amounts owed by Buyer/Applicant to Seller/Beneficiary. When Guarantor informed Seller/Beneficiary, it was discovered that Buyer/Applicant owed Seller/Beneficiary ZAR 60,096,097.08. Accordingly, Seller/Beneficiary made a demand on the guarantee for the that amount. Guarantor honored. Guarantor, in turn, demanded reimbursement from Buyer/Applicant under the Counter Indemnity. When Buyer/Applicant failed to pay, Guarantor sued Sureties for reimbursement. The trial court granted judgment in favor of Guarantor. Sureties appealed. The Supreme Court of Appeal of South Africa, Plasket, Swain, Mathopo, Makgoka and Tshiqi, JJ., affirmed.

The terms of the guarantee were based on Seller/Beneficiary’s standard company template which provided that “[p]ayment shall be made under this guarantee upon receipt by the Guarantor, at the above stated address, of the Beneficiary’s first written demand”. The only address stated above the clause was Seller/Beneficiary’s own place of business. Sureties argued that Seller/Beneficiary’s demand on Guarantor was “not in compliance with the terms of the guarantee solely by reason of the fact that the demands were received by the [Guarantor] at its…business address”. Sureties argued that Guarantor wrongfully honored the demand and therefore Buyer/Applicant had no legal liability to reimburse Guarantor.

The appellate court agreed with the trial court’s assessment that there was “little to gain from attempts to divine the essential distinction” between letters of credit and demand guarantees. The “real issue” was whether “there was compliance with the terms of the guarantee under circumstances where the beneficiary’s demands for payment were made to the guarantor at its address, rather than at the address of the beneficiary”. The appellate court noted that the context in which the demand guarantee was provided to Seller/Beneficiary was “part of a greater complex of rights and obligations” arising from the facility, counter-indemnity and suretyships; the guarantee, however, constituted “‘an independent, autonomous contract’ between [Guarantor] and [Seller/Beneficiary] within which the ‘contractual arrangements with the beneficiary and other parties are of no consequence to the guarantor.’”In this context, the “primary purpose of the demand guarantee [was] to provide for payment to [Seller/Beneficiary] by [Guarantor] when a proper demand [had] been made.”

The appellate court analogized the instant case to MUR Joint Ventures BV v. Compagnie Monegasque De Banque,¹ where a demand guarantee required that presentation be made “by way of registered mail” to the guarantor’s address. In concluding that presentation by courier, fax and e-mail had been effective, the court in MUR Joint Ventures noted that the term regarding how presentation was to be made was “directory, not mandatory”:

The importance of registered mail is that the communication in question is signed for by the recipient and signature precludes any suggestion that it was not received. In this case there is no question but that the demand and its attachments were received by the Bank. Presentation of the first demand was effective.

Accordingly, the appellate court concluded that the demand made by Seller/Beneficiary had been effective and likened the condition regarding the place for presentation under the guarantee as “directory and not mandatory”:

The result is that the court below correctly concluded that the demands had been properly presented, with the result that [Guarantor]’s obligation to pay was effectively triggered. The appeal…cannot therefore succeed.

[MJK]

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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.