Calling up bank guarantees in demands

December 6th, 2013, Published in Articles: Vector

 

There are a number of ways in which a party to a commercial agreement can secure the counter party’s contractual obligations. Security can take the form of guarantees, pledges and cessions in security, among others. Bank guarantees feature regularly, and are very often perceived as “standard” or “template” documents in respect of which little if any negotiation is encountered as far as legal drafting is concerned.

The Supreme Court of Appeal (SCA) judgement of Nedbank versus Procprops of 20 November 2013 dealt with the question of whether a bank guarantee could be enforced by the beneficiary of the guarantee in a series of demands or tranches. The facts were as follows: Procprops leased premises to Top CD. The lease entitled Procprops to a guarantee for the rental. Top CD arranged a bank guarantee from Nedbank. The guarantee read:

“At the instance of the lessee we hold at the landlord’s dispost and undertake to pay to the landlord an amount not exceeding R313 845 subject to the terms and conditions.

“Payment shall be made upon receipt by the bank of the landlord’s first written demand, which shall be accompanied by this original guarantee and which will state that the lessee had failed to comply with its obligations in respect of the lease and that, accordingly, the amount of R313 845, or any lesser portion thereof, is now due and payable”.

Top CD paid rental in terms of the lease up to 1 December 2010 but vacated the premises during December 2010 and made no further payment of rental. Procprops demanded payment of the amount of some R72 000 from Nedbank in terms of the guarantee. In this letter of demand it was stated that Top CD had failed to comply with the lease and that, accordingly, the amount was due and payable. This amount represented only the rental payable on 1 January 2011. The letter was accompanied by the original guarantee and concluded as follows:

“Could you also please consider the fact that this letter calls upon you to perform only partially in terms of the guarantee and, accordingly, our client’s rights in respect thereof are not extinguished. Could you please in view thereof return the original guarantee.”

Nedbank duly paid the amount. Procprops sent a further letter of demand to Nedbank. In this letter, payment in terms of the guarantee of a further amount of R72 000 was demanded. Without having received any response from Nedbank, Procprops demanded payment of yet further amounts. Nedbank then responded that it had duly performed under the guarantee, accepted the return of the original thereof and that the guarantee had been cancelled as a result.

The court made the following points:

  • The bank guarantee established a contractual obligation on the part of Nedbank to pay to Procprops which is wholly independent of the underlying lease between Procprops and Top CD. Disputes arising between Nedbank’s customer (Top CD) and Procprops in relation to the lease did not detract from Nedbank’s obligation to make payment to Procprops, provided only that the conditions for payment specified in the guarantee were met.
  • These conditions were the receipt by Nedbank of a written demand with the contents set out in the guarantee.
  • If these documents were presented, Nedbank could escape liability only upon proof of fraud on the partof Procprops.
  • The central issue, then, is whether, on a proper interpretation of the guarantee, it provided for more than one payment by Nedbank.
  • The provision that the demand must be accompanied by the original guarantee strongly indicated that only one payment was envisaged.
  • The purpose of the provision must therefore have been for Procprops to give up the security of the guarantee to ensure that it could not be presented for payment again.
  • In addition, a meaning must be ascribed to the phrase “first demand”, which is used in the guarantee. In the court’s view, the phrase excluded further demands.
  • Procprops attempted to rely on the last part of its letter of demand, namely its request that after payment of the first demand, Nedbank should return the guarantee to enable Procprops to call on the guarantee, should it become necessary in future. The argument was that both Procprops and Nedbank understood the guarantee in this manner and that it should therefore be given this meaning. This argument was rejected by the court because evidence of subsequent conduct of parties to an agreement is only admissible when the document is ambiguous on the face of it. Here, the guarantee was clear and unambiguous.

In the context of agreements which involve on-going payments (such as leases), careful consideration must be given to the wording of the guarantee and whether it is capable of being drawn down in tranches. Alternatively, the agreement between the creditor and debtor can be drafted such that the creditor may present the guarantee for payment in its entirety and then hold any balance as a cash deposit. The requisite cash deposit clauses should then be included in the agreement.

Cliffe Dekker Hofmeyr

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