A recent finding by South Africa's Supreme Court of Appeal holds that a court will be able to determine, in context, whether compliance with the intention and purpose of the on-demand guarantee was sufficient. Accordingly, parties should seek to phrase mode of delivery clauses carefully in order to ensure that they are prescriptive in nature and that a failure to comply with the mode of delivery clause would result in an invalid demand.
The Supreme Court of Appeal (SCA), was recently tasked with considering the correct interpretation of the mode of delivery clause contained in an on-demand guarantee and whether delivery to the guarantor (albeit not in the manner prescribed) is sufficient and constitutes a valid demand. In Schoeman & Others (Schoemans) v Lombard Insurance Co Ltd (Lombard), Lombard sought to claim three amounts from the Schoemans, who bound themselves as sureties and co-principal debtors to the debts of Golden Sun Retailers (Pty) Ltd (Golden Sun).
These debts arose from Golden Sun's purchasing of fuel, which Sasol Oil (Pty) Ltd (Sasol) supplied on credit. In order for Golden Sun to be provided with this credit facility, it applied to Lombard for a general and commercial guarantee facility (Demand Guarantee) to the value of R60.5 million. Furthermore, there was security for the facility in the form of a counter-indemnity given by Golden Sun and suretyships undertaken by the Schoemans. The provisions of the demand guarantee provided that "Payment shall be made under this guarantee upon receipt by the Guarantor [Lombard], at the above stated address…". The above stated address in this instance was, rather oddly, Sasol's address.
Golden Sun then purchased fuel from Sasol on credit, whereby Sasol would then send the detailed account to Golden Sun and Golden Sun would on send it to Lombard, who would then settle the account on behalf of Golden Sun. Golden Sun would deposit funds into a redemption account for Lombard to drawn down on, once payment to Sasol was made.
At some point, Golden Sun began to alter the Sasol customer account statements, purchasing fuel far in excess of what it had represented to Lombard and which resulted in an amount of over R60 million being owed to Sasol. Sasol then delivered a demand for payment to Lombard for the outstanding amount and, contra to the requirement of the demand guarantee, delivered it to the offices of Lombard (not at Sasol's offices as per the demand guarantee). Lombard, however, paid the requested amount to Sasol under the demand guarantee, credited Golden Sun's redemption account and then claimed the remainder of the amount owing to it from Golden Sun and the sureties, however, no payment was forthcoming.
Golden Sun raised the defence that, due to non-compliance with the mode of delivery clause, there was no valid demand by Sasol on Lombard and as such, Golden Sun's obligations to pay in terms of the counter-indemnity were not triggered.
Accordingly, the court had to determine whether the mode of delivery clause in an on-demand guarantee was prescriptive, in that failure to comply with the clause would render the demand invalid, or whether the clause was descriptive, in that strict compliance with the clause is unnecessary.
The SCA referred to the decision of Natal Joint Municipal Pension Fund v Endumeni Municipality, whereby the court held that when interpreting a document, regard must be had to the context by reading the provisions in light of the document as a whole and the circumstances which surrounded the document coming into existence. The court further noted that a sensible (business-like) meaning should be preferred to one which is not sensible and which undermines the apparent purpose of the document.
In interpreting the broader context in which the demand guarantee was given, the SCA held that the facility given to Golden Sun by Sasol enabled Golden Sun to purchase fuel on credit from Sasol. Additionally, the SCA held that the demand guarantee was intended to protect Sasol from any default on the part of Golden Sun and its purpose was to create an independent autonomous contract between Lombard and Sasol. Essentially, the demand guarantee sought to achieve its purpose by providing for payment to Sasol on the happening of a specified event (being the presentation of a demand by Sasol to Lombard).
The SCA referred to the United Kingdom decision of MUR Joint Ventures BV v Compagnie Monegasque De Banque, which held that mode of delivery clauses in on-demand guarantees are merely descriptive and not prescriptive and that the failure to strictly comply with the clause does not, in itself, render the demand invalid.
The SCA accordingly held that, in light of the decision of MUR and Endumeni, the requirement of the demand being made at a specific address is merely descriptive and not prescriptive in nature and that the guiding principle must be whether there was the effective presentation to the guarantor of the demand in question.
By John Bell, Partner, and Rui Lopes, Associate, Dispute Resolution Practice, Johannesburg