31 October 2018 by and Dispute Resolution Alert

Where a beneficiary makes demand in terms of a guarantee is material! … or is it?

According to the Johannesburg High Court, in the recent case of Lombard Insurance Company Limited v Schoeman and Others 2018 (1) SA 240 (GJ), it really doesn’t matter where a demand is made. In fact, it was held that, if the purpose of the demand (which is to inform the guarantor of the beneficiary’s intention to demand payment in terms of the guarantee) is achieved, then the place where the demand is made is entirely insignificant.

The background to this case is as follows: Golden Sun, a company of which the respondents were a director, employee, sureties and co-principal debtors respectively, entered into a credit agreement with Sasol in terms of which it would receive fuel. It then concluded a facility agreement with Lombard, which required it to conclude a counter indemnity agreement and suretyships in favour of Lombard as security. Lombard was then requested by Golden Sun to conclude a demand guarantee in favour of Sasol in accordance with the latter’s terms and conditions. In terms of this demand guarantee, if Golden Sun failed to make payment to Sasol for the fuel purchased on credit, then Sasol could make demand (up to a certain amount) from Lombard in terms of the guarantee. Lombard, after making payment to Sasol, could then claim the amount paid to Sasol from Golden Sun in terms of the counter indemnity and suretyships.

Every month, Golden Sun was required to send Lombard information it received from Sasol to determine how much it owed the latter. However, it was discovered that it had been sending fraudulent information to Lombard for a few months to hide the actual amount it owed to Sasol, and, based on this and the outstanding balance owed, Sasol submitted two claims to Lombard in terms of the guarantee. Lombard duly paid these claims and claimed compensation for the amounts from Golden Sun under the counter indemnity and suretyships. Golden Sun failed to make payment, and it was this failure that Lombard based its first two claims in the High Court on. Its third claim was based on Golden Sun’s failure to pay a premium in terms of the facility agreement, but it is the first two claims that we are concerned with for the purposes of this publication.

The respondents opposed the claims brought by Lombard for compensation for paying the demands on the basis that Sasol had not complied with the terms of the guarantee because the place where they made the demands was different to the place stipulated in the guarantee. The first clause of the guarantee provided that Sasol’s first written demand had to be received by Lombard at the “above-stated address” for it to be made effectively. The “above-stated address” was Sasol’s business address, however, Sasol made both demands by hand delivering them to Lombard’s business address. The respondents argued that not having made the demands at the place stipulated in the guarantee, Sasol had not fulfilled the terms of the guarantee, and therefore there was no legal duty on Lombard to fulfil the demands. Consequently, there was no legal duty on Golden Sun or the respondents to compensate Lombard.

The court held that exact or strict compliance in terms of the place where the demands were made was not necessary for the demands to have been effectively made. This is because inter alia:

  • neither Golden Sun nor the respondents suffered any risk or prejudice in terms of the guarantee due to where the demand was made;
  • the clause stipulating that demand be made at a specific address did not create a right in favour of Golden Sun which it could exercise in terms of the guarantee, or benefit it in any way;
  • there had been no insistence by Sasol that Lombard’s representative avail themselves at the specified address so that it could effectively make its demand; and
  • where Sasol made its demands was immaterial as the demands remained substantively the same regardless of where they were made.

Furthermore, the court, referring to the Namibian case of Standard Bank of South Africa v Council of the Municipality of Windhoek 2015 JDR 2331 (NmS), emphasised that the strict compliance with a bond depends on its construction, and stated in paragraph 50 – 51 of its judgment that:

“the very substance of or gravamen of the call for payment would have remained unaffected by the place at which the demand was received. The receipt of the demand was the essential

requirement, not the place of receipt…as long as proper demand was made and received, the place at which it was received did not affect or compromise the rights and interests of (Golden Sun) beyond the parameters of the commitments acceded to in the demand guarantee.” (our emphasis)

To support its findings further, the court referred to the recent case of MUR Joint Ventures BV v Compagnie Monegasque De Banque [2016] EWHC 3107 (Comm) (which we have written on previously), which dealt with a similar contention, in that the demand was delivered by means other than registered mail as stipulated in the demand guarantee, and therefore, it was argued, the demand had not been made effectively. The court, in that case, found that “the guiding principle is one of effective presentation of a demand” and that the requirement of the method of delivery “is directory, not mandatory”.

The Lombard case, along with many others before it, clarifies the distinction between ‘strict’ and ‘sufficient’ compliance with demand guarantees, and directs that, as long as the purpose for which a demand has been made is achieved, it is effective and the terms upon which it was made have been sufficiently complied with. Despite this, however, it bears emphasising that ambiguous as well as overly restrictive clauses must be avoided in drafting demand guarantees and that all parties must perform their obligations in terms thereof as much as they possibly can.

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