On-demand guarantees: Compliance – how much is required?

In this case, MUR Joint Ventures made demand for the sum of $500,000 plus interest under a guarantee issued by Monégasque de Banque, a Monégasque Bank. The bank denied liability for payment of this sum alleging that the demand was not compliant with the requirements of the guarantee because, among other things,it was not sent by registered post as required in terms of the guarantee.

The court made reference to the English Appeal Court judgment of IE Contractors v Lloyd’s Bank (1990) 51 Build LR 1 in which it was decided that the level of compliance required under a performance bond was either “strict or not so strict” depending on the actual construction of the bond itself.

While the text of the guarantee in the MUR case required the demand to be sent by registered mail, as an apparent condition precedent for the demand to be effective, the court held that such provision was not mandatory in nature but directory. The guarantee essentially required ‘effective presentation’ of the demand – which had been sent via courier and various other means to the bank prior to the demand itself.

The court considered the rationale behind the requirement that the guarantee be sent by registered mail and concluded that the purpose - being to ensure that the bank received the demand - was effectively served as none of the other means of delivery undertaken were disputed. In terms of the South African position, the Supreme Court of Appeal in the cases of State Bank of India v Denel SOC Limited and Others (947/13) [2014] ZASCA 212 and Compass Insurance Company Limited v Hospitality Hotel Developments (Pty) Limited (756) [2011 ZASCA 149] had previously left open the issue of the degree of compliance required in terms of an on-demand guarantee but held that in a case where a demand is completely non-compliant with the terms of a guarantee, a beneficiary will not be entitled to rely on it.

The MUR judgment is consistent with two recent South African judgments relating to on-demand guarantees, being University of the Western Cape v Absa Insurance Company Ltd (100/2015) [2015] ZAGPJHC 303 and Kristabel Developments (Pty) Ltd v Credit Guarantee Insurance Corporation of Africa Limited (Pty) Ltd 1178/2015 (GJ) in which the High Court similarly reasoned that the standard of compliance required by a demand, made in terms of a guarantee, is different to the standard required in terms of a letter of credit. Unlike a guarantee, in terms of a letter of credit the bank itself shall be in the position to evaluate the claim, as it shall already enjoy possession of all the relevant documents and relevant information. However, the High Court did not definitively find on the issue of whether a beneficiary wishing to rely on the guarantee must ensure strict compliance with its terms.

The MUR case therefore takes great strides in cementing the implicit findings of the court in Kristabel and ABSA Insurance Company, that strict compliance with the terms of a performance bond will only be required when the wording of the bond itself is explicitly clear on the expectations on the parties. Based on the recent case law discussed above, it is clear that any lack of clarity in terms of the wording of the performance bond may result in the terms of that bond being interpreted far wider than anticipated by the parties.

In summary, whether strict compliance will be required is a question of construction. Should the bond be precise regarding the expectations on the parties, strict compliance with the terms of the agreement ought to remain a requirement. However, should the performance bond be unclear or ambiguous, the court may lower the compliance threshold to one of only effective compliance. While such issues shall be determined on a case-by-case basis, parties to a performance guarantee should pay special attention to the wording of such bonds to ensure clarity in terms of the expectations on the parties as well as to mitigate against unpredictable results and uncertainty.