Just what the High Court prescribed – A party may call up a Guarantee in instances where more than three years had passed since the date of the underlying contractual breach

On 26 June 2019, the Pretoria High Court handed down a judgment in a matter in which the Court had to determine whether a party may call up a demand guarantee in instances where the underlying contractual basis for the guarantee may have prescribed.

21 Aug 2019 3 min read Dispute Resolution Article

Investec Bank Ltd (Investec) had entered into an agreement in terms of which it sold immovable property to Esor Uitvlugt (Pty) Ltd (Esor). This agreement required Esor to improve the property by installing internal services with a cumulative value of R20,000,000 by certain dates (Obligation). As a precondition to the agreement, and in order to secure Esor’s performance, the agreement required that Esor provide a demand guarantee in favour of Investec for the due and proper performance of the Obligation.

Esor subsequently approached Lombard Insurance Company Ltd (Lombard) who issued a performance guarantee in favour of Investec (Guarantee). The Guarantee provided that Lombard undertook to pay Investec the guaranteed sum upon receiving written notice from Investec that Esor had defaulted in performing its Obligation.

As at 14 August 2018, Esor had not performed its Obligation and it was at this point that Investec made its demand in terms of the Guarantee for payment of the guaranteed amount from Lombard. This date was more than 3 years after a portion of the Obligation, thus the trigger event for calling up the Guarantee, was to be performed by Esor. 

Lombard’s Counsel argued, amongst other things, that Investec’s right to call up a portion of the guaranteed sum had prescribed due to the lapsing of three years since Esor’s default in performing the Obligation as contained in the underlying agreement.

The Court considered the authorities on demand guarantees and the wording of the Guarantee itself and concluded that the Guarantee was a true demand guarantee and not a suretyship, as argued by Lombard’s Counsel, and that the underlying contract had no effect on Lombard’s liability to Investec, unless fraud was shown, which was not the case, and that any defence that Esor might have had, including that Investec’s claim against it had prescribed, was not at Lombard’s disposal.

The running of prescription is regulated under s12(1) of the Prescription Act, No 68 of 1969, which provides that prescription will commence to run as soon as a debt is due.

In considering when prescription would commence in this case, the High Court referred with approval to the case of De Bruyn v Du Toit, which was confirmed by the Constitutional Court in Trinity Asset Management (Pty) Ltd v Grindstone Investments 132 (Pty) Ltd, and stated that:

“…where the parties agree that the giving of notice is a condition precedent to a claim and is thus a necessary ingredient to a creditor’s cause of action, the running of prescription would only commence when notice is given. Parties are entitled, in entering into an agreement, to determine when prescription will commence running, even if the agreement operates to the detriment of one of the parties.”

From the authority relied upon, it would appear that in this case prescription would begin to run from the date on which Investec gave notice calling up the Guarantee from Lombard.

The Court also considered the wording of the Guarantee which provided that: “This guarantee … shall remain valid until the Purchaser’s obligations in terms of Clause 7 have been fulfilled under the Agreement or upon payment of the Guarantee in terms of this agreement” and held that, in the circumstances, the Guarantee would only lapse when one of two scenarios occurred, either when Esor had complied with the Obligation, or when payment had been effected by Lombard in terms of the Guarantee. Consequently, the Court found that the claim under the Guarantee had not prescribed, as argued by Lombard, despite more than three years having passed since performance in terms of the underlying contract became due.

The calling up of a guarantee will invariably depend on the contractual terms of the guarantee itself and will have to be drafted so as to comply with the terms of the specific guarantee. This case illustrates that the parties to a guarantee are capable of not only determining the amount and the terms for performance under the guarantee but can also agree as to when prescription will begin to run.

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