BANK GUARANTEE OR LETTER OF UNDERTAKING?

The facts in Koumantarakis Group CC v Mystic River Investment 45 (Pty) Ltd and Another (2008) 3 All SA 384 (Supreme Court of Appeal); 2008 5 SA 159 (Supreme Court of Appeal) were as follows: The purchaser concluded an agreement with the seller to purchase an immovable property for R12 million. The agreement was not conditional on the purchaser obtaining finance secured by a mortgage bond from any financial institution, but was intended to be a cash transaction.

Accordingly, the price was payable by way of a deposit of R1 million secured by a bank guarantee acceptable to the seller and a similar guarantee for the balance payable on transfer of the property.

The agreement was silent on the nature of the bank guarantee required, that is, whether it had to be revocable or irrevocable. It left the nature and format of the guarantee required entirely in the discretion of the seller. The purchaser supplied a bank guarantee that was in the standard form that the specific bank used in similar transactions. The standard guarantee contained the following important clause, which accorded the bank the right to withdraw from its commitment under certain circumstances:

“Should any new or previously undisclosed fact emerge which may prejudice the Bank’s security or any circumstances arise to prevent or unduly delay registration of the abovementioned transaction(s) we reserve the right to withdraw here from by giving you written notice to the effect, where-upon the said sum will no longer be held at your disposal.”

The guarantee provided by the purchaser thus constituted a revocable bank guarantee. The seller however, advised the parties that the guarantee had to be irrevocable and valid for a year. The purchaser could not submit a guarantee that was acceptable to the seller and the seller cancelled the agreement. The main dispute turned on the question whether the seller had acted unreasonable in rejecting the revocable guarantee provided by the purchaser.

The court a quo held that the revocable guarantee did not provide adequate security to the seller and that the seller was entitled to reject it and cancel the agreement.

On appeal Mhlantla A J J held, that neither a provision for irrevocability nor a provision that the guarantee provided security was expressly stipulated for in the agreement. In this regard, the court referred with approval to the earlier decision in Rosen v Ekon 2001 (1) SA 199 (w) in which it was held that, subject to any express term in an agreement for the sale of immovable property, the function of the bank guarantee for payment against transfer is not one of security, but rather one of payment. The delivery of a revocable guarantee is in compliance with the purchaser’s obligation to provide a guarantee for payment, unless the contract expressly provides otherwise.

Where a seller has the discretion to accept or reject a guarantee, it must exercise an honest judgement in deciding whether to accept or reject a guarantee. The seller’s decision to reject – objectively viewed – must be based on reasonable grounds.

The court pointed out that the type of clause in question has been in use for a long time and has become a standing practice in most transactions involving a guarantee. The right of the bank to withdraw its guarantee is also not an unfettered discretion, but limited to the particular circumstances.

The bank is not entitled to a “whimsical” withdrawal of its guarantee, but is limited to a withdrawal that is factually based and related to its security.

Finally, the Supreme Court of Appeal held that the guarantee in the context of this contract was not irrevocable and was not intended to serve as security in the true sense of the word. It is evident that the letter issued by the bank is a contractual undertaking that payment will be made on registration of transfer.

The appeal was allowed with costs.