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.
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:
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.”
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
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
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.