South Africa court finds presentation of original guarantee not always pre-requisite for payment

Although the standard position remains that guarantees are formal instruments requiring issuance and delivery of the original, the decision, by the Johannesburg High Court (Gauteng division), demonstrates that courts are willing to prioritise fairness, good faith, and commercial practicality over rigid adherence to form. Where a guarantor’s conduct creates grounds of reasonable reliance for a beneficiary, substantive compliance and equitable principles may override technical deficiencies.

Here, the Development Bank of Southern Africa (DBSA) awarded a contract to a joint venture between Reity Trading Enterprises and a contractor, Phumi HD Construction CC (‘the contractor’) for works at the New Waban Senior Secondary School, in Libode, Eastern Cape. The contractor was required to secure a performance guarantee for completion of its contractual obligations in favour of the DBSA. Fusion Guarantees (Fusion) provided the requisite guarantee to the DBSA on the contractor’s behalf. However, the DBSA only received a copy of the guarantee from the contractor, which it relied upon in good faith.

When the contractor defaulted on its contractual obligations and DBSA called upon Fusion for payment under the guarantee, Fusion refused payment on the grounds that the original guarantee was never delivered to either DBSA or, when payment was demanded, Fusion itself, and had, in the interim, been cancelled.

Fusion argued before the court that the guarantee was invalid because the original embossed document had never been delivered. Additionally, the guarantee itself stated that claims would only be honoured upon submission of the original embossed document. However, Fusion had failed to notify DBSA of the cancellation of the guarantee and retained the original without explanation. The cancellation also appeared to have occurred only after DBSA initiated legal proceedings. Fusion also argued that because the guarantee had been cancelled, it was released from any liability.

The court, however, found that Fusion’s conduct - including failing to disclose the cancellation of the guarantee and retaining the original - was misleading. Fusion’s silence meant that DBSA had a reasonable belief that the guarantee was valid and enforceable. The court cited previous cases to support its reasoning which, while involving different facts, established a precedent for substance over form. It also emphasised commercial practicality in that requiring DBSA to provide the original in this case would lead to an unbusinesslike result, especially since Fusion had control over the document and had failed to act transparently.

The court accordingly held that Fusion was prevented – legally, ‘estopped’ – from denying the issuance and enforceability of the guarantee. By preparing and circulating the signed document without disclosure of any cancellation, Fusion created a reasonable belief in DBSA that the guarantee was valid and, by its silence, it deprived DBSA of the opportunity to secure alternative protection.

As a result the court interpreted the clause requiring presentation of the original embossed guarantee as an administrative rather than absolute condition. Applying the so-called ‘Endumeni’ principles of interpretation – context, purpose, and sensible meaning - the court held that the purpose of the clause was to prevent multiple claims, not to undermine the validity of the guarantee itself. Treating the clause as an absolute condition in the circumstances of this case would lead to an unbusinesslike and inequitable outcome.

Co-written by Prince Rampya of Pinsent Masons.