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[2014] ZASCA 212
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State Bank of India and Another v Denel SOC Limited and Others (947/13) [2014] ZASCA 212; [2015] 2 All SA 152 (SCA) (3 December 2014)
THE SUPREME COURT
OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case
No: 947/13
DATE:
03 DECEMBER 2014
Reportable
In the matter
between:
STATE BANK OF
INDIA
..........................................
FIRST
APPELLANT
BANK OF
BARODA
............................................
SECOND
APPELLANT
And
DENEL SOC
LIMITED
........................................
FIRST
RESPONDENT
ABSA BANK
LIMITED
..................................
SECOND
RESPONDENT
UNION OF
INDIA
.............................................
THIRD
RESPONDENT
Neutral citation:
State Bank of India v Denel SOC Limited (947/13)
[2014] ZASCA 212
(3
December 2014)
Coram: Brand,
Bosielo, Theron and Mbha JJA and Fourie AJA
Heard: 24
November 2014
Delivered: 3
December 2014
Summary:
Interpretation of on demand guarantees ─ whether demands
compliant with terms of guarantees ─ whether a South
African
court has jurisdiction where a guarantee expressly provides that it
should be governed and construed in accordance with
the exclusive
jurisdiction of the Indian courts.
ORDER
On appeal from:
South Gauteng High Court, Johannesburg (Malindi AJ sitting as court
of first instance)
1 The appeal is
upheld to the extent reflected in the substituted order that follows.
2 Each party is to
pay its own costs on appeal.
3 The order in the
court below is substituted by the following order:
‘1 The first
respondent is interdicted from making payment in respect of the
counter guarantees listed in annexure A to the
applicant’s
notice of motion dated 25 May 2011, excluding counter guarantee
number 821-02-0002584G, pending finalisation
of the arbitration and
court proceedings already instituted or to be instituted in India,
pertaining to the principal guarantees
to which the counter
guarantees relate.
2 The respondents
are declared liable for payment of the costs of the application,
including the costs of the Part A proceedings,
which costs are to
include the costs consequent upon the employment of two counsel.’
JUDGMENT
Fourie AJA
(Brand, Bosielo,
Theron and Mbha JJA concurring):
[1] The question in
this appeal is whether the first respondent, Denel Soc Limited
(Denel), is entitled to an interdict prohibiting
its banker, the
second respondent, Absa Bank Limited (Absa), from honouring its
undertaking to pay on eight counter guarantees
issued by Absa in
favour of the appellants, State Bank of India and Bank of Baroda
(collectively referred to as the Indian banks).
The court a quo (per
Malindi AJ) granted the interdict and the Indian banks have appealed
against the whole of the judgment and
the order granted. The appeal
is with the leave of the court a quo.
Background
[2] During the
period January 2000 to April 2002, Denel and the third respondent,
the Union of India (the UOI), concluded four written
contracts in
terms of which Denel undertook to supply the UOI with defence related
equipment. As security for the due performance
of its contractual
obligations, Denel was required to furnish one performance and seven
warranty guarantees (the principal guarantees)
to the UOI, in the
format set out in the annexures to the contracts.
[3] Denel instructed
Absa, with whom it has a banker-client relationship, to attend to the
issuing of the principal guarantees.
Absa thereupon instructed the
Indian banks to issue the eight principal guarantees in favour of the
UOI. In turn, Absa issued eight
counter guarantees in favour of the
Indian banks in consideration for the eight principal guarantees
issued by the Indian banks.
[4] In due course
the UOI contended that Denel had breached its contractual obligations
and called upon the Indian banks to pay
the amounts of the principal
guarantees to it. The Indian banks duly complied and then called upon
Absa to pay the corresponding
amounts due in terms of the counter
guarantees. Absa initially refused to comply with the demands of the
Indian banks, contending
that the claims made in terms of the counter
guarantees ‘were not worded under and in terms of the
guarantees issued’.
Absa subsequently changed its mind and
advised Denel that it intended making payment to the Indian banks of
the amounts due in
terms of the eight counter guarantees and to
recover the aggregate payments of USD 3 776 197 from Denel.
[5] Denel disputed
that the UOI was entitled to call up the principal guarantees and
maintained that Absa was accordingly not lawfully
bound to honour the
counter guarantees. However, the changed attitude of Absa prompted
Denel to approach the South Gauteng High
Court, Johannesburg, on an
urgent ex parte basis and it was granted an interim interdict
restraining Absa from making payment to
the Indian banks on the
counter guarantees. The Indian banks opposed the confirmation of the
interim interdict but, as mentioned
earlier, the interim order was
made final by Malindi AJ. This order effectively interdicted Absa
from making payment in respect
of the counter guarantees, pending the
final determination of arbitration and court proceedings in India
between UOI and Denel
pertaining to the principal guarantees.
Legal Principles
[6] The parties are
agreed as to the applicable legal principles, but differ on the
application of these principles to the peculiar
facts of this case. A
convenient starting point is the principle that South African courts,
like their international counterparts,
should jealously guard the
international practice that banks honour the obligations they have
assumed in terms of guarantees issued
by them. In Loomcraft Fabrics
CC v Nedbank & another
[1995] ZASCA 127
;
1996 (1) SA 812
(A) Scott AJA at 816E-G
approved the following dictum of Kerr J in R D Harbottle (Mercantile)
Ltd & another v National Westminster
Bank Ltd & others
[1977]
2 All ER 862
(QB) at 870b-d:
‘The machinery
and commitments of banks . . . must be allowed to be honoured, free
from interference by the courts. Otherwise,
trust in international
commerce could be irreparably damaged.'
[7] This court has
pronounced on the nature of ‘on demand’ guarantees such
as the principal and counter guarantees in
this case, and described
same as ‘not unlike irrevocable letters of credit’ which
establish a contractual obligation
on the part of the guarantor to
pay the beneficiary on the occurrence of a specified event. See
Lombard Insurance Co Ltd v Landmark
Holdings (Pty) Ltd & others
2010 (2) SA 86
(SCA) para 20; Minister of Transport and Public Works,
Western Cape, & another v Zanbuild Construction (Pty) Ltd &
another
2011 (5) SA 528
(SCA) para 15 and Guardrisk Insurance Co Ltd
& others v Kentz (Pty) Ltd
[2014] 1 All SA 307
(SCA) para 14. In
Loomcraft Fabrics at 816C-817F, this court stressed the importance of
allowing banks to honour their obligations
under irrevocable
undertakings without judicial interference. It was held that an
interdict restraining a bank from paying in terms
of such an
undertaking, will not usually be granted save in the most exceptional
cases. In this regard reliance was placed on the
following
observation made in Intraco Ltd v Notis Shipping Corporation (The
Bhoja Trader) [1981] 2 Lloyd’s Rep 256 (CA) at
257:
‘Irrevocable
letters of credit and bank guarantees given in circumstances such
that they are the equivalent of an irrevocable
letter of credit have
been said to be the life blood of commerce. Thrombosis will occur if,
unless fraud is involved, the courts
intervene and thereby disturb
the mercantile practice of treating rights thereunder as being the
equivalent of cash in hand.’
[8] A ‘first
demand’ guarantee, such as the principal guarantees, is
independent of the underlying contract which gives
rise to the
guarantee. Therefore, regardless of a dispute between the parties to
the underlying contract, the guarantee must be
paid on demand.
Likewise, a counter guarantee is independent of the underlying
contract and is also independent of the principal
guarantee. See the
authorities referred to in para 7 above and the doctoral thesis by
Michelle Kelly-Louw at the University of
South Africa in October
2008, Selective Legal Aspects of Bank Demand Guarantees at 72.
[9] A bank issuing
an on demand guarantee is only obliged to pay where a demand meets
the terms of the guarantee. Such a demand,
which complies with the
terms of the guarantee, provides conclusive evidence that payment is
due. From this it follows that the
beneficiary in the case of an on
demand guarantee should comply with the requirements stipulated in
the guarantee. In Frans Maas
(UK) Ltd v Habib Bank AG Zurich [2001]
Lloyd’s Rep Bank 14 para 58, it was put as follows:
‘The question
is: what was the promise which the bank made to the beneficiary under
the credit, and did the beneficiary avail
himself of that promise? .
. . It is a question of a construction of the bond. If that view of
the law is unattractive to banks,
the remedy lies in their own
hands.’
As was stated in
Minister of Transport and Public Works, Western Cape & another v
Zanbuild Construction (Pty) Ltd & another,
supra, para 13, all
that is required for payment is a demand by the beneficiary, stated
to be on the basis of the event specified
in the guarantee. Whether
or not the demand is compliant will turn on an interpretation of the
guarantee.
[10] The only
exception to the rule that the guarantor is bound to pay without
demur, is where fraud on the part of the beneficiary
has been
established. The party alleging fraud has to establish it clearly on
a balance of probabilities. Fraud will not lightly
be inferred and a
party has to prove that the beneficiary presented the guarantee to
the bank knowing that the demand was false.
Mere error,
misunderstanding or oversight, however unreasonable, would not amount
to fraud. See Loomcraft Fabrics at 817G-H and
Guardrisk Insurance
paras 18 and 19.
The application
of the legal principles
[11] I will first
consider the terms of the relevant guarantees. With regard to the
seven principal warranty guarantees, the Indian
banks undertook to
pay the UOI in the event that the President of India submits a
written demand that Denel has ‘not performed
according to the
warranty obligations’ under the contract concluded between
Denel and the UOI. In the principal performance
guarantee issued by
the Indian banks, the undertaking was to pay the UOI, in the event
that the President of India declares ‘that
the goods have not
been supplied according to the contractual obligations’ under
the contract concluded between Denel and
the UOI. In each of the
eight principal guarantees it was recorded that the UOI’s
written demand would be conclusive evidence
that such payment is due,
which payment would be effected upon receipt of such written demand.
[12] The eight
counter guarantees issued by Absa to the Indian banks in
consideration for the eight principal guarantees issued
by the latter
to the UOI, typically contain an undertaking along the following
lines:
‘We Absa Bank
Limited . . . hereby irrevocably and unconditionally confirm that we
undertake to pay you on your first written
demand by authenticated
SWIFT message stating that you have been called upon to make payment
under and in terms of your guarantee.
. . .’
Although there are
some minor differences in the wording of the counter guarantees, it
does not detract from the basic undertaking
given in each of the
eight counter guarantees, namely that Absa would be liable to make
payment upon receipt of a written demand
by the Indian banks stating
that they have been called upon to make payment under and in terms of
their principal guarantees. I
should add that the amount of each
counter guarantee is the same amount guaranteed in terms of its
corresponding principal guarantee.
[13] The next step
is to consider whether the demands made by the beneficiaries for
payment in terms of the respective guarantees,
complied with the
terms of the relevant guarantees. In each of the seven principal
warranty guarantees the written demand made
by the UOI was basically
similarly worded, namely, that, as the goods have not been supplied
(by Denel) in accordance with the
contractual obligations, payment in
terms of the principal guarantee is demanded. It is immediately
apparent that these demands
differ from the wording of the seven
principal guarantees which prescribe a demand that Denel has not
performed according to the
warranty obligations under the contract
concluded with the UOI.
[14] Turning to the
written demands made by the Indian banks in respect of the seven
warranty counter guarantees, the sole inquiry
is whether the Indian
banks have addressed a written demand to Absa stating that they have
been called upon to make payment under
and in terms of their
corresponding principal warranty guarantees. If so, Absa would be
obliged to honour the counter guarantees
without demur. If not, Absa
would not be liable to make any payment in respect thereof.
[15] It is
convenient to first deal with the following six warranty counter
guarantees.
Absa counter
guarantees nos 821-02-0009417G; 821-02-0009756G; 821-02-0009989G;
821-02-0010334G; 821-02-0011743G and 821-02-0010566G
[16] In respect of
each of these counter guarantees, the Indian banks in their demand to
Absa merely repeated the demand made upon
them by the UOI under the
respective principal guarantees. As I have indicated earlier, the UOI
demanded payment from the Indian
banks on the basis that Denel had
not supplied the goods in accordance with its contractual
obligations. It is clear that the demands
made under the six
corresponding principal guarantees, as well as the demands made under
the six counter guarantees, do not comply
with the terms of the
respective guarantees. What was required in terms of the principal
guarantees, is a demand that Denel had
not performed according to the
warranty obligations under the aforementioned contract. Similarly, a
demand in terms of the six
counter guarantees has to state that the
Indian banks have been called upon to make payment under and in terms
of their guarantee.
This means that the demand should be premised on
Denel’s failure to supply the goods in accordance with the
warranty obligations
under the contract.
[17] However, both
in respect of the six principal warranty guarantees and the
corresponding warranty counter guarantees, the demand
is expressly
premised on a failure by Denel to comply with its contractual
obligations and not a failure to comply according to
the warranty
obligations under the contract. It accordingly follows that, in
respect of each of the six counter guarantees under
discussion, the
demands made by the Indian banks do not comply with the terms of the
counter guarantees. In the absence of compliant
demands, Absa is not
obliged to make payment to the Indian banks under these counter
guarantees.
[18] I now deal with
the remaining warranty counter guarantee and the performance counter
guarantee issued by Absa in favour of
the Indian banks.
Absa counter
guarantee no 821-02-0002584G
[19] This is the
seventh warranty counter guarantee issued by Absa in favour of the
Indian banks. It has the same wording as the
six warranty counter
guarantees dealt with above, except for an ultimate paragraph which
reads as follows:
‘This counter
guarantee shall be governed by and construed in accordance with the
Indian laws and is subject to the exclusive
jurisdiction of courts in
India.’
In their heads of
argument and on appeal counsel for the Indian banks submitted that
the effect of this clause is to oust the jurisdiction
of a South
African court in regard to this counter guarantee. Therefore, it was
submitted, the court a quo should not have interdicted
Absa from
making payment in terms thereof. I may add that this defence was not
foreshadowed in the appellants’ papers in
the court below nor
was it raised in their application for leave to appeal.
[20] In considering
this submission, it has to be borne in mind that there is a
banker-client relationship between Absa and Denel.
The latter
mandated the former to make payment in terms of the warranty counter
guarantees and it has to be accepted that Denel
was aware of the
terms of the counter guarantee now under discussion. From this it
follows that Denel was aware that, if a dispute
would arise with
regard to this counter guarantee, it would have to be interpreted in
accordance with Indian law and by an Indian
court. In fact, the
ultimate paragraph of this counter guarantee expressly provides that
it shall be governed and construed in
accordance with Indian law and
be subject to the exclusive jurisdiction of the Indian courts.
[21] A dispute has
now arisen as to whether or not the demand made by the Indian banks
under this counter guarantee, complied with
the terms of the counter
guarantee. This necessitates a construction of the wording of the
counter guarantee, which, in terms of
the counter guarantee, has been
reserved for the exclusive jurisdiction of the Indian courts. In my
view, this constitutes a complete
ouster of the jurisdiction of a
South African court to deal with the question whether or not the
demand complied with the terms
of the counter guarantee.
[22] If a South
African court were to assume jurisdiction by granting interdictory
relief with regard to this counter guarantee,
it may place Absa in an
untenable position if the Indian banks, as they would be entitled to
do, were to approach an Indian court
for relief. Absa may then be
faced with two conflicting decisions. I therefore conclude that the
court a quo did not have the necessary
jurisdiction to grant
interdictory relief in regard to this warranty counter guarantee.
Absa counter
guarantee no 821-02-0009587G
[23] This counter
guarantee relates to the one principal performance guarantee issued
by the Indian banks. As mentioned above, the
undertaking given by the
Indian banks, in their principal guarantee, was to pay the UOI in the
event of the President of India
submitting a written demand that the
goods supplied by Denel were not in accordance with the contractual
obligations. In terms
of the counter guarantee Absa, in turn,
undertook to pay the Indian banks upon their written demand stating
that they (the Indian
banks) have been called upon to make payment
under and in terms of their principal performance guarantee.
[24] The written
demand of the Indian banks to Absa in this instance, stated the
following:
‘We advise
that we have been called upon by Ministry of Defence, Government of
India to pay the above guaranteed amount .
. . for non-fulfilment of
contractual obligations.’
[25] It is clear
that the principal performance guarantee issued by the Indian banks,
did not contain an undertaking to pay the
UOI in the event of Denel
failing to comply with its contractual obligations, but only in the
event that the goods supplied by
Denel were not in accordance with
its contractual obligations. However, the demand under the counter
guarantee expressly states
that payment by the Indian banks to the
UOI was made upon the non-fulfilment of contractual obligations,
which is not the trigger
event for the invocation of the principal
performance guarantee or the corresponding counter guarantee. It
therefore follows that
Absa is not liable to make payment under this
counter guarantee.
Conclusion
[26] To summarise, I
hold the view that, save for the Absa counter guarantee no
821-02-0002584G, the court below correctly held
that the requirements
were met for the granting of prohibitory interdictory relief to
Denel. Having regard to the general rule
that a court should only
grant interdictory relief of this nature in the most exceptional
circumstances, I believe that Denel has
satisfied this requirement.
Absa is threatening to make payment under the seven counter
guarantees in circumstances where the demands
of the beneficiary (the
Indian banks) are clearly non-compliant, and Denel has no other
suitable remedy to protect its rights pending
the finalisation of the
arbitration and court proceedings in India.
[27] I should
mention that counsel for the appellants did question the locus standi
of Denel, to seek interdictory relief with regard
to the counter
guarantees, as it was not a party thereto. However, as explained
above, there is a banker-client relationship between
Absa and Denel
in terms of which Denel mandated Absa to issue the counter guarantees
to the Indian banks. In my view, this contract
of mandate would be
subject to an implied term that Absa would only make payment to the
Indian banks in circumstances where the
demands of the Indian banks
comply with the terms of the relevant counter guarantees. From this
it follows that Denel would be
entitled to approach the court for
interdictory relief if Absa were to threaten to make payment of a
counter guarantee, in circumstances
where the demand made upon Absa
is non-compliant. In effect, Denel would be asking for specific
performance of the contract of
mandate, in the negative sense of
non-performance of an act impliedly forbidden by the contract of
mandate.
[28] In view of my
findings above, it is not necessary to consider whether the Indian
banks acted fraudulently (as alleged by Denel)
in demanding payment
under the counter guarantees.
[29] In the result
the appeal should succeed in respect of the Absa counter guarantee
number 821-02-0002584G.
[30] A formal aspect
arose with regard to the terms of the court a quo’s order. What
the order essentially referred to was
an interdict precluding Absa
from making payment on the counter-guarantees pending the
finalisation of arbitration proceedings
in respect of those
guarantees. During argument, the appellants raised the objection,
however, that arbitration proceedings in
India do not concern the
counter-guarantees but the principal guarantees to which the
counter-guarantees relate. As a solution
we then suggested that the
problem could be resolved by a simple amendment to the court’s
order. At the time no objection
of prejudice was raised by the
appellants, but they were nonetheless given the opportunity to make
submissions with regard to the
terms of the amended order, should
they wish to do so. During the late afternoon of Friday, 28 November
2014, when this court’s
judgment was ready for delivery, the
appellants saw fit to file a four page document raising arguments of
substance which should
have been raised much earlier. But, be that as
it may, I see no merit in the argument. Moreover, it is clear to me
that the proposed
formal amendment to the court a quo’s order
cannot result in any prejudice to the appellants. Consequently that
amendment
will be made.
[31] Finally, with
regard to the costs of the appeal, it should be borne in mind that,
although the Indian banks have been successful
on appeal in respect
of one counter guarantee, the jurisdictional defence upon which it
succeeded was only raised on appeal. In
the circumstances I believe
that it would be just and equitable to order that each party should
bear its own costs on appeal.
[32] In the result
the following order is made:
1 The appeal is
upheld to the extent reflected in the substituted order that follows.
2 Each party is to
pay its own costs on appeal.
3 The order in the
court below is substituted by the following order:
‘1 The first
respondent is interdicted from making payment in respect of the
counter guarantees listed in annexure A to the
applicant’s
notice of motion dated 25 May 2011, excluding counter guarantee
number 821-02-0002584G, pending finalisation
of the arbitration and
court proceedings already instituted or to be instituted in India,
pertaining to the principal guarantees
to which the counter
guarantees relate.
2 The respondents
are declared liable for payment of the costs of the application,
including the costs of the Part A proceedings,
which costs are to
include the costs consequent upon the employment of two counsel.’
P B Fourie
Acting Judge of
Appeal
APPEARANCES:
For the
appellant: S du Toit SC, with him K Hassim SC
Instructed by:
A W Jaffer
Attorney, Pretoria
Symington &
De Kok, Bloemfontein
For the
respondent: N G P Maritz SC, with him E C Labushagne SC
Instructed by:
Gildenhuys
Malatji Inc, Pretoria
Honey Attorneys,
Bloemfontein