'It's guaranteed!' -  but is it really?

The nature of a guarantee for payment of the purchase price, required by a seller of fixed property, came under the scrutiny of the Durban High Court in the case of Koumantarakis Group Cc v Mystic River Investments 2007(6) SA 404 (D).

The agreement of sale required "a bank guarantee acceptable to the seller."  The purchaser hastened to its bank which issued a guarantee containing a clause which allowed the bank to withdraw under the following circumstances: i) New or previously undisclosed facts emerging which 'might prejudice the bank's security'  ii) any circumstances arising to 'prevent or delay registration.'

Given the subjective nature of such wording, which would make it difficult to challenge the bank's decision to withdraw at any stage up to registration of transfer, the seller understandably rejected this guarantee and terminated the agreement because the purchaser had not provided an acceptable guarantee.

The purchaser did not take this lying down, and hit back with a lawsuit asking the court to force the seller to accept the bank's guarantee.  The court applied the time-honoured test under the SA common law of "the reasonable man" and asked whether it was reasonable for the seller to accept a guarantee for payment of the purchase price which the bank could revoke, leaving the seller without substitute for this security.

The court held that it was unreasonable to expect a seller to have his security pulled like a rug from under his feet, and dismissed the plaintiff's claim.   The case illustrates the importance of attention to the finer details of the contract and a critical examination of whether a so-called guarantee actually meets a client's expectations.

Clive Hill | Financial Services Manager