Guarantee - one of the most abused words in the English language

In a previous article (entitled "Guaranteed -or is it?") the case of Koumantarakis Group CC v Mystic River Investment (Pty) Ltd regarding the acceptability of a revocable bank guarantee to the Seller of a property was discussed. The Durban High Court   decided that it was unreasonable to expect the Seller to accept a guarantee which could at any time before registration of transfer be withdrawn by the bank.  That made sense and so you might have thought that the Seller would have been free to sell the property to someone else who could supply him with an irrevocable guarantee.   But the law often has a strange twist in its tail.

The Purchaser wasn't taking this lying down and appealed to the Supreme Court in Bloemfontein.

This is an expensive exercise.   The Appeal Court focused on the phrase in the Deed of Sale which read '..a bank guarantee acceptable to the Seller."  The Purchaser contended that the right of the bank to withdraw prior to registration of transfer was a long standing right, and that this was general practice amongst financial institutions. It argued that the words "acceptable to the Seller" subjected the Purchaser to the unreasonable whim of the Seller, who did not know what might or might not be 'acceptable'

The court noted that the Deed of Sale had been specially drafted but that no mention was made of the Seller's wish to have an irrevocable guarantee.  It held that the bank would not be entitled to withdraw without factually based reasons which genuinely threatened its security.  The bank's right to withdraw was not therefore a factor which in reality rendered the guarantee unacceptable, and the guarantee met the terms and conditions of the Deed of Sale.  Accordingly the Seller could not reject the guarantee, and therefore the sale was to be upheld.

The message from this court case is that certainty of contract is important, and that phrases like "acceptable to party A" which allow A to resile (withdraw) from a contract for a specious reason, might well be struck down if the matter proceeds to litigation.

Clive Hill | Financial Services Manager