THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Case No: 947/13
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 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:
The appeal is upheld to the extent reflected in the substituted order that
follows.
Each party is to pay its own costs on appeal.
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.

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
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

MEDIA SUMMARY OF JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

FROM

The Registrar, Supreme Court of Appeal

DATE

3 December 2014

STATUS

Immediate

Please note that the media summary is for the benefit of the media and does not form part of
the judgment of the Supreme Court of Appeal.

State Bank of India and another v Denel SOC and others
(947/13) [2014] ZASCA 212 (3 December 2014)

In this appeal the SCA was required to interpret on demand guarantees furnished by a commercial
bank. In particular, the SCA had to determine whether the demands for payment under the
guarantees were compliant with the terms of such guarantees. It held that, in the case of seven of the
eight guarantees concerned, the demands were not compliant and interdictory relief could be granted
to prohibit payment being made in terms thereof. With regard to the eighth guarantee, which
expressly provides that it should be governed and construed in accordance with the exclusive
jurisdiction of the Indian courts, the SCA held that South African courts do not have jurisdiction to
decide whether a demand made thereunder was compliant.

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