State Bank of India v Denel SOC Limited

Denel SOC Limited concluded four defence supply contracts with the Union of India, under which it had to provide one performance guarantee and seven warranty guarantees. These principal guarantees were issued by State Bank of India and Bank of Baroda in favour of the Union of India, on Denel’s instruction via its banker, Absa Bank, which in turn issued eight counter guarantees to the Indian banks. When the Union of India alleged breach by Denel and called up the principal guarantees, the Indian banks paid and demanded payment from Absa under the counter guarantees. Absa initially refused, citing non-compliant demands, but later indicated it would pay and recover the amounts from Denel. Denel urgently sought and obtained an interdict preventing Absa from paying, pending arbitration and court proceedings in India. The Indian banks appealed against the interdict.

The appeal was upheld in part. The High Court order was set aside only insofar as it related to counter guarantee number 821-02-0002584G, which was excluded from the interdict. Absa was interdicted from paying under the remaining counter guarantees pending finalisation of Indian arbitration and court proceedings. Each party was ordered to pay its own costs on appeal.

The case is a leading South African authority on the strict compliance required for demands under on-demand and counter guarantees, the limited circumstances in which courts may interdict payment, and the independence of such guarantees from underlying contracts. It also clarifies the effect of exclusive foreign jurisdiction clauses in bank guarantees and affirms a client’s right to restrain its bank from honouring non-compliant demands.