Koumantarakis Group CC v Mystic River Investment 45 (Pty) Ltd

On 30 May 2006, the appellant (purchaser) and first respondent (seller) concluded a written agreement of sale for immovable property (Erf 301, Portion 16, Springfield Park) for R12 million plus VAT. The agreement required the purchaser to provide a bank guarantee acceptable to the seller: R1 million deposit within 3 days of fulfilling suspensive conditions, and R11 million balance within 45 working days. The purchaser was to conduct due diligence within 30 days. The purchaser requested an extension for due diligence which was refused, and the seller purported to cancel the agreement. On 12 July 2006, the purchaser provided a Standard Bank guarantee containing clause 4 which reserved the bank's right to withdraw in certain circumstances (if new/undisclosed facts prejudiced the bank's security or circumstances arose to prevent or unduly delay registration). The seller rejected the guarantee, demanding an irrevocable guarantee, and purported to cancel the agreement without giving the purchaser notice to cure the alleged breach under clause 14. The seller subsequently advertised the property for sale at R2 million more than the contract price. The purchaser applied to enforce the agreement.

• What is the meaning and ambit of clause 3.2 of the agreement requiring a bank guarantee 'acceptable to the seller'?
• Whether the agreement required an irrevocable guarantee or merely a standard revocable guarantee?
• Whether the seller acted reasonably in rejecting the bank guarantee provided by the purchaser?
• Whether the seller was entitled to cancel the agreement based on the rejection of the guarantee?
• What is the nature and function of bank guarantees in immovable property transactions - security or payment?

The appeal succeeded with costs. The order of the court a quo was set aside. The court declared: (1) the agreement of full force and effect; (2) the Standard Bank letter of undertaking complied with the agreement; (3) the seller must within 5 days do all things necessary to transfer the property against provision of the balance guarantee; (4) in the event of the seller's failure, the Sheriff was authorized to execute the necessary documents; and (5) the seller must pay costs of the application.

In the absence of express contractual provision requiring an irrevocable guarantee or specifying that the guarantee must provide security, a bank guarantee in a sale of immovable property serves the function of payment rather than security, and a revocable guarantee with standard withdrawal clauses is sufficient compliance with a contractual obligation to provide a 'bank guarantee acceptable to the seller'. A seller's discretion to reject a guarantee as unacceptable must be exercised honestly and on objectively reasonable grounds (arbitrio bono viri). Standard withdrawal clauses in bank guarantees that permit withdrawal only on factually-based grounds related to the bank's security or circumstances preventing or unduly delaying registration do not render guarantees unacceptable or subject to whimsical revocation. Where a contract requires something to be done to the satisfaction or acceptance of one party, courts apply an objective test: what would satisfy a reasonable person.

The court made several non-binding observations: (1) If parties wish to impose on a purchaser an obligation to furnish security beyond the standard guarantee, this 'must place this extra duty and burden on a purchaser in the clearest of terms' (citing Wehr v Botha); (2) The provision of guarantees in advance of registration does not necessarily mean that security rather than payment is intended; (3) Post-registration concerns about revocation (such as due to insolvency) are 'fanciful' given modern communication technology enabling almost immediate notification of registration; (4) The word 'guarantee' is capable of bearing different meanings depending on context, and the proper approach is to be alive to various possible meanings and determine which applies by considering the context (citing Hermes Ship Chandlers); (5) 'Undue delay' in the context of withdrawal clauses refers to delay occasioned by unforeseen circumstances irrespective of breach, whereas 'unreasonable delay' would be delay due to failure to pursue with reasonable diligence; (6) The court suggested that the seller's subsequent advertising of the property at a significantly higher price may have been a motivating factor in rejecting the guarantee, though this was not formally part of the ratio.

This case is important in South African property law for establishing principles regarding the interpretation of bank guarantee clauses in sale agreements. It clarifies that: (1) the standard function of property guarantees is payment, not security, unless expressly stipulated otherwise; (2) guarantees are presumed revocable unless irrevocability is expressly required; (3) standard withdrawal clauses in bank guarantees do not render them unacceptable or subject to 'whimsical' revocation; (4) parties seeking special security arrangements (such as irrevocable guarantees) must stipulate this in clear and express terms in the contract; (5) the discretion of a party to accept something as 'satisfactory' or 'acceptable' must be exercised honestly and on objectively reasonable grounds (arbitrio bono viri principle); and (6) expert evidence regarding standard banking practice is relevant to interpreting contractual obligations. The case reinforces that contracts must be interpreted according to their express terms and parties cannot achieve by subsequent objection what they failed to secure by appropriate drafting.