Stefanutti & Bressan (Pty) Limited v Nedbank Limited and Another (5311/2008) [2008] ZAKZHC 50 (30 July 2008)

IN THE HIGH COURT OF SOUTH AFRICA

DURBAN AND COAST LOCAL DIVISION CASE NO. 5311/2008

In the matter between:

STEFANUTTI & BRESSAN (PTY) LIMITED APPLICANT

and

NEDBANK LIMITED FIRST RESPONDENT

HILLSIDE ALUMINIUM LIMITED SECOND RESPONDENT

________________________________________________________________

JUDGMENT Delivered on 30 July 2008 ________________________________________________________________

SWAIN, J.

[1] The applicant seeks the confirmation of a rule granted, with interim relief, by Madondo, J. on 23 April 2008, interdicting the first respondent from making payment to the second respondent, and the second respondent from claiming payment, in terms of a guarantee issued by the first respondent, under Guarantee No. 648/26914301 dated 03 April 2006, as amended by letters of amendment dated 06 April 2006 and 28 March 2007, unless the original documents comprising the guarantee and the two amendments, are presented to the first respondent.

[2] The return date was 29 April 2008, but on that date the matter could not be heard. The return date was therefore extended to 23 June 2008, and the matter was also referred for the hearing of oral evidence, on the issue of whether the original of the letter of amendment, dated 28 March 2007, was delivered by the applicant to the second respondent.

[3] The rule had been obtained as a matter of urgency because

3.1 The guarantee was due to expire on 30 April 2008 and

3.2. A dispute between the applicant and the second respondent as to the performance by the applicant of its obligations in terms of a contract between the applicant and the second respondent for the design, supply and installation of a material handling system for the second respondent at its Richards Bay plant, had not been settled and

3.3 In terms of the applicant’s contract with the second respondent, the applicant was required to provide a performance guarantee.

3.4 The applicant accordingly contracted with the first respondent, to put up the required guarantee, in the sum of R2,635,013.00.

3.5 The second respondent had in its possession the original guarantee, as well as the original amendment dated 06 April 2006, but only an electronically transmitted copy of the amendment dated 28 March 2007.

The effect of the letters of amendment was to increase the value of the performance guarantee by a further R2,635,013.00 to a total value of R5,270,026.00 and fix the expiry date of the guarantee as 30 April 2008.

3.6 The second respondent intimated that it intended to call up the guarantee. The first respondent advised the applicant that should the second respondent attempt to call up the guarantee, without all of the original documentation, it would pay out under the guarantee, as against an indemnity by the second respondent.

The significance of the original documentation lies in the terms of the guarantee, which provides in Clause 4 as follows:

“Payment shall be made upon receipt by the Bank, at the address hereunder, of the beneficiary’s first written demand, which written demand shall be accompanied by the original guarantee ……”

The letters of amendment also contain the following term:

“This letter of amendment forms an integral part of the original letter of guarantee and must be attached thereto”.

[4] To cater for the adjournment of the matter beyond the date of the expiry of the guarantee, being 30 April 2008, the first respondent extended the expiry date to 30 June 2008.

[5] When the matter came before me on 23 and 24 June 2008, and after hearing oral evidence, I indicated to Counsel that I would require more time than the few remaining days before the expiry of the guarantee to finalise this Judgment and requested that the guarantee be extended to 31 July 2008, which request was acceded to.

[6] The issue referred for the hearing of oral evidence was

“whether the original guarantee, a copy of which is MW3 to the founding papers was delivered personally by Wade Ashton Leaf to Vas Munien on or about 02 or 03 April 2007 at Richards Bay”

MW3 is a copy of the printout of the electronically transmitted amendment dated 28 March 2007.

[7] The dispute of fact arose because Ondine Weller, who deposed

to the second respondent’s answering affidavit, stated that extensive enquiries with representatives of the second respondent, had led her to believe that the original document, which must have been in the possession of the applicant in order to have been electronically transmitted by the applicant to the second respondent, was never forwarded to the second respondent.

[8] Wade Leaf, in the applicant’s replying affidavit, refuted this suggestion, stating that he had personally delivered the original of MW3 to Vas Munien.

[9] Vas Munien, when giving evidence, stated that

9.1 Wade Leaf had never given him the original of the letter of amendment dated 28 March 2007, nor had he given him the copy of this letter marked “Copy 2”.

9.2 He had found an “original” of the said letter of amendment marked “Copy 2” signed by the Bank, three to four weeks before the hearing, in a file in the possession of Gason Moonsamy, an employee of the second respondent. Moonsamy when asked originally, said he was not sure where he had got it, but later told Munien that Leaf had handed it to him approximately a week after the electronic copy was received. No objection was raised to the admission of this evidence,

which was obviously hearsay. The fact that Mr. Broster, S.C., who appeared for the applicant, may have assumed that Moonsamy would be called, does not of course render an objection unnecessary.

[10] The applicant closed its case without leading any evidence and consequently the evidence of Munien, that Leaf never gave him the original of the letter of amendment dated 28 March 2007 stands unchallenged. Mr. Broster, S.C., did not contend that Munien should be disbelieved on this issue and accordingly it must be resolved in favour of the second respondent.

In addition, the evidence that the document headed “Copy 2” was delivered to the second respondent by Leaf, supports such a finding.

[11] Mr. Pammenter, S.C., who appeared for the second respondent, submitted that the rule should be discharged on the following grounds:

11.1 It is not necessary for the second respondent to present to the first respondent, the signed version of the extension letter dated 28 March 2007, marked “Original”. It is sufficient for it to submit the signed version marked “Copy 2”.

11.2 If it was a condition of the guarantee that payment was dependent upon the presentment to the Bank of, inter alia, the signed extension letter marked “Original” that condition has been fictionally fulfilled.

11.3 The applicant has no locus standi to restrain the first respondent from making payment to the second respondent, in terms of the letter of guarantee.

[12] Mr. Pammenter, S.C., appreciating that the issue raised in paragraph 11.3, could be decisive of the dispute between the parties, nevertheless requested that I deal with the other issues which may still arise in future litigation between the parties. I regard this as a reasonable request and will therefore do so.

[13] In order to decide the first issue, it is necessary to examine the evidence of Paul Myburgh, a representative of the first respondent.

13.1 He stated that when letters of guarantee are issued, they consist of an original as well as “Bank Copy 1” and “Bank Copy 2”.

13.2 The client (in this case the applicant) is given the original plus the “Bank Copy 2” which is also referred to as “the Client Copy”.

13.3 “Copy 1” is the Bank’s copy, which is retained by the Bank.

13.4 The client retains “Copy 2” for its own records and the client hands the original to the beneficiary, in this case, being the second respondent.

[14] It is therefore clear that the first respondent attaches special significance to the categorisation of these documents. The category into which each of these documents falls, determines not only the party who is to take possession of it, but also its purpose. Copy 1 and Copy 2 are to be retained respectively by the Bank and the Client for their records, and the original is to be held by the beneficiary for presentment, if necessary.

[15] This makes perfect sense when the requirement in the guarantee is considered that the “original guarantee” accompany written demand upon the bank for payment by the beneficiary. In addition the letter of amendment is said to form an integral part of the “Original Letter of Guarantee”and must be attached to it. It is not provided that it forms an integral part of either of the copies.

[16] That a bank is obliged to conform strictly with the terms of the guarantee is made clear in the case of

O K Bazaars (1929) Limited v Standard Bank of SA Limited

2002 (3) SA 688 (SCA) at 697 H – 698 A – C

where Nugent, J. A. had the following to say

“Its interest is confined to ensuring that the documents that are presented conform with its clients’ instructions (as reflected in the letter of credit) in which event the issuing bank is obliged to pay the beneficiary. If the presented documents do not conform with the terms of the letter of credit the issuing bank is neither obliged nor entitled to pay the beneficiary without its customer’s consent. The obligation of the issuing bank was expressed as follows in Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 151:

‘There is of course, no doubt that the bank has to comply strictly with the instructions that it is given by its customer. It is not for the bank to reason why. It is not for it to say; “This, that or the other does not seem to us very much to matter”. It is not for it to say: “What is on the bill of lading is just as good as what is in the letter of credit and means substantially the same thing.” All that is well established by authority. The bank must conform strictly to the instructions which it receives’”.

[17] In similar vein are the words of Scott, A.J.A. in

Loomcraft Fabrics cc v Nedbank & another

[1995] ZASCA 127; 1996 (1) SA 812 (SCA) at 815 I

“The liability of the bank to the beneficiary to honour the credit arises upon presentment to the bank of the document specified in the credit, including typically a set of bills of lading, which on their face conform strictly to the requirements of the credit”

[18] It is therefore clear that the first respondent is only entitled to honour the guarantee, if the presented documents conform strictly with the requirements of the guarantee. What must be presented to the first respondent is a written demand for payment by the second respondent, together with the original guarantee, accompanied by any letters of amendment.

[19] Mr. Pammenter’s answer to this is to submit that the presentment by the second respondent of the signed version of the letter of amendment dated 28 March 2007, marked “Copy 2” complies with the terms of the guarantee, because:

The applicant must have delivered this document to Gason Moonsamy, in order to avoid a demand for payment being made in terms of the original guarantee.

19.2 It must have been the intention of the applicant and the first respondent (as between themselves) that this document, would serve

to extend the expiry date of the guarantee.

This document contained the term “this letter of amendment forms an integral part of the original Letter of Guarantee and must be attached thereto”. Mr. Pammenter places special emphasis upon the words “this letter”. In other words, this document does not state that the version of this letter marked “original” forms an integral part of the guarantee.

Accordingly, the submission of the signed version, received by the second respondent, forms the integral part of the guarantee and it is that signed copy, which has to be attached to the original guarantee on presentment. There is no requirement that the applicant had to present the signed version of the extension letter marked “original” in order to receive payment.

[20] The validity of this argument, which flies in the face of the evidence of Myburgh, as to the significance to be attached to marking the documents “original”, “Copy 1” and “Copy 2”, depends upon an acceptance of the submission that it must have been the intention of the applicant and the first respondent, that this “version” of the document would satisfy the terms of the guarantee.

[21] In other words, the applicant as the client of the first respondent varied its instructions to the first respondent, or consented to the first

respondent paying out, on the letter of amendment marked “Copy 2” and not marked “original”.

[22] I agree that a reasonable inference may be drawn on the evidence, that the applicant furnished the letter of amendment marked “Copy 2” and signed in the original, to the second respondent, simply because according to Myburgh, that could be its only source. I do not agree however that the further inference contended for, can be drawn for the following reasons:

An equally reasonable inference to be drawn on the evidence, is that the document marked “Copy 2” was inadvertently furnished by the applicant to the second respondent. This would accord with the evidence of Munien that he could not accuse anybody at the applicant of deliberately withholding the document marked “original” from the second respondent.

It would also accord with the evidence of Munien that when this document was found amongst the files in Gason Moonsamy’s office, he said to Moonsamy that “this is the original letter of extension” and he said that he thought that he had found the original. He explained that he thought it was the original because “when I pulled the document out I looked at the signatures and one was in blue pen, I think. I felt it and I could see that it was actually signed”.

It is also apparent on comparing the letter of amendment marked “original” and “Copy 2” appearing at pages 11 and 12 of the bundle Exhibit “A”, that these words are not prominently displayed, compared to the “original” and “client copy” of the guarantee appearing at pages 1 – 6 of Exhibit “A”.

In other words, a reasonable inference may be drawn that Leaf believed he had handed the original to the second respondent, whereas he had only handed the document marked “Copy 2” but signed in the original.

22.4 When Myburgh of the first respondent gave evidence, it was never suggested to him that it was the intention of the applicant and the first respondent, that this version of the letter of amendment marked “Copy 2” would comply with the requirements of the guarantee, contrary to his evidence of the significance of marking the document “Copy 2”.

[23] As to the submission that the letter of amendment contains the words “this letter” and makes no mention of the letter marked “original” forming an integral part of the guarantee, it is clear that this letter must be read in its entirety, including the caption “Copy 2”. Interpreted in the context of Myburgh’s evidence, its categorisation as a copy to be used by the applicant solely for record purposes is clear. It is nothing, more or less, than a copy.

[24] I agree with the submission of Mr. Broster, S.C. that the signatures on this document, do no more than authenticate the copy and do not elevate the copy to the status of an “original” or a “duplicate original”. This must be so, again in the light of the evidence of Myburgh, that marking the document “Copy 2” means that it is not regarded as the original, for the purposes of the guarantee.

[25] Turning to the second issue, namely that the condition requiring presentment of the letter of extension marked “original” has been fictionally fulfilled.

[26] The essence of the argument of Mr. Pammenter is that:

26.1 It is clear on the evidence that the original of the letter of extension, dated 28 March 2007, must have been given to the applicant.

26.2 In accordance with the “presumption of continuance” it must be accepted for the purposes of this case, that it is still in the possession of the applicant, and the applicant’s failure now to deliver it to the second respondent, must be deemed to be intentional and deliberate.

26.3 The requirement that the nonfeasence be deliberate for the purposes of the doctrine of fictional fulfilment, is accordingly satisfied.

Alternatively, it must be a tacit term of the agreement between the applicant and the second respondent to extend the expiry date of the guarantee, that the applicant would be required to take active steps to bring about the fulfilment of the condition for payment, by furnishing the second respondent with the original extension letter.

Accordingly, the failure of the applicant to do so would constitute at least culpa on its part, thereby satisfying the doctrine because of the existence of the implied term.

[27] At the outset the so-called “presumption of continuance” needs to be placed in perspective. As stated by de Villiers, J.A. in

R v Fourie 1937 AD 31 at 42

“Its scope and extent is that from the existence of a state of things at a given time, it may be inferred that that state continued to exist for a reasonable time thereafter, according to the circumstances and the nature of the thing. A court of law may therefore draw such an inference if it thinks proper, in any given case, but it is not bound to do so”.

[28] On the evidence it may be accepted that the original of the letter of extension was furnished to the applicant by the first respondent on either 28 or 29 March 2007, because the second respondent received an electronic version, marked “Copy 2” on 29 March 2007. Myburgh stated that the document marked “original” and the document marked “Copy 2” would be delivered to the client by the first respondent.

[29] Munien states that he was told by Moonsamy that the hard copy of this document was delivered by Wade Leaf, on behalf of the applicant, to the second respondent, a week after the 29 March 2007, i.e. approximately 07 April 2007.

[30] Munien only asked the applicant for the original of this document by email on 09 April 2008, a year later.

[31] The issue therefore is whether it is reasonable to infer that the applicant was still in possession of the original a year later, regard being had to the circumstances of the case and the nature of the document. The Court has a discretion whether to draw such an inference and is not bound to do so.

[32] I would expect the applicant to retain possession of such a document for its records, even if its representatives thought that only a copy was in their possession, believing that the original had been given to the second respondent, (as a consequence of my conclusion that a reasonable inference to be drawn is that “Copy 2” was inadvertently handed to the second respondent and not the original). This would be particularly so whilst the contractual relationship continued between the applicant and the second respondent.

[33] My concern however on this aspect of the case, is that the issue that was referred for the hearing of oral evidence was whether the original had been handed by the applicant to the second respondent, on or about the 02 or 03 April 2007. The issue of fictional fulfilment was raised in the second respondent’s answering affidavit, but clearly in the context of a failure by Wade Leaf to hand the original to the second respondent at this time, i.e. April 2007.

[34] It was for this reason that Mr. Broster, S.C., asked the following question of Munien:

“It is not your evidence that Mr. Wade Leaf or anybody else at Stefanutti deliberately withheld this document from you when it was issued that is at the end of March 2007, is it?”

and the answer given was :

“I cannot accuse anybody of that”.

[35] In his heads of argument, Mr. Broster, S.C. relies upon this passage as support for his contention that it cannot be said that the applicant deliberately prevented the fulfilment of a term of its agreement with the second respondent. However, Mr. Broster, S.C. does not deal at all with the argument that the failure by the applicant to hand over the document now is intentional and deliberate and that the defence of fictional fulfilment was therefore satisfied.

[36] It was for this very reason that I raised with Counsel, during the hearing, my concern that the defences be clearly formulated so that there could be no misunderstanding between the parties. What is clear is that the cross-examination of the witness Munien by Mr. Broster, S.C. was conducted on the basis that the defence of fictional fulfilment related only to a failure to hand over the original in April 2007, and not April 2008. The latter was not the case the applicant came to Court to meet.

[37] In my view, in the exercise of my discretion, it would not be proper in the circumstances of this case to draw an inference that the applicant is in possession of the original at present, for the purposes of establishing this new defence of fictional fulfilment, which was only raised by the second respondent after the evidence had been led.

[38] The alternative argument based upon an implied term in the agreement between the applicant and the second respondent must, on similar grounds, suffer the same fate. I agree with the submission of Mr. Broster, that the terms of the agreement have not been properly raised or proved by the second respondent. The agreement and its terms were not an issue before me, and were never canvassed in evidence. I again reiterate the concerns I expressed to Counsel at the hearing, that the defences raised be clearly and properly formulated.

[39] I therefore agree with the submission of Mr. Broster, that no term can be implied, when the agreement itself was not proved, nor its terms raised before me, as an issue.

[40] Turning to the final issue, namely that the applicant does not have locus standi to restrain the first respondent from paying the second respondent.

[41] The cornerstone of Mr. Pammenter’s argument is the decision in Loomcraft case supra where Scott, A.J.A .stated the following at page 816 C – D

“The autonomous nature of the obligation owed by the bank (whether the issuing bank or, if there is one, the confirming bank) to the beneficiary under a credit has been stressed by courts both in South Africa and overseas ………. An interdict restraining a bank from paying in terms of a credit will accordingly not be granted at the instance of the buyer (the bank’s customer} save in the most exceptional cases”.

It was pointed out at page 817 E – F that an exceptional case where a court would grant an interdict restraining a bank from paying the beneficiary, was in the event of it being established that the beneficiary was a party to fraud, in relation to the documents presented to the bank for payment.

[42] It was further held at page 823 A that the appellant in that case had not succeeded in showing that the bills of lading contained a fraudulent misrepresentation.

[43] The following passage at page 823 H – 824 A was also relied upon by Mr. Pammenter

“Whether Nedbank would be prepared to honour the credit or not would depend, therefore, on whether it considers that, even in the absence of the notation, the bills conform with the requirements of the credit. If on this basis it considers itself

obliged to honour the credit, it is difficult to see on what grounds the appellant could obtain an interdict against the bank restraining it from doing so. If Nedbank is wrong, the appellant would have its ordinary contractual remedy against it. No case was made out that the appellant would be unable to obtain relief from Nedbank in the event of the latter acting in breach of its contract with appellant. It is trite law that an applicant for a final interdict must establish that there is no other satisfactory remedy available to him. (See Erasmus Superior Court Practice E8-7 and the authorities there cited). Nor was any other reason advanced why, in the absence of fraud, the Court a quo should have been required to interfere with the freedom of the bank to decide for itself whether to honour its credit or not”.

[44] This passage must however be read in context. Having found at page 823 A-B that the appellant had not succeeded in discharging the burden of proving the falsity of the explanation given by the second respondent, being the seller of goods to the appellant, in respect of a notation “actually on board” on the bills of lading, the appellant submitted in the alternative, that the construction which the second respondent sought to place on the credit was incorrect in law.

It was submitted that once it was acknowledged that the notation “actually on board” was erroneous and the words were to be ignored, it followed that the bills did not conform with the requirement of the credit, with regard to the latest date for shipment (at page 823 D-F).

[45] The following passage at page 815 H – J must also be considered:

“The unique value of a documentary credit, therefore, is that whatever disputes may subsequently arise between the issuing bank’s customer (the buyer) and the beneficiary under the credit (the seller) in relation to the performance or, for that matter, even the existence of the underlying contract, by issuing or confirming the credit, the bank undertakes to pay the beneficiary provided only that the conditions specified in the credit are met. The liability of the bank to the beneficiary to honour the credit arises upon presentment to the bank of the documents specified in the credit, including typically a set of bills of lading, which on their face conform strictly to the requirements of the credit. In the event of the documents specified in the credit being so presented, the bank will escape liability only upon proof of fraud on the part of the beneficiary.”.

[46] In other words the bank is liable to honour the credit to the beneficiary, in the absence of fraud, on presentation to the bank of the documents specified in the credit “which on their face” strictly conform to the requirements of the credit”.

[47] In the Loomcraft case the SCA was therefore concerned not only with the fraud exception, but also with the issue of whether the bills did not conform with the requirement of the credit. However, the important point is that the court was not concerned with whether the bills on their face conformed strictly to the requirements of the credit, but whether a construction could be placed upon the bills, in terms of which the words “actually on board” could be ignored, with the result that the bills did not conform with the credit.

[48] Having stressed at page 816 G the importance to commerce of banks being allowed to honour their obligations under irrevocable credits without judicial interference, the views of the Supreme Court of Appeal at page 823 H to 824 A were, with respect, expressed in the context of the particular challenge raised as to whether the bills conformed with the requirement of the credit. This challenge required a determination of the alleged construction to be placed upon the bill, and not merely a decision as to whether the bills “on their face” conformed with the credit. A refusal to interfere in such a situation and thereby undermine the reliance placed by commerce on irrevocable credits is, with respect, understandable.

[49] However, where it is patently obvious that the particular document does not on its face comply with the credit, the dictum of the Supreme Court of Appeal in the OK Bazaars case supra, at pages 697 H – 698 A – C is apposite (quoted at paragraph [16] supra

Consequently, if the presented documents do not conform with the terms of the letter of credit, the issuing bank is neither obliged, nor entitled to pay the beneficiary without its customer’s consent. The bank must therefore conform strictly to the instructions which it receives.

[50] Although the Supreme Court of Appeal in the OK Bazaars case, was not concerned with an application for an interdict to restrain the bank from honouring the credit, but with a claim for damages, the views expressed, in my view, with respect, support the applicant’s claim for relief, when read together with the decision in

V & A Waterfront Properties (Pty) Ltd. & another

v

Helicopter & Marine Services (Pty) Ltd. & others

2006 (1) SA 252 (SCA) at 258

where Howie, P. said the following

“Coming to the third and final requirement, the respondents submitted that an interdict was not the only appropriate remedy. It was said that the first appellant could sue for damages or cancel the lease. This argument cannot prevail. The first appellant is entitled to enforce its bargain; to obtain the lessee’s promised rental while preventing the latter from conducting itself in a manner that involves breaking the law. The only ordinary remedy which provides it with the necessary protection is an interdict. Cancellation would be quite the opposite of that to which the first appellant is entitled. And damages would be difficult to prove, if possible to prove at all”.

[51] The conduct of the first respondent in indicating that it would honour the guarantee, without all of the original documentation, and in particular the original of the letter of amendment dated 28 March 2007, contrary to the terms of the guarantee, was in breach of its obligations to the applicant. The first respondent is not entitled to pay the second respondent, without the applicant’s consent, where the documentation on its face, does not comply with the guarantee. The applicant is entitled to an interdict to “enforce its bargain” and restrain the first respondent from conducting itself in a manner contrary to the terms of the guarantee.

[52] Mr. Pammenter submits that in the event that this Court is disposed to grant the applicant the relief it seeks, a special order for costs should be made in regard to the hearing of oral evidence on 23 June 2008. It is submitted that it is clear that the applicant must have decided before the hearing, that it was not going to persist with its contention that the original extension letter had been delivered to the second respondent, and was going to rely on legal grounds only for contending that it was entitled to the interdict. Consequently, the leading of evidence was unnecessary, and the applicant should be ordered to pay the costs involved.

[53] On the evidence before me, I cannot find that such a decision was taken by the applicant. Although the applicant closed its case without leading any evidence, to rebut the evidence of Munien, that the applicant represented by Leaf had never handed the original to him, this was only done after Munien had conceded in cross-examination, that he could not say that Leaf had deliberately withheld the original. This was of course a vital concession and struck at the whole basis for the second respondent’s claim to fictional fulfilment, i.e. if it was found that the original was not delivered, then this was done deliberately on the part of the applicant, and the condition requiring presentation of the original must be regarded as fictionally fulfilled.

[54] The issue of whether the original was presented to the second respondent was therefore no longer of importance to the applicant’s case, and the need to lead evidence to rebut the case of the second respondent in this regard therefore fell away.

[55] In the result, the order I make is the following:

The rule granted on 23 April 2008 is confirmed.

The second respondent is ordered to pay the costs of the applicant.

.

__________

SWAIN, J. /Appearances

Appearances:

Counsel for the Applicant : Mr. L. B. Broster, S.C.

Represented by : Cox Yeats

Durban

Counsel for the 2ND Respondent : Mr. C. J. Pammenter, S.C.

Represented by : Shepstone & Wiley

Date of hearing : 23 June 2008

Date of Judgment : 30 July 2008

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