The SCA was recently asked – in Schoeman & Others v Lombard Insurance Co Ltd – to rule on the correct interpretation of the mode of delivery clause contained in an on-demand guarantee and whether delivery to the guarantor is sufficient and constitutes a valid demand.

The court had to determine – says Baker McKenzie’s John Bell and Rui Lopes – whether the mode of delivery clause in an on-demand guarantee was prescriptive, in that failure to comply with the clause would render the demand invalid, or whether the clause was descriptive, in that strict compliance with the clause is unnecessary.

In an analysis on the Legalbrief site, the authors note that the SCA referred to the decision in Natal Joint Municipal Pension Fund v Endumeni Municipality. Here, the court held that when interpreting a document, regard must be had to the context by reading the provisions in light of the document as a whole and the circumstances, which surrounded the document coming into existence.

‘The court further noted that a sensible meaning should be preferred to one which is not sensible and which undermines the apparent purpose of the document.’

The SCA referred to the UK decision in MUR Joint Ventures BV v Compagnie Monegasque De Banque, which held that mode of delivery clauses in on-demand guarantees are merely descriptive (and not prescriptive) – and that the failure to strictly comply with the clause does not, in itself, render the demand invalid.

The SCA held that – in light of these two decisions – the requirement of the demand being made at a specific address is merely descriptive (and not prescriptive) in nature. The court held the guiding principle must be whether there was the effective presentation to the guarantor of the demand in question.

Say Bell and Lopes: ‘Going forward, a court will be able to determine, in context, whether sufficient compliance with the intention and purpose of the on-demand guarantee was sufficient. Accordingly, parties should seek to phrase mode of delivery clauses carefully in order to ensure that they are prescriptive in nature and that a failure to comply with the mode of delivery clause would result in an invalid demand.

Full analysis on the Legalbrief site

Schoeman and Others v Lombard Insurance Company Ltd

Natal Joint Municipal Pension Fund v Endumeni Municipality

MUR Joint Ventures BV v Compagnie Monegasque De Banque