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Cancellation of a contract where the purchaser fails to provide an acceptable bank guarantee for payment of the purchase price

One of the resounding principles of Roman law is pacta sunt servanda– contracts must be adhered to.

But the harsh reality is that often a person who has entered into a contract (a legally binding agreement) later regrets doing so, and looks for some way to wriggle out of it.

For example, when prices in the property market are rising, many sellers realise they have sold too soon, and could have made more money by keeping the property and selling later when prices have risen further. They – and their lawyers – may minutely scrutinise the deed of sale for defects or loopholes.

CONTRACTUAL PARTIES SOMETIMES LOOK FOR AN EXCUSE TO CANCEL AN AGREEMENT

In this situation, an obvious ploy is for the seller to look for – or try to engineer – a breach of contract by the purchaser, and then seize on the breach as an excuse to cancel the contract.

This may or may not have been the real story behind the recent case decided in the Durban High Court of Koumantarakis Group CC v Mystic River Investment 45 (Pty) Ltd 2007 (6) 404(D).

The judgment is an illuminating lesson for all purchasers of immovable property who want to ensure that the seller cannot squirm out of the agreement.

This case involved a straight forward purchase of a R12 million property. The deed of sale provided that the purchaser must provide a deposit of R1 million upon signature of the agreement (which was duly done) and that the balance was payable "by way of a bank guarantee acceptable to the seller". The balance was to be paid when transfer of the property took place by registration in the deeds office.

CLAUSES REGARDING THE PROVISION OF A GUARANTEE CAN BE A CHINK IN THE BUYER’S ARMOUR

In the latter innocuous phrase lay the sting. For, when the purchaser provided a bank guarantee, the seller said that it was not acceptable to him because the guarantee stated that if any undisclosed fact emerged that might prejudice the bank’s security, the bank could cancel the guarantee.

The seller pointed out that the deed of sale said that the guarantee must be in a form acceptable to it, and said that a guarantee in this form was not acceptable – it would only accept a bank guarantee that was expressed to be irrevocable, that is to say, not open to cancellation by the bank in any circumstances.

The bank refused to provide an irrevocable guarantee, saying that it was the general practice of financial institutions to make guarantees in property transactions subject to a right of cancellation in the terms contained in the guarantee it had given.

The seller – drawing rather a long bow – said that the terms of the bank guarantee that had been provided would allow the bank to cancel the guarantee in its discretion and it was for this reason unacceptable to it.

The bank stood firm, and the buyer was unable to persuade it to give an irrevocable guarantee.

When an irrevocable guarantee was not provided to it, the seller invoked the terms of the deed of sale which said that it could cancel the agreement if a guarantee acceptable to it was not provided within the stipulated time, and it gave the purchaser notice that it was cancelling the agreement.

THE SELLER CLAIMED IT WAS ENTITLED TO CANCEL THE AGREEMENT

On these facts, the matter came before the High Court.

The purchaser argued that the seller was not entitled to cancel the contract.

The seller contended that, in terms of the deed of sale, it was entitled to cancel the agreement because the purchaser had failed to provide a bank guarantee in a form acceptable to him.

In its judgment, the court held (at [35]) that the wording of the deed of sale did not give the seller the right to disapprove the terms of a bank guarantee arbitrarily or capriciously; that the seller must exercise an honest judgment in deciding whether the guarantee was acceptable, and (see [35], 37]) that any objection must be fair and reasonable.

In the circumstances of this case, said the court (at [56]) the seller’s decision to reject a revocable guarantee was not commercially irrational.

In the result, the court held that the seller had been within its rights in cancelling the agreement on the grounds that the bank guarantee was not acceptable to it.

PURCHASERS SHOULD ENSURE THAT SUCH CLAUSES IN A DEED OF SALE DO NOT PROVIDE THE SELLER WITH AN EXCUSE TO CANCEL THEIR SALE AGREEMENTS

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