The Western Cape High Court held that the principal debtor (in this case the contractor under a building contract) can apply to court to rectify a guarantee between the guarantor (an insurer) and the beneficiary under the guarantee (the employer) where the contractor had given a counter indemnity to the insurer.

A guarantee contract is an autonomous, independent contract. The contract, although autonomous, is founded on the common intention of the insurer, the beneficiary and the contractor.

This was a demand guarantee in the nature of a construction guarantee issued by the insurer at the request of the contractor to the beneficiary. The purpose of the demand guarantee was to allow the beneficiary to have immediate access to funds necessary to remedy any alleged default under the construction contract by the contractor. The guarantee contract thus arose as a result of the underlying construction contract and was issued at the request of the contractor. The common intention of the contractor, the guarantor and the beneficiary was for the guarantee contract to guarantee the contractor’s performance. The guarantee contract therefore reflected the common intention of all three parties.

Such a guarantee contract can be rectified to reflect the common intention of all three parties which means that the contractor, although not a party to the guarantee itself, could apply for its rectification. The issue whether the guarantee was to be rectified was referred for evidence in the main action.

This is a departure from the usual application of the law of rectification. From a practical point of view it avoids the need for the contractor to oblige one of the other two parties to claim rectification.

The case is Compass Insurance Company Limited v Cobus Smit Projekbestuur CC and other parties.