This blog was co-authored with Adrienne Hendricks, Candidate Attorney.

In April 2024 the Supreme Court of Appeal (SCA) dismissed the bank’s appeal from the High Court, finding that the bank was not entitled to enforce a guarantee where the bank had failed to perform its own obligation to increase the facility under the original facility agreement.

On 10 August 2018, the bank entered into an agreement (contained in a Facilities Letter) with the borrower in terms of which the bank made a primary lending facility of US$2.5 million available to the borrower.

In March 2019 the borrower approached the bank for additional funding and the bank considered increasing the facility amount under the Facilities Letter. The increase of the facility amount was, however, conditional upon fulfilment of several conditions precedent, specifically the provision of a guarantee by the respondents.

On 7 August 2019 the respondents signed the guarantee during the period in which the borrower sought to satisfy the conditions precedent for the increase of the facility amount. The bank, however, signed the guarantee 7 months later after declining to increase the facility amount.

The bank contended that the guarantee was enforceable as the purpose of the guarantee was to secure “any indebtedness owed by the borrower whether past, present or future”. Conversely, the respondents relied on the defence of non-performance by the bank (exceptio non adempleti contractus).  The respondents argued that the guarantee was subject to performance by the bank of a reciprocal obligation, and the bank could not demand the respondents’ counter performance under the guarantee unless the bank had performed by increasing the facility amount.  

The SCA summarised that the guarantee defined the “Secured Obligations” with reference to the definition of “Facilities Letter”, which referred to the contemplated increase of the facility on or about the Signature Date of the guarantee. 

The SCA reaffirmed the following principles of interpretation:

“The approach to interpretation of documents, broadly stated, is to give consideration…to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production. Where more than one meaning is possible each possibility must be weighed in the light of these facts….A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results, or undermines the apparent purpose of the document…. The ‘inevitable point of departure in the language of the document itself”, read in context and having regard to the purpose of the provision and the background to the preparation and production of the document.’” (Emphasis added.)

The SCA took into account the textual and factual context of the guarantee. The facts indicated that the guarantee was sought as additional security in return for the increase to the facility amount. Furthermore, the guarantee was concluded in the context of fulfilling the conditions precedent in return for an increase in the facility amount. The court determined that an interpretation of the guarantee to secure the borrower’s existing debt without the increase in the facility amount, would lead to unbusinesslike results.

The Facilities Letter imposed an obligation on the bank to increase the facility amount on or about the Signature Date as a condition for the enforcement of the guarantee and constituted a pre-requisite to the bank’s right to sue for performance.  The fact that the bank had failed to perform its own reciprocal obligation to increase the facility absolved the guarantors from their obligations.

It is important for lenders to note that the context, both textual and factual, surrounding the conclusion of an agreement is essential to the interpretation of a contract. This case further emphasises the importance of clear and precise drafting of contracts to clearly and accurately reflect the parties’ mutual intentions.

The full judgement can be accessed here: ABSA Bank Limited v Rosenburg and Another (1255/2022) [2024] ZASCA 58 (24 April 2024) (saflii.org)