In this matter, Nedbank issued two demand guarantees in favour of Absa, which Nedbank was obliged to pay once the guarantees were called up. Following payment to Absa under these guarantees, Nedbank sought to recover the amount paid from the principal debtor on the basis of a right of recourse by operation of law, asserting that in its position as guarantor, “like a surety, [it] has a right of recourse against the defendant as principal debtor”. In the alternative, Nedbank sought to recover the amount paid on the basis of unjustified enrichment, asserting that the principal debtor benefited, at its expense, without legal justification.

Right of recourse by operation of law? Is the guarantor akin to a surety?

The Nedbank Limited case outlined the fact that liabilities associated with demand guarantees are primary, and not contingent upon the performance of the underlying contract, like in the case of a surety. This autonomy means that a guarantor must pay upon demand, regardless of any disputes that may exist between the principal debtor and the creditor. A guarantor’s obligation remains intact even if the principal debtor’s contract is invalid, unlike a surety, whose liability ceases under such circumstances.

Both parties in the Nedbank Limited case made mention of the “Kelly-Louw thesis”, which emphasises that:

“The fundamental difference between a true guarantee (suretyship guarantee) and a demand guarantee is that the liability of a surety...is secondary, whereas the liability of the guarantor (issuer) of a demand guarantee is primary...The principle that underlies demand guarantees is that each contract is autonomous.”

The thesis further asserts that a principal debtor must reimburse the guarantor. However, it was held that there is no authority for this proposition and that it is contrary to our law – it does not follow that Nedbank, as guarantor, was entitled to compensation from the principal debtor, being a party not involved in the contract between Nedbank and Absa. It is no wonder that Nedbank in fact admitted that it was unable to find any case law that held that a guarantor (like a surety) has an automatic right of recourse against a principal debtor in the event of it being required to pay under a guarantee.

The case emphasised that, being a commercial bank, Nedbank was free to demand securities to its satisfaction, but that the guarantee constituted a demand guarantee, distinct from a suretyship. Accordingly, the court found that Nedbank did not have a claim as a matter of law against the principal debtor after it had paid Absa in terms of the guarantees. As such, Nedbank’s claim failed. Since guarantors under a demand guarantee lack an automatic right of recourse against the principal debtor, they should secure a contractual right of recourse against the principal debtor in the form of a counterindemnity or guarantee.

What about being unjustifiably enriched?

Nedbank relied on the precedent established in Odendaal v Van Oudtshoorn [1968] (3) SA 433 (T) that if one party pays another party’s debt, the payor may seek restitution if the enrichment is deemed unjust.

Although the principal debtor benefited from the situation, the court clarified that Nedbank’s proposition did not meet the conditions for unjustified enrichment as (i) Nedbank paid its own debt in the context of its contract with Absa and not the debt of the principal debtor; and (ii) the principal debtor’s benefit from the arrangement did not equate to a transformation of Nedbank’s debt into the debt of the principal debtor. Accordingly, the unjustified enrichment claim also failed.