This blog was co-authored by Jos Fogle, candidate attorney at Norton Rose Fulbright South Africa.
In February 2024 the Johannesburg High Court confirmed yet again that a contractor cannot rely on a prima facie right in a construction agreement to interdict the payment by the guarantor under an on-demand guarantee in the absence of fraud.
A principal and a contractor entered into a written agreement for remedial works. The works were secured by two on-demand guarantees issued by an insurer on behalf of the contractor in favour of the principal. After various disputes arose, the beneficiary terminated the agreement and called up the guarantees. In response, the contractor brought an urgent application which sought to interdict the guarantor insurer from honouring its obligations under the guarantees.
The contractor contended that it had disputes with the principal and that its contract with the beneficiary provided that the parties must first attempt to resolve disputes between them by way of arbitration prior to the beneficiary seeking payment of guarantees. The court had to determine whether the contractor had established a prima facie right to secure an interim interdict preventing the insurer as guarantor from paying the beneficiary.
For an interim interdict to be successful, the claimant must prove: the existence of a prima facie right to the relief it seeks; an apprehension of irreparable harm; a balance of convenience that favours granting the interim interdict; and the existence of no other satisfactory or adequate remedy to the dispute, ¬¬other than an interdict.
It is well established that a guarantor’s obligations to pay a beneficiary in terms of an on-demand guarantee are separate from the rights & obligations of the underlying contract between a beneficiary and contractor as long as there is a complying demand for payment of the guarantee. Accordingly, any disputes relating to the underlying contract are irrelevant to a guarantor’s liability to honour its obligations under an on-demand guarantee. Payment of an on-demand guarantee can only be interdicted where the demand made by the beneficiary is found to be fraudulent.
The court noted that the contractor did not allege fraud on the part of the beneficiary. The court refused to grant the interim interdict. The court further commented that the contractor would not suffer irreparable harm if it did obtain the interdict. It had alternative remedies available to enforce its rights against the beneficiary. The application was dismissed.
This case reaffirms the now trite principle that a court will not interdict a guarantor from honouring its obligations under an on-demand guarantee if the interdict would rely on a breach of a contractual term between a beneficiary and contractor, in the absence of fraud.