In October 2024 the High Court reaffirmed the rules governing demand and conditional guarantees in South Africa, and the standards required to challenge a demand on the grounds of fraud only in the clearest cases.

The second respondent (the employer) awarded a contract to the applicants (the JV) to upgrade certain roads. The JV had to deliver a performance guarantee to the employer as part of their contractual obligations. The first respondent (the guarantor) issued a performance guarantee on behalf of the JV in favour of the employer.

A dispute arose when the employer terminated the contract with the JV, citing delays and non-performance. The employer then demanded payment on the performance guarantee issued by the guarantor. The JV contested this, claiming the demand was fraudulent and unconscionable due to wrongful termination. They argued the guarantee was conditional and that a demand could only be made if the contract was terminated due to the JV’s default. The JV insisted that the employer knew they were not in default, making the termination contrary to the conditions of the guarantee.

The court considered several legal issues, including whether the performance guarantee was a demand or conditional guarantee, the validity of the employer’s demand, the alleged fraudulence of the demand, and the potential need to develop common law for stricter requirements on guarantee beneficiaries.

The court concluded that the performance guarantee was a demand guarantee, as the guarantor’s obligation to pay was independent of the JV employer contract and the guarantee specifically created a primary obligation. The employer’s demand was valid as it complied with the guarantee’s requirements, including providing the notice of termination of the contract and a statement of the JV’s default. The court rejected the JV’s claim that the demand was fraudulent and unconscionable. The court held that a dispute of fact over the right to terminate the contract was insufficient to find fraud. Knowledge that a factual contention is incorrect and bad faith in advancing that contention are required. It was not bad faith for the employer to insist on payment while the dispute was pending before an adjudicator.

Finally, the court declined the JV’s call to develop the common law to impose additional requirements on the beneficiary of a guarantee because the existing legal framework, which includes the fraud exception, already safeguards against abuse. Transforming demand guarantees into conditional guarantees would undermine their purpose and value in commercial transactions.

This judgment confirms the clear precedent for the validity of demands under demand guarantees and a reminder that demand guarantees (and the potential to avoid liability under demand guarantees based on fraud) are governed by robust legal principles.

Joint Venture Comprising Gorogang Plant Razz Civils and Others v Infiniti Insurance Limited (02252/2023) [2024] ZAGPJHC 1048 (15 October 2024) (saflii.org)