In January 2025, the High Court handed down a judgment outlining once again the nature of performance guarantees and the legal principles governing their enforcement.
Two agreements were concluded wherein the beneficiary appointed the applicant to provide road rehabilitation services to it. Performance guarantees were issued to the beneficiary by the insurer on behalf of the applicant. For valid claims to be made against the guarantees, the beneficiary had to deliver a written letter of demand and state that due to the applicant’s fault, the contract was terminated.
The contracts were terminated, and the beneficiary demanded payment from the insurer under the guarantees. The applicant sought an urgent interdict to prevent the guarantor from paying under the guarantees. The applicant contended the guarantees were conditional, and that the beneficiary’s demands did not meet the guarantee conditions, rendering them defective and unenforceable. The applicant argued that the beneficiary, in presenting its claims fraudulently, alternately, unconscionably, misrepresented to the insurer that the contracts were validly terminated.
The application was dismissed by the court. In arriving at its decision, the court analysed the legal principles involved:
On Demand vs Conditional Guarantees
The court determined that the guarantees were on-demand guarantees because clause 5.1 of the guarantee provided that the beneficiary was only required to issue the written demand and state that the contract was terminated due to the applicant’s fault. Clause 8 provided only that payment must be made within seven days following receipt of the first written demand. There was no need to prove the validity of the contract.
The Autonomy Principle
The autonomy principle prescribes that a guarantor’s obligation to pay under a guarantee is independent of the underlying contract. Disputes between the contractor and the beneficiary are irrelevant to the guarantor’s obligation to pay. The court noted that the intention of an on-demand guarantee is to provide security and to avoid disputes over the underlying contract involving the guarantor.
The Fraud Exception
The fraud exception is a narrow ground on which payment under a guarantee can be interdicted. The court stated that fraud must be proven and there must be clear facts of fraud – fraud is not likely presumed, and it must entail the deliberate falsification of documents or the intentional misrepresentation of material facts. In this instance, the court found no conclusive evidence of fraud; the beneficiary adhered to the correct procedures for contract termination and demand for payment from the insurer. Courts must differentiate between fraud and innocent breach of contract. A breach of the underlying contract by the beneficiary of a demand guarantee in terminating the contract does not automatically justify the applicant interdicting the insurer from making payment.
Unconscionability and Common Law Development
The applicants further argued that in the absence of fraud, the common law must be developed to include unconscionable conduct as a further exception to the autonomy principle. The court deemed it unnecessary to develop the common law to include unconscionable conduct as an exception to the autonomy principle because it is trite that courts will not enforce conduct that is contrary to public policy. The court held that the applicants’ allegation that the beneficiary mistakenly cancelled the contracts, whether the beneficiary was negligent or reckless in such thinking and whether this was unconscionable, was irrelevant and not a ground to raise the fraud exception. Mistakes and errors do not amount to fraud nor unconscionable conduct.